OTTAWA, Feb. 9 /CNW Telbec/ - Allen-Vanguard Corporation (the "Company"
or "Allen-Vanguard") (TSX:VRS) of Ottawa, Canada today reported its financial
results for the first quarter of fiscal year 2006 ended December 31, 2005.
Revenue for the first quarter was $8.9 million and the net loss was
$2.5 million, or $0.07 per share. This compares to the record quarter reported
a year ago, when revenues were $17.5 million and the net loss was $0.7 million
or $0.03 per share.
"As previously reported, our first quarter revenue performance continued
to be weak, and this was mainly attributable to the timing of several large
orders, particularly in the U.S. market," said David E. Luxton, interim
Chairman and CEO. "However, we are pleased to be able to report that the
operating loss in the first quarter narrowed significantly over the previous
quarter. This reflects a reduction in selling and administrative expenses due
to cost savings measures that we have implemented since the fiscal year began.
With further cost-savings still to take effect, and with a significant
increase in new order intake since December 31, 2005, we foresee much stronger
operating results for the balance of 2006.
The Company affirmed that its financial position remains healthy, and
that it was in compliance with all bank covenants. Working capital was
$15.8 million at the end of the quarter including cash, net of bank
indebtedness of $1.3 million, with working capital expected to strengthen
through the balance of fiscal 2006.
The Company intends to provide a general progress report and update and
has scheduled a conference call with the investment community on February 21,
2006 at 9:00 a.m. The Company recently announced a number of positive
developments including:
- A strategic deal with Lockheed Martin for Electronic Counter Measures
(ECM) equipment sales in the U.S.
- More than $15 in overseas ECM sales in the past 90 days leading to a
strong backlog.
- Outsourcing and cost reduction measures to restore profitability.
First Quarter FY 2006 Financial Highlights
- Revenue was $8.9 million in Q1 2006, including $3.1 million for an
integrated equipment and service package for an Asian military group.
This compared to $17.5 million in Q1 2005, which included revenue of
$3.6 million in respect of the contract for equipping and training the
Iraqi police force, and a further $3.6 million for remote intervention
equipment supplied to Malaysia and Indonesia.
- Gross margin was 40% of revenue in Q1 2006, compared to 44% in Q1 2005.
The Q1 2006 margin was adversely impacted by the absorption of under-
utilized production capacity in its Canadian operations, and by the
lower than average margin on the Asian military supply contract.
- Selling and administration expenses were $4.5 million in both Q1 2006
and Q1 2005. The Q1 2006 figure represents a reduction of $1.2 million
from the Q4 2005 total, reflecting the impact of cost reductions
implemented in the second half of FY 2005.
- Earnings before interest, taxes, amortization, stock-based
compensation, foreign exchange, integration costs and goodwill
impairment ("EBITDA") was a loss of $1.7 million in Q1 2005, compared
to positive EBITDA of $3.0 million in Q1 2005. The bottom line impact
of the substantial difference in revenue is the primary factor
responsible for the year over year decline.
- Adjusted EPS, basic, defined as basic earnings per share, adjusted for
amortization of intangible assets, goodwill impairment and integration
costs, was a loss of $0.07 in Q1 2006, compared to Adjusted EPS of
$0.06 in Q1 2005.
- The net loss for Q1 2006 was $2.5 million or a loss of $0.07 per share,
compared to a net loss of $0.7 million or a loss of $0.03 per share in
Q1 2005.
- Allen-Vanguard's cash and cash equivalents, net of bank indebtedness,
at the end of Q1 2006 amounted to $1.3 million, compared to $5.2
million at the end of FY 2005. Working capital totaled $15.8 million at
the end of Q1 2006, compared to $18.4 million at the end of FY 2005.
- Net Borrowings, defined as bank indebtedness, net of cash, plus long
term debt, totaled $8.9 million at the end of Q1 2006 with a ratio of
debt to debt plus equity of 0.20:1, compared to Net Borrowings of
$6.1 million and a ratio of debt to debt plus equity of 0.14:1 at FY
2005 year-end.
- Allen-Vanguard satisfied its covenant tests to date under its amended
term loan agreement with Bank of Scotland.
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. 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 (TSX: VRS), visit our website at
www.allen-vanguard.com.
<<
ALLEN-VANGUARD CORPORATION
CONSOLIDATED BALANCE SHEETS
At At
December 31, September 30,
2005 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
Current
Cash and cash equivalents $ 2,527,597 $ 5,744,043
Accounts receivable 11,118,211 12,364,232
Inventories 14,337,029 9,716,560
Prepaid expenses and sundry assets 1,647,490 2,049,356
-------------------------------------------------------------------------
29,630,327 29,874,191
Property, plant and equipment 2,676,375 2,805,086
Goodwill 21,584,970 21,584,970
Intangible assets 2,833,352 2,918,759
Future income taxes (Note 10) 1,180,000 1,180,000
-------------------------------------------------------------------------
$ 57,905,024 $ 58,363,006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Bank indebtedness (Note 4) $ 1,208,501 $ 554,017
Accounts payable and accrued charges 6,987,960 7,252,329
Income taxes payable 949,939 729,316
Deferred revenue 2,160,735 -
Current portion of long term debt (Note 5) 2,539,496 2,971,895
-------------------------------------------------------------------------
13,846,631 11,507,557
Long term debt (Note 5) 7,725,125 8,276,455
-------------------------------------------------------------------------
21,571,756 19,784,012
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (Note 6) 64,131,659 64,026,659
Contributed surplus (Note 7) 3,084,667 2,984,070
Cumulative translation adjustment 12,257 12,257
Retained earnings (deficit) (30,895,315) (28,443,992)
-------------------------------------------------------------------------
36,333,268 38,578,994
-------------------------------------------------------------------------
$ 57,905,024 $ 58,363,006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
On behalf of the Board
William L. Hess Q.C. Alain Lambert
VANGUARD RESPONSE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(UNAUDITED)
Three months ended December 31 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, beginning of period $(28,443,992) $976,383
Retroactive adjustment related to stock-based
compensation of prior periods - (788,936)
-------------------------------------------------------------------------
(28,443,992) 187,447
Net loss (2,451,323) (702,244)
-------------------------------------------------------------------------
Balance, end of period $(30,895,315) $ (514,797)
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
VANGUARD RESPONSE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three months ended December 31 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 8,884,428 $ 17,518,743
Cost of sales 5,322,971 9,729,901
-------------------------------------------------------------------------
Gross profit 3,561,457 7,788,842
-------------------------------------------------------------------------
Expenses
Selling and administration 4,515,454 4,497,921
Research and development costs 846,578 377,494
Interest on long term debt 157,095 41,640
Other interest 21,984 82,920
Foreign exchange loss 57,483 145,337
Amortization of intangible assets 85,407 2,178,093
Amortization of property, plant and equipment 292,497 200,681
-------------------------------------------------------------------------
5,976,498 7,524,086
-------------------------------------------------------------------------
Earnings (loss) before income taxes (2,415,041) 264,756
-------------------------------------------------------------------------
Provision for (recovery of) income
taxes (Note 10)
Current 36,282 1,033,000
Future - (66,000)
-------------------------------------------------------------------------
36,282 967,000
-------------------------------------------------------------------------
Net Loss $ (2,451,323) $ (702,244)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic loss per share (Note 11) $ (0.07) $ (0.03)
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
VANGUARD RESPONSE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended December 31 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SOURCES (USES) OF CASH
Operating activities
Net loss $ (2,451,323) $ (702,244)
Items not involving cash
Amortization 377,904 2,378,774
Future income taxes - (66,000)
Stock-based compensation expense 100,597 49,000
-------------------------------------------------------------------------
(1,972,822) 1,659,530
Changes in non-cash working capital items (855,591) (1,385,085)
-------------------------------------------------------------------------
Cash (used in) provided by operating
activities (2,828,413) 274,445
-------------------------------------------------------------------------
Investing activities
Adjustment to cost of acquisition - (262,820)
Purchase of property, plant and equipment (163,787) (527,346)
Acquisition of intangible assets - (53,584)
Deferred consideration - 10,561
Cash effect of translation of foreign subsidiary - 99,446
-------------------------------------------------------------------------
Cash used in investing activities (163,787) (733,743)
-------------------------------------------------------------------------
Financing activities
Decrease in long term debt (983,730) (153,946)
Convertible debentures - (104,349)
Equity portion of convertible debenture - 57,949
Proceeds from issuance of common shares
and warrants 105,000 284,375
Cost of issuance of common shares - (467,200)
-------------------------------------------------------------------------
Cash used in financing activities (878,730) (383,171)
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (3,870,930) (842,469)
Cash and cash equivalents, beginning
of period 5,190,026 (3,471,345)
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,319,096 $ (4,313,814)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Represented by:
Cash $ 2,527,597 $ -
Bank indebtedness (1,208,501) (4,313,814)
-------------------------------------------------------------------------
$ 1,319,096 $ (4,313,814)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other cash flow information:
Interest paid $ 179,200 $ 124,500
Income taxes paid 36,300 79,200
VANGUARD RESPONSE SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. Description of business
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 accompanying 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 Company is in the process of conducting a study of its internal
policies with respect to transfer pricing within the group. The consolidated
income tax provision provided herein has been based on management's best
estimate of the pricing that is equivalent to comparative uncontrolled pricing
for the same or similar products. Until the time for reassessment by taxation
authorities has been statute barred or the taxation authorities have reviewed
and not objected to the tax filings, there is a possibility that a
reassessment may occur.
The accounting policies and practices applied are consistent with those
applied in the September 30, 2005 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 all of its wholly-owned subsidiaries. All inter-company transactions and
balances have been eliminated.
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 licenses
sold under contracts with multiple deliverables, where the license does not
represent a single unit of account in accordance with EIC 142 Revenue
Arrangements with Multiple Deliverables, are recognized straight line over the
term of the license. 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 integrated foreign subsidiaries are translated
using the temporal method, whereby monetary items are translated at the
exchange rate in effect at the balance sheet date and non-monetary items,
including depreciation, are translated at historical exchange rates. Other
revenue and expense items are translated at average exchange rates prevailing
during the year. Exchange gains and losses are included in operations. As at
December 31, 2004, foreign subsidiaries were translated using the current rate
method.
Impairment of long-lived assets
The Company reviews long-lived assets for impairment when events or
circumstances indicate that the assets carrying amount may not be recoverable.
When management determines that an impairment exists, the impairment loss will
be determined by comparing the carrying amount of the asset to its fair value.
3. Integration Costs
The liability is included in accounts payable and accrued charges. The
following table describes the movements in the integration accrual during the
period:
Staff
Terminations Other Costs Total
-------------------------------------------------------------------------
Balance of accural,
September 30, 2005 $ 644,991 $ 343,067 $ 988,058
Other charges to accrual - (34,474) (34,474)
-------------------------------------------------------------------------
Balance of accrual,
December 31, 2005 $ 644,991 $ 308,593 $ 953,584
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Bank indebtedness
At At
December 31, September 30,
2005 2005
-------------------------------------------------------------------------
(Audited)
Working capital facility to a maximum
of $4,100,000: due on demand, interest at
chartered bank base rate plus 2%, secured
by a general security agreement over all
assets of the Company $ 1,208,501 $ 554,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Long term debt
At At
December 31, September 30,
2005 2005
-------------------------------------------------------------------------
(Audited)
Bank term loan: interest at chartered bank
base rate plus 2.25%, repayable in equal
quarterly instalments of $512,000, maturing
July 2010, secured by a general security
agreement over all the assets of the
Company $ 9,195,006 $ 9,759,350
Deferred consideration: non-interest
bearing and unsecured (i) 560,120 560,120
Note payable: unsecured, non-interest
bearing, matures October 2006. 509,495 928,880
-------------------------------------------------------------------------
10,264,621 11,248,350
Less: amount due within one year (2,539,496) (2,971,895)
-------------------------------------------------------------------------
$ 7,725,125 $ 8,276,455
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The deferred consideration is payable in cash to the vendors in an
acquisition completed by P.W. Allen Holdings Ltd. ("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, and is based on management's best estimate of the
actual amount to be paid. The consideration is expected to be paid
within twelve months.
Principal repayments over the next five are years expected to be as
follows:
Year ended December 31, 2006 $ 3,124,215
2007 2,054,600
2008 2,054,600
2009 2,054,600
2010 976,606
-------------------------------------------------------------------------
$ 10,264,621
-------------------------------------------------------------------------
6. Capital stock
(i) Common shares
The authorized capital stock of the Company consists of an unlimited
number of Common Shares. Common shares issued and outstanding include the
following:
Three months ended
December 31, 2005
-------------------------------
Number of shares Amount
-------------------------------------------------------------------------
Balance, September 30, 2005 37,302,566 $ 64,026,659
Issued on exercise of options 100,000 105,000
-------------------------------------------------------------------------
Balance, December 31, 2005 37,402,566 $ 64,131,659
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended
December 31, 2004
-------------------------------
Number of Shares Amount
-------------------------------------------------------------------------
Balance, September 30, 2004 25,499,253 $ 42,161,588
Common Shares issued (a) 800,000 4,000,000
Issued on exercise of warrants 22,050 88,200
Issued on exercise of options 69,833 196,175
Costs related to exercise of warrants
in prior period - (467,200)
-------------------------------------------------------------------------
Balance, December 31, 2004 26,391,136 $ 45,978,763
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) The Common shares were issued in full and final settlement of the
contingent consideration for the acquisition of EOD Performance Inc.,
and resulted in a corresponding increase in the value of goodwill
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.
(ii) Warrants
A summary of the Company's share purchase warrants outstanding and the
changes during the year is presented below:
December 31, 2005 December 31, 2004
----------------------- -------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Warrants Price Warrants Price
-------------------------------------------------------------------------
Outstanding,
beginning
and end of period 7,333,689 $ 2.52 4,149,721 $ 4.25
-------------------------------------------------------------------------
Exercisable, end
of period 6,400,356 $ 2.20 4,149,721 $ 4.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes information for warrants outstanding at
December 31:
2005 2004
Exercise Price Expiry Number Number
-------------------------------------------------------------------------
$ 1.95 March 15, 2007 490,154 -
2.00 March 15, 2007 5,443,535 -
4.00 September 5, 2005 - 2,749,721
4.75 August 12, 2008 1,400,000 1,400,000
-------------------------------------------------------------------------
$ 1.95-4.75 7,333,689 4,149,721
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(iii) Stock options
A summary of the Company's stock options outstanding and the changes
during the period is presented below:
December 31, 2005 December 31, 2004
----------------------- -----------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding,
beginning of
period 2,109,530 $ 3.37 2,524,427 $ 3.23
Granted - - 400,000 3.23
Exercised (100,000) (1.05) (69,833) (2.81)
Cancelled (113,100) (3.34) - -
-------------------------------------------------------------------------
Outstanding, end
of period 1,896,430 $ 3.34 2,854,594 $ 3.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable, end
of period 1,115,546 $ 3.22 1,446,379 $ 2.91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes information for stock options outstanding
at December 31:
2005 2004
Exercise Price Expiry Number Number
-------------------------------------------------------------------------
$ 0.60 June 11, 2008 15,667 15,667
1.05 November 18, 2008 202,564 453,999
1.05 October 18, 2005 - 121,429
1.75 November 18, 2008 30,000 30,000
3.00 November 18, 2008 - 40,000
3.00 September 5, 2005 - 567,000
3.23 November 3, 2009 400,000 400,000
3.35 May 11, 2010 468,700 -
3.37 July 8, 2010 5,000 -
3.44 March 15, 2009 80,000 95,000
3.47 April 8, 2009 90,000 120,000
3.50 November 18, 2008 - 40,000
3.57 November 18, 2008 60,000 80,000
3.93 March 8, 2009 9,500 16,500
4.00 November 18, 2008 5,000 40,000
4.00 September 5, 2005 - 315,000
4.20 July 7, 2009 370,000 370,000
4.25 August 18, 2009 50,000 50,000
4.50 November 18, 2008 5,000 -
5.00 August 12, 2006 99,999 99,999
5.00 November 18, 2008 5,000 -
-------------------------------------------------------------------------
$ 0.60-5.00 1,896,430 2,854,594
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Contributed surplus
Balance, beginning of period $ 2,984,070
Value associated with stock-based
compensation expense for the period 100,597
-------------------------------------------------------------------------
Balance, end of period $ 3,084,667
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
8. Concentration of risks
Credit risk
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.
Iraq contract settlement
Included in accounts receivable at September 30, 2005 is an outstanding
amount of $4,260,000 in respect of the Iraq Contract. On December 20, 2005,
the Company entered into an amending agreement with the other party (the
"Prime") to the Iraq Contract, whereby the Company accepted certain IEDD
equipment from the Prime (transferred from accounts receivable to inventory
during the period) with an estimated net realizable value equal to the
outstanding balance of $4,260,000 owed to the Company by the Prime in full
settlement of the outstanding balance. The Company's obligation to supply
additional components and installation services was terminated. The Company
agreed to sell on a best efforts basis certain additional equipment (the
"Consignment Equipment") owned by the Prime with a net realizable value of
$U.S. 2 million, and agreed to advance a payment of $U.S. 100,000 to the Prime
upon the effective date of the amending agreement, and a further $U.S. 100,000
on January 7, 2006. Any proceeds in excess of $U.S. 2 million realized from
the sale of the Consignment Equipment shall be retained by the Company.
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.
9. 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. 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 December 31 2005 2004
-------------------------------------------------------------------------
(000's) (000's)
Revenue by geographic area
Canada $ 716 $ 1,308
U.S.A. 1,242 5,347
Europe / Middle East 2,868 6,069
Asia / Pacific 4,056 4,047
Other 2 748
-------------------------------------------------------------------------
$ 8,884 $ 17,519
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months ended December 31, 2005, two customers (2004 -
three customers) accounted for Company sales of $4,278,000 or 48% (2004 -
$7,287,000 or 41.6%).
At At
December 31, September 30,
2005 2005
-------------------------------------------------------------------------
(Audited)
(000's) (000's)
Capital assets and goodwill by geographic area
Canada $ 6,113 $ 6,207
U.S.A. 512 517
Europe / Middle East 17,618 17,648
Other 18 18
-------------------------------------------------------------------------
$ 24,261 $ 24,390
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Income tax
The reconciliation of income tax computed at statutory tax rates to the
provision for income taxes is as follows:
Three months ended December 31 2005 2004
-------------------------------------------------------------------------
Earnings (loss) before provision for
income taxes $ (2,415,041) $ 264,756
Basic income tax rate 33.4% 36.2%
-------------------------------------------------------------------------
Computed income tax expense (806,600) 95,800
Effect on income tax resulting from:
Intangible asset amortization not deductible
for tax purposes 126,200 788,000
Other accounting charges not deductible
for tax purposes 325,682 72,600
Taxes losses carried forward 391,000 -
Other - 10,600
-------------------------------------------------------------------------
Provision for income taxes $ 36,282 $ 967,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At December 31, 2005, the Company has approximately $15,223,000 of non-
capital loss carry forwards, which expire as follows:
2010 $ 256,000
2011 3,019,000
2014 1,748,000
2015 5,634,000
2016 1,174,000
Indefinite carry forward 3,392,000
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:
At At
December 31, September 30,
2005 2005
-------------------------------------------------------------------------
(Audited)
Net operating loss carry forward $ 5,084,000 $ 4,836,000
Tax basis of capital assets 50,000 50,000
-------------------------------------------------------------------------
Total future income tax asset 5,134,000 4,886,000
Valuation allowance (3,954,000) (3,706,000)
-------------------------------------------------------------------------
Future income tax asset $ 1,180,000 $ 1,180,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
11. Net loss per share
Net earnings per share is computed using the following weighted average
numbers of outstanding Common Shares:
Three months ended December 31 2005 2004
-------------------------------------------------------------------------
Weighted average shares outstanding 37,369,233 25,648,708
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The effect of diluted potential Common Shares has not been calculated
because the effect would be anti-dilutive.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First Quarter Ended December 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 first quarter
ended 31-Dec-05, the audited consolidated financial statements for the year
ended 30-Sep-05, and the Company's other securities filings available on
www.sedar.com. Allen-Vanguard reports its consolidated financial statements in
accordance with Canadian generally accepted accounting principles ("GAAP").
All financial figures contained in this MD&A are denominated in Canadian
dollars ($CN), unless otherwise specified. The abbreviation "FY" refers to the
fiscal year ended September 30 and "Q" refers to a quarterly period within the
fiscal year.
Through its corporate history, Allen-Vanguard has been a party to
business combinations which have changed its legal name. References herein to
Allen-Vanguard prior to 17-Nov-03 are in respect of NBC Team Limited, and
references from 17-Nov-03 to 10-Feb-05 are in respect of Vanguard Response
Systems Inc.
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 at 08-Feb-06. 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 (see "Risks and Uncertainties"). 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.
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, stock-based
compensation, foreign exchange, integration costs and goodwill
impairment.
Adjusted EPS, basic - Basic earnings per share, adjusted for amortization
of intangible assets, goodwill impairment and integration costs.
Net Borrowings - Bank indebtedness, net of cash, plus long-term debt.
Debt to debt plus equity - Ratio of Net Borrowings to the sum of Net
Borrowings plus shareholders' equity.
OVERALL PERFORMANCE
(I) Corporate Profile
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, personal protective wear for
use in dealing with bio-chemical agents, 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 ("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 and decontamination of bio-
chemical warfare agents.
Head office operations are located in Ottawa, Ontario, Canada, with
manufacturing and / or assembly 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 markets for Allen-Vanguard's products are (1) 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, and (2) the military, where the Company's products are
used in theatres of conflict around the world.
(II) Industry Trends and Market Conditions
The industry in which Allen-Vanguard operates is threat-driven, and has
experienced considerable evolution over the past several decades. Terrorist
groups have developed increasingly 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 United States making up about half of world
spending.
The Company anticipates steady demand within the EOD specialist market
for security tools and remote intervention robots, where Allen-Vanguard's
product lines are well established. Over the past five years, civilian
authorities have placed a high priority on developing emergency response plans
for bio-chemical incidents, which should ultimately lead to strong demand for
related products and services. However, operational protocols have not been
uniformly established and responsibility for responding to such incidents
(i.e. fire departments, HAZMAT teams, military units etc.) varies considerably
among federal, regional and municipal jurisdictions. Consequently, this is a
relatively difficult market for technology suppliers to effectively target.
The increasing use of radio controlled improvised explosive devices by
insurgents and terrorist groups means that many military forces around the
world are seeking to fill this vulnerability gap by the procurement of ECM
equipment. This takes the requirements for ECM from being a specialized item
of equipment used by EOD teams and to protect VIP's to a ubiquitous
requirement for ECM to be fielded as part of a force protection role, in
effect becoming like 'electronic body amour'. It is estimated that this market
could be worth $1billion on its own over the next 3 years.
Allen-Vanguard has recently begun to place greater emphasis on its CBRNE
training business. The market for live agent training is very difficult to
anticipate; however we have internally estimated the market to be $4 million
over the next 3 years based upon our exploitation of current opportunities for
growth.
The U.S. congress has not yet approved budgets for DHS and the Pentagon
for 2006. The devastation caused by Hurricane Katrina and other natural
disasters which occurred in 2005 has diverted billions of dollars from the
U.S. treasury into emergency relief and long-term recovery efforts. The
Pentagon announced that it would trim $US 30 billion from its budget over the
next six years. More will be known about military and defense spending needs
for the next 20 years when the U.S. Department of Defense releases its
Quadrennial Defense Review in February 2006.
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.
(III) Corporate Development
Allen-Vanguard has been fundamentally transformed through a series of
acquisitions and financing transactions in FY 2005 and FY 2004 which have
greatly increased its revenue, overheads, and asset and capital bases. These
transactions, which are summarized in this section, are described in greater
detail in the Company's other securities filings.
In Q1 2004, the Company completed a reverse takeover transaction that
resulted in a change of its legal name to Vanguard Response Systems Inc. and
the listing of its shares on The Toronto Stock Exchange.
On 05-Mar-04, the Company completed an equity private placement which
raised net proceeds of $25 million, and acquired 100% of the outstanding
shares of two Ottawa-based corporations:
- EOD Performance Inc. ("EODP"), a manufacturer of compact mobile robots
for cash purchase consideration and closing costs of $7.2 million plus
up to an additional $12 million in contingent cash and share payments
("EODP Contingent Payments") based on EODP's sales performance. On
16-Dec-05, the Company issued 800,000 common shares to the vendors of
EODP in exchange for cancellation of the contingent cash and remaining
special warrant payments provided for in the original EODP share
purchase agreement.
- Vanguard Protective Technologies Inc. ("VPTI" - formerly Bosik
Holdings Ltd. and its affiliates); a developer of vehicle barrier,
land mine protective seats and suspect package containment
technologies. The purchase consideration was $1.5 million of cash
payable in installments over a two-year period, 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. Following a decision to outsource the manufacturing
of VPTI's products, the Company entered into an amending agreement on
12-Aug-04 with the vendors of VPTI which reduced the purchase
consideration by $0.5 million to $1.0 million, and released the
remaining installment consideration to the vendor, except for
$0.2 million which was paid in FY 2005.
On 03-May-04, the Company entered into a strategic advisory contract
("Giuliani Contract") with Giuliani Partners LLC to assist with marketing the
Company's products in the United States. Giuliani Partners LLC invested
$1.0 million ($US 0.8 million) of its fees in the Company in the form of an
unsecured two-year debenture ("Giuliani Debenture") bearing interest at the
rate of 5% per annum, payable semi-annually, and convertible at the holder's
option into Allen-Vanguard common shares at a price of $4.00 per share. The
terms of the Giuliani Debenture were amended on 29-Sep-05 to remove the
convertibility feature and all accrued interest on the obligation. The
outstanding principal of $0.9 million will be repaid without interest through
an initial payment of $0.2 million plus thirteen monthly payments of
$0.06 million commencing 01-Oct-05.
On 12-Aug-04, the Company 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 ("PWA Vendor Notes"), 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
the Company at a price of $4.75. Additional consideration of up to
$2.2 million (pnds stlg 1 million) in cash ("PWA 2004 EBITDA Bonus") and up to
659,000 common shares of the Company ("Iraq Contract Contingency") 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 05-Mar-04 Financing.
On 10-Feb-05, Vanguard Response Systems Inc. amalgamated with EODP, with
the resulting company being renamed Allen-Vanguard Corporation.
On 01-Apr-05, Allen-Vanguard secured a term loan facility ("BoS Term
Loan") in the amount of $11.4 million (pnds stlg 5 million) from the Bank of
Scotland ("BoS"), repayable in equal quarterly installments over a five year
period, bearing interest at BoS Base Rate plus 2.25%. Allen-Vanguard utilized
$4.4 million to reduce its net borrowings on a working capital facility ("BoS
Working Capital Facility") previously provided by BoS, $1.9 million to repay
and cancel its banking facility with a Canadian chartered bank, and a further
$1.8 million to repay a portion of the outstanding PWA Vendor Notes.
On 15-Sep-05, Allen-Vanguard completed a private placement financing
("15-Sep-05 Financing") consisting of an issue of 8,064,771 subscription
receipts ("Subscription Receipts") at a price of $1.75 per Subscription
Receipt for gross proceeds to Allen-Vanguard of $14.1 million. Each
Subscription Receipt grants the holder the right to receive, for no additional
consideration, one unit ("Unit") consisting of one common share and one-half
of one common share purchase warrant of Allen-Vanguard. Each whole warrant
entitles its holder to purchase an additional common share of Allen-Vanguard
at a price of $2.00 for a period of 18 months following the closing of the
private placement. Insiders and senior employees of Allen-Vanguard purchased
1,062,571 of the Subscription Receipts, and exercised $0.1 million of stock
options. In addition, the holders of the PWA Vendor Notes converted their
outstanding notes, accrued interest and bonuses payable thereon valued at
approximately $1.8 million into 1,075,000 Subscription Receipts, and accepted
1,257,143 Units in settlement of any further contingent amount payable in
respect of the PWA 2004 EBITDA Bonus. The cash proceeds, net of issue costs,
from the above financing activities totaled $12.6 million and short-term
liabilities and future obligations totaling $4.1 million were converted into
equity.
Also on 15-Sep-05, the BoS Term Loan was amended to modify certain
financial covenant measurements.
On 23-Dec-05, Allen-Vanguard entered into a technology license and supply
agreement ("U.S. ECM Agreement") with Lockheed Martin Corporation ("LM"),
pursuant to which the Company granted a license to use its Electronic Counter
Measures ("ECM") technology and agreed to supply certain components and
provide engineering services in connection with ECM units to be sold by LM.
The term of the U.S. ECM Agreement is 7 years, and grants LM the exclusive
right to sell ECM units incorporating Allen-Vanguard's components to customers
located in the U.S., and a non-exclusive license to sell to customers located
outside the U.S. Allen-Vanguard will receive an initial license fee,
engineering fees for a period of three years, and the potential for additional
royalties and component sales over the term of the agreement. The U.S. ECM
Agreement may be terminated by either Allen-Vanguard or LM if certain
specified events or conditions occur or fail to occur.
RESULTS OF OPERATIONS
(I) Selected Quarterly Financial Information (Unaudited)
(Amounts in millions of Canadian dollars,
except share amounts and per share amounts)
Fiscal 2006 Fiscal 2005
-------------------------------------------------------------------------
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue $8.9 $ 9.1 $ 11.3 $ 13.5 $ 17.5
-------------------------------------------------------------------------
Gross profit 3.6 3.7 4.9 5.6 7.8
-------------------------------------------------------------------------
EBITDA (1.7) (4.3) (1.6) 0.1 3.0
-------------------------------------------------------------------------
Integration, amortization
of intangibles and
goodwill charges 0.1 19.5 2.1 0.5 2.2
-------------------------------------------------------------------------
Net earnings (loss) (2.5) (23.3) (3.9) (0.7) (0.7)
-------------------------------------------------------------------------
EPS, basic $(0.07) $(0.89) $(0.14) $(0.03) $(0.03)
-------------------------------------------------------------------------
EPS, diluted - - - - -
-------------------------------------------------------------------------
Adjusted EPS, basic $(0.07) $(0.14) $(0.07) $(0.01) $0.06
-------------------------------------------------------------------------
Capital expenditures 0.2 0.2 0.4 0.4 0.5
-------------------------------------------------------------------------
Working capital 15.8 18.4 6.9 4.4 5.4
-------------------------------------------------------------------------
Total assets 57.9 58.4 73.6 73.0 74.3
-------------------------------------------------------------------------
Shares outstanding
(millions) 37.4 37.3 26.7 26.7 26.4
-------------------------------------------------------------------------
Fiscal 2004
-------------------------------------------------------------------------
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue $ 11.6 $ 5.0 $ 3.0 $ 0.7
-------------------------------------------------------------------------
Gross profit 6.2 1.6 1.4 0.2
-------------------------------------------------------------------------
EBITDA 1.4 (0.1) (0.1) (0.8)
-------------------------------------------------------------------------
Integration, amortization
of intangibles and
goodwill charges 0.2 0.0 0.0 0.0
-------------------------------------------------------------------------
Net earnings (loss) 0.9 (0.1) (0.1) (0.7)
-------------------------------------------------------------------------
EPS, basic $0.04 $(0.00) $(0.00) $(0.06)
-------------------------------------------------------------------------
EPS, diluted $0.03 - - -
-------------------------------------------------------------------------
Adjusted EPS, basic $0.05 $(0.00) $(0.00) $(0.06)
-------------------------------------------------------------------------
Capital expenditures 0.2 0.2 0.0 0.0
-------------------------------------------------------------------------
Working capital 4.2 19.3 18.2 3.2
-------------------------------------------------------------------------
Total assets 68.9 31.4 31.7 5.2
-------------------------------------------------------------------------
Shares outstanding
(millions) 25.5 21.8 21.6 12.6
-------------------------------------------------------------------------
(II) Revenue
Allen-Vanguard's revenue was $8.9 million in Q1 2006, including
$3.1 million for an integrated equipment and service package for an Asian
military group. This compared to $17.5 million in Q1 2005, which included
revenue of $3.6 million in respect of the contract for equipping and training
the Iraqi police force (the "Iraq Contract"), and a further $3.6 million for
remote intervention equipment supplied to Malaysia and Indonesia.
Revenue by Geographic Area
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
Q1 2006 Q1 2005
-------------------------------------------------------------------------
Region
Canada $ 0.7 $ 1.3
-------------------------------------------------------------------------
United States 1.2 5.4
-------------------------------------------------------------------------
Europe / Middle-East 2.9 6.1
-------------------------------------------------------------------------
Asia / Pacific 4.1 4.0
-------------------------------------------------------------------------
Other - 0.7
-------------------------------------------------------------------------
Total $ 8.9 $ 17.5
-------------------------------------------------------------------------
Revenue generated in North America totaled $1.9 million in Q1 2006,
compared to $6.7 million in Q1 2005. The delay in receiving congressional
approval of the DHS and Pentagon budgets appeared to slow equipment
procurement activity in the second half of FY 2005, which likely had an
adverse impact on revenue in Q1 2006.
Revenue generated outside of North America totaled $7.0 million in
Q1 2006, compared to $10.8 million in Q1 2005. The Asian military contract
accounted for 44% of the Q1 2006 total, while the previously noted contracts
for Iraq, Malaysia and Indonesia represented 67% of Q1 2005 revenue generated
outside North America.
Allen-Vanguard is pursuing teaming arrangements with larger contractors
to bid on major program tenders, particularly in the U.S. homeland security
and military sectors. Such relationships could potentially generate
substantial revenues, where Allen-Vanguard lacks the manufacturing, support
and financing capacity to compete on a stand-alone basis against major defence
industry players.
On 23-Dec-06, the Company announced the signing of an ECM technology
license and supply agreement ("U.S. ECM Agreement") with Lockheed Martin
Corporation (see "Overall Performance - (iii) Corporate Development"). The
initial license fee has been deferred and will be recognized over the seven
year life of the ECM Agreement.
Also in Q1 2006, Allen-Vanguard teamed with a U.K. based contractor on a
large robot tender for the British Ministry of Defence ("MoD"). The Company
expects the MoD will announce the results of the tender sometime in the Spring
2006.
Allen-Vanguard has placed a high priority on securing a new channel
partner(s) to more effectively target fire departments in North America, as
fire departments are generally tasked with emergency response to bio-chemical
incidents.
The Company's backlog has increased sharply subsequent to Q1 2006, which
it expects will lead to increased revenue in both Q2 and Q3 2006 compared to
Q1 2006.
(III) Gross Margin
Gross margin was 40% of revenue in Q1 2006, compared to 44% in Q1 2005.
The Q1 2006 margin was adversely impacted by the absorption of under-utilized
production capacity in its Canadian operations, and by the lower than average
margin on the Asian military supply contract.
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. The highest gross margins (generally in the range of 50% to 60%) are
achieved on Allen-Vanguard's ECM and Universal Containment Systems products,
which are based on proprietary and / or patented technology. Lower gross
margins (typically 30% to 40%) are earned on commodity products subject to
extensive competition, such as personal protective equipment, and on R&D
contracts which are generally charged on a time and materials basis.
Allen-Vanguard's gross margin was 43% in FY 2005, with a quarterly range
from 41% to 45%. Subsequent to Q1 2006, the Company announced that it would
reduce overheads in its Ottawa operation and outsource production of the
Vanguard MK2 robot. The Company anticipates that this initiative, combined
with a substantially higher proportion of ECM orders in the total revenue mix,
will restore margin to FY 2005 levels.
(IV) Expenses
Selling and administration
Selling and administration expenses were $4.5 million in both Q1 2006 and
Q1 2005. The following items were noteworthy:
- In common with many listed companies of equivalent size, Allen-
Vanguard has experienced a sharp escalation in professional fees
related to advisory services for audit, taxation, corporate governance
and valuation. These items exceeded $0.3 million in Q1 2006, a three-
fold increase from the prior year quarter.
- The Giuliani Contract was fully expensed in FY 2005, with
approximately $0.3 million absorbed in Q1 2005.
- The Company recorded stock-based compensation of $0.1 million in Q1
2006, or roughly double the Q1 2005 figure.
Staff and other overhead reductions in Allen-Vanguard's Ottawa operation
that were implemented subsequent to Q1 2006 are expected to reduce quarterly
operating expenses by approximately $0.6 million commencing in the month of
February 2006.
Research and development
Research and development expenses, net of grants received and investment
tax credits, were $0.8 million in Q1 2006 compared to $0.4 million in Q1 2005.
The vast majority of R&D activities in the U.K. are self-funded, and Allen-
Vanguard has ramped up development of its ECM and large robot technologies. In
Canada, Allen-Vanguard's R&D program is primarily spread across CBRN, small
robot, and area denial technologies, and is often funded wholly or partially
through government contracts and tax credits.
Amortization
Amortization expense totaled $0.4 million in Q1 2006, compared to
$2.4 million in Q1 2005. Approximately $2.0 million of the Q1 2005 total
relates to the amortization of acquired orders on hand, which were fully
expensed in FY 2005.
Foreign exchange and interest
Allen-Vanguard recorded a net foreign exchange loss of $0.1 million in
both Q1 2006 and Q1 2005. The Company conducts transactions and carries
monetary assets and liabilities in Canadian and U.S. Dollars, U.K. Pounds
Sterling, and European Euros. The relative weighting of these currencies
shifts continuously, and Allen-Vanguard has not implemented a formal hedging
program to neutralize the impact of currency movements. The net loss in
FY 2004 is primarily attributed to the appreciation of the Canadian dollar
relative to the U.S. dollar and U.K. pound sterling.
Prior to Q4 2005, Allen-Vanguard used the current rate method to
translate the financial statements of its U.K., U.S. and Irish subsidiaries.
Pursuant to Section 1650 of the CICA Handbook, it was determined that the
foreign subsidiaries were self-sustaining primarily because of the "ring
fenced" security arrangements with the Company's U.K. and Canadian based banks
which restricted the movement of cash between the parent company and its
foreign subsidiaries. In addition, the degree of operational integration was
limited in the first half of FY 2005. On 01-Apr-05, Allen-Vanguard
consolidated its banking facilities with BoS, with the result that
restrictions on the movement of cash within the Company's operating units were
removed. Allen-Vanguard operations have become increasingly integrated in the
second half of FY 2005. At year end, it was determined that the foreign
subsidiaries would now be more appropriately considered integrated
subsidiaries under the CICA Handbook recommendations, and accordingly Allen-
Vanguard changed its accounting policy effective in Q4 2005 to adopt on a
prospective basis the temporal method of translation.
At the end of Q1 2006, Allen-Vanguard had the following amounts
denominated in foreign currencies:
Amounts Denominated in Foreign Currencies
(In millions of foreign currency unit)
European British
U.S. $ euro pnds stlg
Accounts receivable 2.8 0.1 2.3
Accounts payable 0.2 0.2 0.7
Cash (bank indebtedness) (0.9) (1.0) (2.3)
Income taxes payable 0.2 - 0.3
Long term debt 0.5 0.6 4.3
The quarter end exchange rates used to translate monetary assets and
liabilities, and the quarterly average exchange rates used to translate
revenues and expenses are set out in the following table, based on the daily
noon rates published by the Bank of Canada:
Quarter End Exchange Rates
(per $CN 1.00)
European British
U.S. $ euro pnds stlg
Q1 2005 1.2036 1.6292 2.3062
Q2 2005 1.2096 1.5689 2.2848
Q3 2005 1.2256 1.4827 2.1973
Q4 2005 1.1611 1.4003 2.0546
Q1 2006 1.1659 1.3805 2.0036
Quarterly Average Exchange Rates
(per $CN 1.00)
European British
U.S. $ euro pnds stlg
Q1 2005 1.2203 1.5826 2.2773
Q2 2005 1.2263 1.6079 2.3189
Q3 2005 1.2439 1.5660 2.3083
Q4 2005 1.2012 1.4645 2.1433
Q1 2006 1.1732 1.3950 2.0514
Net interest expense (income) was $0.2 million in Q1 2006, compared to
$0.1 million in Q1 2005. Movements of interest bearing debt are presented in
the "Liquidity" section of this MD&A.
(V) Earnings Measures
Earnings before interest, taxes, amortization, stock-based compensation,
foreign exchange, integration costs and goodwill impairment ("EBITDA") was a
loss of $1.7 million in Q1 2005, compared to positive EBITDA of $3.0 million
in Q1 2005. The bottom line impact of the substantial difference in revenue is
the primary factor responsible for the year over year decline.
The net provision for income taxes was $0.0 million in Q1 2006, compared
to $1.0 million in FY 2005. No recovery of future income taxes was recorded in
Q1 2006. The amortization of intangible assets is non-deductible for tax
purposes, which distorted the Company's tax provision for accounting purposes
relative to its reported earnings or loss before income taxes in Q1 2005. The
basic income tax rate was 33% in Q1 2006 compared to 36% in Q1 2005.
Adjusted EPS, basic, as defined above, was a loss of $0.07 in Q1 2006,
compared to Adjusted EPS of $0.06 in Q1 2005.
The net loss for Q1 2006 was $2.5 million or a loss of $0.07 per share,
compared to a net loss of $0.7 million or a loss of $0.03 per share in
Q1 2005.
LIQUIDITY
Allen-Vanguard's cash and cash equivalents, net of bank indebtedness, at
the end of Q1 2006 amounted to $1.3 million, compared to $5.2 million at the
end of FY 2005. Working capital totaled $15.8 million at the end of Q1 2006,
compared to $18.4 million at the end of FY 2005. The principal components of
cash flow and changes in non-cash working capital are summarized in the
following table and discussed below:
Statements of Cash Flow
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
Q1 2006 Q1 2005
Cash and cash equivalents, net of bank
indebtedness, beginning of period $ 5.2 $ (3.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) (2.5) (0.7)
-------------------------------------------------------------------------
Non-cash operating items 0.5 2.4
-------------------------------------------------------------------------
Changes in non-cash working capital (0.8) (1.4)
-------------------------------------------------------------------------
Cash used in operating activities (2.8) 0.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Acquisitions - (0.3)
-------------------------------------------------------------------------
Capital expenditures and cash effect of
foreign subsidiary translation (0.2) (0.4)
-------------------------------------------------------------------------
Cash used in investing activities (0.2) (0.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Issuance of common shares, warrant and
option exercises 0.1 (0.2)
-------------------------------------------------------------------------
Increase (repayment) of long-term debt and
other financing activities (1.0) (0.2)
-------------------------------------------------------------------------
Cash provided by financing activities (0.9) (0.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net cash flow (3.9) (0.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents, net of bank
indebtedness, end of period 1.3 $ (4.3)
-------------------------------------------------------------------------
(I) Cash Flow from Operating Activities
Operating cash flow, defined as net earnings adjusted for non-cash items,
was $(2.0) million in Q1 2006, compared to $1.7 million in Q1 2005. The
factors affecting net earnings and the material non-cash items were discussed
in the "Results of Operations" section.
Changes in non-cash working capital used cash of $0.8 million in Q1 2006,
compared to a use of $1.4 million in Q1 2005. The changes in non-cash working
capital consisted primarily of the following:
Changes in non-cash working capital
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
Q1 2006 Q1 2005
-------------------------------------------------------------------------
Accounts receivable $ 1.3 $ (2.5)
-------------------------------------------------------------------------
Inventories (4.6) (0.4)
-------------------------------------------------------------------------
Prepaid expenses and sundry assets 0.4 (1.0)
-------------------------------------------------------------------------
Accounts payable and accrued charges (0.3) 3.1
-------------------------------------------------------------------------
Income taxes payable 0.2 1.1
-------------------------------------------------------------------------
Deferred revenue 2.2 (1.7)
-------------------------------------------------------------------------
Total $ (0.8) $ ( 1.4)
-------------------------------------------------------------------------
The most significant factors affecting these changes in non-cash working
capital in Q1 2006 were as follows:
- At FY 2005 year end, a receivable of $4.3 million remained outstanding
in respect of the Iraq Contract. On 20-Dec-2005, the Company entered
into an amending agreement with the other party to the Iraq Contract
("Prime"), whereby Allen-Vanguard accepted certain IEDD equipment from
the Prime with an estimated net realizable value of $4.3 million in
full settlement of the outstanding balance of the receivable. Allen-
Vanguard's obligation to supply additional components and installation
services was terminated. The Company agreed to sell on a best efforts
basis certain additional equipment ("Consignment Equipment") owned by
the Prime with a net realizable value of $US 2 million, and agreed to
advance a payment of $US 100,000 to the Prime upon the effective date
of the amending agreement, and a further $US 100,000 on 07-Jan-06. Any
proceeds in excess of $US 2 million realized from the sale of the
Consignment Equipment shall be retained by Allen-Vanguard. As a result
of this settlement transaction, the Company's receivables decreased and
inventories increased by $4.3 million.
- The initial license fee receivable under the U.S. ECM Agreement was
deferred and will be taken into revenue over the seven year term of the
license.
- Prepaid expenses and sundry assets decreased by $0.4 million in Q1
2006, primarily due to the expensing of product liability insurance
premiums
(II) Investing Activities
Purchases of property, plant and equipment totaled $0.2 million in
Q1 2006, down from $0.5 million in Q1 2005. Leasehold improvements associated
with Allen-Vanguard's Tewkesbury facility and information technology
investments represented the majority of capital expenditures in Q1 2005.
Allen-Vanguard expects quarterly capital spending for the balance of
FY 2006 to remain in line with FY 2005, except for any production capacity
expenditures that would be required in the event of a surge in ECM component
orders under the U.S. ECM Agreement.
(III) Financing Activities
Cash used in financing activities totaled $0.9 million in Q1 2006,
compared to a use of $0.4 million in Q1 2005. Cash of $0.1 million was
provided through the exercise of options and warrants in Q1 2006. Allen-
Vanguard reduced long-term debt by $1.0 million in Q1 2006, consisting of
principal repayments on the BoS Term Loan and Giuliani Debenture.
(IV) Contractual Obligations
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
Remainder
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 Thereafter
-------------------------------------------------------------------------
BoS Term Loan 1.5 2.0 2.0 2.0 2.0 -
-------------------------------------------------------------------------
Deferred
Consideration 0.1 0.1 0.1 0.1 0.1 -
-------------------------------------------------------------------------
Giuliani
Debenture 0.5 - - - - -
-------------------------------------------------------------------------
Total 2.1 2.1 2.1 2.1 2.1 -
-------------------------------------------------------------------------
>>
The BoS Term Loan matures in July 2010, bears interest at the Bank of
Scotland base rate plus 2.25%, is repayable in quarterly installments of
$0.5 million, and is secured by a general security agreement over all the
assets. Financial covenants associated with the BoS Term Loan were
renegotiated on 15-Sep-05, and Allen-Vanguard satisfied its covenant tests at
31-Dec-05.
Deferred Consideration of $0.5 million relates to contingent payments to
the former shareholders of Allen-Vanguard's Irish subsidiary, based on
earnings achieved by the robot manufacturing operation over the period FY 2004
to 2007.
The Giuliani Debenture was renegotiated at FY 2005 year end to remove the
convertibility feature and all accrued interest on the obligation. The
outstanding principal of $0.5 million will be repaid without interest through
ten monthly payments of $0.06 million, ending 01-Oct-06.
In addition to the above contractual obligations, Allen-Vanguard had
various bid and performance bonds and letters of credit outstanding in the
amount of $1.0 million, minimum annual royalties of $0.05 million payable
under the terms of its foam license, and minimum annual net rent payable under
various premises leases of $0.7 million at the end of Q1 2006 (declining
thereafter).
CAPITAL RESOURCES
Allen-Vanguard had common shares outstanding of 37.4 million and fully
diluted shares outstanding of 46.6 million at the end of Q1 2006.
Net Borrowings totaled $8.9 million at the end of Q1 2006 with a ratio of
debt to debt plus equity of 0.20:1, compared to Net Borrowings of $6.1 million
and a ratio of debt to debt plus equity of 0.14:1 at FY 2005 year-end.
The Company has a well established relationship with its primary lender,
BoS, and meets on an ongoing basis to review its financial results. Allen-
Vanguard is tested monthly on its Debtor Cover and quarterly on its Total
Interest, Cash Flow and Asset Covers as those terms are defined under the
amended BoS Term Loan agreement. Allen-Vanguard has satisfied its covenant
tests to date under the amended BoS Term Loan. With respect to the next test
of Total Interest Cover, the Company must achieve a ratio of PBIT (profit
before interest, amortization of intangibles and income taxes) to interest
expense of not less than 2.0:1 for the six-month period ended 31-Mar-06.
Whether or not the Company satisfies the Total Interest Cover test at 31-Mar-
05 will depend to a significant extent on the actual fulfillment dates on
several large orders currently in the Company's order backlog and scheduled
for delivery around the end of Q2 2006.
There are no capital expenditure commitments outside of the ordinary
course of Allen-Vanguard's business, and the Company has no plans to pursue
acquisitions in the short-term. As noted above under "Liquidity", Allen-
Vanguard expects quarterly capital spending for the balance of FY 2006 to
remain relatively constant compared to FY 2005, except for any production
capacity expenditures that would be required in the event of a surge in ECM
component orders under the U.S. ECM Agreement.
On 23-Dec-05, Allen-Vanguard announced the convening of a Special
Committee of its Board of Directors and the appointment of Paradigm Capital
Inc. to assist in the evaluation of strategic alternatives to maximize
shareholder value. It is anticipated that this process will involve a review
of the historical and expected profitability of, and outlook for, Allen-
Vanguard's businesses and assets. Potential actions could involve the
solicitation of offers for the purchase of the Company or specific business
units or assets, or the identification of opportunities to improve Allen-
Vanguard's profitability through organic growth or acquisitions. This review
process is ongoing, and complements cost reduction and revenue generation
initiatives currently being undertaken by management to restore Allen-
Vanguard's profitability in the short-term.
OFF-BALANCE SHEET ARRANGEMENTS
Allen-Vanguard conducts all of its business operations through the
Company and its subsidiaries, and there are no off-balance sheet arrangements
or entities.
TRANSACTIONS WITH RELATED PARTIES
During Q1 2006, the Company purchased decontaminant products and advisory
services from companies controlled by directors of Allen-Vanguard for an
aggregate amount of less than $0.1 million. All of the preceding transactions
were authorized by Allen-Vanguard's board of directors, with the director(s)
involved in the transaction abstaining from voting on the approval resolution.
It is believed that these transactions represent fair value for the products
or services purchased, and there are no ongoing obligations to continue such
purchases.
PROPOSED TRANSACTIONS
There are no proposed asset or business acquisitions or dispositions that
have been approved by the board of directors of Allen-Vanguard. As noted above
under "Capital Resources", the Company is considering a range of strategic
alternatives to maximize shareholder value through the work of the Special
Committee and appointment of Paradigm Capital Inc. as its advisor.
CRITICAL ACCOUNTING ESTIMATES
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. Management reviews its estimates, particularly as
they relate to accounting for long-term contracts, useful lives, income taxes,
impairment of long-lived assets and goodwill, based on management's best
knowledge of current events and actions that the Company may undertake in the
future. Significant changes in estimates and / or assumptions could result in
impairment of certain assets. Actual results could differ from those
estimates.
Allen-Vanguard's critical accounting policies are those that it believes
are the most important in determining its financial condition and results, and
require significant subjective judgment by management. A description of the
Company's accounting policies is presented in Note 2 to the consolidated
financial statements for FY 2005. Allen-Vanguard considers an accounting
estimate to be critical if the estimate requires management to make
assumptions about matters that were highly uncertain at the time the estimate
was made, if different estimates could have been reasonably used or if changes
in the estimate that would have a material impact on Allen-Vanguard's
financial condition or results of operations are likely to occur from period
to period.
1. 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 licenses
sold under contracts with multiple deliverables, where the license does not
represent a single unit of account in accordance with EIC 142 Revenue
Arrangements with Multiple Deliverables, are recognized straight-line over the
term of the license. Revenue from training and consulting services is
recognized in the period in which the services have been rendered.
The Company completes most contracts involving the sale of goods and
equipment within six months of receiving a firm order from the customer.
Contracts under which Allen-Vanguard provides research and development
services can extend beyond one year depending on the scope of the customer's
requirements.
Advance payments received from customers, in excess of revenue
recognized, are classified as deferred revenue.
2. 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.
During Q4 2005, the foreign subsidiaries were integrated into the
operations of the Company, whereby several key operating areas, including cash
and financing, are managed on a consolidated basis. Monetary items are
translated at the exchange rate in effect at the balance sheet date and non-
monetary items, including depreciation, are translated at historical exchange
rates. Other revenue and expense items are translated at average exchange
rates prevailing during the year. Exchange gains and losses are included in
operations.
Prior to Q4 2005, assets and liabilities of foreign subsidiaries were
translated at exchange rates prevailing at the balance sheet date. The
revenues and expenses were translated at average exchange rates prevailing
during the year. Cumulative gains and losses on translation up to 30-Jun-05
are deferred and included as a separate component of shareholders' equity.
3. Research and development costs
Scientific research and experimental development costs are expensed in
the period in which they are incurred. Investment tax credits and other
government assistance related to these activities are credited against the
expense in the period in which they can be reliably estimated.
4. Stock-based compensation
The Company has a stock-based compensation plan, which is described in
Note 10 (iii) to the consolidated financial statements for FY 2005.
Effective 01-Oct-04, 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
granted 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. On the exercise of stock options, the
consideration received is recorded as share capital. The effect of this change
in accounting policy, which has been adopted retroactively without
restatement, is described in Note 11 to the consolidated financial statements
for FY 2005.
5. Income taxes
Allen-Vanguard follows the asset and liability method of accounting for
income taxes. Under this method, future tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases and are measured using the substantially enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
The Company is in the process of conducting a study of its internal
policies with respect to transfer pricing within the consolidated group. The
consolidated income tax provision has been based on management's best estimate
of the pricing that is equivalent to comparative uncontrolled pricing for the
same or similar products. Until the time for reassessment by taxation
authorities has been statute barred or the taxation authorities have reviewed
and not objected to the tax filings, there is a possibility that a
reassessment may occur.
6. 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.
7. Other intangible assets
Other 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. Intangible
assets are amortized on a straight-line basis over ten years, except for
orders on hand, which are written off when the corresponding revenue is
recognized.
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. To date, Allen-Vanguard has been awarded every patent for
which it has applied.
8. 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 and long term debt, approximate their fair values
(see "Risks and Uncertainties - Foreign Currency").
9. Inventories
Inventories consist of laid down cost, duty, brokerage and an
apportionment of direct overheads, and are valued at the lower of cost
(determined on the first-in, first-out basis) and net realizable value. In
Q1 2006, Allen-Vanguard accepted inventory with an estimated net realizable
value of $4.3 million as consideration in kind for full settlement of the
balance outstanding in respect of the Iraq Contract (see "Liquidity - (i) Cash
Flow From Operating Activities").
10. Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is
provided annually on bases intended to amortize the assets over their
estimated useful lives, as follows:
Furniture - 20% declining balance
Computer equipment and machinery - 30% declining balance
Leasehold improvements - straight-line over 5 years
CHANGES IN ACCOUNTING POLICIES
Following the effective date of the U.S. ECM Agreement, the Company
expanded its revenue recognition policy with respect to revenue from licenses
under contracts involving multiple deliverables (see "Critical Accounting
Estimates - Revenue Recognition"). Given this clarification, the accounting
policies followed in Q1 2006 were consistent with FY 2005.
FINANCIAL INSTRUMENTS and OTHER INSTRUMENTS
Allen-Vanguard is exposed to currency risk as a significant volume of its
transactions are denominated in U.S. dollars, European Euros and British
Pounds Sterling. The Company has not entered into forward, swap or option
contracts to manage its exposures to fluctuations in foreign exchange rates,
interest rates, or changes in share price. Monetary assets and liabilities
denominated in foreign currencies at the end of Q1 2006 are presented in
"Results of Operations - Foreign Exchange and Interest" and repayment
obligations for the BoS Term Loan, Deferred Consideration and Giuliani
Debenture are shown in "Liquidity - Contractual Obligations".
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
Allen-Vanguard's customers, the majority of which are government departments
or agencies or military organizations. Allen-Vanguard 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.
SUBSEQUENT EVENTS
Late filing of FY 2005 Audited Financial Statements
Allen-Vanguard was unable to file its audited consolidated financial
statements for FY 2005 by 29-Dec-05; the deadline specified by National
Instrument 51-102. This delay was the result of complexities involved in the
audits of its U.K. and Irish subsidiaries, where the year end's of the
subsidiaries were changed to coincide with that of the parent company and the
audit work was performed by several different firms. As a consequence of
failing to meet the filing deadline, the Ontario Securities Commission ("OSC")
issued a management cease trade order ("MCTO") on 04-Jan-06. An MCTO is part
of a voluntary process whereby specific insiders and management of Allen-
Vanguard are prohibited from trading in the Company's securities until such
time as the required filings of its FY 2005 audited consolidated financial
statements, MD&A and Annual Information Form are completed and MCTO is lifted
by the OSC.
The required filings were completed on 27-Jan-06, and the MCTO was lifted
by the OSC on 01-Feb-06.
RISKS AND UNCERTAINTIES
Allen-Vanguard operates in a highly competitive and rapidly changing
environment that involves a number of risks. The following is a discussion of
the principal risk factors.
(I) Period to Period Fluctuations
Allen-Vanguard's revenue and operating results may fluctuate
substantially from period to period.
Revenue is dependent on orders booked and shipped in the period, the
timing of which is affected by many factors, including (i) customer purchasing
protocols, testing procedures and order acceptance scheduling, (ii) seasonal
government buying patterns, (iii) global, national and local economic and
market conditions, (iv) changes in government policy and regulations, and (v)
competitor activities.
The sales cycle of the Company's products and services is lengthy,
complex and unpredictable, ranging from 6 to 12 months for non-military
markets and from 6 to 24 months or longer for military markets. While
customers are evaluating the Company's products and services, the Company may
incur significant expenses and expend management effort. The result of making
these expenditures, with no corresponding revenue negatively impacts earnings
for the period.
A significant portion of Allen-Vanguard's operating expenses are fixed in
nature, based on an anticipated level of revenue. Consequently, fluctuations
in revenue may have a disproportionate impact on operating results for the
period.
(II) Product Development and Technological Change
The EP&R industry is characterized by ongoing technological advances and
the introduction of new products utilizing new technologies. The success of
Allen-Vanguard will depend on its ability to secure technological superiority
in its products and maintain such superiority in the face of new technologies.
Acceptance of the Company's products is dependent to some extent on changing
established protocols for dealing with explosive devices. Although Allen-
Vanguard is committed to the development of new products and the improvement
of its existing products, there can be no assurance that these research and
development activities will prove profitable or that the resulting products,
if any, will be commercially viable or successfully produced and marketed.
(III) Government and Military Spending
The market for Allen-Vanguard's products and services is to a significant
extent driven by government spending on military and domestic security
programs. There can be no assurances that the government grants and incentive
programs presently being offered to participants in the EP&R industry will
continue at their present levels. If such grants or incentives are reduced or
discontinued, the level of activity in the industry may be reduced and the
revenue of the Company may be adversely affected.
(IV) Competition
Competition within the EP&R industry is intense, and like most other
profitable industries, competition is expected to increase in the future. Many
of Allen-Vanguard's competitors have longer operating histories and greater
financial, technical and marketing resources, and such competitors could
materially and adversely affect the Company's business, results of operations
and financial condition.
(V) Environmental Hazards
Allen-Vanguard's products are complex and sophisticated and some contain
chemicals that may be found to be hazardous to humans. In such event, the sale
and use of the Company's products could result in liability claims. Any
liability claims could have an adverse effect on the operating results and the
business of Allen-Vanguard. There is no assurance that the Company's insurance
coverage will be sufficient to cover one or more such substantial claims.
(VI) Intellectual Property
The success of Allen-Vanguard will depend, in part, on its ability to
maintain trade secret protection and operate without infringing the
proprietary rights of third parties. In those cases where patent or trademark
protection will be an effective means of maintaining its competitive
advantage, the Company will make application for patents and trademarks in the
appropriate jurisdictions. The products developed by Allen-Vanguard also
incorporate technology and processes that will not be protected by any patent
and are capable of being duplicated or improved upon by competitors.
Accordingly, the Company may be vulnerable to competitors who develop
competing technology, whether independently or as a result of acquiring access
to the proprietary products and trade secrets of Allen-Vanguard.
The Company enters into confidentiality agreements with its key employees
and consultants, and generally controls access to and distribution of its
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use Allen-Vanguard's products or
technology without authorization, or to develop similar technology
independently. In addition, effective patent, copyright and trade secret
protection may be unavailable or limited in certain foreign countries and may
be unenforceable under the laws of certain jurisdictions.
Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on Allen-Vanguard's
business, operating results or financial condition.
(VII) Dependence on Key Personnel
The success of Allen-Vanguard has been, and is expected to continue to
be, dependent upon the quality of its key management and research and
development personnel. Loss of the services of such persons, or the inability
to attract quality personnel, could materially adversely affect the Company's
business operations and prospects.
(VIII) Financing
Allen-Vanguard may require additional financing in order to make further
investments, respond to competitive pressures or take advantage of
unanticipated opportunities. The ability of the Company to arrange such
financing in the future will depend in part upon prevailing capital market
conditions, as well as the business success of Allen-Vanguard. If additional
financing is raised by the issuance of shares from treasury, control of the
Company may change and shareholders may suffer additional dilution.
As Allen-Vanguard's common shares are currently listed on The Toronto
Stock Exchange, factors such as announcements of quarterly variations in
operating results, or new actions by competitors, as well as market conditions
in the EP&R industry, may have a significant impact on the market price of the
Company's common shares. The stock market has from time to time experienced
extreme price and volume fluctuations, which have often been unrelated to the
operations of particular companies. Share prices for companies in the EP&R
industry have experienced wide fluctuations that have often been unrelated to
the operations of the companies themselves. Such changes in Allen-Vanguard's
market capitalization or stock market conditions, many of which will be beyond
the Company's control, could substantially change Allen-Vanguard's cost of
capital.
(IX) Acquisitions
Allen-Vanguard may consider acquisition opportunities on a case by case
basis. There is no assurance that the Company will be able to identify
suitable acquisition candidates, negotiate acceptable purchase terms, obtain
necessary financing, or integrate the acquired businesses and their personnel
into Allen-Vanguard's business.
(X) Foreign Currency
Allen-Vanguard consolidates the accounts of its foreign subsidiaries,
generates a significant portion of its revenue with customers based in
countries outside of Canada, contracts with suppliers and customers in
currencies other than the Canadian dollar, and carries monetary balances in
foreign currencies. Any material fluctuation in the Canadian dollar relative
to other currencies, particularly the U.S. dollar or U.K. pounds sterling,
could have a negative impact on the Company's revenue, cost of sales and
working capital position. Allen-Vanguard presently conducts no currency
hedging operations.
%SEDAR: 00018026E
