- Fiscal 2005 results in line with previous disclosure
- Financial position remains strong
- Order flow and backlog increasing sharply
OTTAWA, Jan. 27 /CNW Telbec/ - Allen-Vanguard Corporation (the "Company"
or "Allen-Vanguard") (TSX:VRS) of Ottawa, Canada today reported its financial
results for the fiscal year ended September 30th, 2005.
General update
"We announced on December 30th, 2005, that we would complete this overdue
filing by the end of January," said interim Chairman and CEO David Luxton.
The delay was due solely to technical complexities with the audit, where
the year ends of the U.K. and Irish subsidiaries were changed to coincide with
that of the parent company and the audit work was completed by several
different firms. The financial results being announced today are essentially
the same as the selected unaudited financial highlights provided in December
2005.
The Company added that it will announce its results for the first quarter
of fiscal 2006 ended December 31, 2005, by the required regulatory deadline,
meaning no later than February 14th, 2006. As noted on December 23rd, when the
Company released unaudited interim financial highlights, performance continued
weak in Q1 of fiscal 2006, attributable mainly to timing of orders, especially
in the U.S. "We anticipate that the first quarter of this fiscal year will be
the low water mark in the Company's revenue run-rate," said David Luxton.
The Company stated that its financial position remains healthy, with
orders and backlog now increasing. Working capital was $18.4 million at fiscal
2005 year-end, including cash of $5.2 million. The company was in compliance
with its bank covenants at fiscal year end and expects to be in compliance
with all bank covenants as at the end of the first quarter of fiscal 2006
ended December 31st, 2005.
Last October the Company announced its integration plan and financing
initiatives. The plan included achieving approximately $5 million in
annualized cost reductions. This process began in Q4 of fiscal 2005 and has
continued through Q1 and into Q2 of fiscal 2006. The Company anticipates that
it will be substantially completed by the end of March, 2006. Associated
restructuring charges were accrued at fiscal year end 2005. "We intend to
achieve the full amount of savings in the original plan and we continue to
look for further economies as we work to restore profitability through lower
costs and increased revenues," said David Luxton. "We expect to be able to
provide an update on our progress in the very near future."
FY 2005 Financial Highlights
Results were in line with the Company's expectations announced December
23rd, 2005.
- Revenue was $9.1 million in Q4 2005 and $51.4 million in FY 2005,
compared to $11.6 million in Q4 2004 and $20.3 million in FY 2004.
No revenue was recognized in Q4 2005 in respect of the contract for
equipping and training the Iraqi police force (the "Iraq Contract"),
compared to $2.1 million in Q4 2004. The Iraq Contract accounted for
revenue of $7.9 million in FY 2005 compared to $2.1 million in FY
2004. Excluding the Iraq Contract, Q4 2005 revenue was marginally
under the Q4 2004 figure, while FY 2005 revenue increased 253% from
FY 2004.
- Earnings before interest, taxes, amortization, stock-based
compensation, foreign exchange, integration costs and goodwill
impairment ("EBITDA") was a loss of $4.3 million in Q4 2005 and
$2.8 million in FY 2005, compared to positive EBITDA of $1.4 million
in Q4 2004 and $ 0.5 million in FY 2004.
- In accordance with Canadian GAAP, Allen-Vanguard performs an annual
impairment test on the carrying value of its long-lived assets,
including goodwill. The Company uses generally accepted valuation
techniques such as discounted cash flow and earnings capitalization
to determine the fair value of its long-lived assets, and these fair
values are then compared to their respective carrying values.
Impairment tests involve a significant degree of judgment, as
expectations concerning future net cash flows and the selection of
an appropriate discount rate are subject to considerable risks and
uncertainties. Based on the test at 30-Sep-05 which discounted
expected future net cash flows at a weighted average discount rate
of 26%, the Company concluded that an impairment of goodwill had
occurred. The most significant factor affecting the Company's
valuation of goodwill was the shortfall in operating results in FY
2005 compared to the results expected when the impairment test was
last performed at the FY 2004 year end. Consequently, Allen-Vanguard
reduced the carrying value of goodwill through a charge to earnings
of $20.5 million in Q4 2005.
- Allen-Vanguard's results in FY 2005 have been heavily impacted by
$25.1 million of non-recurring charges, including the charges for
integration and goodwill impairment, amortization of acquired orders
on hand, and Giuliani Contract fees.
- Allen-Vanguard recorded a net foreign exchange loss of $0.2 million
in Q4 2005 and $0.5 million in FY 2005, compared to a gain of
$0.2 million in Q4 2004 and FY 2004. Company 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. The impact of this change
in accounting policy was a charge of approximately $0.9 million in
Q4 2005.
- Adjusted EPS, basic, defined as basic earnings per share, adjusted
for amortization of intangible assets, goodwill impairment and
integration costs., was a loss of $0.14 in Q4 2005 and a loss of
$0.16 in FY 2005, compared to $0.05 in Q4 2004 and $0.02 in FY 2004.
- The net loss for Q4 2005 was $23.3 million or a loss of $0.89 per
share, and $28.6 million or a loss of $1.09 per share in FY 2005.
These figures compare to net earnings of $0.9 million or $0.04 per
share in Q4 2004, and net earnings of $0.1 million or $0.00 per
share in FY 2004.
- Allen-Vanguard's cash and cash equivalents, net of bank
indebtedness, at the end of FY 2005 amounted to $5.2 million,
compared to $(4.0) million at the end of FY 2004. Working capital
totaled $18.4 million at the end of FY 2005, including a
$4.3 million receivable in respect of the Iraq Contract. This
compares to working capital of $4.2 million at the end of FY 2004.
- Net Borrowings, defined as bank indebtedness, net of cash, plus
long-term debt totaled $6.1 million at FY 2005 year-end, compared to
$12.4 million at the prior year-end. The ratio of Net Borrowings to
Net Borrowings plus shareholders' equity was 0.14:1 at FY 2005
year-end, compared to 0.21:1 at the prior year-end.
- Allen-Vanguard had common shares outstanding of 37.3 million and
fully diluted shares outstanding of 47.0 million at FY 2005
year-end.
- The delay in collecting the $4.3 million Iraq Contract receivable
had a pronounced adverse effect on Allen-Vanguard's cash position.
On 20-Dec-2005, the Company entered into an amending agreement with
the 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 0.1 million to the Prime upon the effective date of the amending
agreement, and a further $US 0.1 million 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.
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 STATEMENTS OF EARNINGS
Quarter Ended Fiscal Year Ended
September 30 September 30
(Unaudited) (Audited)
2005 2004 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 9,148,086 $ 11,598,517 $ 51,400,185 $ 20,250,799
Cost of sales 5,422,566 5,358,707 29,356,745 10,859,351
-------------------------------------------------------------------------
Gross profit 3,725,520 6,239,810 22,043,440 9,391,448
-------------------------------------------------------------------------
Expenses
Selling and
administration 5,741,373 4,110,257 21,213,471 8,143,961
Research and
development
costs 2,342,395 685,118 3,908,031 780,131
Interest on
long term debt 57,909 38,983 157,909 67,563
Other interest
(income) (224,394) (132,120) 62,986 (178,740)
Foreign exchange
loss (gain) 227,395 (206,607) 495,326 (245,564)
Amortization of
property, plant
and equipment 493,287 155,346 1,040,464 231,380
Amortization of
intangible
assets (105,158) 206,936 2,781,900 246,436
-------------------------------------------------------------------------
8,532,807 4,857,913 29,660,087 9,045,167
-------------------------------------------------------------------------
Earnings (loss)
from continuing
operations (4,807,287) 1,381,897 (7,616,647) 346,281
-------------------------------------------------------------------------
Other expenses
Goodwill
impairment 20,500,000 - 20,500,000
Integration
costs (900,032) - 1,025,000
Amalgamation
costs - - - 260,277
-------------------------------------------------------------------------
19,599,968 - 21,525,000 260,277
-------------------------------------------------------------------------
Earnings (loss)
from continuing
operations
before income
taxes (24,407,255) 1,381,897 (29,141,647) 86,004
------------------------------------------- ---------------------------
Provision for
(recovery of)
income taxes
Current (704,208) 281,816 (10,208) 711,816
Future (373,000) 191,000 (500,000) (680,000)
-------------------------------------------------------------------------
(1,077,208) 472,816 (510,208) 31,816
-------------------------------------------------------------------------
Net earnings
(loss) $(23,330,047) $ 909,081 $(28,631,439) $ 54,188
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings
(loss) per
share -$0.89 $0.04 -$1.09 $0.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted
earnings
(loss) per
share - 0.03 - $0.00
-------------------------------------------------------------------------
ALLEN-VANGUARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended Fiscal Year Ended
September 30 September 30
(Unaudited) (Audited)
2005 2004 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SOURCES (USES) OF CASH:
Operating
activities
Net earnings $(23,330,047) $ 909,081 $(28,631,439) $ 54,188
Items not
involving
cash
Goodwill
impairment 20,500,000 - 20,500,000 -
Integration
costs (900,032) - 1,025,000 -
Amortization 388,129 362,282 3,822,362 477,816
Stock based
compensation
expense 75,498 - 257,134
Future income
taxes (373,000) 191,000 (500,000) (680,000)
-------------------------------------------------------------------------
(3,639,452) 1,462,363 (3,526,943) (147,996)
Changes in
non-cash
working
capital items 430,942 (4,714,362) (4,538,910) (10,198,557)
-------------------------------------------------------------------------
Cash used in
operating
activities (3,208,510) (3,251,999) (8,065,853) (10,346,553)
-------------------------------------------------------------------------
Investing
activities
Purchase of
property,
plant and
equipment (211,299) (187,788) (1,495,317) (441,455)
Acquisitions - (19,406,301) (497,781) (27,025,508)
Acquisition of
intangible
assets (1) (92,525) 16,693 (158,638)
Cash effect of
translation
of foreign
subsidiary - 233,680 (221,423) 233,680
-------------------------------------------------------------------------
Cash used in
investing
activities (211,300) (19,452,934) (2,197,828) (27,391,921)
-------------------------------------------------------------------------
Financing
activities
Increase in
long term debt (2,360,539) 979,793 5,706,235 1,445,356
Proceeds from
issuance of
common shares
and warrants 12,801,424 7,266,352 13,713,817 32,413,785
Payment of
finders fee - - - (86,250)
-------------------------------------------------------------------------
Cash provided
by financing
activities 10,440,885 8,246,145 19,420,052 33,772,891
-------------------------------------------------------------------------
Net decrease
in cash
and cash
equivalents 7,021,075 (14,458,788) 9,156,371 (3,965,583)
Cash and cash
equivalents,
beginning
of period (1,831,049) 10,492,443 (3,966,345) (762)
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of
period $ 5,190,026 $ (3,966,345) $ 5,190,026 $ (3,966,345)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Represented by:
Cash $ 5,744,043 $ 937,077 $ 5,744,043 $ 937,077
Bank
indebtedness (554,017) (4,903,422) (554,017) (4,903,422)
-----------------------------------------------------------
$ 5,190,026 $ (3,966,345) $ 5,190,026 $ (3,966,345)
-----------------------------------------------------------
-----------------------------------------------------------
ALLEN-VANGUARD CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
AUDITORS' REPORT
-------------------------------------------------------------------------
-------------------------------------------------------------------------
To the Shareholders of
Allen-Vanguard Corporation
We have audited the consolidated balance sheets of Allen-Vanguard
Corporation as at September 30, 2005 and 2004 and the consolidated statements
of earnings, retained earnings (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
September 30, 2005 and 2004 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
(signature)
Goberman LLP
Chartered Accountants
Toronto, Canada
December 23, 2005
ALLEN-VANGUARD CORPORATION
CONSOLIDATED BALANCE SHEETS
At September 30 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 5,744,043 $ 937,077
Accounts receivable (Note 19 (b)) 12,364,232 9,872,332
Inventories 9,716,560 10,794,512
Prepaid expenses and sundry assets 2,049,356 2,138,688
-------------------------------------------------------------------------
29,874,191 23,742,609
Property, plant and equipment (Note 5) 2,805,086 2,350,232
Goodwill (Note 6) 21,584,970 36,378,708
Other intangible assets (Note 7) 2,918,759 5,717,352
Future income taxes (Note 15) 1,180,000 680,000
-------------------------------------------------------------------------
$ 58,363,006 $ 68,868,901
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Bank indebtedness (Note 8) $ 554,017 $ 4,903,422
Accounts payable and accrued charges 7,252,329 5,933,266
Income taxes payable 729,316 481,566
Deferred revenue - 3,756,108
Current portion of long term debt (Note 9) 2,971,895 4,509,280
-------------------------------------------------------------------------
11,507,557 19,583,642
Long term debt (Note 9) 8,276,455 3,895,804
-------------------------------------------------------------------------
19,784,012 23,479,446
-------------------------------------------------------------------------
Commitments (Note 16)
SHAREHOLDERS' EQUITY
Capital stock (Note 10) 64,026,659 42,231,588
Equity portion of convertible
debentures (Note 9) - 9,804
Contributed surplus (Notes 4 and 11) 2,984,070 1,938,000
Cumulative translation adjustment
(Note 2 - Foreign currencies) 12,257 233,680
Retained earnings (deficit) (28,443,992) 976,383
-------------------------------------------------------------------------
38,578,994 45,389,455
-------------------------------------------------------------------------
$ 58,363,006 $ 68,868,901
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
On behalf of the Board
(signed) "William L. Hess" Q.C. (signed) "Alain Lambert"
ALLEN-VANGUARD CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
Year ended September 30 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, beginning of year $ 976,383 $ 922,195
Retroactive adjustment related
to stock-based compensation
of prior periods (Note 11) (788,936) -
-------------------------------------------------------------------------
187,447 922,195
Net earnings (loss) (28,631,439) 54,188
-------------------------------------------------------------------------
Balance, end of year $(28,443,992) $ 976,383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
ALLEN-VANGUARD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 51,400,185 $ 20,250,799
Cost of sales 29,356,745 10,859,351
-------------------------------------------------------------------------
Gross profit 22,043,440 9,391,448
-------------------------------------------------------------------------
Expenses
Selling and administration 21,213,471 8,143,961
Research and development costs 3,908,031 780,131
Foreign exchange (gain) loss 495,326 (245,564)
Interest on long term debt 157,909 67,563
Other interest (income) 62,986 (178,740)
Amortization of intangible assets 2,781,900 246,436
Amortization of property, plant and equipment 1,040,464 231,380
-------------------------------------------------------------------------
29,660,087 9,045,167
-------------------------------------------------------------------------
Earnings (loss) from operations (7,616,647) 346,281
-------------------------------------------------------------------------
Other items
Goodwill impairment (Note 6) 20,500,000 -
Integration costs (Note 3) 1,025,000 -
Amalgamation costs (Note 1) - 260,277
-------------------------------------------------------------------------
21,525,000 260,277
-------------------------------------------------------------------------
Earnings (loss) before income taxes (29,141,647) 86,004
-------------------------------------------------------------------------
Provision for (recovery of) income
taxes (Note 15)
Current (10,208) 711,816
Future (500,000) (680,000)
-------------------------------------------------------------------------
(510,208) 31,816
-------------------------------------------------------------------------
Net earnings (loss) $(28,631,439) $ 54,188
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss) per share (Note 17) $ (1.09) $ 0.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss) per share (Note 17) $ - $ 0.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
ALLEN-VANGUARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30 2005 2004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SOURCES (USES) OF CASH
Operating activities
Net earnings (loss) $(28,631,439) $ 54,188
Items not involving cash
Goodwill impairment 20,500,000 -
Integration costs 1,025,000 -
Amortization 3,822,362 477,816
Stock-based compensation expense 257,134 -
Future income taxes (500,000) (680,000)
-------------------------------------------------------------------------
(3,526,943) (147,996)
Changes in non-cash working capital
items (Note 12) (4,538,910) (10,198,557)
-------------------------------------------------------------------------
Cash used in operating activities (8,065,853) (10,346,553)
-------------------------------------------------------------------------
Investing activities
Acquisitions (Note 4) (497,781) (27,025,508)
Purchase of property, plant and equipment (1,495,317) (441,455)
Acquisition of other intangible assets 16,693 (158,638)
Cash effect of translation of foreign
subsidiary (Note 2) (221,423) 233,680
-------------------------------------------------------------------------
Cash used in investing activities (2,197,828) (27,391,921)
-------------------------------------------------------------------------
Financing activities
Increase in long term debt 5,636,235 1,445,356
Proceeds from issuance of common shares
and warrants 13,783,817 32,413,785
Finders fee - (86,250)
-------------------------------------------------------------------------
Cash provided by financing activities 19,420,052 33,772,891
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 9,156,371 (3,965,583)
Cash and cash equivalents, beginning of year (3,966,345) (762)
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,190,026 $ (3,966,345)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Represented by:
Cash $ 5,744,043 $ 937,077
Bank indebtedness (554,017) (4,903,422)
-------------------------------------------------------------------------
$ 5,190,026 $ (3,966,345)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other cash flow information:
Interest paid $ 407,000 $ 145,000
Income taxes paid 150,000 246,000
Repayment of long term debt by the
issuance of inventory - 480,000
The accompanying notes are an integral part of the consolidated financial
statements
ALLEN-VANGUARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. The Company
On February 10, 2005 Vanguard Response Systems Inc. ("Vanguard")
amalgamated with its wholly owned subsidiary, EOD Performance Inc., by way of
Articles of Amalgamation, with the amalgamated company becoming Allen-Vanguard
Corporation ("the Company").
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.
On November 17, 2003, NBC Team Limited ("NBC") effected a business
combination and amalgamated with Canadian Public Venture Equities I Inc.
("Equities I") to create Vanguard. The business combination constituted a
Qualifying Transaction of Equities I, as defined in Policy 2.4 of the TSX
Venture Exchange Inc. Corporate Finance Manual, and Vanguard was listed on the
Toronto Stock Exchange on November 24, 2003. The business combination was
completed following a secondary offering and a private placement financing for
Vanguard. As a result of the share exchanges described in Note 10, control of
Vanguard passed to the former shareholders of NBC. This type of share
exchange, referred to as a "reverse takeover", deemed NBC to be the acquirer
for accounting purposes and the acquisition was accounted for by the purchase
method.
2. Significant accounting policies
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles 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 consolidated 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.
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 when the risks
and rewards of ownership have been transferred to the customer, which is the
point when the goods are shipped. Revenue from training and consulting are
recognized when 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.
During the quarter ended September 30, 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 June 30, 2005, assets and liabilities of foreign subsidiaries
were translated at exchange rates prevailing at the balance sheet date, and
revenues and expenses were translated at average exchange rates prevailing
during the year. Cumulative gains and losses on translation up to June 30,
2005 are deferred and included as a separate component of shareholders'
equity.
Research and development costs
Scientific research and experimental development costs are expensed in
the period in which they are incurred. Recoveries from Investment Tax Credits
and other government assistance are credited against the expense in the period
in which they can be reliably measured.
Stock-based compensation
The Company has a stock-based compensation plan, which is described in
Note 10 (iii).
Effective October 1, 2004, the Company adopted recommendations of The
Canadian Institute of Chartered Accountants with respect to the accounting for
stock-based compensation and other stock-based payments, using the fair value-
based method. Under the fair value method, compensation costs attributable to
awards granted to employees are measured at fair value at the date of the
grant, amortized over the vesting period on a straight-line basis, and charged
to earnings with a related credit to Contributed Surplus. 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. All awards granted
to non-employees are accounted for using the fair value based method.
Income taxes
The Company 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.
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
unless otherwise disclosed.
It is management's opinion that the Company is not exposed to significant
interest or credit risks (see Note 13).
Cash and cash equivalents
Cash and cash equivalents include term deposits with original maturities
of less than 90 days.
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.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is
provided annually on bases designed to amortize the assets over their
estimated useful lives, as follows:
Furniture - 20% declining balance
Computer equipment - 30% declining balance
Machinery and equipment - 30% declining balance
Leasehold improvements - straight-line over 5 years
Intangible assets
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 is also performed in any period in which events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment is recognized at that time, to the extent that the carrying amount
exceeds the discounted future net cash flows expected from its use. (See Note
6.)
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.
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.
Leases
Leases are classified as either capital or operating in nature. Leases
that transfer substantially all of the benefits and inherent risks of
ownership of property to the Company are accounted for as capital leases. At
the time a capital lease is entered into, an asset is recorded together with
its related long term obligation to reflect the acquisition and financing.
Equipment recorded under capital leases is amortized on the same basis as
described above. Rental payments under operating leases are expensed as
incurred.
Comparative figures
Certain reclassifications for the year ended September 30, 2004 have been
made for the purpose of comparability.
3. Integration costs
An accrual of $1,025,000 was recorded as at September 30, 2005 in respect
of staff and facility termination costs related to the closure of the Ottawa
machine shop, which was completed in August 2005. The liability is included in
accounts payable and accrued charges. The following table describes the
movements in the integration accrual:
Staff
Terminations Other Costs Total
-------------------------------------------------------------------------
Integration charge recognized $ 734,000 $ 291,000 $ 1,025,000
Other charges to accrual (89,009) 52,067 (36,942)
-------------------------------------------------------------------------
Balance of accrual, end of year $644,991 $343,067 $988,058
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Acquisitions
There were no acquisitions during the year ended September 30, 2005.
However, there were adjustments during the year to acquisitions made in the
prior year.
The prior year acquisitions described below have been accounted for using
the purchase method, whereby, the results of operations of each acquired
company are included in the consolidated statements of earnings and cash flows
since the acquisition dates and the related identifiable assets acquired and
liabilities assumed are recorded at their fair values on those dates. Third-
party valuations of certain of the assets acquired and their useful economic
life and thus the allocation of the purchase price were completed during the
current year and found no amendments to be necessary.
Any contingent consideration that is payable in a future period will be
recorded as additional purchase consideration at that time, with a
corresponding adjustment to goodwill.
The fair values of the net assets acquired and liabilities assumed and
the fair values of consideration paid or payable, for each of the companies
acquired during the period, are reflected in the table below:
PWA EOD VPTI Total
-------------------------------------------------------------------------
(i) (ii) (iii)
Net assets
acquired
Net current
assets
(liabilities) $ (3,608,362) $ 914,153 $ (306,934) $ (3,001,143)
Property,
plant and
equipment 1,518,422 382,916 8,294 1,909,632
Deferred
consideration (1,394,801) - - (1,394,801)
Obligations
under capital
lease (538,986) (108,593) - (647,579)
Intangible
assets,
comprising:
Orders on
hand 2,010,000 504,000 48,000 2,562,000
Technical
drawings
and
patents 1,166,848 224,000 188,000 1,578,848
Brand value 1,100,000 - - 1,100,000
Assembled
sales agent
network 250,000 - - 250,000
Customer list 150,000 - - 150,000
Goodwill
(Note 6) 29,969,403 5,225,899 1,113,406 36,308,708
-------------------------------------------------------------------------
$ 30,622,524 $ 7,142,375 $ 1,050,766 $ 38,815,665
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration
Cash $ 14,458,500 $ 6,560,890 $ 1,025,000 $ 22,044,390
Notes payable 4,033,800 - - 4,033,800
Issue of
Common Shares 8,519,500 - - 8,519,500
Issue of
Warrants 1,938,000 - - 1,938,000
Acquisition
costs 1,672,724 581,485 25,766 2,279,975
-------------------------------------------------------------------------
$ 30,622,524 $ 7,142,375 $ 1,050,766 $ 38,815,665
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Acquisition of PW Allen Holdings Limited ("PWA")
On August 12, 2004, the Company acquired all of the outstanding common
shares of PWA, a company based in Tewkesbury, U.K., which produces and markets
explosive ordnance disposal, bomb search and detection equipment, bomb
technician tools and electronic counter measures.
The common share consideration represents 1,846,788 Common Shares valued
at $4.61 per share, based on the opening share price on the acquisition date.
Of this total, 1,400,000 Common Shares are held in escrow and are to be
released in equal tranches on the three subsequent anniversaries of the
acquisition date.
Each of the 1,400,000 warrants issued entitles the holder to purchase one
Common Share of the Company for $4.75. The warrants vest in equal tranches on
the three subsequent anniversaries of the acquisition date and, once vested,
are exercisable at any time until August 12, 2008, at which time any
unexercised warrants will expire. The fair value of the warrant consideration
has been determined by the Black-Scholes model using the following
assumptions: zero dividend yield, expected volatility of 40%, risk-free
interest rate of 4.5% and an average warrant life of 3 years. The fair value
of the warrants is calculated as $1,938,000 and is included in equity as
contributed surplus. On future exercise of the warrants, the pro rata
proportion of the contributed surplus balance will be transferred to share
capital.
During the year, the Company issued 1,257,143 units in part settlement of
the contingent consideration. Each unit comprises one Common Share valued at
$1.75 and one-half of one warrant, of nominal value. The transaction was
accounted for as an increase in the value of goodwill (Note 6) with a
corresponding increase in capital stock (Note 10 (i)).
Further consideration may become payable to the vendors, based on the
future performance achieved under a sales contract acquired, as follows:
(a) Common Shares to a maximum of $3,037,500 (Great Britain pounds, pnds
stlg 1,250,000) representing 658,894 shares at a price of $4.61 being
the opening share price on the day of completion of the acquisition;
(b) A maximum of 400,000 Common Shares, representing a value of
$1,932,000 at a price of $4.83 being the average opening share price
for the 20 days prior to the acquisition date.
(ii) Acquisition of EOD Performance Inc. ("EOD")
On March 5, 2004, the Company acquired all of the outstanding common
shares of EOD, a company based in Ottawa, Ontario, which produces and markets
compact mobile robots and distributes specialty tools.
During the year, the Company issued 800,000 Common Shares, valued at
$5.00 per share, to the vendors of EOD, through exercise of an equivalent
number of special warrants in exchange for cancellation of the contingent cash
and remaining special warrant payments provided for in the original share
purchase agreement. The transaction was accounted for as an increase in the
value of goodwill (Note 6) with a corresponding increase in capital stock
(Note 10 (i) (a)).
(iii) Acquisition of Vanguard Protective Technologies Inc. ("VPTI")
On March 5, 2004, the Company acquired all of the outstanding common
shares of VPTI, a company based in Ottawa, Ontario, which produces and markets
vehicle barriers and suspect package containment systems.
Of the cash consideration of $1,025,000, an amount of $150,000 is held in
escrow, release of which is dependent on the value of sales contracts executed
by December 31, 2004.
Additional contingent cash consideration may become payable, to a maximum
of $8,500,000, based on the post acquisition performance of VPTI.
5. Property, plant and equipment
2005 2004
Net Net
Accumulated Carrying Carrying
Cost Amortization Amount Amount
-------------------------------------------------------------------------
Machinery and
equipment $ 2,679,608 $ 1,167,779 $ 1,511,829 $ 1,224,342
Computer
equipment and
furniture 1,760,382 1,177,190 583,192 642,379
Leasehold
improvements 1,071,683 361,618 710,065 483,511
-------------------------------------------------------------------------
$ 5,511,673 $ 2,706,587 $ 2,805,086 $ 2,350,232
-------------------------------------------------------------------------
6. Goodwill
2005 2004
-------------------------------------------------------------------------
Balance, beginning of year $ 36,378,708 $ -
Recognized on acquisition of PWA,
EOD and VPTI - 36,308,708
Impairment recognized (a) (20,500,000) -
Deferred consideration (Note 9(i)) (921,523) -
Contingent consideration for EOD
acquisition (Note 4 (ii)) 4,000,000 -
Contingent consideration for PWA
acquisition (Note 4 (i)) 2,200,004 -
Adjustment to cost of acquisition 427,781 70,000
-------------------------------------------------------------------------
Balance, end of year $ 21,584,970 $ 36,378,708
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) Operating profits and cash flows during the year were lower than
expected. Those results were used as the basis for forecast cash
flows for the next five years. The Company performed an impairment
test as at September 30, 2005, whereby the carrying amount of
goodwill was compared to the discounted future cash flows expected
from its use, using a weighted average discount rate of 26%.
Impairment tests involve a significant degree of judgment, as
expectations concerning future cash flows and the selection of an
appropriate discount rate are subject to considerable risks and
uncertainties. Management concluded that an impairment had occurred,
and consequently the Company reduced the carrying value of goodwill
through a charge to earnings in the amount of $20,500,000.
7. Other intangible assets
2005 2004
Net Net
Accumulated Carrying Carrying
Cost Amortization Amount Amount
-------------------------------------------------------------------------
Technical
drawings
and patents $ 1,916,264 $ 328,755 $ 1,587,509 $ 1,796,202
Brand value 1,100,000 123,750 976,250 1,086,250
Assembled sales
agent network 250,000 28,125 221,875 246,875
Customer list 150,000 16,875 133,125 148,125
Orders on hand 2,562,000 2,562,000 - 2,439,900
-------------------------------------------------------------------------
$ 5,978,264 $ 3,059,505 $ 2,918,759 $ 5,717,352
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. Bank indebtedness
2005 2004
-------------------------------------------------------------------------
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 $ 554,017 $ -
Repaid during the year - 4,903,422
-------------------------------------------------------------------------
$ 554,017 $ 4,903,422
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Long term debt
2005 2004
-------------------------------------------------------------------------
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
(The term loan in 2004 was renegotiated.) $ 9,759,350 $ 1,542,904
Deferred consideration: non-interest
bearing and unsecured (i) 560,120 1,313,179
Note payable: unsecured, non-interest
bearing, matures October 2006. (The
convertible debenture in 2004 was
renegotiated and the convertible feature
was removed.) 928,880 999,476
Notes payable, retired during the year (ii) - 1,901,541
Other, repaid during the year - 2,647,984
-------------------------------------------------------------------------
11,248,350 8,405,084
Less: amount due within one year (2,971,895) (4,509,280)
-------------------------------------------------------------------------
$ 8,276,455 $ 3,895,804
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The deferred consideration is payable in cash to the vendors in an
acquisition completed by PWA, prior to PWA itself being acquired by
the Company. The deferred consideration is payable based on
performance targets being achieved by the acquired company, and has
been reduced by $921,523, reflecting management's best estimate of
the actual amount to be paid, which is accounted for as a reduction
in goodwill (Note 6). The revised consideration is expected to be
paid within twelve months.
(ii) The notes were retired by an issue of 1,075,000 Common Shares at
$1.75 per share and 537,500 share purchase warrants, of nominal
value. Each warrant entitles the holder to purchase one Common Share
for $2.00. The warrants expire on March 15, 2007.
Principal repayments over the next five years are expected to be made as
follows:
Year ended September 30, 2006 $ 2,971,895
2007 2,112,655
2008 2,054,600
2009 2,054,600
2010 2,054,600
-------------------------------------------------------------------------
$ 11,248,350
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. 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:
Number of
Shares Amount
-------------------------------------------------------------------------
Balance, September 30, 2004 25,499,253 $ 42,231,588
Common Shares issued (a) 800,000 4,000,000
Costs related to exercise of warrants in
prior period - (467,200)
Private placement (b) 8,064,771 14,113,349
Costs related to private placement - (1,411,424)
Issued on conversion of contingent notes (c) 1,257,143 2,200,004
Issued on exercise of warrants 190,703 733,312
Issued on exercise of options 415,696 745,780
Issued on retirement of notes (d) 1,075,000 1,881,250
-------------------------------------------------------------------------
Balance, September 30, 2005 37,302,566 $ 64,026,659
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) The Common Shares were issued in full and final settlement of the
contingent consideration for the acquisition of EOD, as described in
Note 4 (ii).
(b) The September 2005 private placement consisted of 8,064,771 units at
a price of $1.75 per unit. Each unit comprises one Common Share and
one half of one share purchase warrant. The private placement
financing was undertaken because it was determined by the Board of
Directors that the Company was in serious financial difficulty. The
financing was designed to improve the financial situation and was
determined by the Company to be reasonable in the circumstances and
was therefore used as the basis for application to The Toronto Stock
Exchange for the Company to be exempted from the requirements of
obtaining shareholder approval.
(c) The Common Shares were issued in settlement of part of the contingent
consideration for the acquisition of PWA, as described in Note 4 (i).
(d) The Common Shares were issued as consideration for the retirement of
notes payable (see Note 9 (ii)).
Number of
Shares Amount
-------------------------------------------------------------------------
Balance of NBC shares - September 30, 2003 32,857,142 $ 1,314,553
Shares issued for agent fee (e) 325,000 113,750
-------------------------------------------------------------------------
Balance immediately before amalgamation 33,182,142 1,428,303
On amalgamation
Exchange of Equities I shares for
Company shares (f) 1,541,667 320,000
Exchange of NBC shares for Company
shares (g) - cancelled (33,182,142) -
- new issued 11,060,714 -
Issued on exercise of options by agents 13,334 8,000
Costs related to public offering and
qualifying transaction (Note 18) - (200,000)
Private placement
Private placement (h) 9,000,000 27,000,000
Costs related to private placement - (2,324,766)
Issued on exercise of private
placement warrants 1,750,279 7,198,775
Issued on exercise of options 286,471 281,776
Issue of Common Shares (i) 1,846,788 8,519,500
-------------------------------------------------------------------------
Balance, September 30, 2004 25,499,253 $ 42,231,588
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(e) Immediately prior to completion of the business combination, NBC paid
its advisor a fee of $200,000 consisting of cash of $86,250 and the
issue of 325,000 common shares of NBC.
(f) The shareholders of Equities I received an aggregate of 1,541,667 of
Vanguard's Common Shares in exchange for their 4,625,000 common
shares, being all the issued and outstanding shares of Equities I.
(g) The shareholders of NBC received an aggregate of 11,060,714 of
Vanguard's Common Shares in exchange for their 33,182,142 common
shares, being all the issued and outstanding shares of NBC.
(h) The March 2004 private placement consisted of 9,000,000 units at a
price of $3 per unit. Each unit comprises one Common Share and one
half of one warrant.
(i) The Common Shares were issued as part consideration for the
acquisition of PWA, as described in Note 4 (i).
(ii) Warrants
A summary of the Company's share purchase warrants outstanding and the
changes during the year is presented below:
September 30, 2005 September 30, 2004
--------------------------- ---------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Warrants Price Warrants Price
-------------------------------------------------------------------------
Outstanding,
beginning
of year 4,149,721 $ 4.25 - $ -
Issued 5,933,689 1.99 5,900,000 4.18
Exercised (180,703) (4.00) (1,750,279) (4.00)
Expired (2,569,018) (4.00) - -
-------------------------------------------------------------------------
Outstanding,
end of year 7,333,689 $ 2.52 4,149,721 $ 4.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable,
end of year 6,400,356 $ 2.20 4,149,721 $ 4.00
-------------------------------------------------------------------------
The following table summarizes information for warrants outstanding at
September 30:
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:
September 30, 2005 September 30, 2004
--------------------------- ---------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding,
beginning
of year 2,524,427 $ 3.23 4,028,572 $ 0.35
Assumed on
amalgamation - - 575,000 0.20
Exchanged on
amalgamation
- cancelled - - (4,603,572) (0.33)
- new granted - - 1,127,726 0.99
Granted 995,300 3.32 1,696,499 4.08
Exercised (425,696) (1.83) (299,798) (0.99)
Cancelled (102,500) (3.71) - -
Expired (882,001) (3.36) - -
-------------------------------------------------------------------------
Outstanding,
end of year 2,109,530 $ 3.37 2,524,427 $ 3.23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exercisable,
end of year 1,330,696 $ 3.07 1,507,629 $ 2.89
-------------------------------------------------------------------------
The following table summarizes information for stock options outstanding
at September 30:
2005 2004
Exercise Price Expiry Number Number
-------------------------------------------------------------------------
$ 0.60 June 11, 2008 15,667 15,667
1.05 November 18, 2008 204,564 460,832
1.05 October 18, 2005 100,000 121,429
1.75 November 18, 2008 30,000 30,000
3.00 November 18, 2008 - 40,000
3.00 September 5, 2005 - 630,000
3.23 November 3, 2009 400,000 -
3.35 May 11, 2010 575,300 -
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 14,000 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 2,109,530 2,524,427
-------------------------------------------------------------------------
11. Contributed surplus
2005 2004
-------------------------------------------------------------------------
Balance, beginning of year $ 1,938,000 $ -
Retroactive adjustment related to value
of stock-based compensation of prior periods 788,936 -
-------------------------------------------------------------------------
2,726,936 -
Issue of warrants as part consideration
for PWA acquisition - 1,938,000
Value associated with stock-based
compensation expense for the year 257,134 -
-------------------------------------------------------------------------
Balance, end of year $ 2,984,070 $ 1,938,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The stock-based compensation was estimated using the Black-Scholes option
pricing model, with the following assumptions:
Dividend yield - Nil %
Expected volatility - 40%
Risk-free interest rate - 4.5%
Weighted average life - 3.7 years
12. Changes in non-cash working capital items
2005 2004
-------------------------------------------------------------------------
Subscriptions received, held in trust $ - $ 1,082,127
Accounts receivable (2,491,900) (8,106,188)
Inventories 1,077,952 (8,872,466)
Prepaid expenses and sundry assets 89,332 (2,001,669)
Accounts payable and accrued charges 294,064 3,636,973
Income taxes payable 247,750 306,558
Deferred revenue (3,756,108) 3,756,108
-------------------------------------------------------------------------
$ (4,538,910) $(10,198,557)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Concentration of risks
Credit risk
Included in accounts receivable at September 30, 2005 is a balance of
$4,260,000 in respect of the Iraq equipment supply contract ("Iraq Contract").
Pursuant to the terms of the Iraq Contract, Allen-Vanguard is a sub-contractor
to a Cyprus-based corporation (the "Prime"), the latter acting as the prime
contractor to the end-user, which is the Iraqi Ministry of Interior ("MOI").
The Prime contract involves the supply of Improvised Explosive Device Disposal
("IEDD") equipment and training provided by Allen-Vanguard, and the supply of
armoured vehicles and surveillance equipment provided by other
sub-contractors. Collection of the Iraq Contract receivable has been delayed
by performance related issues alleged by the MOI against the Prime. (See Note
19).
Except for the Iraq Contract, there is no particular concentration of
credit risk due to the geographic distribution of the Company's customers.
Management is of the opinion that any risk of credit loss is significantly
reduced due to the financial strength of the Company's major customers. The
Company performs ongoing credit reviews of all customers requiring credit, and
negotiates prepayments, letters of credit, loss protection insurance or other
security arrangements in support of amounts receivable under international
sales contracts.
Foreign currency risk
The Company is exposed to currency risk as a significant volume of its
transactions are denominated in U.S. $'s, European euro's and British pnds
stlg's. Unfavourable changes in the applicable exchange rate may impact
earnings, accounts receivable, accounts payable and loans payable.
At year end, the Company had the following amounts denominated in foreign
currencies:
U.S. European British
$ euro pnds stlg
-------------------------------------------------------------------------
Accounts receivable 8,121,000 668,000 1,387,000
Accounts payable 1,163,000 248,000 719,000
Cash and cash equivalents 537,000 - 1,316,000
Bank indebtedness - - 269,000
Income taxes payable 160,000 - 62,000
Long term debt 800,000 1,058,000 4,750,000
14. Segmented information
The Company's products and services, as described in Note 1, are produced
and marketed to a global customer base differentiated primarily by geographic
region based on the location of the customer. The Company sells and
distributes its products and services through two sales organizations:
Americas and International. The Company's operations comprise one reportable
business segment.
Revenue and certain assets are analyzed geographically as follows:
2005 2004
-------------------------------------------------------------------------
(000's) (000's)
Revenue by geographic area
Europe / Middle East $ 19,746 $ 4,380
U.S.A. 15,860 10,197
Canada 6,698 4,382
Asia / Pacific 8,293 1,068
Other 803 224
-------------------------------------------------------------------------
$ 51,400 $ 20,251
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the year ended September 30, 2005, one customer (2004 - one
customer) accounted for Company sales of $8,023,000 or 15.6% (2004 -
$2,117,000 or 10.3%).
2005 2004
-------------------------------------------------------------------------
(000's) (000's)
Capital assets and goodwill by
geographic area
Canada $ 6,207 $ 7,247
U.S.A. 517 138
Europe / Middle East 18,570 31,324
Other 18 20
-------------------------------------------------------------------------
$ 25,312 $ 38,729
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. Income taxes
The reconciliation of income tax computed at statutory tax rates to the
provision for income taxes is as follows:
2005 2004
-------------------------------------------------------------------------
Earnings (loss) before provision for
income taxes $(29,141,647) $ 86,004
Basic income tax rate 33.4% 36.2%
-------------------------------------------------------------------------
Computed income tax expense (9,733,310) 31,133
Effect on income tax resulting from:
Intangible asset amortization and goodwill
impairment not deductible for tax purposes 8,428,048 89,210
Other accounting charges not deductible
for tax purposes 1,621,602 58,376
Other (826,548) (146,903)
-------------------------------------------------------------------------
Provision for income taxes $ (510,208) $ 31,816
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2005, the Company has approximately $14,049,000 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
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:
2005 2004
-------------------------------------------------------------------------
Net operating loss carry forward $ 4,836,000 $ 662,000
Tax basis of capital assets 50,000 18,000
-------------------------------------------------------------------------
Total future income tax asset 4,886,000 680,000
Valuation allowance (3,706,000) -
-------------------------------------------------------------------------
Future income tax asset $ 1,180,000 $ 680,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The potential income tax benefits relating to the future tax assets are
recognized in the financial statements to the extent that their realization
meets the requirements of the "more likely than not" test under the liability
method of accounting for income taxes.
16. Commitments
License agreements
The Company has the sole right of manufacture and distribution of a foam
based decontaminant under a license agreement with the Canadian Department of
National Defense and the Royal Canadian Mounted Police, which expires in 2019
or, if later, with the expiry of the last existing patent covered by the
agreement.
In addition, the Company is the sole worldwide licensee for the
commercial exploitation of the C4 gas mask, supplied under an agreement with
the Canadian Department of National Defense which expires in 2007. A
sub-license agreement for the C4 gas mask has been entered into with an
unrelated third party.
Under the terms of the license agreements, the Company is committed to
paying royalties based on product sales. The annual royalty payable under the
foam license is the greater of a percentage of the sales value and $50,000 per
calendar year, for the remaining duration of the agreement. Royalty expense
under the foam license agreement for the year is $158,334 (2004 - $496,451).
Operating leases
The Company is committed under various long-term leases for premises
which expire between August 2007 and December 2014. Minimum annual rentals
(exclusive of the requirement to pay taxes, insurance and maintenance costs)
for each of the next five years are approximately as follows:
Year ended September 30, 2006 $ 757,000
2007 634,000
2008 399,000
2009 220,000
2010 135,000
Bonds and letter of credit
At September 30, 2005 the Company has various bid and performance bonds
outstanding amounting to $791,000 (2004 - $724,000), and a letter of credit in
place for $250,000 issued as self insurance for the first $250,000 of
potential loss under the Company's comprehensive liability policy, excluding
its subsidiary, PWA.
17. Earnings (loss) per share
Net earnings per share is computed using the following weighted average
numbers of outstanding Common Shares:
2005 2004
Number Number
-------------------------------------------------------------------------
Weighted average shares outstanding 26,298,483 18,326,963
Effects of diluted potential Common Shares - 3,489,221
-------------------------------------------------------------------------
Denominator for diluted earnings per share 26,298,483 21,816,184
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The effect of diluted potential Common shares in 2005 has not been
calculated because the effect would be anti-dilutive.
18. Related party transactions
During the year, the Company engaged in transactions in the normal course
of operations with the related parties noted. Transactions and balances not
otherwise disclosed are as follows:
2005 2004
-------------------------------------------------------------------------
Companies controlled by certain directors
of the Company
Cost of sales - materials $ 108,656 $ 739,183
Selling and administration costs 67,500 42,685
Accounts payable and accrued charges 26,750 308,649
Costs related to the September 2005 private
placement financing 60,000 -
Costs related to the acquisitions of EOD
and VPTI and related financing (Note 10 (i)) - 200,000
Costs related to the acquisition of PWA - 300,000
Key management of the Company
Contingent consideration for PWA
acquisition (Note 4 (i)) 2,200,004 -
These transactions are measured at the exchange amount, which is the
amount of consideration established and agreed to by the related parties.
19. Subsequent events
(a) Technology license and supply agreement
On December 23, 2005, the Company entered into a technology license and
supply agreement (the "ECM Agreement") with a defence contractor based in the
United States (the "Contractor"), 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 the Contractor. The term of the ECM Agreement is
7 years, and grants the Contractor the exclusive right to sell ECM units
incorporating the Company's components to customers located in the United
states, and a non-exclusive license to sell to customers located outside the
United States. The Company 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 ECM Agreement may be
terminated by either the Company or the Contractor if certain specified events
or conditions occur.
(b) 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 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 $U.S. 2 million realized from
the sale of the Consignment Equipment shall be retained by the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year Ended September 30, 2005 (Canadian Dollars)
The following discussion and analysis ("MD&A") should be read in
conjunction with the audited consolidated financial statements of Allen-
Vanguard Corporation ("Allen-Vanguard" or the "Company") and its quarterly
reports for the year ended September 30, 2005, and also with other securities
filings available on www.sedar.com. Allen-Vanguard reports its consolidated
financial statements in accordance with Canadian generally accepted accounting
principles ("GAAP"). All financial figures contained in this MD&A are
denominated in Canadian dollars ($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 (see "Overall
Performance"). 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 January 24, 2006. 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, and Electronic Counter-
Measures ("ECM") equipment for jamming remote detonation of terrorist devices.
Allen-Vanguard develops, manufactures and markets specialty security equipment
for Explosive Ordnance Disposal, and is the sole, worldwide licensee and/or
developer of patented technologies such as the Universal Containment System
and CASCAD Foam for blast mitigation, decontamination of bio-chemical warfare
agents, and personal protective gear.
Head office operations are located in Ottawa, Ontario, Canada, with
manufacturing operations in Ottawa and Stoney Creek, Ontario; Tewkesbury,
U.K.; and Cork, Ireland, and sales offices in Canada, the U.S., the UK and
southeast Asia. The Company's shares are listed on The Toronto Stock Exchange
(TSX: VRS).
The primary 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 U.S. market consists of thousands of agencies employing millions of
First Responders. According to the National Institute of Justice, the U.S. has
almost 800,000 law enforcement officers. The United States Fire Administration
office of the United States Department of Homeland Security ("DHS") estimates
the U.S. has in excess of one million firefighters and 30,000 fire departments
with approximately 1,500 Hazardous Material teams that are involved in more
than 600,000 annual calls involving hazardous materials or explosives.
Further, security associations estimate the U.S. has in excess of one million
private security personnel working in thousands of at-risk public and private
facilities. There are 2,500 bomb squads in North America.
Estimates of the size of the market for equipment and training vary
widely. In the U.S., the Independent Task Force of the Council on Foreign
Relations estimates the market for equipment and training for First Responders
to be between $US 53 and $US 108 billion over the next five years. The DHS
budget for 2005 provides for $US 3.6 billion in special additional financial
assistance for local First Responders.
In all markets, substantial funds are being budgeted for First Responders
which will be used to procure a range of necessary equipment, including
equipment that Allen-Vanguard does not sell. As a result, the addressable
market for Allen-Vanguard's products is less than the above mentioned market
estimates. Allen-Vanguard's internal market analysis estimates the addressable
market specifically for the kinds of products it sells to be $US 3.2 billion
for the U.S., Europe, Southeast Asia and the Middle East markets combined over
a period of 3 years. The U.S. market accounts for approximately $US
1.6 billion of such market. Market information on the European First Responder
market is more fragmented and less precise than for the U.S. market. As well,
the ratio of First Responders to population varies widely with local
circumstances. Allen-Vanguard's internal market analysis estimates the
addressable European market to be approximately $US 1.2 billion or 75% of the
size of the U.S. market. Information in respect of the First Responder market
in the Middle East and South East Asia is also less precise. Allen-Vanguard's
internal market analysis estimates the size of such market to be approximately
$US 0.4 billion or 25% of the size of the U.S. market.
There is a substantial military market for Allen-Vanguard's CASCAD
decontamination products on their own and in combination with third party
systems for mass decontamination of equipment, facilities and troops. This
market is highly competitive and is only a secondary focus for Allen-Vanguard.
Although the Canadian Government and the United States Department of National
Defense reserved the right to use the technology underlying the Foam License
for their own purposes, Allen-Vanguard has identified certain programs where
it feels it has competitive advantages. Military forces in North America and
other parts of the world are prioritizing the replacement of old
decontaminating chemical stocks and mass decontamination systems with next-
generation decontaminating chemicals and systems. One U.S. military program
for decontaminating chemicals and equipment to protect military sites asked
for up to $US 100 million to spend over six years. The Canadian military also
has a spending program called Canadian Forces Nuclear Biological and Chemical
Decontaminating System, with proposed expenditures of up to $25 million.
The DHS has mandated that all state and local bomb squads in the U.S.
must have at least one robot in service by 2009, which may be a significant
opportunity for Allen-Vanguards range of robotic platforms. These robot
platforms vary in price from $50,000 to $250,000 depending on configurations.
Outside of the U.S. the market for Robotic platforms continues to evolve with
many new requirements emerging as the threat increases and the value of highly
skilled operators is increasingly recognized.
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
supplied many ECM systems to different countries around the world.
The addition through acquisition of an entire line of CBRNE device
solutions, area denial and EOD equipment expands the potential market
significantly, including the Allen-Vanguard line of remote operated vehicles.
The military and first responder market for Allen-Vanguard's remote operated
robots, search equipment, personal protective equipment, detectors and sensors
as well as Electronic Counter Measures (ECM) equipment is substantial.
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) Selected Annual Information (Audited)
(Amounts in millions of Canadian dollars,
except share amounts and per share amounts)
FY 2005 FY 2004 FY 2003
Revenue $ 51.4 $ 20.3 $ 9.9
EBITDA (2.8) 0.5 0.7
Integration,
amortization of
intangibles, and
goodwill charges 24.3 0.2 0.0
Net earnings (loss) (28.6) 0.1 0.3
EPS, basic (1.09) 0.00 0.02
EPS, diluted - 0.00 0.02
Adjusted EPS, basic (0.16) 0.02 0.02
Total assets 58.4 68.9 6.2
Long-term financial
liabilities 11.2 8.4 0.7
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.
Q1 2004
- Completion of a private placement of common shares ("17-Nov-03
Financing") by NBC Team Ltd., the predecessor operating company to
Allen-Vanguard Corporation, which raised net proceeds of
$1.2 million.
- Amalgamation of NBC Team Ltd. and Canadian Public Venture Equities I
Inc. on 18-Nov-03
- Changing of the Company's name to Vanguard Response Systems Inc.
- Listing on The Toronto Stock Exchange
Q2 2004
- Completion of a private placement of 9 million units at a price of
$3.00 per unit ("05-Mar-04 Financing"), each unit consisting of one
common share and one-half of one warrant, with each whole warrant
entitling the holder to purchase one common share at a price of
$4.00 per share for a period of 18 months from the date of issue.
Net proceeds were approximately $25 million.
- Acquired 100% of the outstanding shares of EOD Performance Inc.
("EOD"), an Ottawa-based manufacturer of compact mobile robots. The
purchase consideration was $7.2 million; consisting of cash on
closing of $6.0 million, acquisition costs of $0.6 million,
adjustments to net assets acquired of $0.6 million (paid in Q3
2004), plus up to an additional $12 million in contingent cash and
share payments ("EOD Contingent Payments") based on EOD's sales
performance.
- Acquired 100% of the outstanding shares of Vanguard Protective
Technologies Inc. ("VPTI" - formerly Bosik Holdings Ltd. and its
affiliates); an Ottawa-based company engaged in the development of
vehicle barrier, land mine protective seats and suspect package
containment products. The purchase consideration was $1.5 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.
Q3 2004
- 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 holder of the debenture
may request early repayment at any time after May 3, 2005. The terms
of the Giuliani Debenture were amended at FY 2005 year-end 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 October 2006.
Q4 2004
- Acquired 100% of the outstanding shares of PW Allen Holdings Ltd.
("PWA"); a Tewkesbury, U.K.-based manufacturer and integrator of
explosive ordnance disposal bomb search and detection equipment,
bomb technician tools and ECM equipment. The purchase consideration
was $30.6 million, consisting of cash on closing of $14.5 million,
notes payable of $4.0 million ("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 Allen-Vanguard 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 Allen-Vanguard ("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.
- Following a decision to outsource the manufacturing of VPTI's
products, Allen-Vanguard entered into an amending agreement 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
subject to the value of sales contracts executed up to December 31,
2004, and was paid in FY 2005.
Q1 2005
- It was determined that the contingent payment arrangement provided
for in the original EOD share purchase agreement impeded Allen-
Vanguard's flexibility to market its expanded product range.
Consequently, Allen-Vanguard entered into an agreement for the issue
of 800,000 common shares to the vendors of EOD, through exercise of
an equivalent number of special warrants in exchange for
cancellation of the contingent cash and remaining special warrant
payments provided for in the original EOD share purchase agreement.
Q2 2005
- Amalgamation of Vanguard Response Systems Inc. and EOD, with the
resulting company being renamed Allen-Vanguard Corporation.
Q3 2005
- 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.
Q4 2005
- 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.
- The BoS Term Loan was amended to modify certain financial covenant
measurements.
Comparisons of FY 2005 and Q4 2005 to the corresponding prior year period
are significantly impacted by the preceding acquisitions and financing
transactions.
RESULTS OF OPERATIONS
(I) Selected Quarterly Financial Information (Unaudited)
(Amounts in millions of Canadian dollars,
except share amounts and per share amounts)
-------------------------------------------------------------------------
Fiscal 2005
-------------------------------------------------------------------------
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue $ 9.1 $ 11.3 $ 13.5 $ 17.5
-------------------------------------------------------------------------
Gross profit 3.7 4.9 5.6 7.8
-------------------------------------------------------------------------
EBITDA (4.3) (1.6) 0.1 3.0
-------------------------------------------------------------------------
Integration,
amortization
of intangibles
and goodwill
charges 19.5 2.1 0.5 2.2
-------------------------------------------------------------------------
Net earnings
(loss) (23.3) (3.9) (0.7) (0.7)
-------------------------------------------------------------------------
EPS, basic $ (0.89) $ (0.14) $ (0.03) $ (0.03)
-------------------------------------------------------------------------
EPS, diluted - - - -
-------------------------------------------------------------------------
Adjusted EPS,
basic $ (0.14) $ (0.07) $ (0.01) $ 0.06
-------------------------------------------------------------------------
Capital
expenditures 0.2 0.4 0.4 0.5
-------------------------------------------------------------------------
Working
capital 18.4 6.9 4.4 5.4
-------------------------------------------------------------------------
Total assets 58.4 73.6 73.0 74.3
-------------------------------------------------------------------------
Shares
outstanding
(millions) 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 $9.1 million in Q4 2005 and $51.4 million in
FY 2005, compared to $11.6 million in Q4 2004 and $20.3 million in FY 2004. No
revenue was recognized in Q4 2005 in respect of the contract for equipping and
training the Iraqi police force (the "Iraq Contract"), compared to
$2.1 million in Q4 2004. The Iraq Contract accounted for revenue of
$7.9 million in FY 2005 compared to $2.1 million in FY 2004. Excluding the
Iraq Contract, Q4 2005 revenue was marginally under the Q4 2004 figure, while
FY 2005 revenue increased 253% from FY 2004.
Allen-Vanguard experienced a liquidity problem in the second half of FY
2005, which was primarily caused by continued delays in collecting the
$4.3 million Iraq Contract receivable (see "Subsequent Events - Iraq
Contract"). Supplier credit restrictions forced the delay of a number of
customer shipments beyond the year end, most notably a contract valued at
$5 million to equip an Asian military group with an integrated equipment and
service package. This liquidity problem was remedied by completion of the 15-
Sep-05 Financing, and Allen-Vanguard resumed a normal order fulfillment cycle
by year end.
Revenue by Geographic Area
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
Q4 2005 Q4 2004 FY 2005 FY 2004
-------------------------------------------------------------------------
Region
Canada $ 0.6 $ 1.6 $ 6.7 $ 4.4
-------------------------------------------------------------------------
United
States 2.6 5.8 15.9 10.2
-------------------------------------------------------------------------
Europe /
Middle-East 3.3 3.9 19.7 4.4
-------------------------------------------------------------------------
Asia /
Pacific 2.6 0.2 8.3 1.1
-------------------------------------------------------------------------
Other 0.0 0.1 0.8 0.2
-------------------------------------------------------------------------
Total $ 9.1 $ 11.6 $ 51.4 $ 20.3
-------------------------------------------------------------------------
Revenue generated in North America totaled $3.2 million in Q4 2005 and
$22.6 million in FY 2005, compared to $7.4 million in Q4 2004 and
$14.6 million in FY 2004. While Allen-Vanguard achieved year over year revenue
growth of 55% in North America, the delay in receiving congressional approval
of the DHS and Pentagon budgets appeared to slow equipment procurement
activity in Q4 2005 among certain military and civilian agencies in the U.S.
Allen-Vanguard's North American sales performance was stronger in the first
half of FY 2005, particularly in Canada where an order of personal protective
equipment and several R&D contracts with Canadian government and military
organizations generated substantial revenue. Other notable contracts included
the Mobility Denial System and HAL(R) systems for the U.S. military, and ECM
equipment for deployment in Iraq.
Revenue generated outside of North America totaled $5.9 million in Q4
2005 and $28.8 million in FY 2005, compared to $4.2 million in Q4 2004 and
$5.7 million in FY 2004. The inclusion of PWA results for the entire FY 2005
is the principal reason for the substantial increase in FY 2005 revenue
outside of North America. Notable contracts included remote intervention
equipment for Malaysia and Indonesia totaling $3.6 million.
Over the past nine months, Allen-Vanguard has committed considerable
resources to training its International sales force on products manufactured
in the Americas region, and vice versa. In Q3 2005, Allen-Vanguard secured the
first order of its large Defender robot from the U.S. military, an important
breakthrough as it is anticipated that the military will require robots with
greater lift capacity to contend with increased use of vehicle and roadside
bombs by terrorist groups.
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. An ECM technology license and supply agreement ("U.S.
ECM Agreement") was announced subsequent to year end (see "Subsequent Events -
U.S. ECM Agreement") with Lockheed Martin Corporation, and Allen-Vanguard also
teamed with a U.K. based contractor on a large robot tender for the British
Ministry of Defence. 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.
(III) Gross Margin
Gross margin was 41% and 43% of revenue in Q4 2005 and FY 2005
respectively, compared to 54% in Q4 2004 and 46% in FY 2004. The Company
expensed approximately $0.7 million in Q4 2005 with respect to the revaluation
of standard costs applied in its U.K. and Ireland operations. Excluding this
charge, Q4 2005 margin would have been approximately 48%.
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. The Q4
2004 overall gross margin was improved substantially by strong ECM revenue.
Allen-Vanguard believes that gross margin will fluctuate within the 43%
to 48% range in the foreseeable future.
(IV) Expenses
Selling and administration
Selling and administration expenses were $5.7 million in Q4 2005 and
$21.2 million in FY 2005, compared to $4.1 million in Q4 2004 and $8.1 million
in FY 2004. The inclusion of the PWA, EOD and VPTI acquisitions in the
consolidated accounts for a full year in FY 2005 compared to only a partial
year in FY 2004 is the most significant factor in the increase. In particular,
PWA expenses were not included in the consolidated accounts until the 12-Aug-
04, representing approximately $1.2 million of the increase in Q4 2005
relative to Q4 2004. Other factors contributing to the increase in selling and
administration expense were as follows:
- $1.2 million was expensed in FY 2005 in respect of the Giuliani
Contract, with $0.3 million charged in Q4 2005. This compares to
$0.3 million and $0.2 million in FY 2004 and Q4 2004 respectively.
There will be no further expense associated with the Giuliani Contract
in FY 2006.
- 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 $1.0 million in FY 2005
representing an increase of $0.6 million from FY 2004, with most of
the excess absorbed in Q4-05. The audit of Allen-Vanguard's U.K. and
Irish subsidiaries was particularly complex in FY 2005, as this was
the initial full year audit of these entities as public company
subsidiaries, there was a change of year-end with two audit firms
involved, and the uncertainty concerning collection of the Iraq
Contract receivable was not resolved until the 22-Dec-05 settlement
(see "Subsequent Events - Iraq Contract").
- U.S. market development expenditures associated with Allen-Vanguard's
ECM technology totaled $0.4 million in FY 2005, with approximately
$0.3 million taking place in the second half of the year. These
efforts culminated with the signature of a technology license and
supply agreement with Lockheed Martin Corporation subsequent to year
end (see "Subsequent Events").
- Costs associated with the implementation of an enterprise resource
planning system in Canada and modifications to the U.K. system totaled
$0.3 million in FY 2005.
- A new accounting policy was adopted with respect to stock-based
compensation in FY 2005, resulting in an expense of $0.1 million in Q4
2005 and $0.3 million in FY 2005.
- Allen-Vanguard has increased its investment in the training business,
with Q4 2005 expenses rising $0.1 million compared to Q4 2004.
Training often serves as a catalyst for equipment sales. Through its
affiliation with Defense Research and Development Canada Suffield,
Allen-Vanguard is uniquely able to offer training to emergency
response personnel on the handling of live chemical and biological
agents.
Research and development
Research and development expenses, net of grants received and investment
tax credits, were $2.3 million in Q4 2005 and $3.9 million in FY 2005,
compared to $0.7 million in Q4 2004 and $0.8 million in FY 2005. The inclusion
of PWA in the consolidated accounts for the full FY 2005 comprised
approximately $1.5 million of the increase from FY 2004. The vast majority of
R&D activities in the U.K. are self-funded and targeted towards Allen-
Vanguard's 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.
Goodwill Impairment
In accordance with GAAP, Allen-Vanguard performs an annual impairment
test on the carrying value of its long-lived assets, including goodwill. The
Company uses generally accepted valuation techniques such as discounted cash
flow and earnings capitalization to determine the fair value of its long-lived
assets, and these fair values are then compared to their respective carrying
values. Impairment tests involve a significant degree of judgment, as
expectations concerning future net cash flows and the selection of an
appropriate discount rate are subject to considerable risks and uncertainties.
Based on the test at 30-Sep-05 which discounted expected future net cash flows
at a weighted average discount rate of 26%, the Company concluded that an
impairment of goodwill had occurred. The most significant factor affecting the
Company's valuation of goodwill was the shortfall in operating results in FY
2005 compared to the results expected when the impairment test was last
performed at the FY 2004 year end. Consequently, Allen-Vanguard reduced the
carrying value of goodwill through a charge to earnings of $20.5 million in Q4
2005.
Integration costs
Allen-Vanguard recorded an integration charge of $1.9 million in Q3 2005
consisting primarily of staff and facility costs associated with the
anticipated closure of its Ottawa machine shop and Cork, Ireland robot
assembly plant. Annual operating savings, including reductions in certain
selling and administration costs, were projected to be approximately
$5 million. Allen-Vanguard proceeded with the closure of the Ottawa machine
shop in Q4 2005, but a decision on the closure of the Cork plant was deferred
due to the unexpected opportunity to bid in concert with another U.K. supplier
on a substantial large robot tender issued by the British Ministry of Defence.
Allen-Vanguard is reviewing alternatives to generate equivalent cost savings
pending a final decision on the Cork plant, including the possibility of
financial assistance from the Irish government. A recovery of $0.9 million was
recorded in Q4 2005, reflecting the original provision for the Cork plant
closing.
Amortization
Amortization expense totaled $0.4 million in Q4 2005 and $3.8 million in
FY 2005, compared to $0.4 million in Q4 2004 and $0.5 M in FY 2004.
Amortization of intangible assets represented $(0.1) million of the Q4 2005
and $2.8 million of the FY 2005 totals respectively, compared to $0.2 million
in Q4 2004 and FY 2004. A total of $2.4 million was expensed in the first half
of FY 2005 to fully amortize acquired orders on hand. The Company expects
amortization of intangibles to equal approximately $0.1 million per quarter in
FY 2006.
Foreign exchange and interest
Allen-Vanguard recorded a net foreign exchange loss of $0.2 million in Q4
2005 and $0.5 million in FY 2005, compared to a gain of $0.2 million in Q4
2004 and FY 2004. 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. The impact of this
change in accounting policy was a charge of approximately $0.9 million in Q4
2005.
At year-end, Allen-Vanguard had the following amounts denominated in
foreign currencies:
Amounts Denominated in Foreign Currencies
(In millions of foreign currency unit)
U.S. $ European British
euro pnds stlg
Accounts receivable 8.1 0.7 1.4
Accounts payable 1.1 0.3 0.7
Cash and cash
equivalents 0.5 - 1.3
Bank indebtedness - - 0.3
Income taxes payable 0.2 - 0.1
Long term debt 0.8 1.1 4.8
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)
U.S. $ European British
euro pnds stlg
Q1 2004 1.2924 N/A N/A
Q2 2004 1.3105 N/A N/A
Q3 2004 1.3404 N/A N/A
Q4 2004 1.2639 1.5700 2.2878
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
Quarterly Average Exchange Rates
(per $CN 1.00)
U.S. $ European British
euro pnds stlg
Q1 2004 1.3160 N/A N/A
Q2 2004 1.3179 N/A N/A
Q3 2004 1.3592 N/A N/A
Q4 2004 1.3072 1.5989 2.3786
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
Net interest expense (income) was $(0.2) million in Q4 2005 and
$0.2 million in FY 2005, compared to $(0.1) million in both Q4 2004 and FY
2004. From the 05-Mar-04 Financing to the 12-Aug-04 acquisition of PWA, Allen-
Vanguard held average cash balances of approximately $12 million in interest
bearing deposits. The cash consideration for PWA of $14.5 million was
partially funded through a drawdown of existing cash balances and use of
banking facilities, thereby placing Allen-Vanguard into a net borrowing
position. The Company's interest bearing debt continued to increase throughout
FY 2005 until the 15-Sep-05 Financing was completed. 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 $4.3 million in Q4 2005 and $2.8 million in FY 2005, compared to
positive EBITDA of $1.4 million in Q4 2004 and $ 0.5 million in FY 2004.
Allen-Vanguard's results in FY 2005 have been heavily impacted by
$25.1 million of non-recurring charges, including the charges for integration
and goodwill impairment, amortization of acquired orders on hand, and Giuliani
Contract fees.
The integration and goodwill impairment charges and amortization of
intangible assets are non-deductible for tax purposes, distorting the
Company's tax provision for accounting purposes relative to its reported
earnings or loss before income taxes. The basic income tax rate was 33.4% in
FY 2005 compared to 36.2% in FY 2004. A net tax recovery of $1.1 million in Q4
2005 and $0.5 million in FY 2005, compared to a net tax provision of
$0.5 million in Q4 2004 and $0.0 million in FY 2004.
Adjusted EPS, basic, as defined above, was a loss of $0.14 in Q4 2005 and
a loss of $0.16 in FY 2005, compared to $0.05 in Q4 2004 and $0.02 in FY 2004.
The net loss for Q4 2005 was $23.3 million or a loss of $0.89 per share,
and $28.6 million or a loss of $1.09 per share in FY 2005. These figures
compare to net earnings of $0.9 million or $0.04 per share in Q4 2004, and net
earnings of $0.1 million or $0.00 per share in FY 2004.
LIQUIDITY
Allen-Vanguard's cash and cash equivalents, net of bank indebtedness, at
the end of FY 2005 amounted to $5.2 million, compared to $(4.0) million at the
end of FY 2004. Working capital totaled $18.4 million at the end of FY 2005,
including a $4.3 million receivable in respect of the Iraq Contract. This
compares to working capital of $4.2 million at the end of FY 2004. 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)
-------------------------------------------------------------------------
Q4 2005 Q4 2004 FY 2005 FY 2004
Cash and cash
equivalents,
net of bank
indebtedness,
beginning of
period $ (1.8) $ 10.5 $ (4.0) $ (0.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) (23.8) 0.9 (28.6) 0.1
-------------------------------------------------------------------------
Non-cash operating
items 20.2 0.6 25.1 (0.2)
-------------------------------------------------------------------------
Changes in non-cash
working capital 0.4 (4.8) (4.5) (10.3)
-------------------------------------------------------------------------
Cash used in
operating
activities (3.2) (3.3) (8.0) (10.4)
-------------------------------------------------------------------------
Acquisitions - (19.4) (0.5) (27.0)
-------------------------------------------------------------------------
Capital expenditures
and cash effect of
foreign subsidiary
translation (0.2) (0.1) (1.7) (0.4)
-------------------------------------------------------------------------
Cash used in
investing
activities (0.2) (19.5) (2.2) (27.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Issuance of common
shares, warrant
and option
exercises 12.8 7.3 13.7 32.4
-------------------------------------------------------------------------
Increase (repayment)
of long-term debt
and other
financing
activities (2.4) 1.0 5.7 1.4
-------------------------------------------------------------------------
Cash provided
by financing
activities 10.4 8.3 19.4 33.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net cash flow 7.0 (14.5) 9.2 (4.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash
equivalents,
net of bank
indebtedness,
end of period 5.2 $ (4.0) 5.2 $ (4.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(I) Cash Flow from Operating Activities
Operating cash flow, defined as net earnings adjusted for non-cash items,
was $(3.6) million in Q4 2005 and $(3.5) million in FY 2005, compared to
$1.5 million in Q4 2004 and $(0.1) million in FY 2004. 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 provided cash of $0.4 million in Q4
2005 and used cash of $4.5 million in FY 2005. The changes in FY 2005
consisting primarily of the following:
Changes in non-cash working capital
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Q4 2005 FY 2005
-------------------------------------------------------------------------
Accounts receivable $ (0.5) $ (2.5)
-------------------------------------------------------------------------
Inventories 1.6 1.1
-------------------------------------------------------------------------
Prepaid expenses and sundry assets 0.9 0.1
-------------------------------------------------------------------------
Accounts payable and accrued charges (0.4) 0.3
-------------------------------------------------------------------------
Income taxes payable (1.1) 0.3
-------------------------------------------------------------------------
Deferred revenue (0.1) (3.8)
-------------------------------------------------------------------------
Total $ 0.4 $ (4.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The most significant factors affecting these changes in non-cash working
capital were as follows:
- The increase in accounts receivable in FY 2005 compared to the prior
year was due to the inclusion of the $4.3 million receivable
outstanding in respect of the Iraq Contract (see "Subsequent
Events - Iraq Contract" below),
- Inventories declined by $1.6 million in Q4 2005 and $1.1 million in
FY 2005. The Q4 2005 reduction was primarily due to an adjustment to
the standard costs used in the valuation of inventories in the U.K..
- Prepaid expenses and sundry assets decreased by $0.9 million in Q4
2005 primarily due to the expensing of product liability insurance
premiums and advisory fees paid in advance under the Giuliani
Contract. The FY 2005 balance was virtually even compared to the
year-ago figure.
- Income taxes of $0.2 million were paid in FY 2005.
- Deferred revenue decreased by $3.8 million in FY 2005, due almost
entirely to the recognition of earned revenue on the Iraq Contract
where advance payments had been received in FY 2004.
(II) Investing Activities
Purchases of property, plant and equipment totaled $0.2 million in Q4
2005 and $1.5 million in FY 2005, compared to $0.2 million in Q4 2004 and
$0.4 million in FY 2004. Leasehold improvements associated with Allen-
Vanguard's Tewkesbury and Ottawa facilities, and information technology
investments represented the majority of capital expenditures in FY 2005.
Allen-Vanguard expects quarterly capital spending in 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.
(III) Financing Activities
Cash provided by financing activities totaled $10.4 million in Q4 2005
and $19.4 million in FY 2005, compared to $8.2 million in Q4 2004 and
$33.7 million in FY 2005.
As noted previously, the cash proceeds, net of issue costs, from the
15-Sep-05 Financing totaled $12.6 million in Q4 2005. A further $1.1 million
of cash was provided through the exercise of options and warrants in FY 2005,
with $0.2 million occurring in Q4 2005.
Allen-Vanguard increased its long-term debt by $5.7 million in FY 2005,
due to the drawdown of its BoS Term Loan. The Company reduced long-term debt
by $2.4 million in Q4 2005, following the closing of the 15-Sep-05 Financing.
(IV) Contractual Obligations
(Amounts in millions of Canadian dollars)
-------------------------------------------------------------------------
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 Thereafter
-------------------------------------------------------------------------
BoS Term Loan 2.0 2.0 2.0 2.0 2.0 -
-------------------------------------------------------------------------
Deferred
Consideration 0.1 0.1 0.1 0.1 0.1 -
-------------------------------------------------------------------------
Giuliani
Debenture 0.9 - - - - -
-------------------------------------------------------------------------
Total 3.0 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 expects to satisfy the next
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 Company revised its estimate of Deferred Consideration at FY 2005
year end, and consequently reduced the obligation by $0.9 million, with an
offsetting reduction to goodwill.
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 $0.9 million will be repaid without interest through
an initial payment of $0.2 million plus thirteen monthly payments of
$0.06 million commencing October 2006.
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 in FY 2006 (declining thereafter).
CAPITAL RESOURCES
Allen-Vanguard had common shares outstanding of 37.3 million and fully
diluted shares outstanding of 47.0 million at FY 2005 year-end.
Net Borrowings totaled $6.1 million at FY 2005 year-end, compared to
$12.4 million at the prior year-end. The ratio of debt to debt plus equity was
0.14:1 at FY 2005 year-end, compared to 0.21:1 at the prior year-end.
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 in 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 business units 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 expected to take several months to complete, and will complement
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 FY 2005, Allen-Vanguard purchased products and services from
companies controlled by directors of Allen-Vanguard as follows:
- Decontaminant product in the amount of $0.1 million.
- Strategic advisory services in the amount of $0.1 million.
- Advisory services in the amount of $0.06 million in connection with
the 15-Sep-05 Financing, of which $0.03 million remained payable at
FY 2005 year-end.
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.
In connection with the 15-Sep-05 Financing, 1,257,143 Units valued at
$2.2 million were issued to the vendors of PWA in settlement of any further
contingent amount payable in respect of the PWA 2004 EBITDA Bonus. Pursuant to
the 12-Aug-04 PWA Share Purchase Agreement, any contingent payment was
intended to be made in cash, but Allen-Vanguard's board of directors
determined that it was in the Company's best interest to settle the obligation
by issuing the Units and the vendors of PWA agreed. The vendors of PWA
presently hold senior management positions with Allen-Vanguard and one
individual is also a director of the Company, the latter abstaining from the
vote to approve the settlement.
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 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. A
notable exception is the Iraq Contract which was a significantly higher than
average order size and included the supply of armored vehicles which falls
outside the normal course product offering of Allen-Vanguard (see "Subsequent
Events - Iraq Contract"). 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 the quarter ended 30-Sep-05, 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 30-Jun-05, 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
(see "Results of Operations - Goodwill Impairment").
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" and "Subsequent Events -
Iraq Contract").
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.
Subsequent to FY 2005 year-end, 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 "Subsequent Events - Iraq Contract").
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
During FY 2005, Allen-Vanguard made the following changes to its
accounting policies:
- The method used to translate the statements of its foreign
subsidiaries was changed to the temporal method from the current
rate method, effective 01-Jul-05. The estimated impact of this
change was a charge of $0.9 million recorded in Q4 2005 (see
"Critical Accounting Estimates - Translation of Foreign Currencies"
and "Results of Operations - Foreign Exchange and Interest").
- 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. Allen-Vanguard recorded
stock compensation expense of $0.3 million in FY 2005 (see "Critical
Accounting Estimates - Stock Based Compensation").
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 FY 2005 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".
Apart from the Iraq Contract receivable (see "Subsequent Events - Iraq
Contract"), there is no particular concentration of credit risk due to the
geographic distribution of the Company's customers. Management is of the
opinion that any risk of credit loss is significantly reduced due to the
financial strength of 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
Iraq Contract
Pursuant to the terms of the Iraq Contract, Allen-Vanguard is a sub-
contractor to a Cyprus-based corporation (the "Prime"), the latter acting as
the prime contractor to the end-user, which is the Iraqi Ministry of Interior
("MOI"). The prime contract involves the supply of Improvised Explosive Device
Disposal ("IEDD") equipment and training provided by Allen-Vanguard, and the
supply of armored vehicles and surveillance equipment provided by other sub-
contractors. Collection of the Iraq Contract receivable was delayed by
performance related issues alleged by the MOI against the Prime.
The delay in collecting the $4.3 million Iraq Contract receivable had a
pronounced adverse effect on Allen-Vanguard's cash position. On 20-Dec-2005,
the Company entered into an amending agreement with the 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.
U.S. ECM Agreement
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 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.
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.
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
