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Nicolas MEGELAS - Garda World Security

Nicolas MEGELAS - Garda World Security

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COMPANY ANALYSIS OF GARDA (TSX:GW

)

NICOLAS MEGELAS

November 29th 2010

“If you know both yourself and your hate, you will dismantle the work of a hundred battles with a hundred victories.” Sun Tzu, The art of War

Garda World Security Corporation has gone through an important acquisition process in the past few years. The fact that the company is facing so many changes as well as the economic crisis is creating uncertainty about expected future earnings of the company and the ability of the management to succeed in integrating the new comers into Garda. In 1995, Stéphan D. Crétier took a $25 000 mortgage on his house to start up his own security firm: TransQuebec Security, which he took public in 1999 (having grown considerably). A few months later, Crétier made the acquisition of Montreal-based Garda and appropriated the name to become Garda World Security. Originally a minor league baseball umpire, Crétier is a forward thinker, constantly pushing his company to new heights, whilst instilling in his team values of integrity, excellence, top performance and social conscience (Garda plays a strong role within communities where it operates to help them improve their quality of life) to name a few. First and foremost, for Garda, customer satisfaction always comes first. Having worked in sports, it goes without saying that Crétier values a modern managerial approach, acting as a coach rather than a chief. The company has great growth opportunities and keeps expanding in various sectors; in the long run, this could create heavy hierarchy making it quasi-impossible to keep ahead of the game. Consequently, Garda’s CEO grants its teams, executive and decision-making freedom while encouraging its high level executives to adopt a cutting edge attitude to always be ready when new business opportunities arise. This helps to keep Garda a step ahead of the competition and generate much appreciated value for stockholders. It is its competence, creativity and capacity to differentiate itself that leads Garda to surpass its competitors in more than one way. With prospects for the economy showing relative growth over the next few years, and those of the industry showing excellent growth perspective, we found that the method used by Garda to expand its size is common within the industry. Even though the security industry is more of a defensive one, both the Canadian and the American economies having recently experienced a recession, and with the Americans especially affected by the depreciation of their exchange rate, and decrease in their GDP, we’ve seen quite a notable impact on the stock price. Although the Bank of Montreal (BMO) is expecting a growth in Canadian GDP for 2011, in Garda’s case, we cannot say the industry in which it operates (safety/security/protection industry) is cyclical, and would therefore be expected to emulate the patterns of the economy. Nonetheless we can definitely affirm that the aforementioned industry is dependant on the crises of the world (notably 9/11, the Iraq War etc.) and how much they affect the Americas. 5

Garda’s industry (safety/security/protection industry) more or less emerged at the start of the 20th century. Back then, the underdeveloped sector focused mainly on the offering of protection services. Throughout the century, and especially over the past twenty years, the industry diversified itself and went on to offer a wider range of products to its customers. Nowadays, the industry’s services can be defined as “services provided by the private sector to prevent crimes, damages, or harm against private individuals, organizations or facilities”1. Not only did the industry’s spectrum broaden, it also expanded in size. In 1997, the market size for security services was about 2 billion Canadian dollars. In 2009, estimations reached 4 billion in Canada while generating an astonishing 120 billion of revenues in the United States. It is interesting to notice that over the last thirty years, the number of private security agencies has increased steadily with relation to the population, while the number of police officers has been decreasing. In Canada, the U.S., Australia and South Africa, there are more private security guards than police officers. In recent years, police services have been facing a more complex demand while their budgets have not necessarily grown enough to allow them to fulfill their added duties. From this added pressure on police forces (or the gap between the public’s expectations and what the force is able to offer) stems part of the growth experienced by the private sector. One also easily understands that a turning point for the industry of security services has been experienced since September 11th 2001. From this moment on, fear has driven the demand for security, which increased in commercial, residential and governmental sectors. As for the competitive environment, the Canadian market for security services is said to be very much fragmented and with over 2,400 licensed companies it is quite difficult not to agree with this. Compared with all industries, the average size of businesses operating in the industry of security is large: 51.5% of players have fewer than five employees while the national average for companies having less than five employees is 59.2%. The proportion of businesses in the investigation and security services industry with more than nine employees reaches 31.5%, once again higher than the national average of 23.0%. Therefore, many enterprises in this industry have a larger workforce when compared to Canadian industries in general, although they average a lower pay (See appendix A).

1

http://www.hrsdc.gc.ca/eng/hip/hrp/sp/industry_profiles/investigation_security_services.shtml

6

This affirmation is logical: would a company reduce its security level in a recession and would that be the first area in which expenses are cut? The clear answer is no. Securitas. in recession. as stated in their financial statement. cash handling. the current method for choosing a security provider is to issue a contract call and to subsequently compare the services offered by each company to the services needed.The industry of security is not highly correlated to the market: some even say it is counter cyclical. Garda has an exhaustive set of tools and expertise at hand. In physical security. Group4Securicor walked its first steps on American ground by buying out The Wackenhut Corporation. for instance. Acting in mall. the need for certain services could be reduced. they offer a complete array of security solutions mainly divided in two sectors: physical security and transportation of valuables. the number one security company in the market at that time. and Brink’s Co. in airport screening. because people tend to travel less. Garda is the undisputed leader in Canada and among the top players in the United States. saving their money for more essential needs. For these clients. 7 . three players seem to stand out from the competition: Group4Securicor. investigation). getting everything under one roof (security guard. However. In fact. They both entered the North American market by acquiring well-established security businesses in the United States. After speaking with clients of the security industry2. airport and business place security (to name a few) as well as inspectors and pre-employment investigators. Consequently. Garda’s goal. As for transportation of valuables. especially the one we have known in the past few years. One must not assume that the large number of participants in the market indicates the absence of leaders. it had adopted a similar approach by acquiring Pinkerton. The first two companies are Europeanbased multinational companies among the leaders in the world market for security. ATM maintenance or refilling bank safes. is to work with clients to give them a one-stop shopping experience for all their security solutions. consulting. 2010. does not seem to be of great 2 We called Desjardins and Banque Nationale on November 10th. are the most important factors. the second-largest security services company back in 2002. Garda is currently the leader for such services in Canada and in the Midwestern United States. we came to the conclusion that the quality and quantity of services offered by a given security company as well as the price. As for Securitas. Garda is currently using the same strategy to establish itself in the US security industry as their recent purchases of a few key players illustrate. be it bulletproof trucks.

the advantage resides in that they can reach a greater market. Consequently and together with the current economic situation. In the security business. 8 . we can also affirm that the company shouldn’t declare dividends in the near future. the speed at which it grew is quite astounding. or so the management likes to think. Although Garda has undergone several mergers and acquisitions. Analyzing the expansion of the company. not to mention his ability to always look out for the next growth opportunity. we can see that Garda does possess the strength and size to keep operating well beyond this crisis. after analyzing its growth structure.concern to customers. Mr Crétier will certainly be able to get his empire get back to its pre-2008 level. learning and improving on them but also perhaps not using synergies to their full potential) to ensure its place on the global market. we realize Garda kept buying out its competitors (whilst maintaining each new division’s assets. Considering Garda has only been around since 1995. Garda’s great diversification does not give them as strong a competitive advantage as they may have suggested. we see that its cycle of growth hasn’t yet reached its end. Garda today posts an income statement loss of close to $35M and a negative ROE and ROI: this is a temporary situation. trustworthiness is of primary importance so it is not surprising or unusual to find companies staying in business together for very long periods of time. Looking at the evaluation of Garda’s position in the market as well as the highly involved management style and expertise of its CEO. Consequently. its major competitors are all big multinational firms such as Securitas and Group4 Securicor. but what hit Garda most was actually the bankruptcies of the market as opposed to the reorganization of operations. From this point of view. This affirmation is based on the concept that a company should only declare dividends when it reaches maturity and there are no more projects under review with positive net present value. the company’s stock price still had quite a sharp decline during the recession. Nevertheless. and even though it was thought that the security industry was counter cyclical.

Appendix A Firms representation according to size .

Appendix B Garda World Security Corporation Consolidated Financial Statements For the years ended January 31. 2010 and 2009 .

as well as evaluating the overall financial statements presentation.e.c.l. Our responsibility is to express an opinion on these financial statements based on our audits. the financial position of the Corporation as at January 31. 2010 and 2009 and the consolidated statements of loss. on a test basis. Chartered Accountants Montreal. evidence supporting the amounts and disclosures in the financial statements. comprehensive loss. 2010 1 Chartered accountant auditor permit No.PricewaterhouseCoopers LLP/s.l. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. deficit and cash flows for the years then ended.n. Québec. An audit also includes assessing the accounting principles used and significant estimates made by management./s. in all material respects. We conducted our audits in accordance with Canadian generally accepted auditing standards. Canada April 29.r. Chartered Accountants 1250 René-Lévesque Boulevard West Suite 2800 Montréal. 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. In our opinion. An audit includes examining. these consolidated financial statements present fairly.r. These financial statements are the responsibility of the Corporation’s management. Quebec Canada H3B 2G4 Telephone +1 514 205 5000 Facsimile +1 514 876 1502 Auditors’ Report To the Shareholders of Garda World Security Corporation We have audited the consolidated balance sheets of Garda World Security Corporation as at January 31. 12300 .

030 2009 (restated note 4) Consolidated Statements of Deficit $ 56. (40.943) Approved by the Board of Directors (Signed) François Plamondon.933 173.943) 44.651) 60. end of year Contingencies (note 21) Subsequent event (note 1) See accompanying notes to consolidated financial statements.412 (20.030 Property plant and equipment (note 6) Goodwill (note 7) Intangible assets (note 7) Other assets (note 8) Future income taxes (note 18) Long-term assets held for sale (note 19) LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Bank indebtedness Accounts payable and accrued liabilities Income taxes payable Future income taxes liabilities (note 18) Liabilities held for sales (note 19) Current portion of long-term debt (note 1 and 9) 9.205 57.954 2.703 64.474 876 140.220 770 39.143 8.108 194.616 12.611 94 173.241 14.424 (1.205 335.993 126.606) (78.927) 54.285 9.763 303.551 123.946 238.497 (98.135 2010 $ 622.927) (43.252 57 1.292) (78.894 13.737 12.228 116.203 14.210 48.Garda World Security Corporation Consolidated Balance sheets and Statements of Deficit For the years ended January 31.623 41.135 23. Director (Signed) Stéphan Crétier.122 38.105 12.583 47.834 986.148) (43.111 218.002 3.651) Retained earnings (deficit) beginning of year.665 285 115.148) (43.271 21.798 28.724) (2.651) (35. as previously reported Change in accounting policy (note 4) Retained earnings (deficit).898 986.965 8. as restated Net loss for the year Deficit.618 Long-term debt (note 1 and 9) Future income taxes (note 18) Others long-term liabilities (note 10) Liabilities held for sales (note 19) Shareholders’ Equity Share capital (note 11) Contributed surplus (note 12) Accumulated other comprehensive loss (note 15) Deficit 512.731 804.670 93.018 12. 2010 and 2009 (in thousands of dollars) Consolidated Balance sheets ASSETS Current assets Cash and cash equivalent Accounts receivable (note 5) Revenue to be billed Inventories Prepaid expenses Income taxes refundable Future income taxes (note 18) Current assets held for sale (note 19) 2010 $ 2009 (restated note 4) $ 11.356 9.374 804.612 22.749 271.028 27.857 114.818 (5.125 14. Director .

460 116.629 73.068 55.712 5.122) (17.87) (952) (16.192 843 51.558 27.083.234 3.677) (98. (9.12) 20092 (restated note 4) 2009 (restated note 4) $ 1.176 23.001) (20.435 90.182) 1.471) (24.681) (35.545) 1.003 160.788 827.292) (3. plant and equipment Depreciation and amortization (note 13) Goodwill impairment (note 7) Income before the following: Financing expenses (note 14) Change in fair value of derivative instruments (note 22) Loss before recovery of income taxes and discontinued operations Recovery of income taxes (note 18) Current Future Net loss from continuing operations Loss from discontinued operations (note 19) Loss on disposal of discontinued operations (note 19) Net loss for the year Net loss per share from continuing operations Basic and diluted Net loss per share total (note 16) Basic and diluted Consolidated Statement of Comprehensive Loss (1.34) $ (98.122) (35. 2010 and 2009 (in thousands of dollars except per share amounts) Consolidated Statement of Loss 2010 $ Revenues Operating costs Gross profit Fixed costs.785 277.453) (2.499 (12.998 (90.292) (0.956) 36.089 6.086 151.543 3.649 (3. general and administrative expenses Operating profit Stock based compensation (note 11 (d)) Settlement of litigation (note 21) Loss on disposal of property.052 67.104.000 (61.717) (5.319) (27.074) (73.12) 2010 $ Net loss for the year Other comprehensive income (loss): Gain (loss) on translation of self sustaining foreign operations Unrealized gains (loss) on derivatives Future income taxes Comprehensive loss for the year See accompanying notes to consolidated financial statements.750) 38.852 128.649 (50.148) (2.001 280.Garda World Security Corporation Consolidated Statements of Loss and Comprehensive Loss For the years ended January 31.497) (23.772) (822) (22.148) .087 803.757 51.

187) 1.623 5.111 23.900 (8.Garda World Security Corporation Consolidated Statements of Cash flows (in thousands of dollars) For the years ended January 31.857 11.025 37.322 (22.179) (981) (75.892 1. plant and equipment 2009 (restated note 4) $ (35.586) 1.677 3.459 616 (18.649 843 56.162 80.077 1.057) (1.197) 23. plant and equipment (note 13) Amortization of intangible assets (note 13) Stock based compensation (note (11 (d)) Amortization of deferred financing costs (note 14) Capitalized interest on long-term debt (note 14) Adjustment related to carrying value of long-term debt (note 1) Future income taxes (note 18) Loss on disposal of discontinued operations (note 19) Goodwill impairment (note 7) Change in fair value of derivative instruments (note 22) Loss on disposal of property.904 1.292) 47.465) 45.650) 33.587) (68.261) (8.712 3.068) 74. beginning of the year Cash and cash equivalent.116) 14.187 Net change in non-cash working capital (note 17) CASH FLOW FROM FINANCING ACTIVITIES Increase (decrease) in bank indebtedness Increase in long-term debt Repayment of long-term debt Decrease in revolving facilities Shares issuance (note 11 (c)) Increase in deferred financing costs Others 8.122 27.233) 514 (2.675 (80.550) CASH FLOW FROM INVESTING ACTIVITIES Additions to property.190 (24.128) 487 (1.077) 1.472) (21.446 42.676 (11.219 4. plant and equipment Proceeds from disposal of property. end of year related to: Total cash and cash equivalent including discontinued operations and deposits from customers (note 17) Discontinued operations (note 19) 11.211 (98.857 25.998 43.174 (7.035 (22. .497) 5.489 (48.190 (1.523) (1.757 3. plant and equipment Proceeds from disposal of discontinued operations (note 19) Collateral for insurance provision (note 10) Others (20. 2010 and 2009 2010 $ CASH FLOW FROM OPERATING ACTIVITIES Net loss for the year Non-cash items Depreciation of property.840 Foreign currency translation on cash Net change in cash and cash equivalent during the year Cash and cash equivalent.497 20.339) 10.496 3.333) 25.993 See accompanying notes to consolidated financial statements.148) 47.813 (13.

As part of this new credit agreement the Corporation is subject to certain financial covenants which include a total leverage ratio.00% with reduction in relation with the leverage ratio.75% repayable in full at maturity in March 2017 (note 9 (d)). Significant estimates include the allowance for doubtful accounts. Management estimates The preparation of financial statements in conformity with Canadian 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. certain accrued liabilities. • • The revolving facilities and term loan are secured by a general pledge as well as a movable hypothec on the universality of present and future assets of the Corporation. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 1 Nature of operations and refinancing transaction The Corporation provides security services primarily in Canada and the United States. Senior notes of US $250. Its activities are carried out through two (2) main segments: physical security and cash logistics. realization of income tax assets.00% or at LIBOR or Banker’s acceptance rate plus 5. 2011 to March 2013 (note 9 (d)).00% or at LIBOR or banker’s acceptance plus 5. insurance provision and residual value of property. Significant accounting policies are as follows: Consolidation These consolidated financial statements include the accounts of the Corporation. Repayable in quarterly instalments of $5. 2011 and of $7.000 bearing interest at Canadian prime rate plus 4.000. 2010 the Corporation successfully completed the refinancing of the majority of its long-term debt.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. valuation of goodwill and intangible assets. Senior notes rank pari-passu and are unsecured. 1 .500 from July 31. The new facilities include as follows: • Revolving facilities of a maximum of $125. a senior debt leverage ratio and a fixed charges coverage ratio.000 from July 31. plant and equipment. Actual results could differ from those estimates. On March 12. bearing interest at Canadian prime rate plus 4. Repayable in full at maturity in March 2013 (note 9 (d)). 2 Significant accounting policies Basis of presentation These consolidated financial statements have been prepared under the assumption of going concern in accordance with Canadian generally accepted accounting principles (GAAP). 2010 to April 30. All intercompany balances and transactions have been eliminated on consolidation. its wholly owned subsidiaries and variable interest entities (VIE) if the Corporation is the primary beneficiary.00% with reduction in relation with the leverage ratio. Term loan of $215.000 and CA $75.000 bearing interest at a fixed rate of 9. which assume the realization of assets and the settlement of liabilities in the normal course of operations.

when the price is fixed or determinable. Management considers a number of factors. The Corporation provides an allowance for doubtful accounts using its best estimate of the amount of probable credit losses in its existing accounts receivable. and when collection is reasonably assured. Translation of other foreign currency transactions Monetary items denominated in foreign currencies other than the Canadian dollar are translated at year-end exchange rates. Insurance Certain United States subsidiaries maintain high retention for risks related to vehicles and worker’s compensation. Accounts receivable and allowance for doubtful accounts Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Translation of foreign currencies Self-sustaining foreign operations Assets and liabilities of self-sustaining foreign subsidiaries are translated into Canadian dollars at year-end exchange rates. The non-cash insurance reserve for insurance is determined by management and is based on claims filed and an estimate of claims incurred but not yet reported. Revenue and expense items are translated into Canadian dollars at the average monthly rate on which such items are recognized in income. 2 . Translation gains and losses are recorded as a component of equity in accumulated other comprehensive loss. The United States subsidiaries maintain third party stop-loss insurance policies to cover certain liability costs in excess of predetermined retained amounts. The resulting exchange gains and losses are included in the income for the year.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. Account balances are written off against the allowance when the Corporation determines if it is probable the receivable will not be recovered. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Revenue recognition Revenues are recognized when there is persuasive evidence that an agreement exists. cost being determined according to the specific identification method. Inventories Inventories are valued at the lower of cost and net realizable value. Cash and cash equivalent Cash includes cash on hand and deposits from customers. when services have been rendered. Revenue and expense items are translated into Canadian dollars at the average monthly rate on which such items are recognized in income. when making these determinations. including third party actuary valuations. Revenues are recorded on the basis of cyclical billings and also include revenue accrued in respect of services rendered but as yet unbilled. These United States subsidiaries maintain non-cash insurance reserve to cover the estimated retained liability.

Depreciation is calculated over their estimated useful lives according to the following methods and annual rates or periods: Method Buildings Office furniture Computer equipment Equipment Vehicles Aircraft and aircraft rotables Armored vehicles Uniforms Leasehold improvements Assets under capital lease obligations Leases that transfer substantially all of the benefits and risks of ownership of the assets to the Corporation are accounted for as capital lease obligations. a goodwill impairment test is performed on January 31. Intangible assets Intangible assets consist of service contracts and client relationships and softwares. A “step I” goodwill impairment test determines whether the fair value of a reporting unit exceeds the net carrying amount of that reporting unit as of the assessment date in order to assess if goodwill should be impaired.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. based on their fair values. a “Step II” goodwill impairment test must be performed in order to determine the amount of the impairment charge. less liabilities assumed. Software are amortized on a straight-line basis between 3 and 5 years. less related accumulated depreciation. The amount of impairment loss is the excess of the carrying value over the fair value. On an annual basis. An asset is recorded together with the related capital lease obligation. Goodwill Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired. plant and equipment Property. In the event that the net carrying amount exceeds the fair value. Impairment of long-lived assets Long-lived assets are reviewed for impairment when events or circumstances indicate that costs may not be recoverable. Fair value of goodwill is estimated in the same way as goodwill is determined at the date of acquisition in a business combination. If the fair value is greater than the net carrying amount. no impairment is necessary. which represent their estimated useful lives. Service contracts and client relationships are recorded at cost less accumulated amortization and are amortized on a straight-line basis over periods varying from ten (10) to twenty (20) years. To accomplish the Step II test. Assets under capital lease obligations are amortized over their estimated useful lives at the same rate as other similar assets. the fair value of the reporting unit’s goodwill must be estimated and compared to its carrying value. Goodwill is not amortized. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Property. The excess of the carrying value over the fair value is recorded as an impairment charge in the year. Goodwill is assigned as of the date of the business combination to reporting units that are expected to benefit from business combinations. This test is carried out more frequently if events or changes in circumstances indicate that goodwill might be impaired. Impairment exists when the carrying value of the asset is greater than the undiscounted future cash flows expected to be provided by the asset. Straight-line straight-line straight-line straight-line straight-line Straight-line Straight-line Straight-line Straight-line Rate/Period 20 and 30 years 20% and 5 years 30% and 3 to 5 years 20% and 4 to 5 years 30% and 4 years 12 years with 45% residual 6. 10 and 12 years 2 years 5 to 10 years Declining Declining Declining Declining balance balance balance balance and and and and 3 . plant and equipment are recorded at cost.

The substantially enacted tax rate when these differences are expected to reverse is used to compute future income taxes at the balance sheet dates. Income tax assets are recognized when it is more likely than not that the assets will be realized. when it is probable that the anticipated transaction will not occur within the period determined. Furthermore. instruments with a dilutive effect. 4 . which was designed to estimate the fair value of traded options that have no vesting restrictions and are fully transferable. Accumulated other comprehensive loss related to a cash flow hedging relationship that ceases to be effective is reclassified in the consolidated statements of loss in the periods during which the cash flows related to the hedged item affect losses. which is recognized immediately in income. when applicable. The fair value is calculated based on the Black-Scholes option pricing model. This method consists of recording an expense in income based on the vesting period of the options granted. or when the hedging instrument is sold or terminated prior to maturity. The Corporation formally documents all relationships between the swap agreement and long-term debt and its risk management objective and strategy for using this hedge. Interest rate swap agreement designated as hedging instrument The Corporation has entered into an interest rate swap agreement in order to mitigate the changes in cash flows related to the interest rate risk on a portion of its long-term debt. Changes in the fair value of these derivatives are recognized in the consolidated statements of comprehensive loss. officers. Any consideration paid upon exercise of the options is credited to share capital. Future income taxes The Corporation follows the liability method of accounting for income taxes. Stock options The Corporation has applied the fair value method of accounting for stock-based compensation awards granted to directors. When the derivative financial instrument no longer qualifies as an effective hedge for accounting purposes. Diluted net loss per share is determined using the treasury stock method to evaluate the dilutive effects of stock options and other instruments. except for any ineffective portion. if applicable. hedge accounting is discontinued prospectively. Under this method. The changes in fair value recognized in other comprehensive loss are reclassified in the consolidated statements of loss under change in fair value of derivative instruments in the periods during which the cash flows related to the hedge item affect losses.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. and the proceeds received are considered to have been used to redeem common shares of the Corporation at the average market price for the year. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Deferred financing costs Deferred financing costs include expenses incurred by the Corporation in various financing activities and are amortized using the effective interest rate method over the terms of these financings. The related accumulated other comprehensive loss is then immediately reclassified in the consolidated statements of loss. under which future income taxes are computed based on the difference between the carrying amounts of the various assets and liabilities and their tax basis. The Corporation does not use derivative financial instruments for speculative purposes. employees and other key personnel of the Corporation. Net loss per share Net loss per share is determined using the weighted average number of shares outstanding during the year. basically when the average market price of a share for the period exceeds the exercise price. are considered to have been exercised at the beginning of the year.

Consolidated Financial Statements. The Corporation has made the following classification: • • • Cash is classified as financial assets held for trading and is measured at fair value. revenue to be billed and long-term receivables are classified as loans and receivables and are initially measured at fair value and recorded at amortized cost using the effective interest rate method. measurement. 2011. which replaced the existing HB Section 3062. HB 1601. Gains and losses related to periodical revaluation are recorded in net income. Business Combinations. Consolidated Financial Statements. This Section applies to interim and annual financial statement for fiscal years beginning on or after January 1. Goodwill and Other Intangible Assets. 3 Changes in accounting policies Adopted in the current year: Goodwill and Intangible Assets: In February 2008. which supersedes the like named HB 1600. Financial instruments – Disclosures: In June 2009. the CICA issued Handbook (“HB”) Section 3064. part of a hedging relationship or not. The adoption of this Section was applied retroactively with restatement of consolidated financial statements of prior periods. 5 . and HB 1602. Business Combinations (January 2008). non-controlling interests and goodwill acquired in a business combination be recorded at “full fair value” and acquisition-related costs are recognized as expenses as incurred and that liabilities associated with restructuring or exit activities are recognized only if they meet the definition of a liability as of the acquisition date. Consolidated Financial Statements: CICA issued HB 1601. This amendment is effective for annual financial statements relating to fiscal years ending after September 30. 2008.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. to enhance disclosure requirements about the liquidity risk of financial instruments. The section is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1. Bank indebtedness. This standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1. to establish new standards for accounting for business combinations. The amendment also includes new disclosure requirements about the fair value measurement of financial instruments. accounts payable and accrued liabilities and long-term debt are classified as other liabilities and are initially measured at fair value and subsequently recorded at amortized cost using the effective interest rate method. 2011. New HB 1582. Goodwill and Intangible Assets. amongst others. The new standard provides guidance on the recognition. and HB Section 3450. Research and Development. HB 1601 carries forward the consolidated guidance previously included in HB 1600. presentation and disclosure of goodwill and intangible assets. This new section requires. Accounts receivable. have to be measured at fair value. The Section establishes standards for the preparation of consolidated financial statements. are to be implemented concurrently. “Financial Instruments – Disclosures”. The impact of the adoption of these standards has been included in note 4. 2009. Earlier application is permitted. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Financial instruments Financial assets. To be adopted in future periods: Business Combinations: CICA issued HB 1582. the CICA amended Section 3862. It is the Canadian equivalent to IFRS 3 (revised). liabilities. that most identifiable assets. Non-Controlling Interests. assets and liabilities held for trading and derivative financial instruments.

2009. The Corporation also reclassified the software from computer equipment to intangible assets. and the consolidated statements of loss. Accordingly. 4 Change in accounting policy – Goodwill and intangible assets On February 1. separate from the parent shareholder’s equity. but is allocated to the controlling interest and the non-controlling interest according to their percentage ownership. to clarify the application of the effective interest rate method after a debt instrument has been impaired.000. with certain exceptions. This amendment is effective January 1. In income statements. Consolidated and Separate Financial Statements.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Non Controlling Interests: CICA issued HB 1602. Non-Controlling Interests. Financial instruments – Recognition and measurement: In June 2009. 6 . 2009 have been restated. The section is to be implemented concurrently with HB 1582. start-up costs incurred after obtaining certain contracts and advertising costs that were previously capitalized have been expensed as incurred.927 and increased the net loss for the year ended January 31. The key features are: non-controlling interests in subsidiaries are presented in the consolidated balance sheet with equity. to provide guidance on accounting for non-controlling interests subsequent to a business combination. The Corporation does not expect these three new standards to have a material impact on the Corporation’s consolidated financial statements. The Corporation is evaluating the impact of the adoption of this amendment. The related depreciation has also been reclassified to amortization of intangible assets. other than the disclosure requirements. 2009 as well as the consolidated balance sheet as at January 31. This amendment is effective for years beginning after July 1. The effect of this change decrease the retained earnings at the beginning of the year ended January 31. 2009 by $1. Accounting changes: In June 2009. comprehensive loss and cash flow for the year ended January 31. 2011 with earlier adoption permitted as of the beginning of a fiscal year. HB 1602 replicates the provisions of IAS 27. HB 1602 is effective for fiscal years beginning on or after January 1. to exclude from the scope of this Section changes in accounting policies upon the complete replacement of an entity’s primary basis of accounting. HB 1602 is to be applied retrospectively. Business Combinations. “Financial Instruments – Recognition and Measurement”. At this point. deficit. non-controlling interest is not deducted in arriving at consolidated net income. the CICA amended Section 1506. The amendment also clarifies when an embedded prepayment option is separated from its host debt instrument for accounting purposes. 2009 by $1. the Corporation does not intend to early adopt this amendment. the CICA amended Section 3855. “Accounting Changes”. This reclassification has no impact on the Corporation’s deficit. the Corporation adopted this new standard with retrospective application. 2011. This change in accounting policy has been applied retroactively. 2009.

651) Restatement $ (2. 2009 As previously reported $ Net loss for the year Depreciation and amortization Net change in non-cash working capital Increase in deferred charges (97.915 (72.000) (1.623 (73.000) (0.471) (97.927) (1.148) (3. plant and equipment Intangible assets Shareholders’ Equity Deficit 15.12) The impact on the consolidated statements of cash flows is as follows: For the year ended January 31.466 (79) As restated $ (98.927) The impact on the consolidated statements of loss and comprehensive loss is as follows: As previously reported $ Capitalized deferred charges Amortization of deferred charges Amortization of intangible assets Depreciation of property.385 49.724) As restated $ 12. 2009 As restated Restatement $ $ 1.616 (43.09) For the year ended January 31.677 47.000) (775) 1.148) 53.148) 54.696 79 7 .502 (40.775 (775) 2.292) (1.114) 1.03) 1.292 (2.162 - Restatement $ (1.114 (2.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. 2009 As previously reported $ Assets Other assets Property. 2009 consolidated balance sheet is as follows: As at January 31.205 57.798 271.471) (98.319 56. plant and equipment Net loss from continuing operations Net loss for the year Basic and diluted loss per share 775 3. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) The impact of these changes on the previously reported January 31.725 272.075 35.148) (3.775 5.300 37.

All bad debt expenses are charged to fixed costs. • Bad debt write-offs to total revenues have been approximately 0. general and administrative expenses. Management believes that the credit risk of accounts receivable is limited due to the following reasons: • There is a broad base of customers with dispersion across different market segments. In light of the above.1 million (2009 – $8.2% of consolidated revenues for the last 3 years.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.2 million).6% (2009 – 90. • Approximately 89. the allowance for doubtful accounts at January 31. 8 . 2010 was $5.4%) of the Corporation trade accounts receivable are less than 120 days old. • No single customer accounts for more than 10% of the Corporation’s total revenues. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 5 Accounts receivable The Corporation grants credit to its customers under the ordinary course of business.

717 924 4.335).445 61.548 375.326 respectively (2009 – $98.192 14. 2010 (2009 .309 35.763 2009 (restated note 4) (1) Cost $ Land Buildings Office furniture Computer equipment Equipment Vehicles Aircraft and aircraft rotables Armored vehicles Uniforms Leasehold improvements 283 3.718 126.468 349.866 103.110 17. plant and equipment 2010 Accumulated amortization $ 472 2. 2010.542 4.297 26.287 5.616 and $21.071 131.$15.190 5.625 for the year ended January 31. vehicles.732 Cost $ Land Buildings Office furniture Computer equipment Equipment Vehicles Aircraft and aircraft rotables Armored vehicles Uniforms Leasehold improvements 246 4.829 Net $ 283 3. the cost and accumulated amortization for computer equipment.092 44. 9 .189 3.324 7.202 3.206 1.188 130.933 48.887 6.534 111.737 and $26. As at January 31. armored vehicles and aircraft held under capital leases amounted to $81.135 2.109 17.442 12.494 20.783 5.552 29.765 14.168 33.175 8.074 12.049 44.034 (1) Accumulated amortization $ 388 1.225 75.648 4.774 105.495 Net $ 246 3.301 32.783 7.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.598 24.325 10.594 3.150 8.205 (1) All the aircraft are leased to a private air cargo operator.449 19.174 11.985 3. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 6 Property.682 271. Rental revenues amounted to $21.526 11.330).494 105.280 218.167 145.

127) (5. The result of the test determined that no loss impairment was required as at January 31. 2010. Intangible assets As at January 31.205 2. 2010.918) (55.471 335. as previously reported Change in accounting policy (note 4) Balance – January 31. as assets held for sale.737 379.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. 2010 (1) 51. the Corporation adjusted the change in purchases prices for previous acquisitions. 2008. Intangible assets are shown in the balance sheet net of accumulated amortization of $14.022) 68. the Corporation performed impairment tests of its significant amortizable intangible assets consisting of service contracts and client relationships and no impairment loss was required.745 379.616 1.915).583 During the fourth quarter of 2009. 31 2009.116 79 (4. 2009.677) 9. The results determined that the carrying amount of the Corporation’s physical security and US cash logistics operating segment’s assets exceeded its fair value.5 million and $47. (2) a) The Corporation performed its goodwill impairment test as at January 31. The Corporation performed its goodwill impairment test as at January 31. Accordingly.578) 47.524 57.018 (40. the Corporation reclassified certain assets. As at January.246 (33.$11.745 2. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 7 Goodwill and Intangible assets The changes in the carrying value of goodwill and intangible assets comprise the following: Intangible assets (restated note 4) Goodwill $ $ Balance – January 31. a goodwill impairment loss of $26. 2008.274 (2009.406 55.868) 303.089) (19.998 3. 2009 Software addition Adjustment for assets held for sale Amortization of intangible assets Effect in exchange rate during the year Balance – January 31. restated New service contract Adjustments (1) Adjustments for assets held for sale (2) Amortization of intangible assets (note 4 and 13) Impairment charge Impairment charge for assets held for sale Effect in exchange rate during the year Balance – January 31. including Intangible and Goodwill.6 million was recognized in the physical security and US cash logistics segments respectively.496) (6.404 492 (2. 2009. b) 10 .

002 38.49%. 2010 have been presented as long-term on the consolidated balance sheet in accordance with EIC-122.991 12.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.130 6. b) 11 . 2010. “Balance Sheet Classification of Callable Debt Obligations and Debt Obligations Expected to be Refinanced”.566 750 552. payable in annual and quarterly instalments until October 2010 Deferred financing costs (note 14) 24. collateralized by rolling stock.847 180. maturing on various dates through July 2014 Balances of purchase prices payable. except for capital repayments made prior to the refinancing transaction.807 3.798 9 Long-term debt 2010 $ Authorized revolving facilities repaid in March 2010 (note 9 (a)) Senior term loan repaid in March 2010 (note 9 (a)) Senior term loan repaid in March 2010 (note 9 (a)) Subordinated term loan repaid in March 2010 (note 9 (a)) Capital leases obligations.813.061 45. the Corporation completed the refinancing of the majority of its long-term debt subsequent to year-end.750 233.894 As described in note 1. bearing interest at rates ranging from nil to 10. As at January 31.133 178. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 8 Other assets 2010 $ Notes receivable Other 8.541 2009 $ 27.210 2009 $ 8.356 a) 622. including principal and interest.050 (13.289 144. at interest rates varying between nil and 9. payable in monthly instalments of $287. plant and equipment.130 150.4%. the amounts otherwise due on a current basis under the Corporation’s existing credit facilities as at January 31.933 512.220) 661. bearing interest at a rate of 5%.39% with an average rate of 6.302 3.627 6. As a result of this transaction. maturing at different dates until November 2014 Conditional sales contracts. repayable in monthly instalments of a maximum of $1.035 160.602 66.289 2. principal and interest.108 Less: Current portion (note 9 (a)) 39. letters of credit amounting to $33.694 reduced the available revolving facilities. secured by property.908 12.

029 98 49.035 as an adjustment related to the carrying value of the long-term debt which was consistent with the refinancing transaction subsequent to year-end. The current portion of capital leases obligations is $21. net of collateral of $7. e) The Corporation reassessed the carrying value of its long-term debt and deferred financing costs as at January 31.203 47.61%.015 93.687 Minimum payments on capital leases obligations 23. covering 90% of the senior and subordinated term loans.696 12.671 (2009 .223 64. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) c) d) The Corporation’s management reviews compliance with the financial covenants on a monthly basis and the Corporation’s board of director’s reviews compliance with the financial covenants on a quarterly basis. repaid in March 2010 (note 22) Deferred rent for tenant’s improvements Other 7.441 7.930 506.665 12 .787 1.$21.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.289 31.228 64.653 1.523 (2009 – nil) Fair value of swap on long-term debt to convert from a variable to a fixed average rate of 5.196 3. 2010 and registered an amount of $20.451 93. Principal payments on long-term debt in accordance with note 9 (a) and capital leases obligations over the next five (5) years are as follows: Capital payment on long-term debt 2011 2012 2013 2014 2015 2016 and thereafter 18.021 170 334.454 of which $3. 10 Other long-term liabilities 2010 $ Insurance provision.852 is interest.435 10.224 9.262 29.588).911 2009 $ 18.454 Minimum instalments payable for the subsequent years under capital leases obligations amounting to $49.

105 13 . The Corporation expects to meet all the covenants under the new credit facilities for the next year. net of cash and bank indebtedness.477. the Corporation is not subject to any externally imposed capital requirements.885 81. privileges. The directors are authorized to fix the number of shares in each series and to determine the description. net of bank indebtedness Long-term debt Shareholders’ equity excluding accumulated other comprehensive loss (2. Other than the covenants required by its credit facilities (note 1).002 637. contributed surplus and deficit.963 (23. The Corporation normally finances fixed asset acquisitions through capital leases. 2010 31.298 $ 114.046 718. share capital. rights. issuable in one or more series.882 119. 2009 Issued following exercise of options (note 11 (d)) Balance as at January 31.931 The Corporation’s objectives when managing capital are to maintain an optimal capital structure with the use of external long-term debt to support its growth.980 599.597. b) Authorized – in unlimited number.306) 552.798 487 115.117) 661.399.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. Issued and fully paid c) Changes in share capital issued during the two (2) previous years are summarized as follows: Number of Class “A” shares Balance as at January 31. 2008 Issued following exercise of options (note 11 (d)) Balance as at January 31. restrictions and conditions attached to the shares of each series. voting and participating Class “B” shares.416 31.313 31. The following table summarizes certain information with respect to the Corporation’s capital structure at the end of each year: 2010 2009 $ $ Cash.983 49.569 78. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 11 Share capital a) Capital risk management The Corporation has defined its capital as long-term debt.289 549. without par value Class “A” shares. The Corporation’s management monitors the covenants on a monthly basis and the Corporation's Board of Directors reviews the covenants on a quarterly basis.285 820 116.

686) 2.17 Number of shares Options granted – Beginning of year Granted Exercised Forfeited Cancelled Options granted – End of year Number of shares 2. and service providers to. officers.33 16. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) d) Options The Board of Directors of the Corporation may. by resolution.000 (119.59 4.51 15.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.313) (539.165.471.485. the Corporation and of its subsidiaries.88 6. The vesting period ranging from the date of the grant to five (5) years.471. grant options to directors.001 2.002) 2.31 14.17 4.69 12.30 11.250) (306. employees of. The exercise price of the options is determined by the Board of Directors at the time of the grant of an option.61 3.18 2009 Weighted average exercise price $ 13. The following table summarizes the Corporation’s Class “A” stock option activity: 2010 Weighted average exercise price $ 15.353 1.752.416) (458.353 14 .668 603. provided that the total number of shares issued under the plan does not exceed ten percent (10%) of the common shares issued by the Corporation. The exercise price of the options shall not be lower than the closing price of the shares on the last trading day of the Toronto Stock Exchange prior to the time of the grant.000 (78.

18 Options exercisable Weighted average exercise price $ 8.18 23.000 529.00 5.40 18.40 Exercise price $ 8.000 125.001 Number of shares 106.000 255. 2009 Expected dividend rate Volatility Expected life of options Risk-free interest rate Number of options Fair value of options Nil 90.00 8. The fair value of options granted was estimated on the date of the grant using the Black-Scholes option pricing model on the basis of the following assumptions: Issuance of June 5.98 4.333 6.0% 690.00 15. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) The following table summarizes information about Class “A” share stock options outstanding and exercisable as at January 31.0% 475.39 1.712 (2009 .41 2.28 0.00 8.999 13.000 $2.80 Weighted average exercise price $ 8.334 160. 2010.000 273.752.00 5.00 5.064 During the year.000 400.40 18.00 15.65 3.00 16.000 400.00 8.000 527. 2002.00 11.661 8.500 680.98).50 8.46 4.$3.000 (2009 − 603.429 Issuance of May 21.00 15.000) Class “A” share stock options at exercise prices ranging from $4.50 8.0% 4 years 3. with an offsetting credit to contributed surplus.000 105. 15 .40 18.23 3.00 to $5.165.757) for the options granted since February 1.00 15.62 2.00 15.98 4.00 Number of shares 8.00 16.98 4.35 0.500 40.00 16.50 8.404 During the year ended January 31.662 125.04 1.666 434.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. the Corporation recorded to net loss a stock based compensation charge of $3.585.00 13.667 10.18 23.333 111.82 1.60 14.00 per share (2009 − $4.000 $1.000 16.60 14.750 1. 2009 & Sept 9.18 0.18 23. 2009 Nil 90.00 to $16. the Corporation granted 1.0% 5 years 3.60 14.00 15.000 2. 2010: Options outstanding Weighted average remaining contractual life (years) 0.

496 51. plant and equipment Amortization of intangible assets 47.217 3.430 9.410 4.059 (1.412 13 Depreciation and amortization 2010 $ Depreciation of property.501) 90.757 (182) 9.052 51. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 12 Contributed surplus 2010 $ Balance – Beginning of year Stock-based compensation (note 11 (d)) Options exercised Balance – End of year 9.459 616 76.712 (306) 12.035 92.779) 73.233 4.185 4.818 2009 $ 5.955 (3.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.219 4.300 (2.677 53.040 3.558 59.715 Depreciation and amortization related to discontinued operations (note 19) (663) 2009 (restated note 4) $ 47.497 20.837 3.232) 51.892 1.176 Financing expenses related to discontinued operations (note 19) 16 .623 5.068 14 Financing expenses 2010 $ 2009 $ Interest on long-term debt Interest on capital lease obligation Other interest Amortization of deferred financing costs (note 9) Capitalized interest on long-term debt Adjustment related to carrying value of long-term debt (note 9 (e)) 58.412 3.

00 to $23.606) 4.001 (2009 − 2. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 15 Accumulated other comprehensive loss 2010 $ Unrealized gains (losses) on translation of financial statements of selfsustaining foreign operations Unrealized losses on fair value of financial instruments Future income taxes 2009 $ (5.001 (20.12) 31.752.109 $(3. 2.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.353) Class “A” stock options with an exercise price varying from $4.471.606) (5.40 per share (2009 − $3.40) were excluded in computing the diluted loss per share because the effect was anti-dilutive.522. 2010.292) 2009 (restated note 4) $ (98.350 (36.148) 16 Loss per share The following table reconciles basic and diluted net loss per share: 2010 $ Net loss for the year Weighted average number of shares outstanding for use in computation of basic and diluted income per share Basic and diluted net loss per share (35.593 $(1.499) 12. 17 .148) 31.00 to $23.456.12) As at January 31.

406 (5.809 11.857 13.465) 17.680) 69.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.871) 898 (11. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 17 Consolidated statements of cash flows a) The change in non-cash working capital items is determined as follows: 2010 $ Decrease (increase) in Accounts receivable Revenue to be billed Inventories Prepaid expenses Income taxes refundable Increase (decrease) in Accounts payable and accrued liabilities Income taxes payable 2009 (restated note 4) $ 403 (2.048 3.715 (7.944 (9.384 18 438 7.782 11.408 25.162 b) Additional information: Interest paid Income taxes received 64.344 (2.282) 37.190 18 .254 1.393) (931) (42) 471 15.341) c) Cash and cash equivalent is detailed as follows: Cash on hand Deposits from customers 8.

485) 15.778 19 .795 12.031 23.122 (32.79% (90.043 40. Significant components of the Corporation’s future income tax assets (liabilities) as at January 31.294) (5.769 39.183) 26.134 299 25.896) (36.896) (952) (16.000 (8.74% Income taxes calculated at statutory rate Increase (decrease) resulting from: Benefits arising from a financing structure Non-Canadian applicable income tax rate difference Change in valuation allowance Business disposal Permanent differences and other Change in statutory rate Goodwill impairment (18.141 19.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.653 (23. plant and equipment and intangible assets Liabilities and other provisions Loss carryforwards Financial instruments Valuation allowance Net future income tax assets (29.012) (13.211) 27.946) (19.692 (19.079) 13.587) 8. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 18 Income taxes a) The income tax rate differs from the basic tax rate for the following reasons: 2010 $ Loss before recovery of income taxes and discontinued operations Loss from discontinued operations before incomes taxes Loss on disposal of discontinued operations Loss before income taxes Canadian statutory income tax rate 2009 $ (50. 2010 and 2009 were as follows: 2010 2009 The tax effect of temporary differences relates to the following: $ $ Property.168) 30.623) (117.130 398 1.122) (59.188) 30.497) (577) (23.226) (12.545) (26.122) (1.792) (980) (7.020) b) Future income taxes comprise the following: Future income taxes represent the net tax effect of temporary differences between the financial statements carrying amounts and tax bases of assets and liabilities.772) (3.020) Income tax recovery attributable to loss consist of: Current Future Income taxes of discontinued operations (822) (22.546) (3.

122.5 million.2 million and US $52. 2010. The Canadian losses are set to expire between 2027 and 2030 and the US tax losses are set to expire between 2025 and 2029. the development and upgrading of the technology used in the product. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) As at January 31.25 million. On April 20. Revenues and expenses of CashLINK products and services and of the US and Mexican Guarding operations for the years ended January 31. 2009. The Corporation incurred a loss of $5. totalling $76. 2009.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. 19 Business disposal and discontinued operations The US cash logistics business is involved in the manufacturing of smart-safe units. the Corporation concluded the sale of its US and Mexican Guarding operations for a total cash consideration of US $44. 20 . 2010 and 2009 have been reclassified from continuing operations to discontinued operations. Subsequently. the Corporation acquired certain assets of Kroll in December 2006 and GSS Global in February 2007 in order to complement and enhance its high-threat protection services. the Corporation sold all the assets related to the CashLINK products and services for a cash consideration based on the future sales of the products and services made by the buyer in conjunction with the cash logistics services during the next five (5) years. the Corporation entered the US market for physical security services. With the January 2006 acquisition of Vance International. from the Canadian and US operations respectively. During the fourth quarter of 2009. which includes guarding and global risk consulting services. On June 2. as well as the installation and servicing of units deployed at its customer locations throughout the United States (the “CashLINK” products and services). the Corporation and its subsidiaries have accumulated unused operating losses. it was decided to divest the US and Mexican Guarding operations. It also acquired a platform to offer high-threat protection services internationally.

677) Loss from discontinued operations Loss on disposal of discontinued operations (1.881 20.999 (1.037) (5.677) (24.588) US and Mexican Guarding Operations 45.022 (22.05) (0.122) (7.946) (24.78) 21 .680) (1.623) (1.751 37.588) (908) (908) (706) 331 331 (1.272 663 (1.135 2.779 (2.366 8.243) 1.839) (26.507 44.142 8.132 458 795 1. general and administrative expenses Depreciation and amortization Goodwill impairment Operating income (loss) before the following: Interest on long-term debt Loss before provision for (recovery of) income taxes Provision for (recovery of) income taxes Current Future 5.946) (1.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.20) (0.426 130.122) (6.793) 1.25) (0.385 7.294) (577) (577) (2.159) (3.717) (5.365 7.756 6.232 19.501 Total 151.140 205 (2.501 2009 $ Total 51.680) Net loss per share Basic and diluted (0.545 22.844) 3. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Summary of discontinued operations 2010 $ CashLINK Products and Services Revenues Operating expenses Gross profit (loss) Fixed costs.

023 1.053 55. For the year ended January 31.067 31. the outcome of which cannot be determined at this time and accordingly. 2010.063 represents legal fees incurred.865 2. 2010 2010 $ Assets Cash Non cash working capital Property. the Corporation registered an expense of $5.192 of which $2.000 related to wrongful termination allegations. 21 Contingencies In the normal course of business.437 2.838 73 54 52.680 203 52.763 (2009 – $5. In addition. The pension expense for these plans is represented by the Corporation’s contribution. no provision has been recorded.197 12.174 5.658 12 273 55. the pension expense for these plans amounted to $3. plant and equipment Intangible assets Goodwill Future income taxes Liabilities Long-term debt Other liabilities Net assets held for sale Net assets disposed Consideration: Cash proceeds Balance of sale Total consideration Loss on disposal of discontinued operations 17.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. One of the divisions of the Corporation settled after the year-end a legal action from a former employee for an amount of US$3.589 5.373 - 20 Pension plans The Corporation has established defined contribution pension plans for a certain number of its unionized and non-unionized employees in Canada and the United States. the Corporation is involved in various legal proceedings.415 47.627 2. As a result. 22 .386). The Corporation believes that the resolution of these proceedings will not have a material favorable or unfavorable effect on its financial position and income statement.344 37.122 2009 $ 1. the Corporation also contributes to a registered retirement savings plan for various employees. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Summary of assets and liabilities sold in the fiscal year ended January 31.711 42.

on the age of the specific receivable balance and the current and expected collection trends.584) Level 2 $ Level 3 $ Total $ Credit risk Financial instruments which potentially subject the Corporation to significant credit risk consist principally of cash. either directly (as prices) or indirectly (derived from prices).857 (47.857 (47. Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or liability. the carrying value of these financial instruments is considered to approximate their fair value.234 (859) 2.875 (1. beginning of year Business disposal Bad debt expense Amount written off and recoveries Currency translation adjustment Allowance for doubtful accounts. in part.441) (47. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 22 Financial instruments Fair value The Corporation has estimated the fair value of its financial instruments based on current interest rates. Unless otherwise indicated. end of year 8. and Level 3 – unobservable inputs such as inputs for the asset or liability that are not based on observable market data.441) (35. 2010 are as follows: Level 1 $ Assets and liabilities measured at fair value Cash and cash equivalents Interest rate swaps 11. The Corporation believes that the credit risk of accounts receivable is limited.014 8.466) (641) 5.071 2009 $ 5.234 23 . The fair value of financial assets and financial liabilities measured at fair value in the consolidated balance sheet as at January 31. Therefore.441) 11.605 2. A provision is established when the likelihood of collecting the account has significantly diminished. estimated by the Corporation’s management based.803 (4. The Corporation’s credit risk is principally attributable to its trade receivables. market value and current pricing of financial instruments with similar conditions. The fair value hierarchy under which the Corporation’s financial instruments are valued is as follows: • • • Level 1 – quoted market prices in active markets for identical assets or liabilities. The Corporation’s cash and derivative instrument are held with or issued by high credit quality financial institutions. The amounts presented in the balance sheet are net of an allowance for doubtful accounts. 2010 $ Allowance for doubtful accounts.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. derivative instruments and revenue to be billed.260) 1. the Corporation considers the risk of non-performance on those instruments to be remote. accounts receivable.857 11.

loss before recovery of income taxes and discontinued operations would have been approximately $700 (2009 . Generally. These contracts are designated as hedges of the change in cash flow related to the interest rate risk on a portion of the Corporation’s senior and subordinated term loans. the impact on the operating income before income taxes for the year would have been marginal and the comprehensive loss would have been approximately $984 lower. the Corporation believes that its exposure to risk from currency fluctuations is low. the Corporation does not require collateral or other security from customers for trade accounts receivable.499 recognized in the accumulated comprehensive loss as of January 31. namely in the United States. Had interest rates been 100-basis points lower. 24 . 2010. Interest rate risk As at January 31. Transactions recorded in US dollars relate exclusively to self-sustaining foreign operations and do not result in foreign exchange gains or losses for the Corporation.441 (note 1). Consequently. In addition. the Corporation introduced a monthly LIBOR rate on the variation interest rate paid to the lenders.$1. During the year ended January 31. As such. the Corporation contracted a debt denominated in US dollars in the same proportion as the cash flow stream from self-sustaining foreign operations.250) lower. 2010. through its wholly owned subsidiaries.250) higher. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) The distribution of the Corporation’s customers and the business risk management procedures have the effect of avoiding any concentration of credit risk. all other variables remaining constant. Foreign exchange risk The Corporation has operating activities outside Canada. loss before recovery of income taxes and discontinued operations would have been approximately $700 (2009 $1. credit is extended following an evaluation of creditworthiness. It is therefore exposed to foreign exchange rate risks on the US dollar and the British pound in the net investment in its self-sustaining foreign subsidiaries. the variation in the fair value of the interest rate swap is recognized in the net results since this change occurred. however. the Corporation entered into interest rate swaps that will mature on the same basis as the senior and subordinated term loans. 2009. had interest rate been 100-basis points higher.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. the Corporation performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts when accounts are determined to be uncollectible. The Corporation has amortized during the year the derivative loss of $36. This change resulted in an ineffectiveness of the hedge relationship for its interest rate swap (derivative financial instrument). In June 2007. In October 2008. England and the Middle East.01 on average in comparison to the Canadian dollar. the Corporation’s interest rate risk is summarized as follows: Cash and cash equivalent Accounts receivable Bank indebtedness Accounts payable and accrued liabilities Long-term debt Variable rate Non-interest bearing Variable rate Non-interest bearing See note 9 Based on long-term debts at variable rates as at January 31. if the US dollar had strengthened by $0. In addition. On March 12. the interest rate swap contracts have been terminated for a consideration of $47. giving the repayment of the interest rate swap in March 2010. 2010. 2010.

2010 the Corporation has refinanced the majority of its long-term debt. 25 .435 687.Garda World Security Corporation Notes to Consolidated Financial Statements January 31. As a result of the transaction the contractual cash flow have been calculated using the refinancing terms and conditions (note 1 and 9 (a)).501 Contractual cash flows $ 123.595 83.012 9.220 83.024 Cash flows from operations are the principal source of funding for the Corporation. The Corporation manages this risk by maintaining detailed cash flows and long-term operating and strategic plans.441 732. On March 12.220 855.035. The contractual cash flows include the carrying value amount plus interest using the current rate.982 9. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) Liquidity risk Liquidity risk is the risk that the Corporation will not be able to meet its obligations as they become due or can only do so at excessive cost.441 264.220 552.194 Between one (1) and two (2) years $ 83.595 More than two (2) years $ 687. The following are the contractual maturities of financial liabilities as at January 31.551 47. 2010: Less than one (1) year $ 123.435 Carrying amount $ Accounts payable and accrued liabilities Long-term debt Bank indebtedness Derivative instruments 123.551 47.551 47.289 9.441 1.

airport pre-board security screening services. Minimum lease payments for the upcoming years are as follows: 2011 2012 2013 2014 2015 2016 to 2024 24.795 126.523 16. in-store cash control systems and check imaging. cargo aircraft. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) 23 Commitments The Corporation entered into operating leases of real estate expiring on various dates through May 2024 which call for lease payments of $126. The accounting policies of the reportable segments are the same as those used for the consolidated financial statements.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.504 37.744 22.434 13. deposit processing. through armored transportation. ii) Activities carried on through other segments are not significant and are included in the physical security and other segment. and its activities are carried out through two (2) main reportable segments: i) Physical security and other: security guard services.0 million). This business segment is operated using a combination of armored vehicles.3 million (2009 – $106. high-speed currency processing systems and cash vault. cash vault services.300 24 Segmented information The Corporation provides security services primarily in Canada and the United States. pre-employment screening and other.300 11. 26 . Cash logistics: the Corporation offers its clients a fully integrated approach to managing the supply chain of cash. consulting and investigation/global risk consulting services. from ATM and point-of-sale services. deposit processing systems.

083.219 8.678 47.989 4.627 38.749 (2009 – $105.541 40.205 Goodwill Physical security and other Cash logistics 97.$9.536 (2009 .591 42. The total assets of the private air cargo are $9.111 6.440 258. the total revenues and operating costs of the operator were respectively $105.$126.268 592.518 1.642 335.445 in 2010 (2009 .788 Depreciation of property.865 986.030 (1) (2) Includes amounts relating to discontinued operations The Corporation owns a fleet of cargo aircraft that are leased on a long-term basis to an american private air cargo operator.164) Includes income before financing expenses.408 208.629 Property.063 621. plant and equipment Physical security and other Cash logistics (3) (1) 6. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) a) Business segment 2010 $ 490.374 and $83.563 231.330) that are linked to operating profits generated by the air cargo operator.677 Income before financing expenses. income taxes and discontinued operations related to air cargo in 2010 $11.630 205.166) (5) (6) Includes aircraft and aircraft rotables of $105.355 218.205 Intangible assets Physical security and other Cash logistics 5.977 and $90.496 505 5.670 67.285 57.049 in 2010 (2009 – $132.135 255. aircraft and aircraft rotables of $111. Revenues includes lease payment of $21.954 (2009 – $11.331 52.074 804.765 43.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.435 5.765 271.172 5.104.623 Amortization of intangible assets Physical security and other Cash logistics (1) 507 3.996 47. discontinued operations and change in fair value of derivative instruments Physical security and other Cash logistics (4) 23.$6.$15. plant and equipment Physical security and other Cash logistics(5) 10.819 1.165 730.625 in 2010 (2009 .225) Includes aircraft inventories.763 12.089 (2009 .725 1.061 570.087 2009 (restated note 4) Revenues Physical security and other Cash logistics (2) $ 483.616 Total assets (1) Physical security and other Cash logistics (6) 234.953 303.583 103. income taxes. In 2010.647) (3) (4) Includes depreciation of aircraft in 2010 of $10.541) 27 .146 47.326).737 5.

100 41.415 804.706 303.435 28. 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares) b) Geographical segment 2010 $ 493. plant and equipment Canada United States and other 22.529 39.877 256.536 986.788 Depreciation of property. 28 .690 47.265 1.496 638 5.673 47.514 246.242 (21.950 39.616 Total assets(1) Canada United States and other 204.523 622.623 Amortization of intangible assets(1) Canada United States and other 594 3.877 224.030 (1) Includes amounts relating to discontinued operations 25 Comparative figures Certain comparative figures have been reclassified to conform to the new presentation adopted in the current year. income taxes.629 Property.737 5.328 335.637 47.104. discontinued operations and change in fair value of derivative instruments Canada United States and other 28.135 158.763 24.205 Goodwill Canada United States and other 78.087 2009 (restated note 4) Revenues Canada United States and other $ 482.613) 6.090 218.219 7.677 Income (loss) before financing expenses.205 Intangible assets Canada United States and other 6.902 4.357 589. plant and equipment(1) Canada United States and other 7.583 78.083.720 599.Garda World Security Corporation Notes to Consolidated Financial Statements January 31.656 38.922 57.039 5.673 196.694 51.779 67.691 271.730 1.494 827.

URL address: http://www. [Online]. HEC Montréal. MARCHON. Company overview. [Online]. Official documents In Search of Security: The Roles of Public Police and Private Agencies.shtml&hs=h zp Statistics Canada. McGraw-Hill.bmonesbittburns. [Online].gc. [Online].ca/ Investigation and Security Services. [web page consulted on November 10th 2010].acdi-cida. URL address: http://bea.businessweek. [Online]. 2005. URL address: http://www. [web page consulted on November 9th 2010]. Reference books BODIE. Octobre 2009.hrsdc.asp#Mid   . 2002 3.ca/asp/ gateway.com/economics/focus/20060825/feature.nsf/En/Home Economic analysis.ca/ Canadian International Development Agency.asp?hr=en/hip/hrp/sp/industry_profiles/investigation_security_services. N. [Online]. BMO Nesbitt Burns.fin. Government of Canada. Zvi. URL address: http://www.ca/cidaweb/acdicida. Definition of the Industry.gov/bea/dn/nipaweb/TableView. [web page consulted on November 10th 2010]. Law Commission of Canada. URL address: http://www.gc.ca/ US Department of Commerce – Office of Economic Analysis.gc. Prévoir l’économie pour mieux gérer.Bibliography 1.pdf Finance Canada. [web page consulted on November 10th 2010]. URL address: http://www. Investments. [Online].asp?ticker=GW:CN Bank of Canada. Toronto.statcan. Websites Bloomberg BusinessWeek. 2. Maurice. Fifth Canandian Edition. [web page consulted on November 10th 2010]. Institut d’économie appliquée. URL address: http://investing. [web page consulted on November 9th 2006]. and al. URL address: http://www. 916 p. [web page consulted on November 10th 2010]. [Online].bankofcanada. [web page consulted on November 101h 2010].com/research/stocks/snapshot/snapshot.

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