Colliers International Group Inc. 10-K/A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") set forth in this Item 7 has been revised to reflect the restatements and to update certain forward-looking statements to reflect current expectations, as well as to incorporate certain conforming changes. Apart from the revisions outlined above, this MD&A does not reflect events and developments subsequent to March 31, 2003. Results of operations — year ended March 31, 2003 Consolidated revenues for Fiscal 2003 were $542.7 million, a 6% increase from the $512.7 million reported for the year ended March 31, 2002 ("Fiscal 2002"). Approximately $12.8 million of the increase resulted from tuck-under acquisitions completed during the year, resulting in internal growth of 3%. During Fiscal 2003, the value of the Canadian dollar appreciated 1.0% relative to the value of the U.S. dollar, based on the average annual exchange rate versus the prior year. The impact of the foreign exchange rate movement on earnings was not material. Operating earnings decreased 12% from $44.2 million to $38.9 million in Fiscal 2003. EBITDA(1) decreased 7%, to $53.3 million from $57.1 million in the prior year, while the EBITDA margin declined 130 basis points to 9.8% of revenues. Included in 2003 results were executive life insurance proceeds of $4.2 million and a dilution gain upon the sale of shares of a Consumer Services subsidiary in the amount of $1.1 million. The decline in margins was the result of weakness in the Residential Property Management and Business Services segments. Consumer Services experienced increased profitability, while Integrated Security Services' margin was stable year-over-year. (1) Please refer to Item 6, Selected Financial Data, for a definition of EBITDA and a reconciliation of EBITDA and operating earnings. EBITDA margin refers to EBITDA as a percentage of revenues. Depreciation for the year ended March 31, 2003 was $12.4 million, up 9% from the previous year, due to a higher level of capital expenditures in Fiscal 2002, as compared to Fiscal 2001 and 2001. Amortization of intangibles was $2.1 million, compared to $1.5 million in the previous year. The increase in amortization was the result of the recognition and amortization of intangible assets on acquisitions completed subsequent to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142") on April 1, 2001. Interest expense decreased 30% relative to the prior year, to $9.0 million, due to the combined effects of lower interest rates, lower levels of indebtedness and the $1.4 million write-off of deferred financing fees in the prior year. Weighted average interest rates were approximately 5.5% in Fiscal 2003 compared to 7.1% in Fiscal 2002, excluding the write-off of deferred financing fees. The reduction in rates resulted from lower floating reference rates and from two interest rate swaps which convert the fixed rate on the 8.06% Senior Secured Notes (the "Notes") into variable interest streams. In October 2002, we entered into an interest rate swap agreement in which the interest stream on $25 million of the fixed-rate Notes was exchanged for the variable interest rate of LIBOR + 4.450%. This was in addition to the December 2001 interest rate swap in which the interest stream on $75 million of the fixed-rate Notes was exchanged for the variable interest rate of LIBOR + 2.505%. The swaps resulted in interest savings of $3.5 million for the current year and $0.6 million in the prior year. Both swaps have maturities matched to the underlying Notes due June 29, 2011. The swaps are being accounted for as hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . The swaps are carried at fair value on the balance sheet, with gains or losses recognized in earnings. The carrying value of the hedged debt is adjusted for changes in fair value attributable to the hedged interest rate risk; the associated gain or loss is recognized currently in earnings. The income tax provision for the year ended March 31, 2003 was approximately 28% of earnings before taxes, compared with 33% in the prior year. The decline in tax rate resulted from two major factors: (i) continuing leverage from the cross-border tax structure implemented in Fiscal 2000 and (ii) $4.2 million of non-taxable life insurance proceeds received during the year. The Company anticipates that the Fiscal 2004 tax rate will be approximately 30.5%, resulting from expected efficiencies from the cross-border tax structure. 5 The minority interest share of earnings decreased to $3.2 million or 14.6% of earnings before minority interest from $3.8 million, or 18.2%, in the prior year. The reduction was the result of minority share purchases completed during the year. Net earnings were $18.4 million, an 8% increase over the prior year, while diluted earnings per share increased 9% to $1.27. The extraordinary loss of $797,000, net of income tax benefit of $578,000, reported in the prior year has been restated as increased interest expense of $1,375,000 and a reduction of income tax expense of $578,000 as a result of the adoption of SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections as of April 2002 during Fiscal 2003. The Residential Property Management unit generated $215.0 million of revenues for the year, an increase of 5% over the prior year. Excluding the impact of acquisitions, segment internal revenue growth was 4%. Residential Property Management reported EBITDA of $14.6 million, down $4.2 million or 22% relative to the prior year, primarily due to insurance cost increases and poor results in painting & restoration activities. Insurance costs were approximately $2.0 million higher than the prior year, and little of the cost increase was passed on to clients. The painting & restoration service line operating in South Florida, which accounted for $22.1 million or 10% of the segment's revenues experienced a loss for the year due to difficult market conditions and several poorly performing projects. Also included in the current year's results is $1.0 million of executive life insurance proceeds received upon the death of a senior management employee. The Integrated Security Services unit reported revenues of $107.5 million, representing growth of 13% over the prior year, all generated internally. Sales of systems and manpower contributed approximately equally to the growth. EBITDA for the segment was $7.3 million, while the margin remained constant at 6.8%. Several low-margin initial systems installations were completed during the second half of the year. We expect margins to be in the 7-8% range in Fiscal 2004, resulting from expected higher margins on systems installations. Consumer Services revenues were $93.4 million, up 11% relative to the prior year. Factoring in the two California Closets franchises acquired in October 2002, internal revenue growth was 8%. EBITDA in Consumer Services was $16.4 million, and the margin was 17.6%. The margin increased 110 basis points relative to the prior year as a result of strong performance in the College Pro, California Closets and lawn care businesses as well as the $1.1 million dilution gain experienced on the sale of 7.5% of the shares of Paul Davis Restoration, Inc. to two of its managers, which was offset by $0.5 million of compensation expense related to the sale. Revenues for Business Services were $126.4 million, down 1% or $1.1 million relative to the prior year. Internal revenues declined 7% after considering the impact of acquisitions. A major fulfillment client departed at the end of the third quarter, impacting annual revenues negatively by approximately $1.5 million. Client volumes in the customer support and fulfillment areas were soft throughout the year, impacting revenues negatively and accounting for the remainder of the year-over-year decline. Business Services EBITDA was $19.8 million or 15.6% of revenues, down from $22.4 million or 17.6% of revenues in the prior year. Several factors contributed to this result. The decline in volumes impacted margins because of lower contribution to cover fixed overhead costs, primarily rent. During the fourth quarter, we received proceeds of $3.2 million on a executive life insurance policy on the retired CEO and former controlling shareholder of Herbert A. Watts Ltd. ("Watts"), Rip Gauthier, who passed away after a lengthy illness. Also during the fourth quarter, we incurred costs to reorganize and streamline the operations of Business Services under group president Scott Patterson in the amount of $1.9 million. Fiscal 2004 Business Services revenues are expected to be stable, with the exception of the full-year impact of the departure of the large fulfillment client, which will impact segment revenues by approximately $5 million. Corporate expenses were $4.8 million, up from $4.5 million in fiscal 2002. We expended $0.5 million on the investigation of potential acquisitions that were not completed during the year. Executive bonuses declined $0.7 million, to nil, for Fiscal 2003. Results of operations — year ended March 31, 2002 Consolidated revenues for Fiscal 2002 were $512.7 million, a 21% increase from the $424.2 million reported for the year ended March 31, 2001 ("Fiscal 2001"). Approximately $69.0 million of the increase resulted from the acquisitions of Watts in March 2001, VASEC Virginia Security and Automation, Inc. ("VASEC") in July 2001, several smaller tuck-under companies and the full-year impact of other acquisitions completed in Fiscal 2001. 6 During Fiscal 2002, the value of the Canadian dollar deteriorated 3.9% relative to the value of the U.S. dollar, based on the average annual exchange rate versus the prior year. During Fiscal 2002, 33% of the Company's revenues were Canadian dollar denominated. Had the exchange rate been held constant year-over-year, the Company's revenues would have been approximately $6.9 million higher, EBITDA would have been $0.6 million higher and diluted earnings per share would have been $0.02 higher. Operating earnings increased 25% to $44.2 million from $35.5 million. EBITDA increased 19%, to $57.1 million from $47.9 million in the prior year, while EBITDA margins declined 15 basis points to 11.1% of revenue. The decline in margin is the result of lower sales of higher-margin residential property painting and restoration services, as well as reduced levels of activity in the Business Services fulfillment operations, which typically carry 15% EBITDA margins. Depreciation for the year ended March 31, 2002 was $11.4 million, up 48% from the previous year, mainly due to the acquisition of Watts. Effective April 1, 2001, the Company adopted SFAS 142, therefore, no goodwill amortization was recorded during the fiscal year. Amortization of intangibles was $1.5 million, compared to $1.6 million in the previous year. Interest expense increased 33% over the prior year's level to $13.0 million, primarily as a result of a $1.4 million write off of deferred financing fees, increased borrowings related to the acquisition of Watts completed in March 2001 and contingent acquisition payments made during the year. The Company's average indebtedness during the year increased $41 million or 34% relative to the prior year. Weighted average interest rates were approximately 7.1% in Fiscal 2002 compared to 8.1% in Fiscal 2001, due to the combined effects of lower floating interest rates, the issuance of the fixed-rate debt and the interest rate swap discussed below. In Fiscal 2001, the Company was subject to floating interest rates on the majority of its debt. On June 29, 2001 the Company issued $100 million of 8.06% fixed-rate Notes and amended and restated its credit agreement for a new $140 million committed senior revolving credit facility (the "Credit Facility") bearing interest at 1.50% to 3.00% above floating reference rates, depending on certain leverage ratios. At the time of the issuance of the Notes and the completion of the Credit Facility on June 29, 2001, the Company wrote off the financing fees related to its previous debt arrangements. This resulted in a loss, recorded within interest expense, of $1.4 million. In December 2001, the Company entered into an interest rate swap agreement in which the interest stream on $75 million of the fixed-rate 8.06% Notes was exchanged for the variable interest rate of LIBOR + 2.505%. The swap has a maturity matched to the underlying Notes due June 29, 2011. During the four months the swap was in effect, interest savings of $0.6 million resulted. The income tax provision for the year ended March 31, 2002 was approximately 33% of earnings before taxes, compared with 39% in the prior year. The decline in tax rate resulted from two major factors: (i) the increase in pre-tax earnings resulting from the non-amortization of goodwill due to the adoption of SFAS 142, which reduced the effective tax rate and (ii) continuing leverage from the cross-border tax structure implemented in Fiscal 2000. The minority interest share of earnings increased to $3.8 million or 18.2% of earnings before minority interest from $3.0 million, or 19.1%, in the prior year. The $0.8 million increase reflects the increase in earnings year-over-year, including the effects of the non-amortization of goodwill as per SFAS 142, which impacted certain non-wholly owned subsidiaries with goodwill on their balance sheets. The decline in minority interest as a percentage of earnings before minority interest resulted from the acquisition of minority interests during the year, including California Closet Company, Inc. and The Continental Group, Ltd. Net earnings were $17.0 million, an 11% increase over the prior year (adjusted for SFAS 142), while diluted earnings per share increased 6% to $1.17 (also adjusted for SFAS 142). The increase in diluted earnings per share reflects a 3.8% increase in the weighted average share count as a result of shares issued upon the exercise of stock options and an increase in dilution caused by the 77% increase in the average market price of the Company's shares relative to the prior year. Residential Property Management generated $205.4 million of revenues for the year, up 13% over the prior year due to internal growth and two small tuck-under acquisitions. Residential Property Management EBITDA was $18.8 million, up 4% over the prior year. The EBITDA margin was 9.2% compared to 9.9% in the prior year. The decline in margin is attributable to the slowdown in painting and restoration operations experienced in the second, third and fourth quarters. 7 Integrated Security Services reported revenues of $95.5 million, representing growth of 18% over the prior year primarily due to the acquisition of VASEC in July 2001, as well as the full-year impact of the Security Services and Technologies ("SST") acquisition completed in July 2000, combined with internal growth of 11%. EBITDA was $6.5 million, up 9% over the prior year and EBITDA margins were 6.8% compared with 7.4% in Fiscal 2001. The margin decline is primarily due to mix change resulting from stronger relative revenue growth in the low margin security guard operations, particularly since September 11, 2001. Consumer Services revenues advanced to $84.0 million, up 7% over the prior year due to the July 2001 acquisition of CC Seattle LLC, the Washington State franchise of the Company's California Closets franchise system. EBITDA was $13.8 million, up 10% over the prior year. EBITDA margins rose from 15.9% in the prior year to 16.5% in Fiscal 2002 principally as a result of overhead leveraging. Revenues for Business Services were $127.5 million, an increase of 55% or $45 million over Fiscal 2001. Approximately all of the revenue increase is attributable to the March 2001 acquisition of Watts and the February 2002 acquisition of Right Choice. Internal growth was 2% after adjusting for the impact of foreign exchange. Business Services EBITDA grew 41% to $22.4 million, while margins fell to 17.6% from 19.3%. The margin decline was primarily due to the inclusion of Watts, which carries margins of 13-14% due to its lower-margin direct mail and customer contact operations. Margins at the DDS fulfillment operations were also down year-over-year due to the slowdown in clients' promotional activities experienced in the second, third and fourth quarters. Corporate expenses decreased to $4.5 million in Fiscal 2002 from $4.6 million last year, primarily as a result of lower bonuses at the executive level. Restatements On January 27, 2004, we announced that as a result of a detailed review of the accounting for certain intangible assets, including purchase accounting at the times of acquisition and accounting upon the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets , at April 1, 2001, certain restatements would be made. In particular, we recorded deferred income taxes with respect to franchise intangible assets acquired upon the October 1998 acquisition of California Closet Company, Inc. ("CCC") and the October 1997 acquisition of Paul Davis Restoration, Inc. ("PDR"). In addition, we reevaluated the estimated useful lives of the franchise intangible assets associated with CCC and PDR. It was determined that the amortization of franchise rights should follow the pattern of use, specifically the attrition rate of the franchisees that were present at the dates of acquisition. The amortization of trademarks and trade names was determined to be 35 and 25 years for CCC and PDR, respectively. Previously, all of these assets were treated as indefinite life intangible assets. On an annual basis, the impact upon net earnings for the years ended March 31, 2003 and 2002 is $0.4 million comprised of additional amortization expense of $0.8 million less income tax and minority interest effects of $0.4 million. The annual impact on diluted earnings per share for each of these years is $0.03. The cumulative impact of the restatements upon retained earnings as at March 31, 2003 was $1.0 million. Quarterly results — years ended March 31, 2003 and 2002 (in thousands of U.S. Dollars, except per share amounts) Q1 Q2 Q3 Q4 Year (restated) (restated) (restated) (restated) (restated) FISCAL 2003 Revenues $ 146,036 $ 145,209 $ 126,684 $ 124,763 $ 542,692 Operating earnings 15,103 17,669 4,582 1,530 38,884 Net earnings 7,308 8,795 1,335 1,002 18,440 Net earnings per share: Basic $ 0.53 $ 0.63 $ 0.10 $ 0.07 $ 1.32 Diluted 0.50 0.60 0.09 0.07 1.27 FISCAL 2002 Revenues $ 136,575 $ 140,468 $ 117,809 $ 117,837 $ 512,689 Operating earnings 15,604 18,912 5,975 3,752 44,243 Net earnings 6,197 8,742 1,641 449 17,029 Net earnings per share: Basic $ 0.46 $ 0.65 $ 0.12 $ 0.03 $ 1.26 Diluted 0.43 0.60 0.11 0.03 1.17 OTHER DATA EBITDA—Fiscal 2003 $ 18,510 $ 21,163 $ 8,180 $ 5,470 $ 53,323 EBITDA—Fiscal 2002 18,760 22,012 9,215 7,135 57,122 Seasonality and quarterly fluctuations Certain segments of our operations, which in the aggregate comprise approximately 15% of revenues, are subject to seasonal variations. Specifically, the demand for lawn care services, exterior painting services and swimming pool maintenance in the northern United States and Canada is highest during late spring, summer and early fall and very low during winter. As a result, these operations generate a large percentage of their annual revenues between April and September. We have historically generated lower earnings or net losses during our third and fourth fiscal quarters, from October to March. Residential Property Management, Integrated Security Services, Business Services and most of the franchised Consumer Services generate revenues approximately evenly throughout the fiscal year. 8 The seasonality of the lawn care, painting and swimming pool maintenance operations results in variations in quarterly EBITDA margins. Variations in quarterly EBITDA margins can also be caused by acquisitions that alter the consolidated service mix. Our non-seasonal businesses typically generate a consistent EBITDA margin over all four quarters, while our seasonal businesses experience high EBITDA margins in the first two quarters, offset by negative EBITDA in the last two quarters. As non-seasonal revenues increase as a percentage of total revenues, we expect our quarterly EBITDA margin fluctuations to be reduced. Liquidity and capital resources Cash flow from operations and bank borrowings have historically been the primary funding sources for working capital requirements, capital expenditures and acquisitions. Net cash provided by operating activities for Fiscal 2003 was $32.6 million, up 30% over the prior year, the result of improvements in working capital, lower interest and income tax expenses and the receipt of non-taxable executive life insurance proceeds. Management believes that funds from these sources will remain available and are adequate to support ongoing operational requirements and near-term acquisition growth. The Company has an amended and restated credit agreement that provides $140 million of committed revolving credit facility (the "Credit Facility") that is renewable and extendible in 364-day increments, and if not renewed, a two-year final maturity. The Credit Facility was most recently renewed and extended on May 7, 2003. The Credit Facility bears interest at 1.50% to 3.00% over floating reference rates, depending on certain leverage ratios. The Company has outstanding $100 million of ten-year 8.06% Senior Secured Notes. The Notes have a final maturity date of June 29, 2011, with equal annual principal repayments beginning at the end of the fourth year, resulting in a seven-year average life. Covenants and other limitations within the amended credit agreement and the Notes are similar. As at March 31, 2003, the Company had drawn $52.0 million on the Credit Facility and was in compliance with all covenants. During Fiscal 2003, capital expenditures totaled $10.7 million comprising approximately $2.6 million in expenditures on production equipment, $3.0 million on vehicles, $4.2 million on computer equipment and software and $0.9 million for leasehold improvements. Looking forward to Fiscal 2004, capital expenditures are expected to be in the $11.0 to $12.0 million range. Several office relocations and expansions are planned in Residential Property Management including offices in Fairfax, Virginia; Manhattan, New York; and Dade County, Florida. Acquisition expenditures during the year totaled $16.3 million, comprised of $6.6 million for initial acquisition payments, $3.3 million of contingent consideration payments, and $6.4 million related to the acquisition of minority interests of subsidiaries. All of the acquisition consideration was in the form of cash. When making acquisitions, we generally purchase executive life insurance policies on the principal managers of the acquired businesses. We believe this practice mitigates risk on acquisitions. At March 31, 2003, the Company had 20 such life insurance policies in force. In relation to acquisitions completed during the past three years, we have contingent consideration outstanding totaling $12.7 million. The amount of the contingent consideration is not recorded as a liability unless the outcome of the contingency is determined to be beyond a reasonable doubt. The contingent consideration is based on achieving specified earnings levels, and is issued or issuable at the end of the contingency period. When the contingencies are resolved and additional consideration is distributable, we will record the fair value of the additional consideration as additional costs of the acquired businesses. At March 31, 2002, there was contingent consideration outstanding of $21.3 million. In those operations where operating managements are also minority owners, the Company is party to shareholders' agreements. These agreements allow us to "call" the minority position for a predetermined formula price, which is usually equal to the multiple of earnings paid by the Company for the original acquisition. Minority owners may also "put" their interest to the Company at the same price, with certain limitations. The total value of the minority shareholders' interests, as calculated in accordance with shareholders' agreements, was approximately $26.0 million at March 31, 2003. While it is not our intention to acquire outstanding minority interests, this step would materially increase net earnings. On an annual basis, the impact of the acquisition of all minority interests would increase interest expense by $1.0 million, reduce income taxes by $0.3 million and reduce minority interest share of earnings by $3.2 million, resulting in an approximate net increase to net earnings of $2.5 million. 9 The following table summarizes our contractual obligations as at March 31, 2003: Contractual obligations (In thousands of U.S. Dollars) Payments due by period Total Less than 1 year 1-3 years 4-5 years After 5 years Long-term debt $ 155,144 $ 1,567 $ 29,791 $ 66,662 $ 57,124 Capital lease obligations 3,478 1,463 1,744 271 — Operating leases 71,064 16,585 25,772 16,411 12,296 Unconditional purchase obligations — — — — — Other long-term obligations — — — — — Total contractual obligations $ 229,686 $ 19,615 $ 57,307 $ 83,344 $ 69,420 At March 31, 2003, we had commercial commitments totaling $4.4 million comprised of letters of credit outstanding due to expire within one year. During Fiscal 2003, we reviewed and amended our insurance coverages in response to dramatic increases in premiums, which resulted from market-wide increases in the cost of insurance. To manage costs, we have taken on additional risk in the form of higher deductibles on many of our coverages. We believe that this step will reduce overall costs in the long term, but may cause fluctuations in earnings in the short term in the event of changes in the number of incidents (frequency) or changes in the cost per incident (severity) relative to our historical experience. Discussion of critical accounting policies Critical accounting policies are those that management deems to be most important to the portrayal of our financial condition and results, and that require management's most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified four critical accounting policies: goodwill impairment testing, acquisition purchase price allocations, amortization of intangible assets, and accounting for income taxes. The annual goodwill impairment testing required under SFAS 142 requires judgment on the part of management. Goodwill impairment testing involves making estimates concerning the fair value of reporting units and then comparing the fair value to the carrying amount of each unit. Estimates of fair value can be impacted by sudden changes in the business environment or prolonged economic downturns, and therefore require significant management judgment in their determination. Acquisition purchase price allocations require use of estimates and judgment on the part of management, especially in the determination of intangible assets acquired relative to the amount that is classified as goodwill. For example, if different assumptions were used regarding the profitability and expected lives of acquired customer contracts and relationships, different amounts of intangible assets and related amortization could be reported. Amortization of intangible assets requires management to make estimates of useful lives and to select methods of amortization. Useful lives and methods of amortization are determined at the time assets are initially acquired, and then are reevaluated each reporting period. Significant judgment is required to determine whether events and circumstances warrant a revision to remaining periods of amortization. Changes to estimated useful lives and methods of amortization could result in increases or decreases in amortization expense. Income taxes are calculated based the expected treatment of transactions recorded in the consolidated financial statements. In determining current and deferred components of income taxes, we interpret tax legislation and make assumptions about the timing of the reversal of deferred tax assets and liabilities. If our interpretations differ from those of tax authorities or if the timing of reversals is not as anticipated, the provision for income taxes could increase or decrease in future periods. Impact of recently issued accounting standards In April 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . The adoption of this standard did not have a material impact on results of operations or financial condition. 10 In April 2002, FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections as of April 2002 . Among other changes, this new standard impacts the reporting of gains and losses from extinguishment of debt and accounting for leases, and is effective for the Company's fiscal year beginning April 1, 2003. The Company implemented this standard effective for the year ended March 31, 2003. The impact of the change was to eliminate the Company's 2002 extraordinary loss on the early retirement of debt of $797, net of income tax benefit of $578, and report instead increased interest expense of $1,375 and a reduction of income tax expense of $578. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146"). This statement requires recording costs associated with such activities at their fair values when a liability has been incurred. Previously, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. SFAS 146 is effective for such activities initiated after December 31, 2002. The adoption of this standard had no impact on the results of operations. In November 2002, FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34) ("FIN 45") was issued. FIN 45 clarifies the requirements relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45's provisions for initial recognition and measurement were effective for guarantees issued or modified by the Company after December 31, 2002, and disclosure requirements were effective for financial statements issued after December 15, 2002. The impact of the adoption of FIN 45 was not material. In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of SFAS No. 123 ("SFAS 148"). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, as well as amended disclosure requirements in annual and interim financial statements. The standard is effective for the Company's annual financial statements for the year ended March 31, 2003. The adoption of this standard did not impact results of operations or financial condition as the Company elected to continue to account for its stock option plan in accordance with APB 25. In January 2003, FASB Interpretation No. 46, Consolidation of Variable Interest Entities (an interpretation of ARB No. 51) ("FIN 46") was issued. FIN 46 addresses consolidation by business enterprises of variable interest entities having certain characteristics and applies immediately to variable interest entities created after January 31, 2003. The adoption of FIN 46 had no impact on the Company's results of operations or financial condition. Forward-looking statements This annual report on Form 10-K/A contains or incorporates by reference certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created by such legislation. Such forward-looking statements involve risks and uncertainties and include, but are not limited to, statements regarding future events and the Company's plans, goals and objectives. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Our actual results may differ materially from such statements. Factors that could result in such differences, among others, are: • Political conditions, including any outbreak or escalation of terrorism or hostilities and the impact thereof on our business. 11 • U. S. and Canadian economic conditions, especially as they relate to consumer spending and business spending on customer relations and promotion. • Extreme weather conditions impacting demand for our services or our ability to perform those services. • Competition in the markets served by the Company. • Labor shortages or increases in wage rates. • The effects of changes in interest rates on our cost of borrowing. • Unexpected increases in operating costs, such as insurance, workers' compensation, health care and fuel prices. • Changes in government policies at the federal, state/provincial or local level that may adversely impact our firearms registration processing, lawn care, or textbook fulfillment activities. • The effects of changes in the Canadian dollar foreign exchange rate in relation to the U.S. dollar on the Company's Canadian dollar denominated revenues and expenses. • Our ability to make acquisitions at reasonable prices and successfully integrate acquired operations. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking statements should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. We note that past performance in operations and share price are not necessarily predictive of future performance.