UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2005
Commission file number 0-30366
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
(Exact name of Registrant as specified in its charter)
Alberta, Canada
(Jurisdiction of incorporation or organization)
Suite 355, 10333 Southport Road S.W., Calgary, Alberta, Canada T2W 3X6
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, Without Par Value
--------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
Not Applicable
--------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital of Common stock as of the close of the period covered by this report.
March 31, 2005 7,955,153 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18 _____
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes _____ No X
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS...............................................1
DEFINITIONS.....................................................................................1
PART I..........................................................................................1
Item 1. Identity of Directors, Senior Management and Advisors............................1
Item 2. Offer Statistics and Expected Timetable..........................................2
Item 3. Key Information..................................................................2
Item 4. Information on the Company.......................................................9
Item 5. Operating And Financial Review And Prospects....................................14
Item 6. Directors, Senior Management and Employees......................................24
Item 7. Major Shareholders and Related Party Transactions...............................34
Item 8. Financial Information...........................................................37
Item 9. The Offer and Listing...........................................................38
Item 10. Additional Information..........................................................40
Item 11. Quantitative and Qualitative Disclosures About Market Risk......................54
Item 12. Description of Securities Other than Equity Securities..........................54
PART II........................................................................................54
Item 13. Defaults, Dividend Arrearages And Delinquencies.................................54
Item 14. Material Modifications to the Rights of Securities Holders and Use of Proceeds..54
Item 15. Controls and Procedures.........................................................54
Item 16A. Audit Committee Financial Expert................................................55
Item 16B. Code of Ethics..................................................................55
Item 16C. Principal Accountant Fees and Services..........................................55
PART III.......................................................................................56
Item 17. Financial Statements............................................................56
Item 18. Financial Statements............................................................57
Item 19. Exhibits........................................................................81
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this document constitute "forward-looking statements" that
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's limited operating
history; under-capitalization; risks involving integration of acquisitions;
unpredictability of future revenues; management of growth and integration;
potential technological changes; the Company's dependence on key personnel;
marketing relationships; reliance on third-party insurance companies; potential
new businesses, competition and low barriers to entry; government regulations;
security risks; and the other risks and uncertainties described under Risk
Factors in this Annual Report. Should one or more of these risks and
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in the forward-looking
statements. See "Risk Factors." Forward-looking statements are made based on
management's beliefs, estimates and opinions on the date the statements are made
and management assumes no obligation to update forward-looking statements if
these beliefs, estimates and opinions or other circumstances should change. You
are cautioned against placing reliance on forward-looking statements.
DEFINITIONS
Certain terms used in this Annual Report are defined below:
"Addison York" a wholly owned Delaware subsidiary of the Company.
"Company" means Anthony Clark International Insurance Brokers Ltd.
and, except where otherwise indicated, its subsidiaries.
"Common Shares" means common shares without par value in the capital stock
of the Company.
"General Insurance" means insurance coverage comprising property and casualty
insurance.
"General Insurance Brokerage" means an entity which employs Insurance
Brokers to act on behalf of its customers in seeking to
place General Insurance with any number of Insurance
Companies.
"Insurance Agent" means a person who is an employee of a particular
Insurance Company and represents only that Insurance Company
in the sale of insurance policies.
"Insurance Broker" means an individual who works for a General
Insurance Brokerage and who is responsible for assessing the
needs of his clients, suggesting levels of General Insurance
coverage, if appropriate, canvassing a number of Insurance
Companies which the General Insurance Brokerage represents
for the coverage requested, obtaining price quotes or policy
premium and placing General Insurance coverage.
"Insurance means those entities which provide insurance coverage,
Companies" or assess and provide the payment of any insurance claims and
"Insurance pay commissions to Insurance Brokers and Insurance Agents
Company" for providing customer services and placing insurance
coverage with the Insurance Company.
"OTCBB" means the Nasdaq OTC Bulletin Board.
"TSX" means The Toronto Stock Exchange.
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not Applicable.
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Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
The following table sets forth selected financial data regarding the Company's
consolidated operating results and financial position in Canadian dollars. See
"Currency Translations". The data has been derived from the Company's
consolidated financial statements, which have been prepared in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP"). For a
reconciliation to accounting principles generally accepted in the United States
("U.S. GAAP") for the years ended March 31, 2005, 2004 and 2003, see note 25 to
the consolidated financial statements included in this Annual Report. The
following selected financial data is qualified in its entirety by, and should be
read in conjunction with, the consolidated financial statements and notes
thereto included elsewhere in this Annual Report. The comparability of the
financial data presented is affected by factors such as significant
acquisitions, financings, changes of business and property dispositions. See
"Item 5 - Operating and Financial Review and Prospects".
(Canadian Dollars)
- ----------------------------------------------------------------------------------------------------------------------
March 31, March 31, March 31, March 31, March 31,
2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
(restated) (restated)
Working Capital - Canadian GAAP $(16,785,495) $ 1,848,775 $ 3,910,863 $ 4,263,466 $ 4,391,594
Working Capital- US GAAP $(15,356,831) $ 1,848,775 $ 3,910,863 $ 4,263,466 $ 4,391,594
Total Assets - Canadian GAAP $ 21,862,339 $ 16,864,359 $ 8,662,278 $ 8,959,873 $ 8,890,747
Total Assets - U.S. GAAP $ 22,973,372 $ 16,864,359 $ 8,662,278 $ 8,959,873 $ 8,896,993
Total Liabilities - Canadian GAAP $ 19,453,370 $ 10,366,262 $ 1,425,844 $ 1,367,732 $ 921,074
Total Liabilities - U.S. GAAP $ 18,024,706 $ 10,366,262 $ 1,425,844 $ 1,367,732 $ 921,074
Long Term Obligations - Canadian GAAP $ 336,141 $ 8,243,651 $ 363,786 $ 571,658 $ 169,350
Long Term Obligations - U.S. GAAP $ 336,141 $ 8,243,651 $ 363,786 $ 571,658 $ 169,350
Shareholders' Equity - Canadian GAAP $ 2,408,969 $ 6,498,097 $ 7,236,434 $ 7,592,141 $ 7,969,673
Shareholders' Equity - U.S. GAAP $ 4,908,666 $ 6,458,097 $ 7,196,434 $ 7,592,141 $ 7,975,919
Number of Shares Outstanding 7,955,153 7,955,153 7,692,055 7,692,055 7,725,455
- ----------------------------------------------------------------------------------------------------------------------
(Canadian Dollars)
-------------------------------------------------------------------------
Years ended March 31, March 31, March 31, March 31, March 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
(restated) (restated)
Revenue - U.S. and Canadian GAAP $ 13,060,344 $ 7,469,559 $ 5,175,072 $ 4,449,628 $ 3,894,115
Earnings (loss) before interest, taxes, $ 1,524,161 $ 258,502 $ 552,778 $ 445,029 $ 251,034
depreciation and amortization - Canadian
GAAP (1)
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-------------------------------------------------------------------------
Years ended March 31, March 31, March 31, March 31, March 31,
2005 2004 2003 2002 2001
-------------------------------------------------------------------------
(restated) (restated)
Earnings (loss) before interest, taxes, $ 1,499,207 $ 250,789 $ 545,065 $ 360,618 $ (30,772)
depreciation and amortization - US GAAP (1)
Dividends per Share (2) $ 0 $ 0 $ 0 $ 0 $ 0
Net earnings (loss) - Canadian GAAP $ (4,470,154) $ (1,051,498) $ (355,801) $ (131,742) $ 9,944
Net earnings (loss) - U.S. GAAP $ (1,955,411) $ (1,059,211) $ (363,514) $ (222,399) $ (294,919)
Earnings (loss) per Common Share, basic and
diluted:
Canadian GAAP $ (0.56) $ (0.14) $ (0.05) $ (0.02) $ 0.00
U.S. GAAP $ (0.25) $ (0.14) $ (0.05) $ (0.03) $ (0.05)
(1) Earnings (loss) before interest, taxes, depreciation and amortization
(EBITDA) is discussed and presented here as a non-Generally Accepted
Accounting Principles measure because it is management's major
performance indicator. EBITDA is reconciled to Net Earnings (loss) in
Item 5.A under the heading "Earnings (loss) before interest, taxes,
depreciation and amortization (EBITDA)".
(2) The Company has paid no dividends on its shares since incorporation
and does not anticipate doing so for the foreseeable future. The
declaration of dividends on the Common Shares of the Company is within
the discretion of the Company's board of directors and will depend
upon, among other factors, earnings, capital requirements, and the
operating and financial condition of the Company.
Currency Translations
The following table sets forth the average exchange rates for Canadian dollars
("Cdn$") expressed in terms of one United States dollar ("US$") in effect at the
end of the following periods (based on the average of the exchange rates on the
last day of each month in such periods).
Canadian Dollars Per U.S. Dollar
Fiscal Year Ended March 31,
------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------
Average for the period 1.2791 1.3353 1.5447 1.5671 1.5041
The following table sets forth the high and low exchange rates for Canadian
dollars expressed in terms of one United States dollar for each of the last 6
months.
------------------------------------------------------
August July June May April March
2005 2005 2005 2005 2005 2005
------------------------------------------------------
High for the month 1.2185 1.2437 1.2578 1.2703 1.2568 1.2463
Low for the month 1.1888 1.2048 1.2256 1.2373 1.2146 1.2017
Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York. The noon rate of exchange on August 31, 2005 as
reported by the United States Federal Reserve Bank of New York for the
conversion of one Canadian dollar into United States dollars was US$0.8408
(US$1.00 = Cdn$1.1893). In this Annual Report on Form 20-F (the "Annual Report"
or "20-F"), unless otherwise specified, all monetary amounts are expressed in
Canadian dollars.
-3-
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
The securities of the Company are highly speculative. A prospective investor or
other person reviewing the Company should not consider an investment unless the
investor is capable of sustaining an economic loss of the entire investment.
Certain risks are associated with the Company's business including the
following:
FUTURE GROWTH AND EXPANSION IS DEPENDENT ON ONGOING ACQUISITIONS OF GENERAL
INSURANCE BROKERAGES
To a large extent, the Company's growth and expansion plans depend upon the
ongoing acquisition of independent General Insurance Brokerages at reasonable
prices. There can be no assurance that an adequate number of acquisition
candidates will be available to the Company to meet its expansion plans, or in
the event that such independent General Insurance Brokerages are available for
acquisition that they will be available at a price which would allow the Company
to operate on a profitable basis. The Company competes for acquisition and
expansion opportunities with entities that have substantially greater resources
than the Company and these entities may be able to outbid the Company for
acquisition targets. If the Company fails to execute its acquisition strategy,
the Company's revenue growth is likely to suffer and the Company may be unable
to remain competitive.
THE COMPANY MAY BE UNABLE TO SUCCESSFULLY INTEGRATE ITS RECENT OR FUTURE
ACQUISITIONS
There can be no assurance that the Company's recently acquired brokerages or any
brokerages acquired by the Company in the future will achieve acceptable levels
of revenue and profitability or otherwise perform as expected. The Company has
limited experience in acquiring and integrating brokerages in other markets. The
Company may be unable to successfully integrate its recently-acquired brokerages
in the United States, or other brokerages that the Company may acquire in the
future, due to diversion of management attention, strains on the Company's
infrastructure, difficulties in integrating operations and personnel, entry into
unfamiliar markets, or unanticipated legal liabilities or tax, accounting or
other issues. A failure to integrate acquired brokerages may be disruptive to
the Company's operations and negatively impact the Company's revenue or increase
the Company's expenses.
THE COMPANY HAS ACQUIRED AND MAY CONTINUE TO ACQUIRE BROKERAGES PRIOR TO RECEIPT
OF ALL REGULATORY LICENSES AND CARRIER APPOINTMENTS, AND IN SUCH CIRCUMSTANCES
THE COMPANY IS DEPENDENT UPON THE VENDOR TO CONTINUE TO HOLD AND TO COMPLY WITH
THE REQUIREMENTS OF SUCH LICENSES AND APPOINTMENTS
The Company has in the past, and may in the future, purchase the assets of
General Insurance Brokerages located in jurisdictions where the Company has not
yet obtained the necessary licenses to operate as a General Insurance Brokerage.
Without possessing such licenses, the Company cannot obtain carrier appointments
from Insurance Companies which would enable it to market and sell General
Insurance products in those jurisdictions. As such, the Company has in the past,
and may in the future, enter into agency agreements with the vendors of these
General Insurance Brokerages whereby the vendors of those agencies agree, for
the sole and exclusive benefit of the Company, to market, sell, distribute,
place and write General Insurance products to the clients of the Company and to
any and all other potential customers who may wish to purchase General Insurance
products from the Company. If the Company is unable to secure the required
licenses in the various different states in which it operates or if the Company
cannot obtain Insurance Company representation then this will have a negative
impact on its ability to service its customers and provide alternative
competitive insurance products. In addition, these agency agreements create a
reliance by the Company on third parties in that the Company must rely upon the
respective vendors to comply with applicable laws, to perform on the agency
agreements and to process the Company's General Insurance business in the United
States. If the vendors fail to properly perform on the agency agreements then
this will have a negative impact on the Company's ability to service its
customers.
-4-
THE COMPANY ANTICIPATES THE NEED FOR ADDITIONAL FINANCING, WHICH IT MAY NOT BE
SUCCESSFUL IN ARRANGING
The Company has relied principally on debt financing to fund its recent
acquisitions in the United States. The Company will require additional funds to
make future acquisitions of General Insurance Brokerages and may require
additional funds to market and sell its products into the marketplace. The
Company has a history of losses and does not, therefore, anticipate that it will
generate sufficient cash flow from operations in order to meet its financing
needs. The ability of the Company to arrange such financing in the future, and
to repay its existing debt, will depend in part upon the prevailing capital
market conditions as well as the business performance of the Company. In
addition, the Company is subject to certain financial and other covenants under
its financing arrangements. If the Company is unable to or does not comply with
these covenants, the Company's financing needs may be accelerated. There can be
no assurance that the Company will be successful in its efforts to arrange
additional financing, when needed, on terms satisfactory to the Company. If
additional financing is raised by the issuance of shares from the treasury of
the Company, control of the Company may change and shareholders may suffer
additional dilution. If additional financing is not available on terms favorable
to the Company, the Company may be unable to grow or may be required to limit or
halt its expansion plans. In addition, the Company's existing creditors, some of
whom have security interests in the Company's assets, may exercise their rights
to acquire or dispose of the Company's assets.
PLANNED FUTURE GROWTH IS LIKELY TO PLACE SIGNIFICANT STRAINS ON THE COMPANY'S
MANAGEMENT, ADMINISTRATIVE, OPERATIONAL AND FINANCIAL RESOURCES
Since its inception, the Company has experienced steady growth in revenue,
number and complexity of products, personnel, and customer base. The Company's
planned future growth is likely to place significant strains on the Company's
management, administrative, operational and financial resources. Increased
growth will require the Company to continue to add additional management
personnel, improve its financial and management controls, reporting systems and
procedures on a timely basis, to implement new systems as necessary, to expand,
train, motivate and manage its sales and other personnel and to service the
Company's customers effectively. There can be no assurance that the Company will
be able to attract qualified personnel or improve its financial and management
controls or implement new systems as necessary and the failure to do so may
result in increased costs or a decline in revenue or both.
THE COMPANY'S PERFORMANCE AND FUTURE OPERATING RESULTS AND SUCCESS ARE DEPENDENT
ON THE EFFECTIVENESS OF THE COMPANY'S MANAGEMENT TEAM AND KEY PERSONNEL
The Company's performance and future operating results and success are
substantially dependent on how effective the management team and key personnel
are at organizing and implementing the Company's growth strategy and integrating
acquired General Insurance Brokerages into the Company's overall organization.
Shareholders will be relying on the judgment and expertise of the management of
the Company.
The senior management and some key personnel are employed under employment
contracts, while other key personnel of the Company are employed on a month to
month basis and are not under an employment contract with the Company. Although
the Company is in an industry in which there is not high employee turnover, the
unexpected loss or departure of any of the Company's key management personnel,
Mr. Podorieszach, the Chief Executive Officer, Mr. Consalvo, the Chief Operating
Officer, Mr. Bhatia, the Chief Financial Officer and the Corporate Controller,
Ms. Shelley Samec could be detrimental to the future operations of the Company.
There can be no assurance that the Company can retain its key personnel and
managerial employees or that it will be able to attract or retain highly
qualified personnel in the future. The Company believes that the compensation to
its key management personnel is competitive with what other companies pay its
key management personnel in the insurance brokerage industry. Although the
Company plans to compensate its senior management and other key personnel at
compensation levels that are competitive within the industry, there is no
assurance that it will continue to be able to do so in the future and this may
result in a departure of some if its senior management or other personnel.
The Company maintains keyman life insurance policies of $100,000 each on Mr.
Podorieszach and Mr. Consalvo and $175,000 on Mr. Bhatia and has no other keyman
life insurance on any other senior management or other
-5-
personnel. The loss of the services of any of the Company's senior management or
other key personnel or the inability to attract and retain the necessary
technical, sales and managerial personnel could have a material adverse effect
upon the Company's business, operating results and financial condition.
THE COMPANY FACES INTENSE COMPETITION IN THE INSURANCE INDUSTRY
The Company is in an industry in which intense competition exists. The Company
competes with other General Insurance Brokerages, as well as Insurance Companies
that sell insurance directly to consumers and do not pay commissions to agents
and brokers. Some competitors have substantially more financial resources and
other assets available than the Company does and are larger and better
established than the Company. Such competitors have existing distribution
facilities and channels, customer recognition, customer lists, and greater
research and development capabilities and sales marketing staff than does the
Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, or that competitive
pressure faced by the Company will not have a material adverse effect on its
business, financial condition and results of operation.
INCURSION OF GOVERNMENT, BANKS OR OTHER FINANCIAL INSTITUTIONS
The Company is susceptible to an incursion in the general insurance industry by
government or banks or other financial institutions. A government takeover of
the general insurance business (or parts thereof) could affect the profitability
of the Company. In addition, banks with greater financial resources and a larger
customer base than the Company may enter (or are currently entering) the general
insurance business. While management believes that the Company's representation
of a large and diverse number of Insurance Companies will allow it to remain
competitive against any such incursion by the banks, there is a possibility that
their entrance into this market could affect the profitability of the Company.
THE COMPANY CANNOT ACCURATELY FORECAST COMMISSION REVENUE BECAUSE COMMISSIONS
DEPEND ON PREMIUM RATES CHARGED BY INSURANCE COMPANIES, WHICH HISTORICALLY HAVE
VARIED AND ARE DIFFICULT TO PREDICT. ANY DECLINES IN PREMIUMS MAY ADVERSELY
IMPACT PROFITABILITY
Revenue from commissions fluctuates with premiums charged by insurers, as
commissions typically are determined as a percentage of premiums. When premiums
decline, the Company experiences downward pressure on revenue and earnings.
Historically, property and casualty premiums have been cyclical in nature and
have varied widely based on market conditions. Because we cannot determine the
timing and extent of premium pricing changes, we cannot accurately forecast our
commission revenue, including whether it will significantly decline. If premiums
decline or commission rates are reduced, our revenue, earnings and cash flow
could decline. In addition, our budgets for future acquisitions, capital
expenditures, dividend payments, loan repayments and other expenditures may have
to be adjusted to account for unexpected changes in revenue.
INSURANCE COMPANY CONTINGENT COMMISSIONS AND VOLUME OVERRIDES ARE LESS
PREDICTABLE THAN NORMAL COMMISSIONS, WHICH IMPAIRS THE COMPANY'S ABILITY TO
FORECAST THE AMOUNT OF SUCH REVENUE THAT WILL BE RECEIVED AND MAY NEGATIVELY
IMPACT OUR OPERATING RESULTS
A portion of the Company's revenue is derived from contingent commissions and
volume overrides. The aggregate of these sources of revenue generally has
accounted for approximately 6% of our total revenue. Contingent commissions may
be paid by an Insurance Company based on the profit it makes on the overall
volume of business that we place with it. Volume overrides and contingent
commissions are typically calculated in the first or second quarter of the
following calendar year by the Insurance Companies and are paid once calculated.
Further, we have no control over the process by which Insurance Companies
estimate their own loss reserves, which affects our ability to forecast
contingent commissions. Because these contingent commissions affect our revenue,
any decrease in their payment to us could adversely affect our results of
operations. Recently, legal proceedings challenging the appropriateness of
revenue sharing arrangements between Insurance Companies and brokerages,
including contingent profit and volume override arrangements, have been
commenced against certain insurance brokerages. These proceedings allege that
such revenue sharing arrangements conflict with a broker's duty to its clients.
While we have not been named as a defendant in any such proceeding, and disagree
with the underlying premise that these revenue sharing arrangements create a
conflict of interest, we could be the subject of a similar action in the future.
A finding that such arrangements conflict with a broker's duty to its clients
could have a material adverse affect on our revenue and profitability.
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PROPOSED TORT REFORM LEGISLATION ON THE UNITED STATES, IF ENACTED, COULD
DECREASE DEMAND FOR LIABILITY INSURANCE, THEREBY REDUCING COMMISSION REVENUE
Legislation concerning tort reform is currently being considered in the United
States Congress and in several states. Among the provisions being considered for
inclusion on such legislation are limitations on damage awards, including
punitive damages, and various restrictions applicable to class action lawsuits,
including lawsuits asserting professional liability of the kind of which
insurance is offered under certain policies we sell. Enactment of these or
similar provision by Congress, or by states or countries in which we sell
insurance, could result in reduction in the demand for liability insurance
policies or a decrease in policy limits of such policies sold, thereby reducing
our commission revenue.
PRIVACY LEGISLATION MAY IMPEDE THE COMPANY'S ABILITY TO UTILIZE THE CUSTOMER
DATABASE AS A MEANS TO GENERATE NEW SALES
The Company intends to utilize its extensive customer databases for marketing
and sales purposes, which it believes would enhance the Company's ability to
meet its organic growth targets. However, new privacy legislation, such as the
Gramm-Leach-Bailey Act and the Health Insurance Portability and Accountability
Act of 1996 in the United States and the Personal Information Protection and
Electronic Documents Act (PIPEDA) in Canada, as well other regulatory changes,
may restrict the Company's ability to utilize personal information that we have
collected in the normal course of operations to generate new sales. If the
Company becomes subject to new restrictions, or other regulatory restrictions,
which we are not aware of, the Company's ability to grow the business may be
adversely affected.
IF THE COMPANY FAILS TO COMPLY WITH REGULATORY REQUIREMENTS FOR INSURANCE
BROKERAGES, THE COMPANY MAY NOT BE ABLE TO CONDUCT BUSINESS
The Company is subject to legal requirements and governmental regulatory
supervision in the jurisdictions in which it operates. These requirements are
designed to protect our clients by establishing minimum standards of conduct
particularly regarding the provision of advice and product information as well
as financial criteria.
Our activities in the United States and Canada are subject to regulation and
supervision by state and provincial authorities. Although the scope of
regulation and form of supervision by state and provincial authorities may vary
from jurisdiction to jurisdiction, insurance laws in the United States and
Canada are often complex and generally grant broad discretion to supervisory
authorities in adopting regulations and supervising regulated activities. This
supervision generally includes the licensing of insurance brokers and agents and
the regulation of the handling and investment of client funds held in fiduciary
capacity. Our ability to conduct our business in the jurisdictions in which we
currently operate depends on our compliance with the rules and regulations
promulgated from time to time by the regulatory authorities in each of these
jurisdictions.
Our clients have the right to file complaints with the regulators about our
services, and the regulators may investigate and require us to address these
complaints. Our failure to satisfy the regulators that we are in compliances
with their requirements or the legal requirements governing our activities can
result in a disciplinary action, fines, reputation damage and financial harm.
In addition, changes in legislation or regulation and actions by regulators,
including changes in administration and enforcement policies, could from time to
time require operational improvements or modifications at various locations
which could result in higher costs or hinder our ability to operate our
business.
THE COMPANY'S SUCCESS IS DEPENDENT ON ITS ABILITY TO REPRESENT QUALITY INSURANCE
COMPANIES
The Company's success is dependent upon its continued representation of quality
Insurance Companies in order to sell insurance policies to customers. The
Company's existing brokerage contracts with certain Insurance Companies do not
have a set term or expiry date but may be terminated by either the Company or
the Insurance Company on between 90-120 days' written notice of termination
depending on the terms of the specific contract. In the event of termination on
any of its contracts with Insurance Companies, there are no penalties to the
Company but following termination, the Company is no longer able to represent
the applicable Insurance Company as agent on the future
-7-
placement or renewal of insurance policies. If the Company loses Insurance
Company representation then this will have a negative impact on its ability to
service its customers and provide alternative competitive insurance products.
DILUTION AND SALES OF ADDITIONAL COMMON SHARES AND THE EXERCISE OF OPTIONS AND
WARRANTS
The number of outstanding Common Shares held by shareholders who are not
affiliates of the Company and the number of Common Shares underlying outstanding
stock options and warrants is large relative to the trading volume of the
Company's Common Shares. Any substantial sale of the Common Shares, including
Common Shares underlying stock options and warrants, or even the possibility of
such sales occurring may have an adverse effect on the market price of the
Common Shares.
BROKER-DEALERS MAY BE DISCOURAGED FROM EFFECTING TRANSACTIONS IN THE COMMON
SHARES BECAUSE THEY ARE CONSIDERED PENNY STOCKS AND SUBJECT TO PENNY STOCK RULES
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934
(the "Exchange Act") impose sales practice and disclosure requirements on NASD
brokers-dealers who make a market in "a penny stock." A penny stock generally
includes any non-Nasdaq equity security that has a market price of less than
US$5.00 per share. The Common Shares of the Company are posted for trading on
the TSX and the closing price of its Common Shares on August 31, 2005 was $.60
per share. The Common Shares of the Company are also quoted on the OTCBB and the
quoted price of its Common Shares on August 31, 2005 was US$.46 per share. As
such, the Common Shares of the Company will be deemed penny stock for the
purposes of the Exchange Act. The additional sales practices and disclosure
requirements imposed upon broker-dealers may discourage broker-dealers from
effecting transactions in the Common Shares of the Company, which could severely
limit the market liquidity of the Common Shares and impede the sale of the
Common Shares in the secondary market.
Under the penny stock regulations, a broker-dealer selling penny stock to anyone
other than an established customer or "accredited investor", which is generally
an individual with a net worth in excess of US$1,000,000 or an annual income
exceeding US$200,000, or US$300,000 together with his or her spouse, must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt. In addition, the penny
stock regulations require the broker-dealer to deliver, prior to any transaction
involving a penny stock, a disclosure schedule prepared by the Commission
relating to the penny stock market, unless the broker-dealer or the transaction
is otherwise exempt. A broker-dealer is also required to disclose commissions
payable to the broker-dealer and the registered representative and current
quotations for the securities. Finally, a broker-dealer is required to send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer's account and information with respect to the limited
market in penny stocks.
THE COMPANY HAS SIGNIFICANT COSTS AND LOWER PRODUCTIVITY COULD RESULT IN
OPERATING LOSSES
Fixed costs including costs associated with salaries and employee benefits,
depreciation and amortization, rent, and interest and financing costs, and loan
principal repayments account for a significant portion of the Company's costs
and expenses. As a result, downtime or low productivity from its sales
representatives, lower demand for insurance products, loss of the Company's
customers, any significant decrease in the premium rates, volume and commission
paid in the different segments of the general insurance industry, or other
factors could result in operating losses and adversely impact on the Company.
NO INTENTION TO DECLARE DIVIDENDS
The Company has a recent history of losses and has not declared or paid any cash
dividends on its Common Shares. The Company currently intends to retain any
future earnings to fund growth and operations and it is unlikely to pay any
dividends in the immediate or foreseeable future. Any decision to pay dividends
on its Common Shares in the future will be made by the board of directors on the
basis of the Company's earnings, financial requirements and other conditions at
such time.
-8-
CONFLICTS OF DIRECTORS AND OFFICERS WHO SERVE AS DIRECTORS OR OFFICERS OR ARE
SIGNIFICANT SHAREHOLDERS OF OTHER COMPANIES
Directors and officers of the Company may serve as directors or officers of, or
have significant shareholdings in other companies, or be or become engaged in
business and activities in other fields, on their own behalf and on the behalf
of other companies and entities. To the extent that such other companies or
entities may participate in industries or ventures in which the Company may
participate, the directors and officers of the Company may have a conflict of
interest. Conflicts, if any, will be subject to the procedures and remedies
under the Business Companies Act (Alberta). None of the Company's directors
serve as directors or officers of any competitors of the Company.
INVESTORS MAY NOT BE ABLE TO SECURE FOREIGN ENFORCEMENT OF CIVIL LIABILITIES
AGAINST THE COMPANY'S MANAGEMENT
The enforcement by investors of civil liabilities under the federal securities
laws of the United States may be adversely affected by the fact that the Company
is amalgamated under the laws of Canada, that all of its officers and directors
are residents of a foreign country and that all or a substantial portion of its
assets and such person's assets are located outside of the United States. As a
result, it may be difficult for holders of the Common Shares to effect service
of process on such persons within the United States or to realize in the United
States upon judgments rendered against them.
Item 4. Information on the Company
A. History and Development of the Company
Anthony Clark International Insurance Brokers Ltd. (the "Company") is a
corporation amalgamated pursuant to the laws of Alberta, Canada. The Company's
head office and principal business office is located at Suite 355, 10333
Southport Road, S.W., Calgary, Alberta, Canada T2W 3X6 and its telephone number
is (403) 278-8811. The Company's registered office in Alberta is located at
1200, 1015 - 4th Street S.W., Calgary, Alberta, Canada T2R 1J4. The Company's
agent for the service in Alberta, Canada, is Thomas Milley at the law firm of
Demiantschuk, Milley, Burke & Hoffinger at 1200, 1015 - 4th Street, S.W.,
Calgary, Alberta, Canada, T2R 1J4.
On April 1, 1996, the Company was amalgamated with six other companies under the
Business Corporations Act (Alberta). The companies involved in the amalgamation
were 393675 Alberta Inc., 487220 Alberta Inc., 537169 Alberta Inc., 582939
Alberta Inc., 537168 Alberta Inc., Global FGI Inc. (all Alberta companies) and
Anthony Clark International Insurance Brokers Ltd. (which was a federal company
incorporated on June 23, 1993, extra-provincially registered in the Province of
Alberta on October 6, 1993, and continued into the jurisdiction of the Province
of Alberta on March 18, 1996, for the purposes of the amalgamation). On February
28, 1999, the Company amalgamated with Mayfair Insurance Brokers Ltd., its
wholly-owned subsidiary, to form the resulting corporation.
On July 31, 2002, the Company completed a U.S.$5,000,000 revolving line of
credit (the "Textron Facility") pursuant to a loan agreement dated July 31, 2002
between the Company and Textron Financial Company ("Textron"), as amended by an
agreement dated April 3, 2003. The Textron Facility had an interest rate of the
greater of (a) the Wall Street Journal prime rate plus 2.5% per annum, or (b)
U.S.$10,000 per month. A commitment fee of $100,000 was paid on the closing date
and is also required to be paid on the anniversary of the closing date each
year. As collateral for the Textron Facility, Textron obtained a first charge
over all of the assets of the Company.
On October 17, 2003, the Company acquired the net assets of DKWS Enterprises
Inc. and the Kabaker Family Trust of July 1998, doing business as Vista
International Insurance Brokers ("Vista"), a California based General Insurance
Brokerage for purchase consideration of $6,117,633. The purchase was financed
using cash and seller financing. The Vista acquisition is subject to contingent
adjustment based on commission revenue earned in the second year after closing.
A further adjustment of 20% of the purchase consideration will be made based on
a price calculation relating to the commission revenue in the fifth year after
closing. This additional consideration cannot be reasonably estimated and will
therefore be accounted for when the contingency is resolved.
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On October 20, 2003, a termination and release agreement was executed with
Textron Financial Corporation, which terminated the loan agreement and released
all security documents.
On November 6, 2003, the Company executed a loan agreement (the "Paragon Loan")
with Paragon Capital Corporation Ltd. ("Paragon") with loan proceeds of
$2,100,000. The loan had a one-year term, with interest only payments, with
interest at 2% per month. A commitment fee of $63,000 was paid to Paragon in
connection with the Paragon Loan. The Paragon Loan was secured against all of
the assets of the Company.
On November 6, 2003, the Company acquired the net assets of Johns Insurance
Agency, Inc. ("Johns"), a California based General Insurance Brokerage for
purchase consideration of $2,483,009. The purchase was financed using cash and
seller financing.
On February 26, 2004, the Company completed the private placement and issuance
of 263,098 Units (4,000 of these Units were issued as commission) at a price of
$1.28 per Unit. The proceeds of the private placement amounted to $336,765,
which was added to the Company's working capital. Each Unit consists of one
common share and one common share purchase warrant (the "Warrant"). Each Warrant
is exercisable to purchase an additional common share of the Company at a price
of $1.60 per share for a period of 24 months from the closing date of the
private placement, which may result in an additional $420,957 of proceeds to the
Company.
On March 22, 2004, the Company completed a US$5,000,000 debt financing
arrangement with Oak Street Funding ("Oak Street") whereby Oak Street agreed to
provide a US$5,000,000 reducing revolving line of credit (the "Oak Street
Facility") subject to a borrowing base formula. The Oak Street Facility had an
interest rate of prime plus 8% per annum with interest only payments for a
period of two years. The Oak Street Facility was required to be used to
refinance the Paragon Loan, acquisitions of General Insurance Brokerages and
related working capital and equipment needs and other purposes approved by Oak
Street. The Oak Street Facility was secured against all of the assets of the
Company, other than the collateral subject to future financing.
On March 22, 2004, the Paragon Loan was repaid with the proceeds received from
the Oak Street Facility.
On May 31, 2004, the Company settled a previously outstanding legal proceeding
for a cash payment of $450,000 (including legal costs). The judgment related to
the Company's alleged failure to honor a stock option agreement dated October 1,
1998.
On June 14, 2004, the Company completed a U.S.$7,500,000 ($10,090,725) debt
financing arrangement with First Capital Company, LLC ("FCC") whereby FCC will
provide up to a U.S.$7,500,000 ($10,090,725) reducing revolving line of credit
(the "FCC Facility") subject to a borrowing base formula. The FCC Facility had a
maturity 5 years from the close of the transaction, with interest only payments
during the first two years. The FCC Facility had a Wall Street Journal interest
rate of prime plus 2% per annum. As collateral for the FCC Facility, FCC had a
security interest in the assets of the Company acquired after June 14, 2004, in
connection with any acquisition financed by FCC and a subsequent security
interest in the assets of the Company, subject to certain permitted
encumbrances. The FCC Facility was to be used to fund acquisitions of General
Insurance Brokerages within the United States and provide working capital for
the related acquisitions.
On August 31, 2004, the Company obtained U.S.$3,250,000 ($4,192,500) in debt
financing from Emmett Lescroart ("Emmett"), pursuant to an arrangement whereby
Emmett agreed to provide a loan of up to US $3,250,000 ($4,192,500 CDN) (the
"Emmett Facility") to purchase substantially all of the net assets of Al
Vinciguerra Ltd., ("Vinciguerra") a Norfolk, Virginia area based General
Insurance Brokerage. The Emmett Facility was fully drawn down on August 31,
2004, bears interest at a rate of 14% per annum, and requires the Company to
make monthly interest only payments until 2008. The principal amount is due
September 1, 2008. The Emmett Facility is secured by certain assets of the
Company.
On September 8, 2004, the Company acquired Vinciguerra for purchase
consideration of $8,978,354. The purchase was financed using the FCC Facility,
the Emmett Facility and seller financing. On January 12, 2005, the Company
acquired the net assets of Schuneman Insurance Agency Inc. ("Schuneman"), a
Sterling, Illinois based General Insurance Brokerage, for purchase consideration
of $1,122,477. The purchase was financed using an existing FCC Credit Facility
and seller financing.
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On June 15, 2005, the Company completed a U.S.$25,000,000 ($30,750,000) secured
debt financing arrangement (the "Bridge Facility") with United States lenders,
Bridge Healthcare Finance, LLC and Bridge Opportunity Finance LLC (collectively,
the "Lenders"). The Bridge Facility was used to repay the FCC and Oak Street
Facilities and certain other obligations amounting to approximately U.S.$7.5
Million and the balance of the Bridge Facility will be used for working capital
and to fund future acquisitions of General Insurance Brokerages within the
United States. The Bridge Facility will mature in five years and interest is
payable monthly during the term of the loan. Principal is payable during the
term of the loan based upon an excess cash flow availability formula. The Bridge
Facility has an interest rate of prime plus 6.25% per annum, with an effective
rate reduction of 1.5% and 2.5% for new equity raised of U.S.$3.0 Million and
U.S.$5.0 Million respectively. As additional consideration for providing the
Bridge Facility, the Company has issued the Lenders a total of 1,439,128
warrants exercisable to purchase 1,439,128 common shares of the Company at a
price of $0.80 per share for a five-year period following the closing of the
Bridge Financing. The Bridge Facility has been fully guaranteed and
collateralized by the Company.
B. Business Overview
The Company is engaged in the insurance business as a General Insurance
Brokerage which employs Insurance Brokers to act on behalf of its customers in
seeking to place general insurance coverage comprising property and casualty
insurance with any number of Insurance Companies. The General Insurance industry
insures against many different types of risk including automobile, personal
property, commercial property and liability. Compared with other sectors of the
financial services industry, the General Insurance industry is highly
fragmented. The large number of competitors results in no single Insurance
Company having a dominant market share in any line of business. Industry-wide
financial conditions are putting pressure upon General Insurance Companies to
become more efficient and profitable. One way in which Insurance Companies are
becoming more efficient is by reducing the number of General Insurance
Brokerages with which they do business. Larger General Insurance Brokerages are
expected to benefit from this trend.
General Insurance Industry
Insurance Brokers are required to be licensed in each state, province or
territory that they conduct business. In addition, most jurisdictions require
individuals who engage in Insurance Brokerage activities to be personally
licensed. Licensing laws for Insurance Brokers vary from jurisdiction to
jurisdiction and are subject to amendment by applicable regulatory authorities.
Regulatory authorities have the right to grant, review and revoke licences and
approvals to sell insurance.
There are two types of distribution systems which account for the majority of
sales of General Insurance to the general public: firstly, direct placement by
the Insurance Company through an in-house employee sales force and, secondly,
placement through independent General Insurance Brokerages that place General
Insurance for its customers with one of a number of Insurance Companies. New
sources of competition continue to emerge as banks and other financial services
companies expand the products and services they offer to include insurance
products and brokerage services. In addition, independent Insurance Brokers are
faced with competition from Insurance Companies who utilize aggressive media
campaigns and telemarketing distribution methods to place General Insurance
directly with its customers.
The Insurance Companies have put pressure on General Insurance Brokerages to
consolidate the distribution component of the insurance industry, requiring
ever-increasing premium volume to justify the continuance of their brokerage
contracts (i.e., contracts pursuant to which a General Insurance Brokerage
receives product access and support from the Insurance Company). A larger
General Insurance Brokerage generally seeks to have brokerage contracts with a
number of Insurance Companies so that the cancellation of any one brokerage
contract would not reduce its ability to offer alternative competitive products
to its customers. Smaller General Insurance Brokerages that generally have
contracts with only a few Insurance Companies are more vulnerable to the
cancellation of any one brokerage account and the potential inability to offer
alternative competitive General Insurance products to their customers.
Profile
The Company is a General Insurance Brokerage and has been in business since
1989. The Company carries on operations in Alberta, Canada and the States of
California, Virginia, and Illinois, U.S.A. The Company operates out
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of nineteen locations: six in Alberta, two in California, ten in Virginia and
one in Illinois. The Company generated revenue of $13,060,344 in the fiscal year
ended March 31, 2005, $7,469,559 in the fiscal year ended March 31, 2004, and
$5,175,072 in the fiscal year ended March 31, 2003. The Company's business is
generally not affected by seasonality and experiences recurring revenues that
are principally derived from commissions earned from placing General Insurance
with insurance carriers on behalf of the Company's customers.
The Company's operations are highly automated and it strives to maintain an
excellent reputation with its customers and the insurance carriers. Since its
inception, the Company has pursued an aggressive growth strategy of acquiring
other General Insurance Brokerages and integrating them into the Company's
overall business structure. As of March 31, 2005, the Company had purchased 19
General Insurance Brokerages in the Province of Alberta, Canada, two insurance
brokerages in the State of California, one insurance brokerage in the State of
Virginia and one insurance brokerage in the State of Illinois.
Growth Strategy
The Company has a growth strategy of acquiring strategically located General
Insurance Brokerages ("Flagship Brokerages"). Upon acquiring a Flagship
Brokerage, the Company plans to take advantage of the consolidation pressure in
the General Insurance industry by further acquiring and integrating other
General Insurance Brokerages located close to the Flagship Brokerage in order to
take advantage of the economies of scale of a larger operation. Moreover, it is
the Company's goal to generate more revenue by providing increased General
Insurance coverage to existing and newly acquired customers by virtue of the
Company's representation of various Insurance Companies and their products. The
revenue growth during the past three years has been primarily attributed to
business acquisitions and internally generated business. There can be no
assurance that the Company will have earnings growth and benefit from economies
of scale being achieved from increased revenue volume and commission from its
operations and growth strategy.
The Company plans to continue a growth strategy of acquiring General Insurance
Brokerages in other parts of Canada and the U.S.
The Company requires licences and insurance carrier appointments to operate as a
General Insurance Brokerage in each state, province or territory which would
enable it to market and sell General Insurance products. The Company may not
have the required licenses or carrier appointments at the time of completion of
each acquisition of a General Insurance Brokerage. Accordingly, the Company
enters into separate agency agreements with the vendors of such acquired General
Insurance Brokerages whereby the vendors of such agencies agree, for the sole
and exclusive benefit of the Company, to market, sell, distribute, place and
write General Insurance products to the clients of the Company and to any and
all other potential customers who may wish to purchase General Insurance
products from the Company. To date, the Company has obtained licences in the
States of California, and Virginia and currently requires a license in Illinois.
The Company is actively filing all necessary licensing applications and
obtaining carrier appointments with the Insurance Companies.
All of the agency agreements entered into with the vendors of the Vista, Johns,
Vinciguerra and Schuneman assets are similar in respect to the duties and
obligations of the parties thereto and can be summarized as follows. Pursuant to
the terms of the agency agreements the vendors agreed, for the exclusive benefit
of the Company, to staff, manage and operate the Insurance Brokerages and the
purchased assets within an established budget and in a professional and prudent
manner. The agreements further specify that all clients and revenues stemming
from the operation of the Insurance Brokerage shall belong solely to the Company
and that the Company is responsible for the payment of all of the reasonable and
provable expenses of the vendors with respect to the staffing, management and
operation of the Insurance Brokerages in accordance with the established budget.
By their respective terms, the agency agreements will terminate upon the
occurrence of the earliest of the following events: a) the date upon which the
Company obtains: i) all of the necessary regulatory approvals to operate as an
Insurance Brokerage or agent in the State where the purchased assets are
located; and ii) all of the carrier appointments from the Insurance Companies
(or such number of carrier appointments as the Company deems satisfactory); or
b) December 31, 2018 in respect of Johns, September 30, 2018 in respect of
Vista, December 31, 2024 in respect of Vinciguerra and December 31, 2024 in
respect of Schuneman; or c) the date that the Company delivers written notice to
the vendor (as the case may be) that it is terminating the agency agreement.
Upon the
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termination of an agency agreement all of the vendors right title and interest
in and to any and all employment agreements, non-competition agreements and
confidentiality agreements which it may have with its employees shall be
assigned to the Company and any and all amounts which are or will become due and
owing to the Company pursuant to the terms of the agency agreement will
immediately become due and payable.
As security for the performance of the terms and conditions of the agency
agreement the shareholders of the different vendors pledged all of their issued
and outstanding capital stock in the vendors to the Company and further provided
the Company with a directors resolution of the respective vendors authorizing
the officers of the Company to become the proper signing officers of the vendors
with respect to the control of the bank accounts of the vendors. The respective
pledge of shares agreements and the directors resolutions are currently being
held in escrow by the firm of Demiantschuk Milley Burke & Hoffinger and are to
be released to the Company in the event of a default of the respective agency
agreements or to the respective vendors upon the termination of an agency
agreement in accordance with its terms.
The Company plans to acquire additional General Insurance Brokerages over the
next 12-month period depending upon its cash resources and its ability to raise
additional capital to acquire Insurance Brokerages. Depending upon market
conditions, the availability of other General Insurance Brokerages and the price
that they are available, the Company's acquisition plans may change. Any further
growth may require the Company to obtain additional equity or debt financing,
which may not be available on attractive terms, or at all, or may be dilutive to
current or future shareholders.
For a breakdown of revenues by geographic market for the last three fiscal
years, see Note 22, Segment Disclosures in the Consolidated Financial
Statements.
C. Organizational Structure
The Company is a General Insurance Brokerage which conducts its insurance
business in Alberta, Canada, and in the States of California, Virginia, and
Illinois, U.S.A. In Canada, it conducts its business through Anthony Clark
International Insurance Brokers Ltd. and Heritage Hill Insurance Ltd., a
wholly-owned Alberta subsidiary of the Company. In the U.S., it conducts its
business through Addison York Insurance Brokers Ltd., a wholly-owned Delaware
subsidiary of the Company.
-----------------------------------------------------
Anthony Clark International Insurance Brokers Ltd.
(Alberta Corporation)
-----------------------------------------------------
|
- ----------------------------------------------------------------------------
| |
Addison York Insurance Brokers Heritage Hill Insurance Ltd.
Ltd.(Delaware (Alberta Corporation)
Corporation) 100% 100%
- ------------------------------------ ------------------------------------
D. Property, Plant and Equipment
The Company does not own any real property but leases office space to conduct
its business operations as a General Insurance Brokerage. The Company has a
conditional operating sublease commitment for office premises in Calgary,
Alberta for a term expiring July 30, 2006 at a base rent of $11,096 per month
plus operating costs estimated at $10,040 per month. Heritage Hill Insurance
Ltd., a wholly-owned subsidiary, also has an operating lease commitment for
office premises in Calgary, Alberta for a term expiring March 31, 2006 at a base
rent of $1,738 per month plus operating costs estimated at $1,836 per month. The
remaining four offices operate on a month-to-month office sharing arrangement
basis without formal leases. The total amount of additional month-to-month lease
costs is approximately $1,122 per month in the aggregate.
In California, the Company's subsidiary Addison York has two operating leases,
one in the San Francisco area for a term expiring on August 31, 2006 at a rent
of US$11,126 plus operating costs estimated at $1,000 per month and one in the
Los Angeles area for a term expiring September 30, 2006 at a rent of $2,048 plus
operating costs estimated at $500 per month.
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In Virginia, the Company's subsidiary Addison York has twelve operating leases
with varying terms of expiry up to August 31, 2007 for a total monthly rent of
US$21,709 per month plus operating costs estimated at US$3,296 per month.
In Illinois, the Company's subsidiary Addison York has one operating lease in
Sterling, Illinois for a term expiring December 31, 2006 at a rent of US$2,100
plus operating costs estimated at US$750 per month.
Item 5. Operating And Financial Review And Prospects
The following discussion and analysis explains trends in the Company's financial
condition and results of operations for the three fiscal years ended March 31,
2005, 2004 and 2003. This discussion and analysis of the results of operations
and financial condition of the Company should be read in conjunction with the
audited consolidated financial statements and the related notes, as well as
statements made elsewhere in this Form 20-F. See "Special Note Regarding Forward
Looking Statements". The audited consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
which conform to accounting principles generally accepted in the United States,
except as described in the notes to the Consolidated Financial Statements dated
March 31, 2005, 2004 and 2003. Unless expressly stated otherwise, all references
to dollar amounts in this section are in Canadian dollars (in accordance with
Canadian GAAP). For a reconciliation to accounting principles generally accepted
in the United States ("U.S. GAAP"), see note 25 to the audited consolidated
financial statements and supplemental information entitled Reconciliation to
United States GAAP for years ended March 31, 2005, 2004 and 2003.
Overview
The Company's operations are primarily directed to acting as a General Insurance
Brokerage and acquiring Flagship Brokerages which the Company integrates into
its existing operations in order to take advantage of the economies of scale of
a larger Insurance Brokerage operation. It is the Company's goal to generate
more revenue by providing increased General Insurance coverage to existing and
newly acquired customers by virtue of the Company's representation of various
Insurance Companies and their products.
Critical Accounting Policies
On December 12, 2001 the Securities and Exchange Commission ("SEC") issued
Financial Reporting Release ("FRR") No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" which, among other things,
encourages discussion concerning the most critical accounting policies used in
the preparation of the Company's financial statements. Critical accounting
policies are defined as those that are both very important to the portrayal of
the Company's financial condition and results, and require management's most
difficult, subjective or complex judgments. We are required to make certain
estimates, judgments and assumptions that we believe are reasonable based upon
available information, historical information and/or forecasts. These estimates,
judgments and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
The accounting policies which management believes are the most critical to aid
in fully understanding and evaluating our reported financial results include
those relating to business acquisitions, and accounting for the resulting
customer accounts, goodwill and non-competition agreements, stock-based
compensation and income taxes.
Impairment of long-lived assets
Long-lived assets are assessed for impairment when events and circumstances
warrant. The carrying value of a long-lived asset is impaired when the carrying
amount exceeds the estimated undiscounted net cash flow from use and fair value.
In that event, the amount by which the carrying value of an impaired long-lived
asset exceeds its fair value is charged to earnings.
Business combinations
Business acquisitions are accounted for using the purchase method whereby the
fair value of consideration given is allocated to identifiable assets acquired
and liabilities assumed. The results of operations and cash flows of an acquired
business are included in the Company's financial statements from the date of
acquisition. Where the
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consideration given is subject to contingent adjustment based on future periods'
operating results, such adjustment is recognized in the period the contingency
is resolved.
Customer accounts
Acquired customer accounts are carried at cost less accumulated amortization.
Amortization is provided on a straight-line basis over estimated useful lives of
between two and seventeen years. The carrying value of customer accounts is
periodically assessed for impairment in accordance with the Company's accounting
policy for impairment of long-lived assets.
Goodwill
Goodwill results from business combinations and represents the excess of the
consideration given over the fair value of identifiable net assets acquired.
Goodwill is not subject to amortization but is subject to an impairment test
that is performed at least annually.
Non-competition agreements
Non-competition agreements are secured at the time of business combinations and
are recognized at their estimated fair value at the date of acquisition.
Amortization is provided on a straight-line basis over their estimated useful
lives of between six and ten years. Impairment is periodically assessed in
accordance with the Company's policy for impairment of long-lived assets.
Stock-based compensation
Stock-based compensation is accounted for at fair value as determined by the
Black-Scholes option pricing model using amounts that are believed to
approximate the volatility of the trading price of the Company's stock, the
expected lives of awards of stock-based compensation, the fair value of the
Company's stock and the risk-free interest rate. The estimated fair value of
awards of stock-based compensation are charged to expense as awards vest, with
offsetting amounts recognized as contributed surplus.
Income taxes
Income taxes are recorded using the liability method. Under this method, current
income taxes are recognized for the estimated income taxes payable for the year.
Future income tax assets and liabilities are recognized for the estimated income
tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective income tax
bases. Future income tax assets and liabilities are recognized using enacted or
substantively enacted income tax rates. Future income tax assets are recognized
with respect to deductible temporary differences and loss carryforwards only to
the extent their realization is considered more likely than not.
A. Operating Results
US Acquisitions
Year ended March 31, 2005
During the year the Company acquired the net assets of the Vinciguerra insurance
brokerage, located in Virginia, and the Schuneman insurance brokerage, located
in Illinois. Aggregate purchase consideration of $ 10,100,831 (US$ 8,228,463)
was given to effect these acquisitions. Both acquisitions are subject to
contingent adjustment based on future commission revenue, though in both
acquisitions the purchase consideration may only be reduced. Goodwill attributed
to both acquisitions is expected to be deductible for income tax purposes.
The results of operations and cash flows of the acquired businesses are included
in these financial statements from the closing dates of the acquisitions, which
are September 8, 2004 for Vinciguerra and January 12, 2005 for Schuneman and
thus reflect results for only part of the year. The Company's revenues and
expenses are expected to be significantly different in the next fiscal year as
results of the full year of operations will be included in the financial
statements.
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The consideration given has been allocated to acquired identifiable assets and
liabilities as follows based on the foreign exchange rates in effect on the
dates of closing.
Vinciguerra Schuneman Total
--------------------------------------------------
Customer accounts $ 1,855,983 $ 227,906 $ 2,083,889
Computer systems and equipment 64,390 36,759 101,149
Non-competition agreements 160,975 34,308 195,283
Goodwill 6,978,094 823,504 7,801,598
Other 6,439 - 6,439
Liabilities assumed (87,527) - (87,527)
--------------------------------------------------
$ 8,978,354 $ 1,122,477 $ 10,100,831
--------------------------------------------------
Consideration paid
Cash $ 7,857,638 $ 299,588 $ 8,157,226
Fair values of notes payable 1,120,716 822,889 1,943,605
--------------------------------------------------
$ 8,978,354 $ 1,122,477 $ 10,100,831
--------------------------------------------------
The notes issued in connection with the Vinciguerra and Schuneman acquisitions
are at rates of interest that were determined to be below the estimated market
rate of interest for indebtedness with similar terms and credit quality. These
notes have therefore been accounted for at their discounted fair values.
The acquired customer accounts will be amortized on a straight-line basis over
two years and ten years, respectively for the Vinciguerra and Schuneman
agencies, their estimated useful lives.
During the year ended March 31, 2005 the contingent adjustment related to John's
was resolved, and the purchase consideration was reduced by $ 9,083 (U.S.$
7,509).
Revenues
The Company's revenue has increased to $13,060,344 for the year ended March 31,
2005 from $7,469,559 for the year ended March 31, 2004 primarily due to revenue
generated from US acquisitions (approximately $5,891,000). Revenue from the US
acquisitions has been recorded from the closing date of acquisition.
The Company's revenue increased to $7,469,559 for the year ended March 31, 2004
from $5,175,072 for the year ended March 31, 2003 primarily due to revenue
generated from US acquisitions (approximately $1,980,000), new business
commissions generated and premium increases (approximately $231,000), and a net
increase in combined other revenue (approximately $83,000, primarily due to
increase in contingent commissions of $261,000, a decrease in interest revenue
of approximately $10,000 and non-recurrence of one-time revenue of $151,000
booked in the prior year). Revenue from the US acquisitions has been recorded
from the closing date of acquisition.
Contingent commissions are commissions paid to the Company by Insurance
Companies based upon volume, growth and/or profitability of business placed with
such Insurance Companies by the Company.
-16-
Expenses
Salaries and wages have increased to $7,925,260 for the period ending March 31,
2005 from $4,818,880 for the period ending March 31, 2004 mainly due to salaries
and wages of US acquisitions. Salaries and wages were streamlined in one US
office during the year resulting in an expected annual saving of approximately
$767,000.
Salaries and wages increased to $4,818,880 for the twelve month period ended
March 31, 2004 from $3,165,924 for the twelve month period ended March 31, 2003
mainly due to salaries and wages of US acquisitions (approximately $1,500,000),
salaries and wages related to the new business generated (approximately
$111,000) and administrative salary adjustments (approximately $42,000).
Rent increased to $805,937 for the year ending March 31, 2005 from $422,672 for
the year ending March 31, 2004 primarily due to rent related to the new US
acquisitions.
Rent increased to $422,672 for the year ended March 31, 2004 from $283,242 for
the year ended March 31, 2003 primarily due to rent related to the US
acquisitions.
General and administrative expenses increased to $2,393,711 for the year ending
March 31, 2005 from $1,446,886 for the year ending March 31, 2004 primarily due
to the US acquisitions.
General and administrative expenses increased to $1,446,886 for the year ended
March 31, 2004 from $1,173,128 for the year ended March 31, 2003 mainly due to
the inclusion of general and administrative expenses of US acquisitions
(approximately $350,000), increase in legal fees (approximately $33,000),
increase in insurance costs (approximately $42,000), increase in accounting fees
(approximately $24,000), decrease in operating costs of the website and computer
maintenance costs (approximately $36,000), and decrease in other expenses
primarily related to acquisition identification (approximately $102,000).
During the year ended March 31, 2005, the Company awarded 520,000 stock options
which were accounted for in accordance with the new guidance Section 3870
"Stock-Based Compensation and Other Stock-Based Payments" of the CICA Handbook
which requires the expensing of the fair value of the options ($411,275).
During the year ended March 31, 2004, legal judgment expense of $522,619 was
recorded. This judgment was made against the Company with respect to a
previously outstanding legal proceeding. The judgment related to the Company's
alleged failure to honor a stock option agreement dated October 1, 1998. During
the year ended March 31, 2005, the Company settled for a cash payment of
$450,000 (including legal costs). The difference between the judgment amount and
settlement of $72,619 was recovered and reflected in the first quarter of the
2005 fiscal year.
Revenues and expenses for US acquisitions have been included in the current
fiscal year from the closing date of the acquisitions and thus reflect results
for only part of the year. The revenues and expenses are expected to be
significantly different in the next fiscal year as results of the full year of
operations will be included in the financial statements.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA is a non-Generally Accepted Accounting Principles measure and represents
earnings before interest, income taxes and depreciation and amortization
(non-cash expenses). The Company's EBITDA increased to $1,524,161 for the year
ended March 31, 2005 from $258,502 for the year ended March 31, 2004 primarily
due to US acquisitions, two of which were included for the full year and two of
which occurred during the year. EBITDA as a percentage of revenue has increased
from 3.5% for the year ended March 31, 2004 to 11.7% for the year ended March
31, 2005. Management has taken steps to streamline the costs associated with its
US operations and expects further EBITDA improvements in upcoming quarters from
these adjustments together with the effect of new acquisitions
The Company's EBITDA decreased from $552,778 for the year ended March 31, 2003
to $258,502 for the year ended March 31, 2004 primarily due to the legal
judgement ($522,619). EBITDA as a percentage of revenue has decreased from 10.7%
for the year ended March 31, 2003 to 3.5% for the year ended March 31, 2004.
-17-
EBITDA is discussed and presented here as a non-Generally Accepted Accounting
Principles measure because it is management's major performance indicator.
EBITDA is reconciled to Net Earnings (loss) below.
Years ended March 31, 2005 2004 2003 2002 2001
(restated) (restated)
OPERATIONS
Revenue $ 13,060,344 $ 7,469,559 $ 5,175,072 $ 4,449,628 $ 3,894,115
Earnings before the following (EBITDA) 1,524,161 258,502 552,778 445,029 251,034
Interest and Financing Costs (4,539,268) (941,153) (285,720) (9,540) (9,614)
Depreciation and amortization (1,303,867) (481,025) (609,546) (634,886) 438,133)
Income Taxes (expense) recovery (151,180) 112,178 (13,313) 67,561 206,657
Net (Loss) Earnings $ (4,470,154) $ (1,051,498) $ (355,801) $ (131,836) $ 9,944
During the year ended March 31, 2005, non-cash expenses included in arriving at
net loss amounted to $4,651,527 which related to stock-based compensation,
depreciation and amortization, amortization of deferred financing costs and loan
discounts, and the impairment of deferred financing costs and unamortized loan
discounts on reclassified long-term debt.
During the year ended March 31, 2004, non-cash expenses included in arriving at
net loss amounted to $956,537 which related to depreciation and amortization and
amortization of deferred financing costs and loan discounts.
Interest and Financing Costs
2005 2004
Canadian operations:
Interest and financing costs on Paragon term loan repaid (note
10(b)) $ -- $ 274,866
Interest and financing costs on long-term debt -- --
Interest on obligations under capital lease 1,410 1,701
---------------------------------------------------------------------------------------------------
1,410 276,567
US operations:
Amortization of discount on reclassified long-term debt 166,489 62,625
Amortization of financing costs 230,199 412,887
Impairment of discount on reclassified long-term debt 1,428,664 -
Impairment of deferred financing costs on reclassified
long-term debt 1,111,033 -
Interest and loan fees on long-term debt 1,596,851 186,520
Interest on obligations under capital lease 4,622 2,554
---------------------------------------------------------------------------------------------------
4,537,858 664,586
Total interest and financing costs $ 4,539,268 $ 941,153
Depreciation and Amortization
Depreciation and amortization increased to $1,303,867 for the year ended March
31, 2005 from $481,025 for the year ended March 31, 2004. The increase was due
mainly to the amortization of increased customer accounts resulting from the US
acquisitions, one of which has a two year amortization period.
-18-
Depreciation and amortization decreased to $481,025 for the year ended March 31,
2004 from $609,546 for the year ended March 31, 2003. The Depreciation and
Amortization expense was higher during the year ended March 31, 2003 primarily
due to the final amortization of the website development costs, the change in
accounting policy related to business combinations, goodwill and other
intangible assets and purchase price adjustments part way through the year.
During the year ended March 31, 2004, the Depreciation and Amortization expense
included an amount of $196,814(2003 - $0) relating to US acquisitions.
Net loss and loss per Common share
2005 2004 2003
Net loss (4,470,154) (1,051,498) (355,801)
Loss per Common Share, basic and diluted: (0.56) (0.14) (0.05)
Net loss for the year ended March 31, 2005 was $4,470,154 compared to a net loss
of $1,051,498 for the year ended March 31, 2004 due to an increase in non-cash
expenses related to stock-based compensation ($411,275), depreciation and
amortization ($1,303,867), amortization of deferred financing costs and loan
discounts ($396,688) , and the impairment of deferred financing costs and
unamortized loan discounts on reclassified long-term debt $2,539,697).
Net loss for the year ended March 31, 2004 increased by $695,697 mainly due to a
legal judgment of $522,619 and an increase in interest and financing costs of
$655,433, offset by a decrease in depreciation and amortization of $128,521 and
a decrease in future income tax expenses of $125,491. Net loss as a percentage
of revenue has increased from 6.89% for the year ended March 31, 2003 to 14.1%
for the year ended March 31, 2004.
CHANGE IN ACCOUNTING POLICY
Stock-based Compensation
Effective on April 1, 2004 the Company adopted the guidance in Section 3870
"Stock-Based Compensation and Other Stock-Based Payments" of the CICA Handbook.
As permitted, the Company adopted Section 3870 on a retroactive basis but has
adjusted opening retained earnings of the current year for the cumulative effect
of adoption on prior years. The comparative figures for the fiscal year ended
March 31, 2004 have therefore not been restated to reflect this change in
accounting policy. This change in accounting policy had no effect on the fiscal
year ended March 31, 2003.
B. Liquidity and Capital Resources
At March 31, 2005, the Company had a working capital deficiency of $(16,785,495)
and obligations under capital leases of $19,231. The working capital deficiency
is due to the reclassification of the long-term debt to demand loans in current
liabilities in accordance with Canadian accounting standards (EIC-59 Long-term
debt with covenant violations). Subsequent to the March 31, 2005 year end, new
financing was obtained which resulted in the repayment of the existing senior
debt and the reclassification of the senior and seller's debt to long-term debt.
The Company's balance sheet as at March 31, 2005 as compared to March 31, 2004
reflects a net decrease in working capital of $18,634,270 primarily due to the
reclassification of all senior and seller's debt to current liabilities as
demand loans in accordance with Canadian accounting standards (EIC-59 Long-term
debt with covenant violations). Subsequent to the March 31, 2005 year end, new
financing was obtained which resulted in the repayment of the existing senior
debt and the reclassification of the seller's debt to long-term debt. Other
major changes include a net increase in customer accounts ($651,098), increase
in goodwill ($7,066,149), financing costs paid ($832,998) and net change in debt
($9,065,539) related to financing US acquisitions of customer accounts and
goodwill. Shareholders' equity has decreased by $4,089,128, primarily due to the
current year operating loss of
-19-
$4,470,154, partially offset by an increase in the contributed surplus due to
the accounting for stock-based compensation.
At March 31, 2004, the Company had working capital of $1,848,775 and long-term
debt outstanding of $8,014,044.
The Company's balance sheet as at March 31, 2004 as compared to March 31, 2003
reflects a net decrease in working capital of $2,062,088 due to cash used for
the US acquisitions. Other major changes include an increase in net customer
accounts ($3,465,334) and goodwill ($3,884,353), long-term debt ($8,477,142)
related to financing acquisitions of customer accounts and goodwill and a
decrease in shareholder's equity of $738,337, primarily due to an operating loss
of $1,051,498 less net proceeds from a share issue of $314,006.
Shareholders' equity has decreased from $6,498,097 as at March 31, 2004 to
$2,408,969 as at March 31, 2005 due primarily to the operating loss for the
twelve month period ended March 31, 2005 of $4,470,154 primarily due to non-cash
based items of stock-based compensation ($411,275), the impairment of discount
on reclassified long-term debt ($1,428,664), impairment of deferred financing
costs on reclassified long-term debt ($1,111,033) and depreciation and
amortization ($1,303,867), partially offset by an increase in the contributed
surplus due to the accounting for stock-based compensation.
Shareholders' equity has decreased from $7,236,434 as at March 31, 2003 to
$6,498,097 as at March 31, 2004 due to the loss for the twelve month period
ended March 31, 2004 primarily related to the legal judgement ($522,619) and
expensing of the financing costs related to new and terminated financing
($495,763) and depreciation and amortization ($481,025). The decrease was
partially offset by the net proceeds of $314,006 from the private placement.
Cash and cash equivalents decreased $1,587,719 in the year ending March 31, 2005
due to negative cash flow from investing activities, partially offset by
positive cash flow from financing and operating activities. Cash flow from
investing activities was negative, due to cash being used primarily to acquire
new brokerages ($8.1 million) and computer systems and office equipment
($66,256). Cash flow was provided by financing activities primarily due to the
FCC debt financing ($3.5 million) and Emmett debt financing ($3.9 million)
partially offset by deferred financing costs paid ($832,998), and repayment of
debt ($417,340).
Cash and cash equivalents decreased $1,729,745 in the year ending March 31, 2004
due to negative cash flow from operating and investing activities, partially
offset by positive cash flow from financing activities. Operating activities
generated negative cash flow due to legal judgement of $522,619 and higher
interest and financing costs. Cash flow from investing activities was negative,
as cash was used primarily to acquire new brokerages ($4.6 million) and computer
systems and office equipment ($66,230). Cash flow from financing activities
provided positive cash flow of $3.5 million mainly due to a private placement of
$314,006 and Oak Street debt financing ($4.4 million), partially offset by
$655,274, deposited as collateral to the Oak Street debt financing, and $557,324
paid for deferred financing costs.
As at March 31, 2005, the Company had contractual and long-term obligations as
set forth in Item 5.F.
The Company does not currently enter into any financial instruments for hedging
purposes.
Financing Arrangements and Acquisitions
On July 31, 2002, the Company completed a U.S.$5,000,000 revolving line of
credit (the "Textron Facility") pursuant to a loan agreement dated July 31, 2002
between the Company and Textron Financial Company ("Textron"), as amended by an
agreement dated April 3, 2003. The Textron Facility had an interest rate of the
greater of (a) the Wall Street Journal prime rate plus 2.5% per annum, or (b)
U.S.$10,000 per month. A commitment fee of $100,000 was paid on the closing date
and is also required to be paid on the anniversary of the closing date each
year. As collateral for the Textron Facility Textron, obtained a first charge
over all of the assets of the Company.
On October 17, 2003, the Company acquired the net assets of DKWS Enterprises
Inc. and the Kabaker Family Trust of July 1998, doing business as Vista
International Insurance Brokers ("Vista"), a California based General Insurance
Brokerage for purchase consideration of $6,117,633. The purchase was financed
using cash and seller
-20-
financing. The seller financing is by way of a US$3,515,000 note payable with
interest at 7% per annum and repayable in monthly payments of $49,366 including
principal and interest, due on September 30, 2013 and is collateralized by a
pledge of certain assets of the Company. No payments have been made since August
2004 as the lending agreement provides for secession of payments based on
available working capital. The Vista acquisition is subject to contingent
adjustment based on commission revenue earned in the second year. A further
adjustment of 20% of the purchase consideration will be made based on a price
calculation relating to the commission revenue in the fifth year after closing.
This additional consideration cannot be reasonably estimated and will therefore
be accounted for when the contingency is resolved.
On October 20, 2003, a termination and release agreement was executed with
Textron Financial Corporation, which terminated the loan agreement and released
all security documents.
On November 6, 2003, the Company executed a loan agreement (the "Paragon Loan")
with Paragon Capital Corporation Ltd. ("Paragon") with loan proceeds of
$2,100,000. The loan had a one-year term, with interest only payments, with
interest at 2% per month. A commitment fee of $63,000 was paid to Paragon in
connection with the Paragon Loan. The Paragon Loan was secured against all of
the assets of the Company.
On November 6, 2003, the Company acquired the net assets of Johns Insurance
Agency, Inc. ("Johns"), a California based General Insurance Brokerage for
purchase consideration of $2,483,009. The purchase was financed using cash and
seller financing. The seller financing was by way of a US$174,719 note payable,
bearing no interest, was unsecured and was paid on December 31, 2004.
On March 22, 2004, the Company completed a US$5,000,000 debt financing
arrangement with Oak Street Funding ("Oak Street") whereby Oak Street agreed to
provide a US$5,000,000 reducing revolving line of credit (the "Oak Street
Facility") subject to a borrowing base formula. The Oak Street Facility had an
interest rate of prime plus 8% per annum with interest only payments for a
period of two years. The Oak Street Facility was required to be used to
refinance the Paragon Loan, acquisitions of General Insurance Brokerages and
related working capital and equipment needs and other purposes approved by Oak
Street. The Oak Street Facility was secured against all of the assets of the
Company, other than the collateral subject to future financing.
On March 22, 2004, the Paragon Loan was repaid with the proceeds received from
the Oak Street Facility.
On June 14, 2004, the Company completed a U.S.$7,500,000 ($10,090,725) debt
financing arrangement with First Capital Company, LLC ("FCC") whereby FCC will
provide up to a U.S.$7,500,000 ($10,090,725) reducing revolving line of credit
(the "FCC Facility") subject to a borrowing base formula. The FCC Facility had a
maturity 5 years from the close of the transaction, with interest only payments
during the first two years. The FCC Facility had a Wall Street Journal interest
rate of prime plus 2% per annum. As collateral for the FCC Facility, FCC had a
security interest in the assets of the Company acquired after June 14, 2004, in
connection with any acquisition financed by FCC and a subsequent security
interest in the assets of the Company, subject to certain permitted
encumbrances. The FCC Facility was to be used to fund acquisitions of General
Insurance Brokerages within the United States and provide working capital for
the related acquisitions.
On August 31, 2004, the Company obtained US $3,250,000 ($4,192,500 CDN) in debt
financing from Emmett Lescroart ("Emmett"), pursuant to an arrangement whereby
Emmett agreed to provide a loan of up to US $3,250,000 ($4,192,500 CDN) (the
"Emmett Facility") to purchase substantially all of the net assets of Al
Vinciguerra Ltd., ("Vinciguerra") a Norfolk, Virginia area based General
Insurance Brokerage . The Emmett Facility was fully drawn down on August 31,
2004, bears interest at a rate of 14% per annum, and requires the Company to
make monthly interest only payments until 2008. The principal amount is due
September 1, 2008. The Emmett Facility is secured by certain assets of the
Company.
On September 8, 2004, the Company acquired Vinciguerra for purchase
consideration of $8,978,354. The purchase was financed using the FCC Facility,
the Emmett Facility and seller financing. The seller financing was by way of a
US$1,000,000 note payable with interest at 7% per annum and repayable in monthly
payments of $23,951 including principal and interest, due on August 31, 2009 and
collateralized by a pledge of certain assets of the Company.
-21-
On January 12, 2005, the Company acquired the net assets of Schuneman Insurance
Agency Inc. ("Schuneman"), a Sterling, Illinois based General Insurance
Brokerage, for purchase consideration of $1,122,477. The purchase was financed
using an existing FCC Credit Facility and seller financing. The seller financing
was by way of a US$1,155,000 note payable with interest at 8% per annum and
repayable in monthly payments of $28,328 including principal and interest, that
do not begin until January 1, 2008, due on December 31, 2012 and collateralized
by a pledge of certain assets of the Company.
On June 15, 2005, the Company completed a U.S.$25,000,000 ($30,750,000) secured
debt financing arrangement (the "Bridge Facility") with United States lenders,
Bridge Healthcare Finance, LLC and Bridge Opportunity Finance LLC (collectively,
the "Lenders"). The Bridge Facility was used to repay the FCC and Oak Street
Facilities and certain other obligations amounting to approximately U.S.$7.5
Million and the balance of the Bridge Facility will be used for working capital
and to fund future acquisitions of General Insurance Brokerages within the
United States. The Bridge Facility will mature in five years and interest is
payable monthly during the term of the loan. Principal is payable during the
term of the loan based upon an excess cash flow availability formula. The Bridge
Facility has an interest rate of prime plus 6.25% per annum, with an effective
rate reduction of 1.5% and 2.5% for new equity raised of U.S.$3.0 Million and
U.S.$5.0 Million respectively. As additional consideration for providing the
Bridge Facility, the Company has issued the Lenders a total of 1,439,128
warrants exercisable to purchase 1,439,128 common shares of the Company at a
price of $0.80 per share for a five-year period following the closing of the
Bridge Financing. The Bridge Facility has been fully guaranteed and
collateralized by the Company.
Subsequent Events
On June 15, 2005, the Company closed a U.S.$ 25,000,000 ($ 30,750,000) secured
debt financing arrangement with United States lenders, Bridge Healthcare
Finance, LLC and Bridge Opportunity Finance, LLC (collectively, the "Lenders")
whereby the Lenders have agreed to provide a U.S.$ 25,000,000 ($ 30,750,000)
five year term loan facility (the "Facility") to the Company.
The Company can borrow an aggregate amount, not to exceed at any time
outstanding, three times the trailing twelve month adjusted Earnings Before
Interest, Income Taxes, Depreciation and Amortization (EBITDA). The Facility
will mature on June 15, 2010. Principal repayments are based upon an excess cash
flow availability formula. Interest is payable monthly calculated at the rate of
prime plus 6.25% per annum, but at no time less than 12% per annum, with an
effective rate reduction of 1.5% and 2.5% for new equity raised of U.S.$ 3.0
million and U.S.$ 5.0 million respectively. As additional consideration for
providing the Facility, the Company has issued the Lenders a total of 1,439,128
warrants exercisable to purchase 1,439,128 common shares at a price of $ 0.80
per share until June 15, 2010.
The Facility has been fully guaranteed and collateralized by the Company.
The initial term loan proceeds of U.S.$ 7,527,105 were used to repay the credit
facilities that were in default as of March 31, 2005 in the amount of U.S.$
6,458,460, and pay the costs of U.S.$ 1,515,000 incurred in relation to the
Facility. Additional costs have been incurred for which the amounts cannot be
determined at this point in time.
The balance of the Facility may only be used to fund permitted acquisitions
within the United States.
On or about June 17, 2005, DKWS Enterprises, Inc. (DKWS") filed an action (the
"Initial Action") against Addison York alleging that approximately U.S.$583,500
is due and owing by Addison York to DKWS. On or about July 14, 2005, Addison
York filed legal proceedings against John Kabaker, DKWS and the Kabaker Family
Trust of July 1998 (collectively, the "DKWS Group") for, interalia, breach of
contract and misrepresentation concerning the purchase of the net assets of
Vista and is claiming damages in the amount of approximately U.S.$3,136,000 or
in the alternative, rescission of the purchase and sale agreement in respect of
the purchase of the net assets of Vista.
On or about July 29, 2005, DKWS filed an amendment to the Initial Action filed
on June 17, 2005 and have added the Company as a defendant, and DKWS Group, as
plaintiffs, alleging, interalia, $583,500 is due and owing by the Company to
DKWS, breach of certain contracts, including wrongful dismissal of John Kabaker
and is claiming damages according to proof and costs. On the advice of counsel,
the Company is of the view that the legal proceedings and claims by the DKWS
Group are without merit. The Company intends to vigorously defend against the
actions by the DKWS Group and at the same time vigorously pursue its claim
against the DKWS Group. Pursuant to the above noted alleged breach of contract
by John Kabaker, DKWS and the Kabaker Family Trust of July 1998, the Company
exercised its rights under the Agency Agreement and Share Pledge Agreement (both
dated October 1,2003), and on or about June 22, 2005, seized the shares and bank
accounts of DKWS.
On September 15, 2005, John Kabaker filed a complaint with the U.S. Department
of Labor, for unlawful retaliation pursuant to section 806 of the Sarbanes-Oxley
Act. It is the intent of the Company to vigorously defend the Company against
the claim.
-22-
Additional Financing
Provided that the Company's lenders do not accelerate any of the Company's
outstanding debt and the Company does not complete any additional acquisitions,
the Company believes that its existing working capital and cash flows from
operations will be sufficient to meet the Company's working capital needs for at
least the next 12 months, after which the Company will require additional debt
or equity financing. Additional financing may be required prior to such time if
the Company identifies additional acquisition targets, or if the Company's
revenues are less than, or its expenses are greater than, expected. The
Company's working capital and cash flows from operations are not currently
sufficient to pay its obligations under its existing long-term debt when such
debt becomes due. Accordingly, the Company anticipates it will in the future
need additional financing in order to refinance or repay such debt The Company
may seek additional financing by issuing debt, Common Shares, or other types of
securities in private placements or public offerings. There can be no assurance
that additional financing will be available to the Company when required on
favorable terms, if at all.
C. Research and Development, Patents and Licenses, etc.
The Company does not generally engage in research and development activities but
has a growth strategy of acquiring strategically located General Insurance
Brokerages and integrating them into its operation to take advantage of
economies of scale of a larger operation. The Company evaluates the market for
potential acquisitions in various jurisdictions but has to date made
acquisitions in Alberta, Canada, and in California, Virginia, and Illinois,
U.S.A.
D. Trend Information
There are not any unusual or infrequent events or transactions or any
significant economic changes which are expected to materially affect income from
continuing operations. Management does not expect that inflation will materially
adversely affect income from continuing operations as proportional increases can
be expected from commission revenue generated from insurance policies.
E. Off-Balance Sheet Arrangements
None.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth the Company's future contractual and long-term
obligations as at March 31, 2005:
Less than 1 - 3 3 - 5 More than
Contractual Obligations Total 1 Year Years Years 5 years
- ---------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations 39,966 20,735 14,435 4,796 -
Operating Lease Obligations 989,698 712,203 277,495 - -
Demand Loans
Kabaker Family Trust 3,973,513 524,567 751,106 863,627 1,834,213
Schuneman Insurance Agency Inc. 1,397,088 - 57,423 503,021 836,644
-23-
Less than 1 - 3 3 - 5 More than
Contractual Obligations Total 1 Year Years Years 5 years
- ---------------------------------------------------------------------------------------------------------------------
Oak Street Funding (1) 3,624,294 - 1,374,706 1,780,408 469,180
First Capital Corporation 3,509,728 - 1,757,420 1,752,308 -
Emmett Lescroart 3,931,200 - - 3,931,200 -
Al Vinciguerra Ltd. 1,089,241 218,082 484,591 386,568 -
Total 18,554,728 1,475,587 4,717,176 9,221,928 3,140,037
- ---------------------------------------------------------------------------------------------------------------------
(1) Net of cash held in collateral account $609,306 (US$500,000).
During the year ended March 31, 2005, the Company reclassified the long-term
debt (except capital lease obligations) to current liabilities as demand loans
in accordance with EIC-59 (Long-Term Debt with Covenant Violations). Subsequent
to the March 31, 2005 year end, new financing was obtained which repaid the
existing senior debt. The result will be the reclassification of the demand
loans to long-term debt as they are no longer demand loans. The above table
reflects the contractual obligations taking into account the reclassification of
the demand loans to long-term debt, subsequent to the year end.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The names, municipality of residence, position(s) with the Company and principal
occupation(s) of each director and executive officer of the Company are as
follows:
- -----------------------------------------------------------------------------------------------------------------------
Date First
Name, Municipality of Elected or
Residence and Office or Appointed as a
Position Currently Held Age Principal Occupation For The Past Five Years Director
- -----------------------------------------------------------------------------------------------------------------------
Primo Podorieszach 49 April 1996 to Present: President of the Company April 1, 1996
Kamloops, British Columbia
President, Chief Executive
Officer and Director
- -----------------------------------------------------------------------------------------------------------------------
Tony Consalvo 45 April 1996 to Present: General Manager and Chief Operating April 1, 1996
Calgary, Alberta Officer of the Company
Chief Operating Officer and
Director
- -----------------------------------------------------------------------------------------------------------------------
Douglas Farmer(1)(2)(3) 47 Since February 1, 2000, Branch Manager, First National September 24,
Calgary, Alberta Financial Corp. 1998
Director
- -----------------------------------------------------------------------------------------------------------------------
Thomas Milley(1)(2)(3) 45 Barrister & Solicitor; Partner, Demiantschuk, Milley, Burke June 30, 1999
Calgary, Alberta & Hoffinger since 1993
Director
- -----------------------------------------------------------------------------------------------------------------------
Joseph P. Giuffre(3) 48 Barrister & Solicitor, Shareholder - Axium Law Corporation February 9, 2000
Vancouver, British Columbia since January 1, 2004; Barrister & Solicitor; Partner,
Director and Secretary Gowling Lafleur Henderson LLP April 1, 2000 - December 2003.
- -----------------------------------------------------------------------------------------------------------------------
Normand Cournoyer(1)(2) 56 Independent Insurance Consultant from July 2003 to July August 16, 2004
Calgary, Alberta 2004; Assistant Vice-President, Business Development Western
Director Canada of Allianz Canada, from 1998 to April 2003.
- -----------------------------------------------------------------------------------------------------------------------
-24-
- -----------------------------------------------------------------------------------------------------------------------
Date First
Name, Municipality of Elected or
Residence and Office or Appointed as a
Position Currently Held Age Principal Occupation For The Past Five Years Director
- -----------------------------------------------------------------------------------------------------------------------
Mahesh Bhatia(4) 46 Chief Financial Officer - June 2005 to present; Interim N/A
Calgary, Alberta Chief Financial Officer, August 2004 to February 2005;
Chief Financial Officer Independent consultant from February 2003 - June 2005; Nov
2000 - January 2003, Corporate Controller, Proprietary
Industries Inc., public company listed on Toronto Stock
Exchange; Oct 1998 - Oct 2000, Sr. Coordinator, Financial
Reporting, ICG Propane Inc.
- -----------------------------------------------------------------------------------------------------------------------
(1) Messrs. Farmer, Milley and Cournoyer are the members of the Company's
Audit Committee.
(2) Messrs. Farmer, Cournoyer and Milley are members of the Compensation
Committee.
(3) Messrs. Milley, Giuffre, and Farmer are members of the Corporate
Governance Committee.
(4) Mahesh Bhatia joined the Company as a consultant on January 15, 2004,
served as interim Chief Financial Officer from August 16, 2004 to
February 28, 2005, and was appointed as Chief Financial Officer on June
15, 2005.
Primo Podorieszach - President, Chief Executive Officer and Director; Mr.
Podorieszach is a Chartered Accountant and has been President of the Company
since its inception, and has extensive accounting and insurance industry
experience. He obtained a Chartered Accountant designation in 1982.
Tony Consalvo - Chief Operating Officer, General Manager and Director; Mr.
Consalvo has been involved as Vice-President and Chief Operating Officer of the
Company since its inception, and has extensive insurance industry experience.
Douglas Owen Farmer - Director; Mr. Farmer is employed as a manager with First
National Financial Corporation and has over 20 years' experience in the banking
and trust industry.
Joseph P. Giuffre - Director and Secretary; Mr. Giuffre is a founder and
principal shareholder of the British Columbia law firm Axium Law Corporation,
carries on a diverse commercial and business law practice with emphasis in the
area of securities law, acquisitions and mergers, corporate reorganizations and
public and private securities offerings.
Thomas Milley - Director; Mr. Milley is a Partner of the law firm Demiantschuk,
Milley, Burke & Hoffinger. He has served on a number of boards of public and
private companies focussed principally in the high tech sector. He is also a
director of ILI Technologies Corp.
Normand Cournoyer - Director; Mr. Cournoyer is an independent insurance
consultant and has over 20 years of experience in the insurance industry.
Mahesh Bhatia - Chief Financial Officer; Mr. Bhatia joined the Company as a
consultant in January 2004, served as interim Chief Financial Officer from
August 16, 2004 to February 28, 2005 and was appointed Chief Financial Officer
on June 15, 2005. Mr. Bhatia is a CPA and Chartered Accountant (India) and has
extensive accounting and public company experience. He had been working as an
independent consultant since February 2003 to June 2005 and prior to that worked
as a Corporate Controller of Proprietary Industries Inc., a public company
involved in real estate, hospitality, golf and mining. From Oct 1998 - Oct 2000,
he worked as a Sr. Coordinator, Financial Reporting in ICG Propane Inc., a
propane gas distribution company.
B. Compensation
The aggregate amount of compensation paid by the Company and its subsidiaries
during the fiscal year ended March 31, 2005 to officers and directors, as a
group, for services in all capacities was $272,333 as compared to $283,772 at
March 31, 2004, excluding fees billed for legal services by laws firms in which
certain of the Company's directors are partners (see Item 7 (B)). The Company
does not set aside or accrue funds to provide pension, retirement or similar
benefits for officers and directors of the Company.
-25-
"Named Executive Officer" means the Chief Executive Officer ("CEO") and the
Chief Financial Officer ("CFO"), regardless of the amount of compensation of
that individual, and the Company's three most highly compensated executive
officers, other than the CEO and CFO, who were serving as such at the end of the
most recently completed fiscal period, whose total salary and bonus during the
most recent fiscal year end was $150,000 or more, whether or not they were
executive officers at the end of the fiscal year
The Company had three Named Executive Officers during the fiscal year ended
March 31, 2005, Primo Podorieszach, Shelley Samec, and Mahesh Bhatia. The
following table sets forth the compensation awarded, paid to or earned by the
Company's Named Executive Officers during the financial years ended March 31,
2003, 2004 and 2005.
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ---------------------------------------------------------------------------------------------------------------
Awards Pay-outs
---------------------------------------
Name and Year Salary Bonus Other Securities Restricted LTIP All
Principal (1) ($) ($) Annual Under Shares or Pay- Other
Position Compen- Options/ Restricted outs Compen-
sation SARs Share ($) sation
($) granted Units ($)
(#) ($)
- ---------------------------------------------------------------------------------------------------------------
Primo 2005 $100,000 Nil Nil 358,837/0 N/A N/A Nil
Podorieszach 2004 $100,000 Nil Nil 143,837/0 N/A N/A Nil
President 2003 $100,000 Nil Nil Nil N/A N/A Nil
& Chief Executive
Officer
- ---------------------------------------------------------------------------------------------------------------
Shelley Samec 2005 $ 7,083 Nil Nil 20,000/0 N/A N/A Nil
Chief Financial 2004 $ 77,917 Nil $5,855(3) 13,017/0 N/A N/A Nil
Officer (2) 2003 $ 85,000 $12,500 -- Nil N/A N/A Nil
- ---------------------------------------------------------------------------------------------------------------
Mahesh Bhatia 2005 $ 48,750 $ 7,500 Nil Nil N/A N/A Nil
Interim Chief
Financial
Officer (4)
- ---------------------------------------------------------------------------------------------------------------
(1) Fiscal years ended March 31, 2005, 2004 and 2003.
(2) Ms. Samec was on maternity leave from March 1, 2004 to March 1, 2005 and
ceased to be the Chief Financial Officer on June 15, 2005.
(3) Paid in lieu of vacation time
(4) Mr. Bhatia was appointed Interim Chief Financial Officer from August 12,
2004 to February 28, 2005. Mr. Bhatia was appointed Chief Financial Officer
on June 15, 2005.
-26-
Long Term Incentive Plan Awards
Long term incentive plan award ("LTIP") means "any plan providing compensation
intended to serve as an incentive for performance to occur over a period longer
than one financial year whether performance is measured by reference to
financial performance of the Company or an affiliate, or the price of the
Company's shares but does not include option or stock appreciation rights plans
or plans for compensation through restricted shares or units". The Company has
not granted any LTIP's during the fiscal year ended March 31, 2005.
Stock Appreciation Rights
Stock appreciation right ("SAR") means a right, granted by an issuer or any of
its subsidiaries as compensation for services rendered or in connection with
office or employment, to receive a payment of cash or an issue or transfer of
securities based wholly or in part on changes in the trading price of the
Company's shares. No SAR's were granted to or exercised by the Named Executive
Officers or directors during the fiscal year ended March 31, 2005.
Option Grants in Last Fiscal Year
The following tables sets forth information concerning grants of stock options
during the financial year ended March 31, 2005 to the Named Executive Officers
of the Company:
- -------------------------------------------------------------------------------------------------------------------
Market Value of
Securities
Securities % of Total Underlying
Under Options Granted Exercise or Options/SAR's on
Options/SAR's to Employees in Base Price Date of Grant Expiration
Name Granted (#) Fiscal Year (1) ($/Security) ($/Security Date
- -------------------------------------------------------------------------------------------------------------------
Primo Podorieszach 358,837 69% $1.10 $1.10 August 5, 2009
- -------------------------------------------------------------------------------------------------------------------
Shelley Samec 20,000 3.8% $1.10 $1.10 August 5, 2009
- -------------------------------------------------------------------------------------------------------------------
Mahesh Bhatia Nil N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
(1) Percentage of all of the Company's options granted during the fiscal year
ended March 31, 2005.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
As no stock options were exercised by the Named Executive Officers during the
fiscal year ended March 31, 2005, the following table sets forth details of the
fiscal year-end value of unexercised options on an aggregated basis:
- --------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
Securities Aggregate (#)(1) ($)(1)(2)(3)
Acquired on Value
Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
Name
- --------------------------------------------------------------------------------------------------------------------
Primo Podorieszach Nil Nil 527,674/Nil Nil/Nil
- --------------------------------------------------------------------------------------------------------------------
Shelley Samec Nil Nil 88,017/Nil Nil/Nil
- --------------------------------------------------------------------------------------------------------------------
-27-
- --------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
Securities Aggregate (#)(1) ($)(1)(2)(3)
Acquired on Value
Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
Name
- --------------------------------------------------------------------------------------------------------------------
Mahesh Bhatia Nil Nil N/A N/A
- --------------------------------------------------------------------------------------------------------------------
(1) As freestanding SARs have not been granted, the number of shares relate
solely to stock options.
(2) Based on the closing price of $0.80 for the common shares of the Company on
The Toronto Stock Exchange on March 31, 2005, no options were in-the-money.
(3) On April 12, 2004, an aggregate of 335,000 of the options held by the Named
Executive Officers expired.
Pension Plans
The Company does not provide retirement benefits for directors or executive
officers.
Termination of Employment, Change in Responsibilities and Employment Contracts
Other than as described below, the Company has not entered into any plans or
arrangements in respect of remuneration received or that may be received by the
Named Executive Officers in the Company's most recently completed financial year
or current financial year in respect of compensating such officers or directors
in the event of termination of employment (as a result of resignation,
retirement, change of control, etc.) or a change in responsibilities following a
change of control, where the value of such compensation exceeds $100,000 per
executive officer or director.
The Company entered into employment agreement dated April 1, 2003 (the
"Agreements") with Primo Podorieszach (the "CEO") whereby, among other things,
should the Company terminate the CEO without just cause, the CEO will receive
payment equal to 300% of his then current annual base salary.
In addition, should any of the following events occur:
(a) an adverse change in any of the current duties, powers, rights,
discretion, salary or benefits of the CEO;
(b) a diminution of the current title of the CEO;
(c) a change in the person or body to whom the CEO currently reports,
except if such person or body is of equivalent rank or stature or such
change is a result of the resignation or removal of such person or
persons comprising such body, as the case may be, provided that this
does not include a change resulting from a promotion in the normal
course of business;
(d) a change in the municipality at which the CEO currently carries out
his terms of employment with the Company, without the CEO's consent,
unless the CEO's terms of employment include the obligation to receive
geographic transfers from time to time in the normal course of
business; or
(e) the CEO is not nominated as a management nominee of the Board of
Directors of the Company at a general meeting of the shareholders of
the Company,
(f) the CEO will be entitled to terminate his employment with the Company
and receive a payment equal to 300% of his then current annual base
salary.
Composition of Compensation Committee
The Company's executive compensation program is administered by a compensation
committee made up of three directors from the board of directors, Thomas Milley,
Normand Cournoyer and Douglas Farmer. The Compensation Committee has, as part of
its mandate, primary responsibility for the appointment and remuneration of
executive officers of the Company. The Board of Directors also evaluates the
performance of the Company's senior executive officers and reviews the design
and competitiveness of the Company's compensation plans.
-28-
Report on Executive Compensation
Executive Compensation Program
The Company's executive compensation program is based on a pay for performance
philosophy. It is designed to encourage, compensate and reward employees on the
basis of individual and corporate performance, both in the short and the long
term. The Compensation Committee reviews and recommends to the Board of
Directors base salaries based on a number of factors enabling the Company to
compete for and retain executives critical to the Company's long term success.
Incentive compensation is directly tied to corporate and individual performance.
Share ownership opportunities are provided to align the interests of executive
officers with the longer term interests of shareholders. Independent consultants
may be retained on an as needed basis by the Company to assess the executive
compensation program.
Compensation for the Named Executive Officers, as well as for executive officers
as a whole, consists of a base salary, along with annual incentive compensation
in the form of a discretionary annual bonus, and a longer term incentive in the
form of stock options granted. As an executive officer's level of responsibility
increases, a greater percentage of total compensation is based on performance
(as opposed to base salary and standard employee benefits) and the mix of total
compensation shifts towards stock options, thereby increasing the mutuality of
interest between executive officers and shareholders.
Base Salary
The Chief Executive Officer and Chief Operating Officer approve base salaries
for employees at all levels of the Company based on performance and other
reviews of market data available. The level of base salary for each employee
within a specified range is determined by the level of past performance, as well
as by the level of responsibility and the importance of the position to the
Company.
Annual Bonus
The Board of Directors determines on a discretionary basis, incentive awards or
bonuses to be paid by the Company to all eligible employees in respect of a
fiscal year. Corporate performance is measured by reviewing personal performance
and other significant factors, such as level of responsibility and importance of
the position to the Company. The individual performance factor allows the
Company to recognize and reward those individuals whose efforts have assisted
the Company to attain its corporate performance objective.
Stock Options
The Board has sole discretion to determine the key employees to whom grants will
be made and to determine the terms and conditions of the options forming part of
such grants. The Board approves stock option grants for each level of executive
officer or employee. Individual grants are determined by an assessment of an
individual's current and expected future performance, level of responsibilities
and the importance of the position to the Company.
The number of stock options which may be issued under the Stock Option Plan in
the aggregate and in respect of any fiscal year is limited under the terms of
the Stock Option Plan and cannot be increased without shareholder approval.
Stock options may be granted with or without SARs attached. Existing stock
options/SARs have up to a five year term and are exercisable at the market price
(as defined in the Stock Option Plan) of the Company's common shares on the date
of grant. Generally, a holder of stock options/SARs must be a director, an
employee or consultant of the Company, a subsidiary or an affiliate in order to
exercise stock options/SARs.
2005 Compensation of Senior Executive Officers
The Compensation Committee has not yet presented its report to the Board of
Directors concerning an incentive award or bonus to be paid to senior officers
of the Company in respect of 2005 fiscal year. In considering whether an
incentive award or bonus should be paid, the Board of Directors takes into
account revenues of the Company and other relevant factors including the senior
officers personal commitment and ongoing contributions in the ongoing success
and development of the Company.
-29-
Shareholder Return Performance Graph
The chart below compares the yearly percentage change in the cumulative total
shareholder return on the Company's common shares against the cumulative total
shareholder return of The TSX Composite Index for the fiscal period commencing
March 31, 2000, and ending March 31, 2005.
[GRAPHIC OMITTED - Performance Graph]
----------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005
March 31
----------------------------------------------------------------------------------------
Company $100.00 $47.20 $9.68 $7.60 $10.80 $6.40
----------------------------------------------------------------------------------------
TSX Composite Index $100.00 $81.39 $85.36 $70.33 $96.87 $110.37
----------------------------------------------------------------------------------------
Compensation of Directors
Remuneration is not presently paid to the directors of the Company for acting in
their capacity as such; however, directors are entitled to reimbursement for
reasonable travel and other out-of-pocket expenses incurred in connection with
attendance at meetings of the Board of Directors. In the past, the Company had
Fgranted options to acquire Common Shares to directors.
The following stock options were granted to the Company's directors who are not
Named Executive Officers during the fiscal year ended March 31, 2005:
-30-
- ----------------------------------------------------------------------------------------------------------------------
Market Value of
% of Total Securities
Options/SARs Underlying
Securities Under Granted to Exercise or Base Options/SARs on
Options/SARs Employees in Price the Date of Grant
Name Granted (1) Fiscal Year(2) ($/Security) ($/Security)(3) Expiration Date
- ----------------------------------------------------------------------------------------------------------------------
Directors who are 126,163 24% $1.10 $1.10 August 5, 2009
not Named Executive
Officers 15,000 2.9% $1.25 $1.25 August 16, 2009
- ----------------------------------------------------------------------------------------------------------------------
1) As freestanding SARs have not been granted, the number of shares relate
solely to stock options.
2) Percentage of all of the Company's options granted during the fiscal year
ended March 31, 2005.
3) Market value of the Company's shares on August 5. 2004 and August 16, 2004,
being the dates of grant.
C. Board Practices
The current Board of Directors was elected at an annual general meeting of
shareholders of the Company held on August 15, 2005. They shall serve until the
next annual general meeting or until their successors are appointed.
The Company has no director's service contracts with any director providing for
benefits upon termination of employment.
The standing committees of the Board of Directors of the Company are the Audit
Committee, the Compensation Committee and the Corporate Governance Committee.
The Audit Committee of the Company's Board of Directors currently consists of
Messrs. Cournoyer, Milley and Farmer. This committee is directed to review the
scope, cost and results of the independent audit of the Company's books and
records, the results of the annual audit with management and the adequacy of the
Company's accounting, financial and operating controls; to recommend annually to
the Board of Directors the selection of the independent auditors; to consider
proposals made by the Company's independent auditors for consulting work; and to
report to the Board of Directors, when so requested, on any accounting or
financial matters. Directors have historically received no remuneration for
acting as members of the Audit Committee, nor are their appointments for any
fixed term or subject to any specific terms of reference. However, as at August
16, 2004, audit committee members are to be paid $1,500 per audit committee
meeting.
The Company's executive compensation program is administered by a Compensation
Committee made up of three directors from the Board of Directors, Messrs.
Farmer, Cournoyer and Milley. The Compensation Committee has, as part of its
mandate, primary responsibility for the appointment and remuneration of
executive officers of the Company. The Board of Directors also evaluates the
performance of the Company's senior executive officers and review the design and
competitiveness of the Company's compensation plans. Directors receive no
remuneration for acting as members of the Compensation Committee, nor are their
appointments for any fixed term or subject to any specific terms of reference.
The Compensation Committee reviews and recommends to the Board of Directors base
salaries based on a number of factors enabling the Company to compete for and
retain executives critical to the Company's long term success. Incentive
compensation is directly tied to corporate and individual performance. Share
ownership opportunities are provided to align the interests of executive
officers with the longer term interests of shareholders. Independent consultants
may be retained on an as needed basis by the Company to assess the executive
compensation program.
The Corporate Governance Committee of the Company's Board of Directors currently
consists of Messrs. Milley, Farmer, and Giuffre. The overall purpose of the
Corporate Governance Committee (the "Committee") is to implement and oversee the
structure used to direct and manage the business affairs of the company with the
objective of enhancing long-term value for shareholders and the financial
viability of the business. It also has the responsibility to assess the
effectiveness of the board as a whole, as well as the contribution of individual
members and to develop the Company's approach to Corporate Governance issues
including developing a set of corporate governance principles and guidelines
that are specifically applicable to the Company.
-31-
No director or executive officer of the Company has any family relationship with
any other officer or director of the Company.
D. Employees
As of March 31, 2005, the Company had 144 employees, which were located in
Alberta, Canada (53) and in California, Virginia and Illinois, U.S.A (91). There
is no relationship between management and any labour unions and the management
structure is typical of other General Insurance Brokerages.
E. Share Ownership
The following table sets forth, as of July 31, 2005, the number of the Company's
Common Shares beneficially owned by (a) directors and Named Executive Officers
of the Company, individually, and as a group, and (b) the percentage ownership
of the outstanding Common Shares represented by such shares. The security
holders listed below are deemed to be the beneficial owners of Common Shares
underlying options which are exercisable within 60 days from the above date.
Unless otherwise indicated, the shareholders listed possess sole voting and
investment power with respect to the shares shown. All of our shareholders
possess the same voting rights.
- -------------------------------------------------------------------------------------------------------------------
Title of Class Name and Municipality Position Amount Percentage of
Class(1)
- -------------------------------------------------------------------------------------------------------------------
Common Primo Podorieszach, Chief Executive Officer & 996,304(2) 11.7%
Kamloops, British Columbia Director
- -------------------------------------------------------------------------------------------------------------------
Common Tony Consalvo, Chief Operating Officer & 539,179(3) 6.6%
Calgary, Alberta Director
- -------------------------------------------------------------------------------------------------------------------
Common Mahesh Bhatia, Chief Financial Officer Nil N/A
Calgary, Alberta
- -------------------------------------------------------------------------------------------------------------------
Common Thomas Milley, Director 107,940(4) 1.3%
Calgary, Alberta
- -------------------------------------------------------------------------------------------------------------------
Common Douglas Farmer, Director 153,740(5) 1.9%
Calgary, Alberta
- -------------------------------------------------------------------------------------------------------------------
Common Joseph P. Giuffre, Secretary & Director 131,240(6) 1.6%
Vancouver, British Columbia
- -------------------------------------------------------------------------------------------------------------------
Common Patti Runnalls, Director (term expired 15,000(7) *
Calgary, Alberta August 15, 2005)
- -------------------------------------------------------------------------------------------------------------------
Common Normand Cournoyer Director 15,000(8) *
Calgary, Alberta
- -------------------------------------------------------------------------------------------------------------------
Common Directors and Officers as a 1,958,403(9) 21.7%
group (8 persons)
- -------------------------------------------------------------------------------------------------------------------
* Less than 1%
(1) As of July 31, 2005 there were 7,955,153 common shares of the Company
issued and outstanding. Percentage of class is based on the number of
shares beneficially owned by the individual (or group, if applicable),
divided by the sum of 7,955,153 plus any shares subject to stock options
exercisable by such individual (or group) within 60 days of July 31, 2005.
(2) Includes 527,674 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(3) Includes 200,000 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(4) Includes 106,240 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(5) Includes 106,240 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(6) Includes 106,240 shares subject to stock options exercisable within 60 days
of July 31, 2005.
-32-
(7) Includes 15,000 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(8) Includes 15,000 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(9) Includes 1,076,394 shares subject to stock options exercisable within 60
days of July 31, 2005.
Director and Employee Stock Option Grants
Stock options to purchase Common Shares from the Company are granted to
directors, officers, employees and consultants of the Company on the terms and
conditions acceptable to the applicable securities regulatory authorities in
Canada. The Company has adopted a formal written stock option plan (the "Plan")
which authorizes 1,309,811 shares available for the grant of stock options under
the Plan. Under the plan, options expired or cancelled will be available for
future issuances.
Under the Plan, the Board of Directors of the Company may from time to time
grant to the directors, officers, employees or consultants of the Company (the
"Eligible Persons") and its associated, affiliated, controlled and subsidiary
companies, as the Board of Directors shall designate, the option to purchase
from the Company such number of its Common Shares as the Board of Directors may
designate. Options may be granted on authorized but unissued Common Shares up to
but not exceeding the number reserved for issuance under the Plan. The total
number of Common Shares to be optioned to the insiders under the Plan may exceed
10% of the outstanding issue (determined on the basis of the number of Common
Shares that are outstanding immediately prior to the share issuance in question,
excluding Common Shares issued pursuant to share compensation arrangements over
the preceding one year period). In addition, within a one year period, directors
and senior officers may receive Common Shares issued pursuant to share
compensation arrangements that exceed 10% of the outstanding issue and the
issuance to any one insider or such insider's associates may exceed 5% of the
outstanding issue. The purchase price per Common Share for any option granted
under the Plan shall not be less than the closing price of the Company's shares
on the TSX on the trading day immediately preceding the date of grant. Options
shall be granted under the Plan pursuant to an option agreement in a form that
complies with the rules and policies of the TSX, which provide as follows:
o all options granted shall be non-assignable;
o an option must be exercisable during a period not extending beyond 10
years from the time of grant; and
o no financial assistance will be provided with respect to the exercise
of stock options.
As of July 31, 2005, 1,290,411 options were outstanding under the Plan.
Director and Employee Stock Option Grants
The names and titles of the directors and Named Executive Officers of the
Company to whom outstanding stock options have been granted and the number of
Common Shares subject to such stock options are set forth below as at July 31,
2005.
-33-
- -----------------------------------------------------------------------------------------------------------------
Total Outstanding
Options at
31-July-2005 to
Total Directors and
Options Exercise Officers of the
Name and titles of Optionees Granted Price Expiration Date Company
- -----------------------------------------------------------------------------------------------------------------
Primo Podorieszach, President, 25,000 $1.00 Oct. 26, 2006 25,000
Chief Executive Officer & Director 143,837 $0.81 August 29, 2008 143,837
358,837 $1.10 August 5, 2009 358,837
- -----------------------------------------------------------------------------------------------------------------
Tony Consalvo, Chief Operating 100,000 $1.00 Oct. 26, 2006 100,000
Officer & Director 68,837 $0.81 August 29, 2008 68,837
31,163 $1.10 August 5, 2009 31,163
- -----------------------------------------------------------------------------------------------------------------
Thomas Milley, Director 25,000 $1.00 Oct. 26, 2006 25,000
31,240 $0.81 August 29, 2008 31,240
50,000 $1.10 August 5, 2009 50,000
- -----------------------------------------------------------------------------------------------------------------
Douglas Farmer, Director 55,000 $1.00 Oct. 26, 2006 55,000
31,240 $0.81 August 29, 2004 31,240
20,000 $1.10 August 5, 2009 20,000
- -----------------------------------------------------------------------------------------------------------------
Joseph P. Giuffre, Secretary & 65,000 $1.00 Oct. 26, 2006 65,000
Director 31,240 $0.81 August 29, 2008 31,240
10,000 $1.10 August 5, 2009 10,000
- -----------------------------------------------------------------------------------------------------------------
Patti Runnalls, Director (term 15,000 $1.10 August 5, 2009 15,000
expired August 15, 2005)
- -----------------------------------------------------------------------------------------------------------------
Normand Cournoyer, Director 15,000 $1.25 August 16, 2009 15,000
- -----------------------------------------------------------------------------------------------------------------
Mahesh Bhatia, Chief Financial Nil Nil Nil Nil
Officer
- -----------------------------------------------------------------------------------------------------------------
Total 1,076,394 1,076,394
- -----------------------------------------------------------------------------------------------------------------
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The Company is a publicly owned Corporation. As at July 18, 2005, 99.5% of the
Company's outstanding common shares were owned of record by persons resident
outside of the United States and the remaining .5% were owned of record by a
total of 6 persons resident in the United States. To the best of the Company's
knowledge, the Company is not directly owned or controlled by another
corporation or by any foreign government.
-34-
To the best of the Company's knowledge, there are no beneficial owners of record
of over 5% of the Company's outstanding Common Shares other than as described
below. To the best of the Company's knowledge, there are no voting arrangements
in existence between the shareholders of the Company.
As at July 31, 2005, to the best of the Company's knowledge, the registered
shareholders of more than 5% of the issued shares of the Company were:
- -------------------------------------------------------------------
Number of Shares as Percentage of
Shareholder Name of July 31, 2005 Class(3)
- -------------------------------------------------------------------
Primo Podorieszach 996,304(1) 11.7%
- -------------------------------------------------------------------
Tony Consalvo 539,179(2) 6.6%
- -------------------------------------------------------------------
Bridge Opportunity 1,439,128(4) 15.3%
Finance, LLC
- -------------------------------------------------------------------
(1) Includes 527,674 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(2) Includes 200,000 shares subject to stock options exercisable within 60 days
of July 31, 2005.
(3) As of July 31, 2005 there were 7,955,153 common shares of the Company
issued and outstanding. Percentage of class is based on the number of
shares beneficially owned by the individual (or group, if applicable),
divided by the sum of 7,955,153 plus any shares subject to stock options or
warrants exercisable by such individual (or group) within 60 days of July
31, 2005.
(4) Represented by warrants exercisable to purchase 1,439,128 common shares at
a price of $0.80 per share until June 15, 2010.
-35-
To the best of the Company's knowledge, there have been no significant changes
in the percentage ownership held by the Company's major shareholders during the
past three years, except that on February 11, 2005, each of John Podorieszach
and Pietro Podorieszach filed an amendment to his Schedule 13G beneficial report
stating that he had ceased to be the beneficial owner of more than 5% of the
Company's common shares. All of the Company's common shares have the same voting
rights. The Company's major shareholders do not have different voting rights.
There are no known arrangements that would result in a change in control of the
Company.
B. Related Party Transactions
Other than as disclosed in Item 6, the following is a list which includes all
transactions and loans since April 1, 2004 and all presently proposed
transactions and loans to which the Company or any subsidiary was, is or will be
a party and that are required to be disclosed under this Item 7.C.
The Company enters into transactions with related parties from time to time in
the normal course of business. Related party transactions are measured at the
exchange amount, being the amount of consideration established and agreed to
between the related parties, unless otherwise noted.
1. On June 27, 2001, the Company approved and advanced a loan of $200,000 to
Mr. Tony Consalvo, a director of the Company to satisfy certain personal
financial obligations at an interest rate equal to the variable, nominal
rate per annum for Canadian dollar loans in Canada as declared by the Royal
Bank of Canada, under the terms of a demand promissory note dated June 28,
2001 which provides that repayment is required upon demand by the Company.
The loan was secured by a general security agreement that provides the
Company with a security interest in all present and after-acquired property
of Mr. Consalvo to secure the repayment of the $200,000 loan. As of July
31, 2005, the outstanding indebtedness has been reduced to $40,000 (As of
March 31, 2004 - $40,000).
2. During the fiscal year ended March 31, 2005, the Company was billed
$188,364 for legal fees, disbursements and taxes by a law firm in which
Thomas Milley, a director of the Company, is a partner, for legal services
rendered. The Company expects that it will continue to engage the law firm
from time to time.
-36-
3. During the fiscal year ended March 31, 2005, the Company was billed $43,237
for legal fees, disbursements and taxes by a law firm in which Joseph
Giuffre, a director of the Company, is a shareholder, for legal services
rendered. The Company expects that it will continue to engage the law firms
from time to time.
4. Subsequent to the Company's acquisition of the Vista brokerage from DKWS
Enterprises, Inc. and Kabaker Family Trust of July 1998, Addison York
appointed an owner and trustee of DKWS and Kabaker Family Trust,
respectively, as an officer of Addison York. Although such person is not a
member of key management of the Company and is not otherwise a related
party within the scope of Item 7.B, the Company is providing the following
disclosure relating to certain transactions among Addison, DKWS and Kabaker
are described below:
a) Pursuant to an asset management agreement with DKWS, Addison York
processes its clients insurance policies through DKWS, whereby Addison
shall receive all the revenues therefrom and shall pay all associated
operating costs. During the fiscal year ended March 31, 2005, the Company
processed $ 2,377,971 (2004 - $ 1,307,446) of revenue through this
arrangement, incurred payroll costs, rent and overhead of $ 3,053,440 (2004
- $ 1,462,369) and paid for the purchase of office equipment of $ 40,984
(2004 - $ 46,103). The Company's accounts receivable as at March 31, 2005
include $ 60,408 (2004 - accounts payable of $ 60,832) in connection with
this arrangement.
b) The Company holds a US$150,000 promissory note issued by Kabaker Family
Trust on October 10, 2003. This note is due on demand and is non-interest
bearing. It is secured by a general security agreement.
c) The Company has issued a $4,444,479 promissory note to Kabaker Family
Trust. The note bears interest at 7% per annum and is repayable over 10
years in equal monthly instalments of US$40,812 including interest, secured
by a general security agreement. That note has been discounted to
$3,760,015 (US$2,844,617) to reflect the fair value of the note based upon
the market value rate for a similar note of 12%. The difference has been
deducted from goodwill. The outstanding balance as at March 31, 2005 is
US$3,284,982. Included in the Company's accounts payable and accrued
liabilities as at March 31, 2005 is $ 159,014 (2004 - $ Nil) of accrued
interest due to Kabaker Family Trust on the promissory note. During the
fiscal year ended March 31, 2005, the Company paid $ 246,831 (2004 - $
322,146) to Kabaker Family Trust, comprised of $ 118,154 (2004 - $ 222,255)
representing interest on a note payable and $ 128,677 (2004 - $ 99,696) of
principal.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Financial Statements
Included in this Annual Report are consolidated financial statements audited by
independent auditors and accompanied by an audit report consisting of the
following:
o Balance Sheets as of March 31, 2005 and 2004
o Statements of Operations and Deficit for the fiscal years ended March
31, 2005, 2004 and 2003;
o Statements of Cash Flow for the fiscal years ended March 31, 2005,
2004 and 2003; and
o Notes to the Consolidated Financial Statements.
Legal Proceedings
The Company is aware of no pending or threatened legal or arbitration
proceedings which may have or have had in the recent past significant effects on
the Company's financial position or profitability (except as discussed below).
-37-
The Company is aware of no material proceeding in which any director, member of
senior management or affiliate of the Company is an adverse party to the Company
or its subsidiaries or has a material interest adverse to the Company or its
subsidiaries.
On or about June 17, 2005, DKWS Enterprises, Inc. (DKWS") filed an action (the
"Initial Action") against Addison York alleging that approximately U.S.$583,500
is due and owing by Addison York to DKWS. On or about July 14, 2005, Addison
York filed legal proceedings against John Kabaker, DKWS and the Kabaker Family
Trust of July 1998 (collectively, the "DKWS Group") for, interalia, breach of
contract and misrepresentation concerning the purchase of the net assets of
Vista and is claiming damages in the amount of approximately U.S.$3,136,000 or
in the alternative, rescission of the purchase and sale agreement in respect of
the purchase of the net assets of Vista.
On or about July 29, 2005, DKWS filed an amendment to the Initial Action filed
on June 17, 2005 and have added the Company as a defendant, and DKWS Group, as
plaintiffs, alleging, interalia, $583,500 is due and owing by the Company to
DKWS, breach of certain contracts, including wrongful dismissal of John Kabaker
and is claiming damages according to proof and costs. On the advice of counsel,
the Company is of the view that the legal proceedings and claims by the DKWS
Group are without merit. The Company intends to vigorously defend against the
actions by the DKWS Group and at the same time vigorously pursue its claim
against the DKWS Group. Pursuant to the above noted alleged breach of contract
by John Kabaker, DKWS and the Kabaker Family Trust of July 1998, the Company
exercised its rights under the Agency Agreement and Share Pledge Agreement (both
dated October 1,2003), and on or about June 22, 2005, seized the shares and bank
accounts of DKWS.
On September 15, 2005, John Kabaker filed a complaint with the U.S. Department
of Labor, for unlawful retaliation pursuant to section 806 of the Sarbanes-Oxley
Act. It is the intent of the Company to vigorously defend the Company against
the claim.
Dividend Policy
No dividends have been declared or paid on the Common Shares since incorporation
and it is not anticipated that any dividends will be declared or paid on the
Common Shares in the immediate or foreseeable future. Any decision to pay
dividends on the Common Shares will be made by the board of directors on the
basis of the Company's earnings, financial requirements and other conditions
existing at such future time.
B. Significant Changes
None, except as disclosed elsewhere in this Annual Report.
Item 9. The Offer and Listing
A. Offer and Listing Details
The Company's Common Shares without par value are issued in registered form. The
transfer agent for the Common Shares is CIBC Mellon Trust Company at its
principal office at Suite 600, 333, 7th Avenue S.W, Calgary, Alberta T2P 2Z1. No
significant trading suspensions have occurred in the Common Shares in the last
three years. Below is a table of the high and low prices, for the periods
indicated, of trading or quotations on various stock exchanges or markets in
which the Company's Common Shares are or have been traded or quoted.
- ----------------------------------------------------------------------------
Exchange High Low
- ----------------------------------------------------------------------------
(a) Year Ended
- ----------------------------------------------------------------------------
March 31, 2001 TSX $15.00 $5.60
- ----------------------------------------------------------------------------
March 31, 2002 TSX $6.45 $0.58
OTCBB US$4.50 US$0.38
- ----------------------------------------------------------------------------
-38-
- ----------------------------------------------------------------------------
Exchange High Low
- ----------------------------------------------------------------------------
(a) Year Ended
- ----------------------------------------------------------------------------
March 31, 2003 TSX $1.69 $0.75
OTCBB US$1.20 US$0.25
- ----------------------------------------------------------------------------
March 31, 2004 TSX $1.60 $0.80
OTCBB US$1.30 US$0.51
- ----------------------------------------------------------------------------
March 31, 2005 TSX $1.48 $0.80
OTCBB US$1.10 US$0.65
- ----------------------------------------------------------------------------
(b) Quarter Ended
- ----------------------------------------------------------------------------
June 30, 2003 TSX $1.02 $0.80
OTCBB US$0.70 US$0.65
- ----------------------------------------------------------------------------
September 30, 2003 TSX $0.98 $0.80
OTCBB US$0.78 US$0.51
- ----------------------------------------------------------------------------
December 31, 2003 TSX $1.60 $1.35
OTCBB US$1.30 US$1.01
- ----------------------------------------------------------------------------
March 31, 2004 TSX $1.45 $1.34
OTCBB US$1.10 US$1.03
- ----------------------------------------------------------------------------
June 30, 2004 TSX $1.20 $0.93
OTCBB US$0.81 US$0.65
- ----------------------------------------------------------------------------
September 30, 2004 TSX $1.40 $0.98
OTCBB US$1.10 US$0.65
- ----------------------------------------------------------------------------
December 31, 2004 TSX $1.48 $0.94
OTCBB US$1.10 US$0.70
- ----------------------------------------------------------------------------
March 31, 2005 TSX $1.20 $0.80
OTCBB US$1.01 US$0.70
- ----------------------------------------------------------------------------
June 30, 2005 TSX $0.85 $0.75
OTCBB US$0.72 US$0.54
- ----------------------------------------------------------------------------
(c) Month Ended
- ----------------------------------------------------------------------------
March 31, 2005 TSX $1.04 $0.80
OTCBB US$0.86 US$0.72
- ----------------------------------------------------------------------------
April 30, 2005 TSX $0.80 $0.78
OTCBB US$0.72 US$0.54
- ----------------------------------------------------------------------------
May 31, 2005 TSX $0.80 $0.79
OTCBB US$0.54 US$0.54
- ----------------------------------------------------------------------------
June 30, 2005 TSX $0.85 $0.75
OTCBB US$0.63 US$0.54
- ----------------------------------------------------------------------------
July 31, 2005 TSX $0.75 $0.65
OTCBB US$0.63 US$0.54
- ----------------------------------------------------------------------------
August 31, 2005 TSX $0.75 $0.55
OTCBB US$0.62 US$0.46
- ----------------------------------------------------------------------------
B. Plan of Distribution
Not applicable.
-39-
C. Markets
The Company's Common Shares are listed on the TSX under the trading symbol "ACL"
and on the OTCBB under the trading symbol "ACKBF".
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Objects and Purposes of the Company
The Articles and Bylaws of the Company places no restrictions upon the Company's
objects and purposes and the Corporate Access Number of the Company is 208204016
with the Registrar of Corporations (Alberta).
Directors' Powers
There are no provisions in the Company's Articles with respect to a director's
power to vote on a proposal, arrangement or contract in which the director is
materially interested.
Section 5.06 of the Bylaws provides that the quorum necessary for the
transaction of the business of the directors at any meeting of the board of
directors shall consist of a majority of the directors holding office or such
greater number of directors as the board of directors may from time to time
determine.
Section 4.08 of the Bylaws provides that the remuneration of the directors may
be determined from time to time by the directors. There are no restrictions in
the Bylaws upon the directors' power, in the absence of an independent quorum,
to vote compensation to themselves or any members of their body.
Section 2.01 of the Bylaws gives directors a broad discretion to borrow money
upon the credit of the Company, issue, re-issue, sell or pledge bonds,
debentures, notes or other evidences of indebtedness or guarantee of the
Company, whether secured or unsecured; to the extent permitted by the
Corporations Act (Alberta), give a guarantee on behalf of the Company to secure
performance of any present or future indebtedness, liability or obligation of
any person; and mortgage, hypothecate, pledge or otherwise create a security
interest in all or any currently owned or subsequently acquired real or
personal, moveable or immoveable, property of the Company including book debts,
rights, powers, franchises and undertakings, to secure any bonds, debentures,
notes or other evidences of indebtedness or guarantee or any other present or
future indebtedness, liability or obligation of the Company.
Qualifications of Directors
There is no provision in the Articles or Bylaws imposing a requirement for
retirement or non-retirement of directors under an age limit requirement.
-40-
Section 4.04 of the Bylaws provides that a director shall not be required to
hold a share in the capital of the Company as qualification for his office but
no person shall be qualified for election as a director if he is less than 18
years of age, if he is of unsound mind and has been so found by a court in
Canada or elsewhere; if he is not an individual; or if he has the status of a
bankrupt.
Share Rights
All of the authorized Common Shares of the Company are of the same class and,
once issued, rank equally as to dividends, voting powers, and participation in
assets and in all other respects, on liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, or any other distribution of the
assets of the Company among its shareholders for the purpose of winding up its
affairs. The issued Common Shares are not subject to call or assessment rights
or any pre-emptive or conversion rights. The holders of Common Shares are
entitled to one vote for each Common Share on all matters to be voted on by the
shareholders. There are no provisions for redemption, purchase for cancellation,
surrender or purchase funds.
To change the rights of shareholders of stock, where such rights are attached to
an issued class or series of shares, section 173(1) of the Business Corporations
Act requires the consent by a separate resolution of the shareholders of the
class or series of shares, as the case may be, requiring a majority of 2/3 of
the votes cast by all the shareholders entitled to vote on that resolution.
Meetings
The Business Corporations Act provides that the directors of the Company must
call an annual general meeting of shareholders not later than 15 months after
the last preceding annual meeting. The Company must give to its shareholders,
directors and auditor entitled to receive notice of a general meeting not less
than 21 days' and not more than 50 days' notice before the meeting of the
Company, but shareholders and any other person entitled to attend a meeting of
shareholders may waive notice for a particular meeting. The Business
Corporations Act requires management of a corporation, concurrently with giving
notice of a meeting of shareholders, to send a form of proxy in a prescribed
form to each shareholder who is entitled to receive notice of the meeting.
However a proxy is not required to be sent where the corporation has not more
than 15 shareholders entitled to vote at a meeting of shareholders with 2 or
more joint shareholders being counted as 1 shareholder, or if all of the
shareholders entitled to vote at a meeting waive this requirement.
The directors are required to place before the shareholders at every annual
meeting comparative financial statements, the report of the auditor and any
further information respecting the financial position of the corporation and the
results of its operations required by the articles, the bylaws or any unanimous
shareholder agreement. This provision of the Business Corporations Act does not
apply to a corporation that is subject to and complies with the provisions of
the Securities Act (Alberta) relating to the financial statements to be placed
before the shareholders at every annual meeting.
The Business Corporations Act provides that holders of not less than 5% of the
issued voting shares of the Company may requisition the directors to call a
meeting of shareholders for the stated purpose in the requisition.
Limitations on Ownership of Securities
There are no limitations on the right to own securities, imposed by foreign law
or by the charter or other constituent document of the Company.
Change in Control of Company
No provision of the Company's articles of association, charter or bylaws would
have the effect of delaying, deferring, or preventing a change in control of the
Company, and operate only with respect to a merger, acquisition or corporate
restructuring of the Company or any of its subsidiaries.
-41-
Ownership Threshold
There are no bylaw provisions governing the ownership threshold above which
shareholder ownership must be disclosed.
C. Material Contracts
The following are the material contracts of the Company, other than those
mentioned elsewhere in this Annual Report, to which the Company or any member of
the group is a party, for the two years immediately preceding the date of this
Annual Report.
On July 3, 2001, the Board of Directors of the Company declared a distribution
of one common share purchase right (a "Right") for each outstanding Common
Share. Each Right has an exercise price of $60.00, subject to adjustment (the
"Exercise Price"). The description and terms of the Rights are set forth in a
Shareholder Rights Plan Agreement (the "Rights Agreement") between the Company
and CIBC Mellon Trust Company, as Rights Agent. Initially, the Rights will be
attached to all share certificates representing Common Shares and no separate
Rights certificates will be distributed. Subject to certain limitations, the
Rights will detach from the Common Shares and will become exercisable after the
close of business on the eighth trading day following the date of the earlier to
occur of the following, which date is referred to herein as the "Separation
Time":
(a) the first date of a public announcement by the Company or by an
Acquiring Person (as defined in the Rights Agreement) that such
Acquiring Person has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding voting shares
of any class (other than as a result of certain reductions in the
number of shares outstanding, a Permitted Bid or a Competing Permitted
Bid (each as defined below), certain pro rata acquisitions, certain
inadvertent acquisitions or certain Take Over Bids (as defined below)
pursuant to take over bid circulars that are approved by the Board of
Directors); or
(b) the date on which any person does or first publicly announces that it
intends to do any of the following: (i) commence an offer to purchase
or a solicitation of an offer to sell, or (ii) accept an offer to
sell, voting shares or securities convertible into voting shares
(other than as a result of a Permitted Bid or a Competing Permitted
Bid (each as defined below)) that would in the aggregate, if accepted,
cause such person to beneficially own, together with any securities
previously beneficially owned by such person, 20% or more of the
voting shares of any class (a "Take Over Bid").
Until the Separation Time, (i) the Rights shall not be exercisable and no Right
may be exercised, (ii) the Rights will be evidenced by the Common Share
certificates in the name of the holder and will only be transferable with such
certificates, (ii) Common Share certificates issued after July 3, 2001 have
contained and will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates for Common
Shares outstanding will also constitute the transfer of the Rights associated
with the Common Shares represented by such certificate.
After the Separation Time and prior to the expiry of the Rights, the Rights are
exercisable and the registration and transfer of Rights will be separate from
and independent of the Common Shares.
The Rights Agreement was re-confirmed by the Company's shareholders at the
Company's 2005 annual meeting of shareholders, which was held on August 15,
2005. The Rights Agreement must be reconfirmed at the annual meeting of
shareholders held in 2008 in order for the Rights to remain outstanding. The
required vote for the Rights Agreement to be so reconfirmed is a majority of the
votes cast by holders of voting shares, excluding those voting shares
beneficially owned by an Acquiring Person, a person making a Take Over Bid
(other than a person who has completed a Permitted Bid or a Competing Permitted
Bid (each as defined below) or certain exempt acquisitions), any affiliates or
associates of or persons acting jointly with such persons, and any employee
benefit or similar plan or trust for the benefit of the Company's employees,
unless the beneficiaries of the plan or trust direct the manner in which the
voting shares are to be voted or tendered. If the Rights Agreement is not
reconfirmed or is not presented for reconfirmation at either of such annual
meetings, then the Rights Agreement and all outstanding Rights shall terminate
on the date of the termination of such annual meeting; provided, however, that
the Rights shall not
-42-
terminate if a Flip-In Event (as defined below) has occurred prior to such date.
Unless terminated earlier in accordance with the foregoing, the Rights Agreement
and all outstanding Rights shall terminate at the close of business on July 3,
2011.
Promptly following the Separation Time, Rights certificates and a description of
the rights will be mailed to holders of record of Common Shares as of the
Separation Time (other than an Acquiring Person, any affiliate or associate of
an Acquiring Person, any person acting in concert with any of the foregoing, any
transferee of Rights, directly or indirectly, from any of the foregoing, and any
person holding Rights beneficially owned by an Acquiring Person) and,
thereafter, the separate Rights certificates alone will represent the Rights.
In the event that a person acquires 20% or more of the voting shares of any
class of the Company, other than through certain permitted acquisitions,
including a Permitted Bid (as defined below), certain pro rata acquisitions,
certain reductions in the number of outstanding shares, certain inadvertent
transactions or in certain Take Over Bids involving take over bid circulars that
are approved by the Board of Directors (a "Flip-In Event"), each holder of a
Right will thereafter have the right to receive, upon payment of the Exercise
Price, that number of Common Shares (or, in certain circumstances, cash,
property or other securities of the Company) having an aggregate market price
equal to two (2) times the Exercise Price for an amount in cash equal to the
Exercise Price. Notwithstanding any of the foregoing, following the occurrence
of any of the events set forth in this paragraph, all Rights that are, or (under
certain circumstances specified in the Rights Agreement) were, beneficially
owned by any Acquiring Person, any affiliate of associate of an Acquiring Person
or any person acting jointly with any of the foregoing will be null and void.
For example, at an Exercise Price of $60.00 per Common Share issuable pursuant
to the exercise of the Rights, each Right not owned by an Acquiring Person (or
by certain related parties) following a Flip-In Event would entitle its holder
to purchase $120.00 worth of Common Shares for $60.00. Assuming that the Common
Shares had a per share value of $4.00 at such time, the holder of each valid
Right would be entitled to purchase thirty (30) Common Shares for $60.00.
A person will not trigger the exercisability of the Rights if he becomes the
beneficial owner of 20% or more of the voting shares of any class as a result of
a Permitted Bid (as defined below), certain reductions in outstanding shares,
certain pro-rata acquisitions, certain inadvertent transactions and certain Take
Over Bids involving take over bid circulars that are approved by the Board of
Directors (collectively the "Permitted Acquisitions"), provided that if such
person or group becomes the beneficial owner of 20% or more of the voting shares
of any class by such means and subsequently acquires additional voting shares
constituting more than 1% of the outstanding shares of such class, other than by
a Permitted Acquisition, then, as of the date of such additional acquisition, he
shall become an Acquiring Person.
Any person who was the beneficial owner of 20% or more of the outstanding Common
Shares on July 3, 2001 will be "grandfathered," so that the dilutive effects of
the Rights will not be triggered unless such person subsequently increases his
shareholdings by more than 1%, other than through a Permitted Acquisition. The
Company is not aware of any person or related group that was the beneficial
owner of 20% or more of the outstanding Common Shares on July 3, 2001.
The Exercise Price payable, and the number of Common Shares or other securities
or property issuable, upon exercise of the Rights are subject to adjustment from
time to time to prevent dilution, including (i) in the event of a stock dividend
on (other than pursuant to any dividend reinvestment plan), or a subdivision,
combination or reclassification of, the Common Shares, (ii) if holders of the
Common Shares are granted certain rights, options or warrants to subscribe for
Common Shares or convertible securities at less than the market price of the
Common Shares on the record date set for such grant, or (iii) upon the
distribution to holders of the Common Shares of evidences of indebtedness or
assets (excluding annual cash dividends and those dividends referred to above)
or of subscription rights, options or warrants (other than those referred to
above).
With certain exceptions, no adjustment in the Exercise Price will be required
until cumulative adjustments amount to at least 1% of the Exercise Price. No
fractional Common Shares or fractional Rights will be issued and no amounts will
be paid in respect of such fractional amounts.
The Exercise Price is payable by certified check, banker's draft of money order
payable to the order of the Company.
-43-
The Board of Directors may, acting in good faith, at any time prior to the
occurrence of a Flip-In Event, elect to redeem all but not less than all of the
outstanding Rights at the redemption price of $0.0001 per Right, subject to
adjustment under certain circumstances (the "Redemption Price"). Any such
redemption prior to the Separation Time shall require the prior approval of the
Company's shareholders by an affirmative vote of the majority of the votes cast
by holders of voting shares (excluding voting shares beneficially owned by
persons that are not independent shareholders) at a meeting duly called and held
for such purpose (the "Required Vote of Voting Shares"). Any such redemption
after the Separation Time shall require the prior approval of the Rights holders
by an affirmative vote of the majority of the votes cast by holders of Rights
(excluding those Rights that have been become null and void in accordance with
the Rights Agreement) at a meeting of Rights holders duly called and held for
such purpose (the "Required Vote of Rights").
The Rights Agreement requires the Company to redeem all of the outstanding
Rights at the Redemption Price upon the completion of a Take Over Bid
transaction if the Board of Directors has waived the occurrence of a Flip-In
Event with respect to such transaction. Such waiver and redemption shall not
require the approval of the Company's shareholders or Rights holders.
As discussed above, a take over bid which fits the criteria of a Permitted Bid
or a Competing Permitted Bid will not trigger the dilutive effects of the
Rights. A Permitted Bid is a take over bid made by way of a take over bid
circular and which also complies with the following conditions:
(i) the bid is made for all voting shares of the Company to all
shareholders of record of such voting shares (wherever resident)
registered on the books of the Company other than the offeror;
(ii) the bid contains, and the take up and payment of the securities
tendered or deposited thereunder shall be subject to, irrevocable and
unqualified provisions that:
(a) voting shares will be taken up and paid for pursuant to the bid:
(i) prior to the close of business on a date which is not less
than 75 days following the date of the bid; and
(ii) only if at such date more than fifty percent (50%) of the
voting shares held by independent shareholders have been
deposited pursuant to the bid and not withdrawn;
(b) all voting shares may be deposited pursuant to the bid at any
time prior to the close of business on the date referred to in
(a)(i) above and that all voting shares deposited pursuant to the
bid may be withdrawn until taken up and paid for; and
(c) should the condition referred to in (a)(ii) above be met, the
offeror must make a public announcement of that fact and the bid
must remain open for deposits and tenders of voting shares for
not less than ten (10) business days from the date of such public
announcement.
A Competing Permitted Bid is a take over bid which is made while another
Permitted Bid is in existence, and which satisfies all the provisions of a
Permitted Bid except that the time limit set out in (ii)(a)(i) above is the date
which is no earlier than the later of: (i) 35 days after date of the Competing
Permitted Bid, and (ii) the 75th day after the earliest date on which any other
Permitted Bid then in existence was made.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a shareholder of the Company, including, without limitation, the right to vote
or to receive dividends.
The Company may from time to time amend the Rights Agreement without the
approval of the holders of voting shares or Rights to correct any clerical or
typographical errors and to address changes in law. Any amendment adopted prior
to the Separation Time to address changes in law must be submitted to the
Company's shareholders for approval at the next annual meeting. If the
shareholders fail to approve the amendment by the Required Vote of Voting Shares
at such meeting, the Rights Agreement shall thereafter terminate. Any amendment
adopted after the Separation Time to address changes in law must be submitted to
the Rights holders for approval at a meeting to be
-44-
held not later than the next annual meeting of the Company's shareholders. If
the Rights holders fail to approve the amendment by the Required Vote of Rights
at the meeting, the Rights Agreement shall thereafter terminate. Other changes
to the Rights Agreement may be made only (i) prior to the Separation Time, with
the approval of the Company's shareholders by the Required Vote of Voting
Shares, or (ii) after the Separation Time, with the approval of the Company's
Rights holders by the Required Vote of Voting Shares. Notwithstanding the
foregoing, the approval of the Rights Agent shall always be required to amend
Article 4 of the Rights Agreement, which sets forth the terms of engagement of
the Rights Agent.
The Rights have certain anti-takeover effects. The Rights may cause substantial
dilution to a person or group that attempts to acquire the Company other than by
way of a Permitted Bid or a Take Over Bid involving a take over bid circular
that is approved by the Board of Directors. The Rights Agreement permits the
Board of Directors to waive the dilutive effects of the Rights in certain
limited circumstances. The Rights may interfere with an offeror that is willing
to negotiate with the Company, since the approval of the Company's shareholders
or Rights holders at a meeting called for such purpose is required in order for
the Company to redeem the Rights or to amend or terminate the Rights Agreement.
The Rights may also interfere with other transactions approved by the Board of
Directors, including issuances of additional voting shares or securities
convertible into voting shares, transfers of such securities, and mergers and
other business combinations that would not otherwise require the approval of the
Company's shareholders, if such transactions would result in a person or group
beneficially owning 20% or more of the voting shares of any class of the
Company.
D. Exchange Controls
Canada has no system of exchange controls. There are no exchange restrictions on
borrowing from foreign countries nor on the remittance of dividends, interest,
royalties and similar payments, management fees, loan repayments, settlement of
trade debts, or the repatriation of capital. However, any dividends remitted to
U.S. Holders, as defined below, will be subject to withholding tax. See "Item
10E - Taxation".
Except as provided in the Investment Canada Act (the "Act"), as amended by the
Canada-United States Free Trade Agreement Implementation Act (Canada) and the
Canada-United States Free Trade Agreement, there are no limitations specific to
the rights of non-Canadians to hold or vote the common shares of the Company
under the laws of Canada or the Province of Alberta or in the charter documents
of the Company.
Management of the Company considers that the following general summary fairly
describes those provisions of the Act pertinent to an investment in the Company
by a person who is not a Canadian resident (a "non-Canadian"). However,
provisions of the Act are complex and any non-Canadian contemplating an
investment to acquire control of the Company should consult professional
advisors as to whether and how the Act might apply.
The Act requires a non-Canadian making an investment which would result in the
acquisition of control of a Canadian business, the gross value of the assets of
which exceed certain threshold levels or the business activity of which is
related to Canada's cultural heritage or national identity, to either notify, or
file an application for review with, Investment Canada, the federal agency
created by the Act.
The notification procedure involves a brief statement about the investment
containing the prescribed information which is required to be filed with
Investment Canada by the investor at any time up to 30 days following
implementation of the investment. It is intended that investments requiring only
notification will proceed without government intervention unless the investment
is in a specific type of business activity related to Canada's cultural heritage
and national identity.
If an investment is reviewable under the Act, an application for review
containing the prescribed information is normally required to be filed with
Investment Canada prior to the investment taking place and the investment may
not be implemented until the review has been completed and the Minister
responsible for Investment Canada is satisfied that the investment is likely to
be of net benefit to Canada.
Factors to be considered include: (i) the effect of the investment on the level
and nature of economic activity in Canada, including employment, on resource
processing, on utilization of parts, components and services produced in Canada
and on exports from Canada; (ii) the degree and significance of participation by
Canadians in the Canadian business or new Canadian business and in any industry
or industries in Canada of which the Canadian business or
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new Canadian business forms or would form a part; (iii) the effect of the
investment on productivity, industrial efficiency, technological development,
product innovation and product variety in Canada; (iv) the effect of the
investment on competition within any industry or industries in Canada; (v) the
compatibility of the investment with national industrial, economic and cultural
policies, taking into consideration industrial, economic and cultural objectives
enunciated by the government or legislature of any province likely to be
significantly affected by the investment; and (vi) the contribution of the
investment to Canada's ability to compete in world markets.
If the Minister is not satisfied that the investment is likely to be of net
benefit to Canada, the non-Canadian must not implement the investment or, if the
investment has been implemented, may be required to divest himself of control of
the business that is the subject of the investment.
The following investments by non-Canadians are subject to notification under the
Act:
(a) an investment to establish a new Canadian business; and
(b) an investment to acquire control of a Canadian business that is not
reviewable pursuant to the Act.
The following investments by a non-Canadian are subject to review under the Act:
(a) direct acquisitions of control of Canadian businesses with assets of
$5,000,000 or more, unless the acquisition is being made by a World Trade
Organization ("WTO") member country investor (the United States being a
member of the WTO);
(b) direct acquisitions of control of Canadian businesses with assets of
$250,000,000 or more by a WTO investor;
(c) indirect acquisitions of control of Canadian businesses with assets of
$5,000,000 or more if such assets represent more than 50% of the total
value of the assets of the entities, the control of which is being
acquired, unless the acquisition is being made by a WTO investor, in which
case there is no review;
(d) indirect acquisitions of control of Canadian businesses with assets of
$50,000,000 or more even if such assets represent less than 50% of the
total value of the assets of the entities, the control of which is being
acquired, unless the acquisition is being made by a WTO investor, in which
case there is no review;
(e) indirect acquisitions of control of Canadian businesses with assets of
$250,000,000 or more by a WTO investor if such assets represent more than
50% of the total value of the assets of the entities, the control of which
is being acquired; and
(f) an investment subject to notification that would not otherwise be
reviewable if the Canadian business engages in the activity of publication,
distribution or sale of books, magazines, periodicals, newspapers, film or
video recordings, audio or video music recordings, or music in print or
machine-readable form.
Generally speaking, an acquisition is direct if it involves the acquisition of
control of the Canadian business or of its Canadian parent or grandparent and an
acquisition is indirect if it involves the acquisition of control of a
non-Canadian parent or grandparent of an entity carrying on the Canadian
business. Control may be acquired through the acquisition of actual or lawful
voting control of a Canadian corporation or through the acquisition of
substantially all of the assets of the Canadian business. No change of voting
control will be deemed to have occurred if less than one-third of the voting
control of a Canadian corporation is acquired by an investor.
A WTO investor, as defined in the Act, includes an individual who is a national
of a member country of the World Trade Organization or who has the right of
permanent residence in relation to that WTO member, a government or government
agency of a WTO investor-controlled corporation, limited partnership, trust or
joint venture and a corporation, limited partnership, trust or joint venture
that is neither WTO-investor controlled or Canadian controlled of which
two-thirds of its board of directors, general partners or trustees, as the case
may be, are any combination of Canadians and WTO investors. The WTO review
threshold ($250,000,000) is adjusted annually by a formula relating to increases
in the nominal gross domestic product of Canada.
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The higher thresholds for WTO investors do not apply if the Canadian business
engages in activities in certain sectors such as uranium, financial services
(except insurance), transportation services or media activities.
The Act specifically exempts certain transactions from either notification or
review. Included among this category of transactions is the acquisition of
voting shares or other voting interests by any person in the ordinary course of
that person's business as a trader or dealer in securities.
E. Taxation
Certain Canadian Federal Income Tax Consequences
The following is a general summary of certain Canadian federal income tax
considerations generally applicable to a holder of the Company's Common Shares
who is not a resident of Canada for the purposes of the Income Tax Act (Canada)
(the "Act"). The discussion does not address all potentially relevant federal
income tax matters and it does not address consequences peculiar to persons
subject to special provisions of federal income tax law.
The summary is based on the current provisions of the Act and the regulations
thereunder and the Company's understanding of the current administrative
practices published by, and Press announcements released by the Canada Revenue
Agency and the Department of Finance. This summary takes into account proposals
to amend the Act announced prior to the date hereof (although no assurances can
be given that such changes will be enacted in the form presented or at all), but
does not otherwise take into account or anticipate any other changes in law,
whether by judicial, governmental or legislative action or decision nor does it
take into account any provincial, territorial, local or foreign tax
considerations. Accordingly, holders and prospective holders of the Company's
Common Shares should consult their own tax advisors about the federal,
provincial, territorial, local and foreign tax consequences of purchasing,
owning and disposing of such shares.
The Act provides in subsection 212(2) that dividends and other distributions
which are deemed to be dividends and which are paid or credited or are deemed to
be paid or credited by a Canadian resident Company to a non-resident of Canada
shall be subject to non-resident withholding tax equal to 25 percent of the
gross amount of the dividend or deemed dividend. In subsection 215(1), the Act
imposes an obligation on a corporation to withhold the applicable tax from the
dividends paid to a non-resident and remit that amount forthwith to the Receiver
General.
Subsections 2(3), 115(1) and 248(1) of the Act provide that a non-resident
person is subject to tax in Canada at the rates generally applicable to
residents of Canada on any "taxable capital gain" arising on the disposition of
the shares of a company resident in Canada which are listed on a prescribed
stock exchange (i.e. certain listed Canadian, U.S.A. and other international
stock exchanges as defined in Regulations 3200 and 3201 but does not include
"over-the-counter" trading ) only if such non-resident, together with persons
with whom he does not deal at arm's length, owned 25 percent or more of the
issued shares of any class of the capital stock of the Company at any time in
the five years immediately preceding the date of disposition of the shares. This
also includes the disposition of any interest in or option on such shares. The
Common Shares of the Company are traded on the Exchange, which is a prescribed
stock exchange for the purpose of these rules.
Subsections 2(3), 115(1) and 248(1) also provide that a non-resident person is
subject to tax in Canada on taxable capital gains arising on the disposition of
shares that constitute capital property used in carrying on a business in Canada
which also includes the disposition of any interest in or option in such
property. Taxable Canadian Property that is "treaty protected" property is
exempted from taxation in Canada by subsection 115(1). However, it is necessary
for a non-resident to report the disposition of such property on a Canadian
income tax return and claim an exemption under a tax treaty. A capital gain is
the excess of the proceeds of disposition of a property over its adjusted cost
base (cost amount plus or minus adjustments under s.53 for certain distribution,
contributions of capital, etc.) to the holder, with the taxable portion being
one-half thereof. Subsection 116(5) and paragraph 116(6)(b) exempt a purchaser
from being required to withhold tax from proceeds of disposition paid to a
non-resident of Canada for purchases of shares traded on a prescribed stock
exchange.
Provisions in the Act relating to dividend and deemed dividend payments and
gains realized by non-residents of Canada who are residents of the United States
are subject to the Canada-United States Income Tax Convention (1980), as amended
(the "1980 Convention").
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Article X of the 1980 Convention provides that for 1997 and subsequent taxation
years pursuant to the Third Protocol to the 1980 Convention the rate of Canadian
non-resident withholding tax on dividends paid to a U.S. company that
beneficially owns at least 10% of the voting stock of the Company shall not
exceed 5% of the dividends. Otherwise, and except in the case of dividends
received by a resident of the United States who carries on business in Canada
through a Canadian permanent establishment and the shares in respect of which
the dividends are paid are effectively connected with that permanent
establishment, the rate of non-resident withholding shall not exceed 15 percent
of the dividend. Where the dividends are received by a non-resident of Canada
who is a United States person carrying on business in Canada through a Canadian
permanent establishment and the shares in respect of which the dividends are
paid are effectively connected with that permanent establishment the dividends
are generally subject to Canadian tax as business profits, generally without
limitation under the 1980 Convention. Article XIII of the 1980 Convention
provides that gains realized by a United States resident on the disposition of
shares of a Canadian company may not generally be taxed in Canada unless the
value of those shares is derived principally from real property situated in
Canada or the shares form part of the business property of a permanent
establishment which the non-resident of Canada who is a United States
shareholder has or had in Canada within the 12 month period preceding the date
of disposition. Based on Canadian domestic law and provisions of the Convention
as set out above, a non-resident of Canada who is a US person would be subject
to income tax on a capital gain in Canada on a disposition of Common Shares of
the Company only where the 25% ownership threshold is met (under domestic
Canadian law as described above) and the value of those common shares derives
principally from real property situated in Canada (as stipulated under the
Convention as described above). Canada also retains the right to tax gains on
property owned at the time of departure from Canada if it is sold by a person
who was resident in Canada for 120 months in any 20 consecutive years preceding
the sale and who was a resident in Canada at any time in the 10 years preceding
sale. This rule also applies to property substituted in a tax-deferred
transaction for the property owned on departure.
U.S. Federal Income Tax Consequences
The following is a summary of the anticipated material U.S. federal income
tax consequences to a U.S. Holder (as defined below) arising from and relating
to the acquisition, ownership, and disposition of Common Shares.
This summary is for general information purposes only and does not purport
to be a complete analysis or listing of all potential U.S. federal income tax
consequences that may apply to a U.S. Holder as a result of the acquisition,
ownership, and disposition of Common Shares. In addition, this summary does not
take into account the individual facts and circumstances of any particular U.S.
Holder that may affect the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Common Shares. Accordingly, this
summary is not intended to be, and should not be construed as, legal or U.S.
federal income tax advice with respect to any U.S. Holder. Each U.S. Holder
should consult its own financial advisor, legal counsel, or accountant regarding
the U.S. federal, U.S. state and local, and foreign tax consequences of the
acquisition, ownership, and disposition of Common Shares.
Scope of this Disclosure
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations (whether final, temporary, or proposed), published
rulings of the Internal Revenue Service ("IRS"), published administrative
positions of the IRS, the Convention Between Canada and the United States of
America with Respect to Taxes on Income and on Capital, signed September 26,
1980, as amended (the "Canada-U.S. Tax Convention"), and U.S. court decisions
that are applicable and, in each case, as in effect and available, as of the
date of this Annual Report. Any of the authorities on which this summary is
based could be changed in a material and adverse manner at any time, and any
such change could be applied on a retroactive basis. This summary does not
discuss the potential effects, whether adverse or beneficial, of any proposed
legislation that, if enacted, could be applied on a retroactive basis.
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U.S. Holders
For purposes of this summary, a "U.S. Holder" is a beneficial owner of
Common Shares that, for U.S. federal income tax purposes, is (a) an individual
who is a citizen or resident of the U.S., (b) a corporation, or any other entity
classified as a corporation for U.S. federal income tax purposes, that is
created or organized in or under the laws of the U.S. or any state in the U.S.,
including the District of Columbia, (c) an estate if the income of such estate
is subject to U.S. federal income tax regardless of the source of such income,
or (d) a trust if (i) such trust has validly elected to be treated as a U.S.
person for U.S. federal income tax purposes or (ii) a U.S. court is able to
exercise primary supervision over the administration of such trust and one or
more U.S. persons have the authority to control all substantial decisions of
such trust.
Non-U.S. Holders
For purposes of this summary, a "non-U.S. Holder" is a beneficial owner of
Common Shares other than a U.S. Holder. This summary does not address the U.S.
federal income tax consequences of the acquisition, ownership, and disposition
of Common Shares to non-U.S. Holders. Accordingly, a non-U.S. Holder should
consult its own financial advisor, legal counsel, or accountant regarding the
U.S. federal, U.S. state and local, and foreign tax consequences (including the
potential application of and operation of any tax treaties) of the acquisition,
ownership, and disposition of Common Shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of Common Shares to U.S. Holders
that are subject to special provisions under the Code, including the following
U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified
retirement plans, individual retirement accounts, or other tax-deferred
accounts; (b) U.S. Holders that are financial institutions, insurance companies,
real estate investment trusts, or regulated investment companies; (c) U.S.
Holders that are dealers in securities or currencies or U.S. Holders that are
traders in securities that elect to apply a mark-to-market accounting method;
(d) U.S. Holders that have a "functional currency" other than the U.S. dollar;
(e) U.S. Holders that are liable for the alternative minimum tax under the Code;
(f) U.S. Holders that own Common Shares as part of a straddle, hedging
transaction, conversion transaction, constructive sale, or other arrangement
involving more than one position; (g) U.S. Holders that acquired Common Shares
in connection with the exercise of employee stock options or otherwise as
compensation for services; (h) U.S. Holders that hold Common Shares other than
as a capital asset within the meaning of Section 1221 of the Code; or (i) U.S.
Holders that own, directly or indirectly, 10% or more, by voting power or value,
of the outstanding shares of the Company. U.S. Holders that are subject to
special provisions under the Code, including U.S. Holders described immediately
above, should consult their own financial advisor, legal counsel or accountant
regarding the U.S. federal, U.S. state and local, and foreign tax consequences
of the acquisition, ownership, and disposition of Common Shares.
If an entity that is classified as a partnership (or "pass-through" entity)
for U.S. federal income tax purposes holds Common Shares, the U.S. federal
income tax consequences to such partnership (or "pass-through" entity) and the
partners of such partnership (or owners of such "pass-through" entity) generally
will depend on the activities of the partnership (or "pass-through" entity) and
the status of such partners (or owners). Partners of entities that are
classified as partnerships (or owners of "pass-through" entities) for U.S.
federal income tax purposes should consult their own financial advisor, legal
counsel or accountant regarding the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Common Shares.
Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed
This summary does not address the U.S. state and local, U.S. federal estate
and gift, or foreign tax consequences to U.S. Holders of the acquisition,
ownership, and disposition of Common Shares. Each U.S. Holder should consult its
own financial advisor, legal counsel, or accountant regarding the U.S. state and
local, U.S. federal estate and gift, and foreign tax consequences of the
acquisition, ownership, and disposition of Common Shares. (See
"Taxation--Canadian Federal Income Tax Consequences" above).
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U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and
Disposition of Common Shares
Distributions on Common Shares
General Taxation of Distributions
A U.S. Holder that receives a distribution, including a constructive
distribution, with respect to the Common Shares will be required to include the
amount of such distribution in gross income as a dividend (without reduction for
any Canadian income tax withheld from such distribution) to the extent of the
current or accumulated "earnings and profits" of the Company. To the extent that
a distribution exceeds the current and accumulated "earnings and profits" of the
Company, such distribution will be treated (a) first, as a tax-free return of
capital to the extent of a U.S. Holder's tax basis in the Common Shares and, (b)
thereafter, as gain from the sale or exchange of such Common Shares. (See more
detailed discussion at "Disposition of Common Shares" below).
Reduced Tax Rates for Certain Dividends
For taxable years beginning after December 31, 2002 and before January 1, 2009,
a dividend paid by the Company generally will be taxed at the preferential tax
rates applicable to long-term capital gains if (a) the Company is a "qualified
foreign corporation" (as defined below), (b) the U.S. Holder receiving such
dividend is an individual, estate, or trust, and (c) such dividend is paid on
Common Shares that have been held by such U.S. Holder for at least 61 days
during the 121-day period beginning 60 days before the "ex-dividend date" (i.e.,
the first date that a purchaser of such Common Shares will not be entitled to
receive such dividend).
The Company generally will be a "qualified foreign corporation" under Section
1(h)(11) of the Code (a "QFC") if (a) the Company is incorporated in a
possession of the U.S., (b) the Company is eligible for the benefits of the
Canada-U.S. Tax Convention, or (c) the Common Shares are readily tradable on an
established securities market in the U.S. However, even if the Company satisfies
one or more of such requirements, the Company will not be treated as a QFC if
the Company is a "passive foreign investment company" (as defined below) for the
taxable year during which the Company pays a dividend or for the preceding
taxable year. In 2003, the U.S. Department of the Treasury (the "Treasury") and
the IRS announced that they intended to issue Treasury Regulations providing
procedures for a foreign corporation to certify that it is a QFC. Although these
Treasury Regulations were not issued in 2004, the Treasury and the IRS have
confirmed their intention to issue these Treasury Regulations. It is expected
that these Treasury Regulations will obligate persons required to file
information returns to report a distribution with respect to a foreign security
issued by a foreign corporation as a dividend from a QFC if the foreign
corporation has, among other things, certified under penalties of perjury that
the foreign corporation was not a "passive foreign investment company" for the
taxable year during which the foreign corporation paid the dividend or for the
preceding taxable year.
As discussed below, the Company does not believe that it was a "passive foreign
investment company" for the taxable year ended March 31, 2005, and does not
expect that it will be a "passive foreign investment company" for the taxable
year ending March 31, 2006. (See more detailed discussion at "Additional Rules
that May Apply to U.S. Holders" below). However, there can be no assurance that
the IRS will not challenge the determination made by the Company concerning its
"passive foreign investment company" status or that the Company will not be a
"passive foreign investment company" for the current or any future taxable year.
Accordingly, although the Company expects that it should be a QFC for the
taxable year ending March 31, 2005, there can be no assurances that the IRS will
not challenge the determination made by the Company concerning its QFC status,
that the Company will be a QFC for the current or any future taxable year, or
that the Company will be able to certify that it is a QFC in accordance with the
certification procedures issued by the Treasury and the IRS.
If the Company is not a QFC, a dividend paid by the Company to a U.S. Holder,
including a U.S. Holder that is an individual, estate, or trust, generally will
be taxed at ordinary income tax rates (and not at the preferential tax rates
applicable to long-term capital gains). The dividend rules are complex, and each
U.S. Holder should consult its own financial advisor, legal counsel, or
accountant regarding the dividend rules.
Distributions Paid in Foreign Currency
The amount of a distribution paid to a U.S. Holder in foreign currency generally
will be equal to the U.S. dollar value of such distribution based on the
exchange rate applicable on the date of receipt. A U.S. Holder that does
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not convert foreign currency received as a distribution into U.S. dollars on the
date of receipt generally will have a tax basis in such foreign currency equal
to the U.S. dollar value of such foreign currency on the date of receipt. Such a
U.S. Holder generally will recognize ordinary income or loss on the subsequent
sale or other taxable disposition of such foreign currency (including an
exchange for U.S. dollars).
Dividends Received Deduction
Dividends paid on the Common Shares generally will not be eligible for the
"dividends received deduction." The availability of the dividends received
deduction is subject to complex limitations that are beyond the scope of this
discussion, and a U.S. Holder that is a corporation should consult its own
financial advisor, legal counsel, or accountant regarding the dividends received
deduction.
Disposition of Common Shares
A U.S. Holder will recognize gain or loss on the sale or other taxable
disposition of Common Shares in an amount equal to the difference, if any,
between (a) the amount of cash plus the fair market value of any property
received and (b) such U.S. Holder's tax basis in the Common Shares sold or
otherwise disposed of. Any such gain or loss generally will be capital gain or
loss, which will be long-term capital gain or loss if the Common Shares are held
for more than one year. Gain or loss recognized by a U.S. Holder on the sale or
other taxable disposition of Common Shares generally will be treated as "U.S.
source" for purposes of applying the U.S. foreign tax credit rules. (See more
detailed discussion at "Foreign Tax Credit" below).
Preferential tax rates apply to long-term capital gains of a U.S. Holder that is
an individual, estate, or trust. There are currently no preferential tax rates
for long-term capital gains of a U.S. Holder that is a corporation. Deductions
for capital losses are subject to significant limitations under the Code.
Foreign Tax Credit
A U.S. Holder who pays (whether directly or through withholding) Canadian income
tax with respect to dividends paid on the Common Shares generally will be
entitled, at the election of such U.S. Holder, to receive either a deduction or
a credit for such Canadian income tax paid. Generally, a credit will reduce a
U.S. Holder's U.S. federal income tax liability on a dollar-for-dollar basis,
whereas a deduction will reduce a U.S. Holder's income subject to U.S. federal
income tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid (whether directly or through withholding) by a U.S. Holder
during a year.
Complex limitations apply to the foreign tax credit, including the general
limitation that the credit cannot exceed the proportionate share of a U.S.
Holder's U.S. federal income tax liability that such U.S. Holder's "foreign
source" taxable income bears to such U.S. Holder's worldwide taxable income. In
applying this limitation, a U.S. Holder's various items of income and deduction
must be classified, under complex rules, as either "foreign source" or "U.S.
source." In addition, this limitation is calculated separately with respect to
specific categories of income (including "passive income," "high withholding tax
interest," "financial services income," "general income," and certain other
categories of income). Dividends paid by the Company generally will constitute
"foreign source" income and generally will be categorized as "passive income"
or, in the case of certain U.S. Holders, "financial services income." However,
for taxable years beginning after December 31, 2006, the foreign tax credit
limitation categories are reduced to "passive income" and "general income" (and
the other categories of income, including "financial services income," are
eliminated). The foreign tax credit rules are complex, and each U.S. Holder
should consult its own financial advisor, legal counsel, or accountant regarding
the foreign tax credit rules.
Information Reporting; Backup Withholding Tax
Payments made within the U.S., or by a U.S. payor or U.S. middleman, of
dividends on, and proceeds arising from certain sales or other taxable
dispositions of, Common Shares generally will be subject to information
reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a)
fails to furnish such U.S. Holder's correct U.S. taxpayer identification number
(generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification
number, (c) is notified by the IRS that such U.S. Holder has previously failed
to properly report items subject to backup withholding tax, or (d) fails to
certify, under penalty of perjury, that such U.S. Holder has furnished its
correct U.S. taxpayer identification number and that the IRS has not notified
such U.S. Holder that it is subject to backup withholding tax. However, U.S.
Holders that are corporations generally are excluded from these
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information reporting and backup withholding tax rules. Any amounts withheld
under the U.S. backup withholding tax rules will be allowed as a credit against
a U.S. Holder's U.S. federal income tax liability, if any, or will be refunded,
if such U.S. Holder furnishes required information to the IRS. Each U.S. Holder
should consult its own financial advisor, legal counsel, or accountant regarding
the information reporting and backup withholding tax rules.
Additional Rules that May Apply to U.S. Holders
If the Company is a "controlled foreign corporation" or a "passive foreign
investment company" (each as defined below), the preceding sections of this
summary may not describe the U.S. federal income tax consequences to U.S.
Holders of the acquisition, ownership, and disposition of Common Shares.
Controlled Foreign Corporation
The Company generally will be a "controlled foreign corporation" under Section
957 of the Code (a "CFC") if more than 50% of the total voting power or the
total value of the outstanding shares of the Company is owned, directly or
indirectly, by citizens or residents of the U.S., domestic partnerships,
domestic corporations, domestic estates, or domestic trusts (each as defined in
Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10%
or more of the total voting power of the outstanding shares of the Company (a
"10% Shareholder").
If the Company is a CFC, a 10% Shareholder generally will be subject to current
U.S. federal income tax with respect to (a) such 10% Shareholder's pro rata
share of the "subpart F income" (as defined in Section 952 of the Code) of the
Company and (b) such 10% Shareholder's pro rata share of the earnings of the
Company invested in "United States property" (as defined in Section 956 of the
Code). In addition, under Section 1248 of the Code, any gain recognized on the
sale or other taxable disposition of Common Shares by a U.S. Holder that was a
10% Shareholder at any time during the five-year period ending with such sale or
other taxable disposition generally will be treated as a dividend to the extent
of the "earnings and profits" of the Company that are attributable to such
Common Shares. If the Company is both a CFC and a "passive foreign investment
company" (as defined below), the Company generally will be treated as a CFC (and
not as a "passive foreign investment company") with respect to any 10%
Shareholder.
The Company does not believe that it has previously been, or currently is, a
CFC. However, there can be no assurance that the Company will not be a CFC for
the current or any future taxable year.
Passive Foreign Investment Company
The Company generally will be a "passive foreign investment company" under
Section 1297 of the Code (a "PFIC") if, for a taxable year, (a) 75% or more of
the gross income of the Company for such taxable year is passive income or (b)
50% or more of the assets held by the Company either produce passive income or
are held for the production of passive income, based on the fair market value of
such assets (or on the adjusted tax basis of such assets, if the Company is not
publicly traded and either is a "controlled foreign corporation" or makes an
election). "Passive income" includes, for example, dividends, interest, certain
rents and royalties, certain gains from the sale of stock and securities, and
certain gains from commodities transactions.
For purposes of the PFIC income test and asset test described above, if the
Company owns, directly or indirectly, 25% or more of the total value of the
outstanding shares of another foreign corporation, the Company will be treated
as if it (a) held a proportionate share of the assets of such other foreign
corporation and (b) received directly a proportionate share of the income of
such other foreign corporation. In addition, for purposes of the PFIC income
test and asset test described above, "passive income" does not include any
interest, dividends, rents, or royalties that are received or accrued by the
Company from a "related person" (as defined in Section 954(d)(3) of the Code),
to the extent such items are properly allocable to the income of such related
person that is not passive income.
If the Company is a PFIC, the U.S. federal income tax consequences to a U.S.
Holder of the acquisition, ownership, and disposition of Common Shares will
depend on whether such U.S. Holder makes an election to treat the Company as a
"qualified electing fund" or "QEF" under Section 1295 of the Code (a "QEF
Election") or a mark-to-market election under Section 1296 of the Code (a
"Mark-to-Market Election"). A U.S. Holder that does not
-52-
make either a QEF Election or a Mark-to-Market Election will be referred to in
this summary as a "Non-Electing U.S. Holder."
Under Section 1291 of the Code, any gain recognized on the sale or other taxable
disposition of Common Shares, and any "excess distribution" (as defined in
Section 1291(b) of the Code) paid on the Common Shares, must be ratably
allocated to each day in a Non-Electing U.S. Holder's holding period for the
Common Shares. The amount of any such gain or excess distribution allocated to
prior years of such Non-Electing U.S. Holder's holding period for the Common
Shares generally will be subject to U.S. federal income tax at the highest tax
applicable to ordinary income in each such prior year. A Non-Electing U.S.
Holder will be required to pay interest on the resulting tax liability for each
such prior year, calculated as if such tax liability had been due in each such
prior year.
A U.S. Holder that makes a QEF Election generally will not be subject to the
rules of Section 1291 of the Code discussed above. However, a U.S. Holder that
makes a QEF Election generally will be subject to U.S. federal income tax on
such U.S. Holder's pro rata share of (a) the "net capital gain" of the Company,
which will be taxed as long-term capital gain to such U.S. Holder, and (b) and
the "ordinary earnings" of the Company, which will be taxed as ordinary income
to such U.S. Holder. A U.S. Holder that makes a QEF Election will be subject to
U.S. federal income tax on such amounts for each taxable year in which the
Company is a PFIC, regardless of whether such amounts are actually distributed
to such U.S. Holder by the Company.
A U.S. Holder that makes a Mark-to-Market Election generally will not be subject
to the rules of Section 1291 of the Code discussed above. A U.S. Holder may make
a Mark-to-Market Election only if the Common Shares are "marketable stock" (as
defined in Section 1296(e) of the Code). A U.S. Holder that makes a
Mark-to-Market Election will include in gross income, for each taxable year in
which the Company is a PFIC, an amount equal to the excess, if any, of (a) the
fair market value of the Common Shares as of the close of such taxable year over
(b) such U.S. Holder's tax basis in such Common Shares. A U.S. Holder that makes
a Mark-to-Market Election will, subject to certain limitations, be allowed a
deduction in an amount equal to the excess, if any, of (a) such U.S. Holder's
adjusted tax basis in the Common Shares over (b) the fair market value of such
Common Shares as of the close of such taxable year.
The Company does not believe that it was a PFIC for the taxable year ended March
31, 2005, and does not expect that it will be a PFIC for the taxable year ending
March 31, 2006. Whether the Company will, in fact, be a PFIC for the taxable
year ending March 31, 2006, depends on the assets and income of the Company over
the course of the taxable year ending March 31, 2006, and, as a result, cannot
be predicted with certainty as of the date of this Annual Report. In addition,
there can be no assurance that the IRS will not challenge the determination made
by the Company concerning its PFIC status or that the Company will not be a PFIC
for the current or any future taxable year.
The PFIC rules are complex, and each U.S. Holder should consult its own
financial advisor, legal counsel, or accountant regarding the PFIC rules and how
the PFIC rules may affect the U.S. federal income tax consequences of the
acquisition, ownership, and disposition of Common Shares.
F. Dividends and paying agents.
Not Applicable.
G. Statement by experts.
Not applicable.
H. Documents on Display.
The documents described herein may be inspected at the principal executive
offices of the Company, Suite 355, 10333 Southport Road, Calgary, Alberta, T2W
3X6, during normal business hours.
I. Subsidiary Information.
Not Applicable.
-53-
Item 11. Quantitative and Qualitative Disclosures About Market Risk
The Company deposits surplus funds with a Canadian chartered bank or U.S. bank
earning daily interest. The Company does not invest in any instruments for
trading purposes.
Exchange rate sensitivity
We report our revenue in Canadian dollars. Our U.S. operations earn revenue and
incur expenses in U.S. dollars. Given our increasingly significant U.S. dollar
revenue, we are sensitive to the fluctuations in the value of the U.S. dollar
and are therefore exposed to foreign currency exchange risk. Foreign currency
exchange risk is the potential for loss in revenue and net income as a result of
a decline in the Canadian dollar value of U.S. dollar revenue due to a decline
in the value of U.S. dollar compared to Canadian dollar.
The table below summarizes the effect that a hypothetical 10% decline or
increase in the value of US dollar would have had on our revenue, net loss and
cumulative translation adjustment account for the twelve months ended March 31,
2005.
(in thousands of Canadian dollars)
2005
Revenue +/- $787
Net loss +/- $440
Cumulative translation adjustment +/- $44
We expect that the proportion of revenue earned in U.S. dollars will continue to
increase, further increasing our foreign currency exchange sensitivity.
Interest rate sensitivity
The Company's Bridge Facility is a variable interest bearing debt instrument.
The Company is therefore subject to interest rate risk with respect to this
instrument. Based on the total principal amount of the Bridge Facility at July
31, 2005, the maximum potential future reduction in cash flows from a
hypothetical instantaneous 10% increase in the prevailing interest rates as at
July 31, 2005 is approximately US$100,300 per annum. The future reduction in
cash flows could vary based on the amount actually drawn and any principal
repayments.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages And Delinquencies
None.
Item 14. Material Modifications to the Rights of Securities Holders
and Use of Proceeds
None.
Item 15. Controls and Procedures
In connection with this filing, the Company's management, with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of the Company's disclosure controls
-54-
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this report (the "Evaluation Date").
Based upon the evaluation described above, the Chief Executive Officer and Chief
Financial Officer concluded that as of the Evaluation Date the Company's
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company (or its consolidated subsidiaries)
required to be included in reports that the Company files or submits under the
Exchange Act.
No changes were made in the Company's internal control over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Item 16A. Audit Committee Financial Expert
The Company's Board of Directors has determined that Doug Farmer, a member of
the Company's Audit Committee, is an audit committee financial expert. Mr.
Farmer is independent, as that term is defined in the listing standards
applicable to companies listed on the American Stock Exchange
Item 16B. Code of Ethics
The Company has adopted a code of ethics that applies to the Company's principal
executive officer, principal financial officer and principal accounting officer
or controller, among other employees.
Item 16C. Principal Accountant Fees and Services
The following table discloses the aggregate fees billed for each of the last two
fiscal years for professional services rendered by the Company's former external
auditors, KPMG LLP : No fees were billed by the current external auditors, D&H
Group LLP in the fiscal year ended March 31, 2005.
Fiscal Year ended March 31, 2005 and 2004 Fiscal Year Fiscal Year
Principal Accountant Fees and Services 2005 2004
- ---------------------------------------------------------------------------
Audit Fees $ 111,782 $ 55,000
-------------------------------
Audit Related Fees (1) $ 25,000 $ 14,975
-------------------------------
Tax Fees (2) $ 15,182 $ 35,079
-------------------------------
All Other Fees (3) $ 59,308 Nil
-------------------------------
Total $ 211,272 $ 105,054
===============================
(1) Audit related fees during fiscal 2005 related to the following services:
limited reviews of interim financial statements. Audit related fees during
fiscal 2004 related to the following services: Due diligence of new
acquisition, and review and limited reviews of interim financial
statements.
-55-
(2) Tax fees during fiscal 2005 related to the following services: Advise on
Canadian and U.S. tax matters; filing of Canadian and U.S. tax returns; and
tax planning. Tax fees during fiscal 2004 related to the following
services: Advise on Canadian and U.S. tax matters; filing of Canadian and
U.S. tax returns; advice on financing, business acquisitions.
(3) Other fees related to the auditor's involvement in providing audit services
on acquisitions
All services to be undertaken by the Company's outside auditor must be
pre-approved by the Audit Committee.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and
Affiliated Purchasers
Neither the Company nor any affiliated purchaser purchased any of the Company's
Common Shares during the year ended March 31, 2005.
During the year ended March 31, 2005, the Company received regulatory approval
from the TSX to make a normal course issuer bid. The bid commenced on May 20,
2004 and ended on May 19, 2005. The Company did not repurchase any of its Common
Shares pursuant to the bid.
PART III
Item 17. Financial Statements
The Consolidated Financial Statements for the year ended March 31, 2005 were
reported on by D&H Group LLP. The Consolidated Financial Statements for the
years ended March 31, 2004 and 2003 were reported on by KPMG LLP. These
Consolidated Financial Statements were prepared in accordance with Canadian GAAP
and are presented in Canadian dollars. There are differences between United
States and Canadian GAAP which are set forth in note 25 to the Consolidated
Financial Statements.
Item 18. Financial Statements
Not applicable.
Item 19. Financial Statements and Exhibits
(A) Financial Statements
Auditors' Report to the Shareholders dated May 20, 2005 (except for note 24
which is as at June 15, 2005)
Auditors' Report to the Directors dated June 17, 2004 (except for notes 13 and
25 which are as at November 15, 2004)
Consolidated Balance Sheet as at March 31, 2005 (audited) and March 31, 2004
(audited)
Consolidated Statement of Operations and Deficit for the years ended March 31,
2005, 2004 and 2003 (audited)
Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004
and 2003 (audited)
Notes to Consolidated Financial Statements for the years ended March 31, 2005,
2004 and 2003
-56-
Anthony Clark International
Insurance Brokers Ltd.
CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
-57-
[D&H GROUP LOGO]
AUDITORS' REPORT
To the Shareholders of
Anthony Clark International Insurance Brokers Ltd.
We have audited the consolidated balance sheet of Anthony Clark International
Insurance Brokers Ltd. as at March 31, 2005 and the consolidated statements of
operations and deficit and cash flow for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 2005
and the results of its operations and cash flow for the year then ended in
accordance with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected assets and shareholders' equity as at March 31, 2005 and
2004 and results of operations for the years ended March 31, 2005, 2004 and 2003
to the extent summarized in Note 25 to the consolidated financial statements.
On May 20, 2005, we reported separately to the shareholders of Anthony Clark
International Insurance Brokers Ltd. on consolidated financial statements as at
and for the year ended March 31, 2005 audited in accordance with Canadian
generally accepted auditing standards.
/s/ D&H Group LLP
Vancouver, B.C.
May 20, 2005, except as to Note 24,
which is as of June 15, 2005 Chartered Accountants
D&H Group LLP
a British Columbia Limited Liability Partnership of Corporations
A Member of BHD Association with affiliated offices across
Canada and Internationally
10th Floor, 1333 West Broadway, Vancouver B.C. V6H 4C1
|_| www.dhgroup.ca |_| F 604-731-9923 T 604-731-5881
-58-
[D&H GROUP LOGO]
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA - U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Company's consolidated financial statements, such as the change described
in Note 3 (a) to the consolidated financial statements. Our report to the
shareholders dated May 20, 2005, except as to Note 24, which is as of June 15,
2005, is expressed in accordance with Canadian reporting standards which do not
require a reference to such a change in accounting principles in the auditors'
report when the change is properly accounted for and adequately disclosed in the
consolidated financial statements.
/s/ D&H Group LLP
Vancouver, B.C.
May 20, 2005, except as to Note 24,
which is as of June 15, 2005 Chartered Accountants
D&H Group LLP
a British Columbia Limited Liability Partnership of Corporations
A Member of BHD Association with affiliated offices across
Canada and Internationally
10th Floor, 1333 West Broadway, Vancouver B.C. V6H 4C1
|_| www.dhgroup.ca |_| F 604-731-9923 T 604-731-5881
-59-
KPMG
KPMG LLP Telephone (403) 691-8000
Chartered Accountants Fax (403) 691-8008
1200 205 - 5th Avenue SW Internet www.kpmg.ca
Calgary AB T2P 4B9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors of Anthony Clark International Insurance Brokers Ltd.
We have audited the accompanying consolidated balance sheets of Anthony Clark
International Insurance Brokers Ltd. and subsidiaries as of March 31, 2004 and
2003 and the consolidated statements of operations and deficit and cash flows
for each of the years in the two year period ended March 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our audit opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Anthony Clark
International Insurance Brokers Ltd. and subsidiaries as of March 31, 2004 and
2003 and the results of their operations and their cash flows for each of the
years in the two-year period ended March 31, 2004 in accordance with Canadian
generally accepted accounting principles.
As discussed in note 3(b), the Company has corrected the application of Canadian
generally accepted accounting principles for the amounts allocated to customer
accounts and goodwill, and the amortization periods used in connection with
business combinations completed prior to July 1, 2001.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 13(b) to the
financial statements, the Company was in noncompliance with certain covenants in
its long-term borrowing agreement which covenants were waived as at September
30, 2004. The Company expects that these covenants will be in continuous
noncompliance pending their replacement or revision. The uncertainty relating to
the Corporation's ability to reach a satisfactory resolution with it's the
lenders raises substantial doubt of the Corporation's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chartered Accountants
Calgary, Canada
June 17, 2004 (except for notes 13 and 25 which are as at November 15, 2004)
KPMG LLP, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.
-60-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
CONSOLIDATED BALANCE SHEETS
March 31, 2005 and 2004
(Expressed in Canadian dollars)
- -----------------------------------------------------------------------------------------------------------
2005 2004
-------------- --------------
(Note 23)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 401,944 $ 1,989,663
Accounts receivable 1,708,085 1,335,775
Prepaid expenses 221,705 123,329
Restricted cash (Note 5) - 522,619
-------------- --------------
2,331,734 3,971,386
Restricted cash (Note 5) - 655,274
Note receivable from related party (Note 6) 181,440 196,575
Due from director (Note 7) 40,000 40,000
Computer systems and office equipment (Note 8) 399,442 376,540
Customer accounts (Note 9) 5,678,499 5,027,401
Goodwill 12,525,334 5,459,185
Deferred financing costs (Notes 10 and 13) - 474,447
Non-competition agreements (Note 11) 705,890 663,551
-------------- --------------
$ 21,862,339 $ 16,864,359
============== ==============
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 959,964 $ 915,066
Accrued liabilities 547,589 199,479
Loans payable (Note 13) 13,551,551 -
Due to related party-current (Note 12) 3,973,513 184,787
Current portion of long-term debt (Note 13) - 277,748
Current portion of obligations under capital leases (Note 14) 20,735 22,912
Income taxes payable 63,877 -
Litigation liability (Note 5) - 522,619
-------------- --------------
19,117,229 2,122,611
Obligations under capital leases (Note 14) 19,231 39,966
Due to related party (Note 12) - 3,436,108
Long-term debt (Note 13) - 4,537,970
Future income taxes (Note 19) 316,910 229,607
-------------- --------------
19,453,370 10,366,262
-------------- --------------
Commitments (Note 20)
SHAREHOLDERS' EQUITY
Share capital (Note 15) 9,895,142 9,897,116
Contributed surplus 667,585 104,022
Retained earnings (deficit) (8,124,638) (3,502,196)
Cumulative translation adjustment (29,120) (845)
-------------- --------------
2,408,969 6,498,097
-------------- --------------
$ 21,862,339 $ 16,864,359
============== ==============
Subsequent event (Note 24)
See accompanying notes to the consolidated financial statements.
Approved by the Board "Tony Consalvo" Director "Thomas Milley" Director
--------------- ---------------
-61-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Years ended March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------- ------------- -------------
(Note 23)
REVENUE $ 13,060,344 $ 7,469,559 $ 5,175,072
------------- ------------- -------------
EXPENSES
General and administrative 2,393,711 1,446,886 1,173,128
Legal judgment - 522,619 -
Rent 805,937 422,672 283,242
Salaries and wages 7,925,260 4,818,880 3,165,924
Stock-based compensation 411,275 - -
------------- ------------- -------------
11,536,183 7,211,057 4,622,294
------------- ------------- -------------
Earnings before interest, income taxes,
depreciation and amortization 1,524,161 258,502 552,778
Interest and financing costs (Note 21) (4,539,268) (941,153) (285,720)
------------- ------------- -------------
Earnings (loss) before income taxes,
depreciation and amortization (3,015,107) (682,651) 267,058
Depreciation and amortization (1,303,867) (481,025) (609,546)
------------- ------------- -------------
Earnings (loss) before income taxes (4,318,974) (1,163,676) (342,488)
------------- ------------- -------------
INCOME TAXES (Note 19)
Current 63,877 - -
Future (recovery) 87,303 (112,178) 13,313
------------- ------------- -------------
151,180 (112,178) 13,313
------------- ------------- -------------
Net earnings (loss) for the year (4,470,154) (1,051,498) (355,801)
------------- ------------- -------------
RETAINED EARNINGS (DEFICIT), beginning of year
As previously reported (3,502,196) (2,450,698) (2,669,781)
Change in accounting policy (Note 3 (a)) (152,288) - -
Correction of accounting error (Note 3 (b)) - - 574,884
------------- ------------- -------------
As restated (3,654,484) (2,450,698) (2,094,897)
------------- ------------- -------------
RETAINED EARNINGS (DEFICIT), end of year $ (8,124,638) $ (3,502,196) $ (2,450,698)
============= ============= =============
Earnings (loss) per share - basic and diluted $ (0.56) $ (0.14) $ (0.05)
============= ============= =============
See accompanying notes to the consolidated financial statements.
-62-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- -------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------- ------------- -------------
(Note 23)
CASH FLOW FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss) for the year $ (4,470,154) $ (1,051,498) $ (355,801)
Adjustments to reconcile net cash provided
by operating activities
Depreciation and amortization 1,303,867 481,025 609,546
Future income taxes (recovery) 87,303 (112,178) 13,313
Amortization of deferred financing costs and
loan discounts 396,688 485,694 102,385
Impairment of deferred financing costs and
unamortized loan discounts 2,539,697 - -
Stock-based compensation 411,275 - -
Changes in non-cash working capital
relating to operations
Accounts receivable (370,786) (297,054) (114,185)
Prepaid expenses (103,420) 47,086 (37,463)
Note receivable from related party - (196,575) -
Accounts payable 44,898 (21,592) 240,887
Accrued liabilities 320,626 78,804 78,410
------------- ------------- -------------
159,994 (586,288) 537,092
------------- ------------- -------------
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Net proceeds on sale of common shares (1,974) 314,006 -
Proceeds from loans payable 7,469,141 6,632,353 -
Repayments on loans payable (417,340) (2,199,696) (180,754)
Financing costs paid (832,998) (557,324) (442,578)
Repayment from director - - 60,327
Restricted cash - (655,274) -
------------- ------------- -------------
6,216,829 3,534,065 (563,005)
------------- ------------- -------------
CASH FLOW FROM (USED IN) INVESTING ACTIVITIES
Additions to computer systems and office equipment (66,256) (66,230) (31,766)
Business acquisitions (Note 4) (8,157,225) (4,611,292) -
------------- ------------- -------------
(8,223,481) (4,677,522) (31,766)
------------- ------------- -------------
EFFECT OF FOREIGN EXCHANGE 258,939 - -
------------- ------------- -------------
INCREASE (DECREASE) IN CASH DURING THE YEAR (1,587,719) (1,729,745) (57,679)
CASH AND CASH EQUIVALENTS, beginning of year 1,989,663 3,719,408 3,777,087
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 401,944 $ 1,989,663 $ 3,719,408
============= ============= =============
CASH AND CASH EQUIVALENTS is comprised of
Cash $ 401,944 $ 679,006 $ 1,719,408
Term deposits - 1,310,657 2,000,000
------------- ------------- -------------
$ 401,944 $ 1,989,663 $ 3,719,408
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ - $ - $ -
============= ============= =============
Interest paid $ 1,390,222 $ 382,766 $ 80,156
============= ============= =============
See accompanying notes to the consolidated financial statements.
-63-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Anthony Clark International Insurance Brokers Ltd. (the "Company") operates
general insurance brokerages in Canada and the United States.
2. ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") and include
the accounts of the Company and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated on
consolidation. GAAP differs in certain material respects from United States
generally accepted accounting principles ("U.S. GAAP"). The material
differences between GAAP and U.S. GAAP that apply to these financial
statements are described in Note 25.
Use of estimates
Significant estimates used in the preparation of these financial statements
include the collectibility of accounts receivable, the allocation of the
purchase price on business acquisitions, the valuation of reporting units
when testing the recoverability of goodwill and intangible assets, the
estimated useful lives of tangible and intangible assets and the fair value
of stock-based compensation.
Revenue recognition
Commission revenue, which is earned by the placement of insurance policies
with underwriters, is recognized as of the effective date of each policy
provided that collection is believed to be reasonably assured. Contingent
commissions are based on the underwriters' profitability on insurance
policies placed by the Company and are recognized when received.
Cash and cash equivalents
Cash and cash equivalents consist of bank deposits and short-term
investments with an initial term to maturity of three months or less.
Computer systems and office equipment
Computer systems and office equipment are carried at cost less accumulated
depreciation. Depreciation is provided using the following rates and
methods:
Computer equipment and software - 30% declining balance
Corporate website - 3 years straight-line
Furniture and equipment - 20% declining balance
Impairment of long-lived assets
Long-lived assets are assessed for impairment when events and circumstances
warrant. The carrying value of a long-lived asset is impaired when the
carrying amount exceeds the estimated undiscounted net cash flow from use
and fair value. In that event, the amount by which the carrying value of an
impaired long-lived asset exceeds its fair value is charged to earnings.
Business combinations
Business acquisitions are accounted for using the purchase method whereby
the fair value of consideration given is allocated to identifiable assets
acquired and liabilities assumed. The results of operations and cash flows
of an acquired business are included in the Company's financial statements
from the date of acquisition. Where the consideration given is subject to
contingent adjustment based on future periods' operating results, such
adjustment is recognized in the period the contingency is resolved.
Customer accounts
Acquired customer accounts are carried at cost less accumulated
amortization. Amortization is provided on a straight-line basis over
estimated useful lives of between two and seventeen years. The carrying
value of customer accounts is periodically assessed for impairment in
accordance with the Company's accounting policy for impairment of
long-lived assets.
-64-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
2. ACCOUNTING POLICIES - continued
Goodwill
Goodwill results from business combinations and represents the excess of
the consideration given over the fair value of identifiable net assets
acquired. Goodwill is not subject to amortization but is subject to an
impairment test that is performed at least annually.
Non-competition agreements
Non-competition agreements are secured at the time of business combinations
and are recognized at their estimated fair value at the date of
acquisition. Amortization is provided on a straight-line basis over their
estimated useful lives of between six and ten years. Impairment is
periodically assessed in accordance with the Company's policy for
impairment of long-lived assets.
Deferred financing costs and debt discounts
Deferred financing costs and debt discounts are amortized over the term of
the related indebtedness using the effective interest rate method. If the
related debt becomes due on demand or is settled earlier, the related
balance of unamortized deferred financing costs and debt discounts are
charged to earnings.
Foreign currency translation
The Company uses the current rate method under which the assets and
liabilities of self-sustaining foreign operations are translated into
Canadian dollars at the exchange rate in effect at the balance sheet date.
Revenues and expenses are translated using weighted average exchange rates
for the year. Foreign currency translation gains and losses are shown as a
separate component of shareholders' equity.
Earnings (loss) per share
Earnings (loss) per share is determined using the weighted average number
of common shares outstanding during the year, which amounted to 7,955,153
(2004 - 7,713,980, 2003 - 7,692,055) common shares. Diluted earnings (loss)
per share is calculated using the treasury stock method, which assumes
proceeds from the exercise of stock options and warrants would be used to
purchase common shares at the average market price for the year. Diluted
earnings (loss) per share has not been presented separately as the effect
of common shares issuable on exercise of issued stock options would be
anti-dilutive.
Stock-based compensation
Stock-based compensation is accounted for at fair value as determined by
the Black-Scholes option pricing model using amounts that are believed to
approximate the volatility of the trading price of the Company's stock, the
expected lives of awards of stock-based compensation, the fair value of the
Company's stock and the risk-free interest rate. The estimated fair value
of awards of stock-based compensation are charged to expense as awards
vest, with offsetting amounts recognized as contributed surplus.
Income taxes
Income taxes are recorded using the liability method. Under this method,
current income taxes are recognized for the estimated income taxes payable
for the year. Future income tax assets and liabilities are recognized for
the estimated income tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and
their respective income tax bases. Future income tax assets and liabilities
are recognized using enacted or substantively enacted income tax rates.
Future income tax assets are recognized with respect to deductible
temporary differences and loss carryforwards only to the extent their
realization is considered more likely than not.
-65-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
3. ADJUSTMENTS TO RETAINED EARNINGS
a) Change in accounting policy
Stock-based compensation
Effective on April 1, 2004 the Company adopted the guidance in Section
3870 "Stock-Based Compensation and Other Stock-Based Payments" of the
CICA Handbook. As permitted, the Company adopted Section 3870 on a
retroactive basis but has adjusted opening retained earnings of the
current year for the cumulative effect of adoption on prior years. The
comparative figures for the fiscal year ended March 31, 2004 have
therefore not been restated to reflect this change in accounting
policy.
b) Correction of accounting error
Business combinations, goodwill and other intangible assets
On April 1, 2002, the Company implemented the new accounting standards
for business combinations and goodwill and other intangible assets as
set out in CICA Handbook section 1581 and 3062.
Under section 1581, the purchase method should be used to account for
all business combinations initiated on or after July 1, 2001. Under
Section 1581, intangible assets acquired in a business combination
should be identified and recognized apart from goodwill when they
arise from either contractual or other legal rights or they can be
separated from the acquired enterprise and sold, transferred,
licensed, rented or exchanged, either individually or with a group of
related assets or liabilities. Any intangible assets acquired in a
business combination completed before July 1, 2001, that do not meet
the criteria for separate recognition in Section 1581, must be
subsumed into goodwill.
Under Section 3062, goodwill is not amortized and is tested for
impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired.
The Company adopted Sections 1581 and 3062 effective April 1, 2002. As
of the date of adoption, the Company had previously reported an
intangible asset called customer accounts in the amount of $
3,085,009, and no goodwill. In accordance with the requirements of
Sections 1581 and 3062, the adoption of these two Sections is not
applied retroactively and the amounts presented for prior periods are
not to be restated for this change. However, in accordance with the
requirements of those Sections, the Company reviewed each of the
business combinations completed prior to July 1, 2001 to determine if
the carrying amount of acquired customer accounts met the criteria in
Section 1581 for recognition apart from goodwill, and whether the
amortization period of acquired customer accounts continued to be
appropriate. In connection with this review, the Company determined
that it has incorrectly allocated amounts to customer accounts under
superseded CICA Handbook Section 1580 for business combinations
consummated prior to July 1, 2001, and that it had used an
inappropriate amortization period for customer accounts.
Accordingly, in connection with the adoption of Sections 1581 and
3062, the Company has restated the carrying amounts of goodwill and
customer accounts at April 1, 2001 in order to correct the allocation
of the excess purchase price over the fair value of tangible assets
acquired in business combinations completed prior to July 1, 2001, and
to adjust the amortization period used in prior periods. As a result,
it was determined that, in aggregate, net carrying value of $
1,593,468 of customer accounts at April 1, 2001 should have been
classified as goodwill under Section 1580. In conjunction with this
correction, the amortization period of customer accounts was reduced
to 12 years retroactively, with a net reduction of customer accounts
of $ 1,008,515. The future income tax liability related to customer
accounts was reduced by $ 203,160 and the deficit was reduced by $
788,113. The statement of operations and deficit for the year ended
March 31, 2002 has been restated to reflect the resulting changes in
depreciation, amortization and future income tax expense for that
year. Depreciation and amortization has increased from $ 343,172 to $
634,792 and future income tax recovery has increased by $ 78,391,
resulting in an increase of $ 213,229 in net loss for the year ended
March 31, 2002. This correction conformed the Company's accounting for
business combinations completed prior to July 1, 2001, and the
amortization of goodwill and customer accounts, under GAAP with the
accounting the Company had followed under US GAAP. Accordingly, there
have been no changes in the reported operating results or financial
position of the Company for US GAAP purposes (See note 25).
-66-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
4. BUSINESS ACQUISITIONS
Year ended March 31, 2005
During the year the Company acquired the net assets of two insurance
brokerages known as "Vinciguerra", located in Virginia, and "Schuneman"
located in Illinois. Purchase consideration of $ 10,100,831 (U.S.$
8,228,463) was given to effect these acquisitions. Both acquisitions are
subject to contingent adjustment based on future commission revenue, though
in both acquisitions the purchase consideration may only be reduced.
Goodwill attributed to both acquisitions is expected to be deductible for
income tax purposes.
The results of operations and cash flows of the acquired businesses are
included in these financial statements from the closing dates of the
acquisitions, which are September 8, 2004 for Vinciguerra and January 12,
2005 for Schuneman.
The consideration given has been allocated to acquired identifiable assets
and liabilities as follows based on the foreign exchange rates in effect on
the dates of closing.
Vinciguerra Schuneman Total
------------- ------------ --------------
Customer accounts $ 1,855,983 $ 227,906 $ 2,083,889
Computer systems and equipment 64,390 36,759 101,149
Non-competition agreements 160,975 34,308 195,283
Goodwill 6,978,094 823,504 7,801,598
Other 6,439 - 6,439
Liabilities assumed (87,527) - (87,527)
------------- ------------ --------------
$ 8,978,354 $ 1,122,477 $ 10,100,831
============= ============ ==============
Consideration paid
Cash $ 7,857,638 $ 299,588 $ 8,157,226
Fair values of notes payable 1,120,716 822,889 1,943,605
------------- ------------ --------------
$ 8,978,354 $ 1,122,477 $ 10,100,831
============= ============ ==============
The notes issued in connection with the Vinciguerra and Schuneman
acquisitions are at rates of interest that were determined to be below the
estimated market rate of interest for indebtedness with similar terms and
credit quality. These notes have therefore been accounted for at their
discounted fair values.
During the year ended March 31, 2005 the contingent adjustment related to
John's, see below, was resolved, and the purchase consideration was reduced
by $ 9,083 (U.S.$ 7,509).
Year ended March 31, 2004
During the year the Company acquired the net assets of two insurance
brokerages known as "Vista" and "John's", both of which are located in
California. Purchase consideration of $ 8,600,642 (U.S.$ 6,515,638) was
given to effect these acquisitions. The Vista acquisition is subject to
contingent adjustment based on commission revenue earned in the second year
and the fifth year after closing. This additional consideration cannot be
reasonably estimated and will therefore be accounted for when the
contingency is resolved. Goodwill attributed to both acquisitions is
expected to be deductible for income tax purposes.
The results of operations and cash flows of the acquired businesses are
included in the financial statements from the closing dates of the
acquisitions, which are October 17, 2003 for Vista and November 6, 2003 for
John's.
-67-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
4. BUSINESS ACQUISITIONS - continued
The consideration given was allocated to acquired identifiable assets and
liabilities as follows based on the foreign exchange rates in effect at the
dates of closing.
Vista John's Total
-------------- ------------- --------------
Customer accounts $ 2,481,432 $ 1,372,120 $ 3,853,552
Computer systems and office equipment 136,706 45,941 182,647
Non-competition agreements 523,992 179,826 703,818
Goodwill 3,038,638 885,122 3,923,760
Obligation under capital lease (63,135) - (63,135)
-------------- ------------- --------------
$ 6,117,633 $ 2,483,009 $ 8,600,642
============== ============= ==============
Consideration paid
Cash $ 2,357,618 $ 2,253,674 $ 4,611,292
Fair values of notes payable 3,760,015 229,335 3,989,350
-------------- ------------- --------------
$ 6,117,633 $ 2,483,009 $ 8,600,642
============== ============= ==============
The note issued in connection with the Vista acquisition is at a rate of
interest that was determined to be below the estimated market rate of
interest for indebtedness with similar terms and credit quality. This note
has therefore been accounted for at its discounted fair value.
5. RESTRICTED CASH
During the year ended March 31, 2005 the Company settled an outstanding
legal judgment for a cash payment of $ 450,000. As at March 31, 2004 the
Company had provided for the full amount of the judgment, $ 522,619 and had
paid that amount into trust. During 2005 the difference of $ 72,619 was
recovered.
As required by the Debt Financing agreement with Oak Street, an amount of $
655,274 (U.S.$ 500,000) has been deposited into a collateral account. The
Company is required to maintain this balance at all times during the term
of the Debt Financing. Due to the related loan being in default at March
31, 2005, the loan is presented net of the collateral account. See also
Notes 13(a) and 24.
6. NOTE RECEIVABLE FROM RELATED PARTY
The amount due from a corporation controlled by an officer of the
subsidiary is due on demand, does not bear interest and is denominated in
U.S. dollars (U.S.$ 150,000). The amount due is collateralized by a pledge
of assets.
7. DUE FROM DIRECTOR
The amount due from an officer and director bears interest at the Royal
Bank of Canada's prime rate of interest and is collateralized by a pledge
of marketable securities and a pledge of other personal assets. The amount
is repayable on demand but the Company does not anticipate requesting full
repayment during the 2006 fiscal year.
8. COMPUTER SYSTEMS AND OFFICE EQUIPMENT
2005
---------------------------------------------------
Accumulated
Cost depreciation Net
------------- -------------- ------------
Computer equipment and software $ 885,741 $ 654,360 $ 231,381
Furniture and equipment 398,481 230,420 168,061
Corporate website 9,245 9,245 -
------------- -------------- ------------
$ 1,293,467 $ 894,025 $ 399,442
============= ============== ============
-68-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
8. COMPUTER SYSTEMS AND OFFICE EQUIPMENT - continued
2004
---------------------------------------------------
Accumulated
Cost depreciation Net
------------- -------------- ------------
Computer equipment and software $ 805,876 $ 569,390 $ 236,486
Furniture and equipment 334,434 195,920 138,514
Corporate website 9,245 7,705 1,540
------------- -------------- ------------
$ 1,149,555 $ 773,015 $ 376,540
============= ============== ============
Included in computer systems and office equipment are assets under capital
lease with a cost of $ 45,693 (2004 - $ 26,518) net of accumulated
depreciation of $ 15,078 (2004 - $ 7,425).
9. CUSTOMER ACCOUNTS
2005 2004
------------- ------------
Cost $ 8,719,481 $ 7,069,520
Accumulated amortization (3,040,982) (2,042,119)
------------- ------------
$ 5,678,499 $ 5,027,401
============= ============
10. DEFERRED FINANCING COSTS
2005 2004
------------- ------------
Cost $ - $ 476,727
Accumulated amortization - (2,280)
------------- ------------
$ - $ 474,447
============= ============
During the year ended March 31, 2005 the Company charged all deferred
financing costs to earnings as discussed in Note 13.
11. NON-COMPETITION AGREEMENTS
2005 2004
------------- ------------
Cost $ 830,300 $ 703,818
Accumulated amortization (124,410) (40,267)
------------- ------------
$ 705,890 $ 663,551
============= ============
12. DUE TO RELATED PARTY
2005 2004
--------------- -------------
Note payable (U.S.$ 3,284,982) to a trust of which an officer of the
Company's subsidiary is a trustee, with interest at 7% per annum and
repayable in monthly payments of $ 49,366 including principal and
interest, due on September 30, 2013 and collateralized by a pledge of
certain assets of the Company. No payments have been made since August
2004 as the lending agreement provides for secession of payments based
on available working capital. $ 3,973,513 $ 4,444,379
Unamortized discount provided at 12% market rate
of interest - (823,484)
--------------- -------------
3,973,513 3,620,895
Current portion 3,973,513 184,787
--------------- -------------
$ - $ 3,436,108
=============== =============
See Note 13 (b)
-69-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
13. LOANS PAYABLE
2005 2004
--------------- -------------
a) Note payable (U.S.$ 3,500,000) with interest at the prime rate
of interest plus 8% per annum, with interest only payments
until March 24, 2005 and then repayable in monthly payments
of approximately $ 95,000 including principal and interest,
due on demand and maturing on March 22, 2011 and collateralized
by a pledge of all assets of the Company and cash held in
escrow. $ 4,233,600 $ 4,586,749
Cash held in collateral account (U.S.$ 500,000) (609,306) -
--------------- -------------
3,624,294 4,586,749
--------------- -------------
Note payable (U.S.$ 2,901,558) with interest at the prime rate of
interest plus 2% per annum, with interest only payments until
June 14, 2006 and then repayable in monthly payments of $
103,446 including principal and interest, due on demand and
maturing on June 14, 2009 and collateralized by a pledge
of all assets of the Company. 3,509,728 -
--------------- -------------
Note payable (U.S.$ 3,250,000) with interest at 14%
per annum, with interest only payments, due on
August 31, 2008 and collateralized by a pledge
of certain assets of the Company. 3,931,200 -
--------------- -------------
Note payable without interest, repaid on December 31,
2004. - 228,969
--------------- -------------
Note payable (U.S.$ 900,497) with interest at 7% per annum and
repayable in monthly payments of $ 23,951 including principal
and interest, due on August 31, 2009 and collateralized by a
pledge of certain assets of the Company. 1,089,241 -
--------------- -------------
Note payable (U.S.$ 1,155,000) with interest at 8% per annum and
repayable in monthly payments of $ 28,328 including principal
and interest, that do not begin until January 1, 2008, due on
December 31, 2012 and collateralized by a pledge of certain
assets of the Company. 1,397,088 -
--------------- -------------
13,551,551 4,815,718
Long-term portion - 4,537,970
--------------- -------------
$13,551,551 $ 277,748
=============== =============
-70-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
13. LOANS PAYABLE - continued
During the year the Company and its creditors entered into agreements
that define the rights and priorities of each creditor in respect of
the Company's collateral in the event of default. These agreements
impose no additional material obligations on the Company.
b) Compliance with lending covenants
The Company was in compliance with the financial covenant requirements
of the prime plus 8% note payable of $ 4,233,600 (2004 - $ 4,586,739)
(U.S.$ 3,500,000), (the "Oak Street Debt") as described above, at
March 31, 2004 and therefore, the note was classified as long-term at
that time.
During the year ended March 31, 2005 the Company closed a U.S.$
7,500,000 ($10,090,725) debt financing arrangement with a United
States lender, First Capital Corporation, LLC ("FCC") whereby FCC
provided up to a U.S.$ 7,500,000 ($ 10,090,725) reducing revolving
line of credit (the "Facility") subject to a borrowing base formula.
The Company could borrow an aggregate amount not to exceed at any time
outstanding the lesser of (a) the maximum principal amount of the Line
of Credit or (b) the Borrowing Base. The Borrowing Base is determined
as a percentage of recurring annual revenue of eligible insurance
commissions earned with regard to policies of acceptable insurance
pursuant to agency agreements with the borrower by the insurance
companies having a rating by AM Best of B and above.
The Facility has a Wall Street Journal interest rate of prime plus 2%
per annum, with interest only payments for two years following the
date of closing. After the initial two year period, the Company shall
pay the principal and interest in the amount calculated based on the
amortization schedule with the total amount being repaid over a 36
month period.
The Facility is secured by the general security agreement over the
Company's assets. Pursuant to the Facility, FCC, will have: (i) a
first priority security interest in the assets of the Company which
are acquired after June 14, 2004, in connection with any purchase or
other acquisition by the Company from an unaffiliated party and
financed by FCC, of: (a) an insurance agency; (b) any group of
insurance policies; (c) any "book of business" with respect to
insurance policies; and (d) any "expirations" with respect to
insurance policies: in each case together with all future insurance
policies (including all commissions paid or payable thereunder) and
other assets directly related to such acquired assets, and all
products and proceeds thereof; and (ii) a subsequent security
interest, subject to certain permitted encumbrances in the assets of
the Company.
The Facility was required to be used to fund permitted acquisitions
with the United States and provide working capital for the related
acquisitions.
The FCC Debt and the Oak Street Debt loan agreements each contain
subjective acceleration clauses whereby the lenders may terminate
their loan facilities and declare the obligations immediately due and
payable, without presentment, demand, protest or notice of any kind,
all of which the Company has expressly waived. The defaults that may
cause the acceleration clause to occur include a "material adverse
change" in the Company's business or financial conditions as
determined by the lenders in good faith.
-71-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
13. LOANS PAYABLE - continued
During the year ended March 31, 2005, the Company was in
non-compliance with the Oak Street Debt and the FCC Debt as a result
of the Company's non-compliance with certain financial covenants
prescribed in the respective loan agreements. Tangible Net Worth
("TNW") covenants contained in each agreement, which require the
Company to maintain a minimum TNW, as defined in the loan agreements,
were in non-compliance. Also, Minimum Interest Coverage Ratios
("MICR") and the Total Liabilities to TNW, as defined in the loan
agreements, were in non-compliance. The lenders waived non-compliance
with each of these covenants as at September 30, 2004. The Company
expected that these covenants would be in continuous non-compliance
for the foreseeable future and had been in discussions with the
lenders to revise or replace the subject covenants by amendment of the
loan agreements. No agreement was reached with the lenders with
respect to amendment of the loan agreements. The Company anticipated
that it would be able to obtain further waivers and/or amendments of
the Company's covenants from the lenders. The Company was unable to
comply with the financial covenants and they were not waived by the
lenders, the lenders could have exercised their rights to accelerate
repayment of the Company's obligations and (unless paid with
replacement financing) acquire or dispose of the Company's assets.
Subsequent to year end, one creditor furnished formal notice of
default effective as of February 28, 2005.
As is required by Canadian generally accepted accounting principles,
the Company reclassified its long-term debt as current liabilities as
a result of these covenant violations. All unamortized deferred
financing costs and unamortized debt discounts were also charged to
earnings (see Note 21).
See Note 24.
14. OBLIGATIONS UNDER CAPITAL LEASES
2005 2004
------------- -------------
Obligation under capital lease, bearing interest at 9.78%
per annum and secured by the assets under lease $ 12,444 $ 17,624
Obligation under capital lease, bearing interest at 15%
per annum and secured by the assets under lease 27,522 45,254
------------- -------------
39,966 62,878
Current portion (20,735) (22,912)
------------- -------------
$ 19,231 $ 39,966
============= =============
15. SHARE CAPITAL
Authorized
Unlimited common shares without par value
2005 2004 2003
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Issued
Beginning of year 7,955,153 $ 9,897,116 7,692,055 $ 9,687,132 7,692,005 $ 9,687,132
Common shares issued
for private placement - - 263,098 336,765 - -
Fair value of stock
purchase warrants - - - (104,022) - -
Share issue costs - (1,974) - (22,759) - -
------------ ------------ ------------ ------------ ------------ ------------
7,955,153 $ 9,895,142 7,955,153 $ 9,897,116 7,692,055 $ 9,687,132
============ ============ ============ ============ ============ ===========
-72-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
15. SHARE CAPITAL - continued
During the year ended March 31, 2004 the Company issued 263,098 units on a
private placement basis for cash of $ 336,765 ($ 1.28 per unit) and paid
costs of issue of $ 24,733. Each unit was comprised of one common share and
one share purchase warrant. Each share purchase warrant is exercisable into
one common share at $ 1.60 per common share until February 28, 2006. No
share purchase warrants were exercised during the year ended March 31,
2005.
16. STOCK-BASED COMPENSATION
The Company has an incentive stock option plan which provides for the award
of stock options to directors, officers, employees and consultants. A
maximum of 1,309,811 common shares are reserved under the plan. The terms
and exercise prices of all stock option awards are determined by the
directors at the time of issue. All stock options awarded prior to March
31, 2001 vested immediately. Stock options awarded during the year ended
March 31, 2002 vest over periods of up to five years. All stock options
awarded during the years ended March 31, 2004 and 2005 vested immediately.
Changes in stock options during the years ended March 31, 2005 and 2004 are
as follows:
2005 2004 2003
-------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding,
beginning of year 1,308,811 $ 1.23 984,400 $ 1.37 991,400 $ 1.37
Awarded 520,000 1.10 334,411 0.82 - -
Cancelled (4,000) (1.00) (10,000) (1.00) (7,000) (1.00)
Expired (534,400) (1.69) - - - -
----------- ----------- ----------- ----------- ----------- -----------
Outstanding,
end of year 1,290,411 $ 1.00 1,308,811 $ 1.23 984,400 $ 1.37
=========== =========== =========== =========== =========== ===========
Exercisable,
end of year 1,277,411 $ 1.00 1,244,611 $ 1.25 859,400 $ 1.43
=========== =========== =========== =========== =========== ===========
The following table sets forth information relating to stock options
outstanding as at March 31, 2005:
Number Weighted Number
outstanding average Weighted exercisable Weighted
Range of at remaining average at average
exercise March 31, contractual exercise March 31, exercise
Expiry prices 2005 life price 2005 price
------------- ----------- ------------ ------------- ----------- ------------- -----------
10/26/06 $ 1.00 431,000 1.58 $ 1.00 420,500 $ 1.00
03/18/07 1.15 5,000 1.96 1.15 2,500 1.15
08/29/08 0.81 319,411 3.42 0.81 319,411 0.81
08/29/08 1.00 15,000 3.42 1.00 15,000 1.00
08/05/09 1.10 505,000 4.33 1.10 505,000 1.10
08/16/09 1.25 15,000 4.33 1.25 15,000 1.25
----------- ------------ ------------- ----------- ------------- -----------
$ 0.81 to $ 1.25 1,290,411 3.17 $ 1.00 1,277,411 $ 1.00
=========== ============ ============= =========== ============= ============
-73-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
16. STOCK-BASED COMPENSATION - continued
The fair value of stock options awarded to employees, directors and
consultants was estimated on the dates of awards using the Black-Scholes
option pricing model with the following assumptions:
2005 2004
--------- ---------
Risk-free interest rate 2.6% 2.6%
Estimated volatility 93% 64%
Expected lives 5 years 5 years
The average fair value of stock options awarded during the 2005 and 2004
fiscal years, as calculated using the Black-Scholes option pricing model,
was $ 0.79 and $ 0.45 per stock option.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of stock options that have no vesting provisions and are
fully transferable. Also, option pricing models require the use of
estimates and assumptions including expected volatility. The Company uses
expected volatility rates which are based upon historical volatility rates.
Changes in the underlying assumptions can materially affect these fair
value estimates.
17. RELATED PARTY TRANSACTIONS
The Company enters into transactions with related parties from time to time
in the normal course of business. Related party transactions are measured
at the exchange amount, being the amount of consideration estimated and
agreed to between the related parties, unless otherwise noted.
Included in accounts payable and accrued liabilities is $ 159,014 (2004 - $
Nil) of accrued interest due to a corporation controlled by an officer of
the subsidiary.
Two directors are also partners with law partnerships. During the year the
Company incurred $ 231,601 (2004 - $ 298,296, 2003 - $ 162,384) of legal
fees with these law partnerships.
During the year the Company paid $ 246,831 (2004 - $ 322,146, 2003 - $ Nil)
to a trust, of which an officer of the Company's subsidiary is a trustee,
comprised of $ 118,154 (2004 - $ 222,255, 2003 - $ Nil) representing
interest on a note payable and $ 128,677 (2004 - $ 99,696, 2003 - $ Nil) of
principal.
During the year ended March 31, 2004 the Company acquired the fixed assets
and customer accounts of a California insurance brokerage ("Vista") from
the Kabaker Family Trust, a trust in which an officer of the Company's
subsidiary is a trustee, and DKWS Enterprises Inc. ("DKWS"), a corporation
controlled by an officer of the Company's subsidiary. Pursuant to an asset
management agreement with DKWS, the Company processes its clients'
insurance policies through DKWS, whereby the Company shall receive all the
revenues there from and shall pay all associated operating costs. During
the year ended March 31, 2005, the Company received $ 2,377,971 (2004 - $
1,307,446, 2003 $ Nil) in revenues, paid expenses of $ 3,053,440 (2004 - $
1,462,369, 2003 - $ Nil) for payroll, rent and administrative charges, and
paid for capital asset additions and capital leases in the amount of $
40,984 (2004 - $ 46,103, 2003 - $ Nil) to DKWS in accordance with the asset
management agreement. Accounts receivable at March 31, 2005 includes $
60,408 (2004 - accounts payable of $ 60,832) due to DKWS for expenses
incurred on behalf of the Company.
See Notes 6, 7 and 12.
-74-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
18. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, an amount due from a director, a note receivable from
a related party, accounts payable, accrued liabilities, loans payable, an
amount due to a related party and obligations under capital leases.
Fair value
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their fair values due
to the relatively short periods to maturity of the instruments. The fair
value of the amount due from a director, loans payable, an amount due to a
related party and the obligations under capital leases are approximated by
their carrying values as these items bear market rates of interest. The
fair value of the note receivable from a related party is not practicably
determinable as the amount is due from a related party.
Credit risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are in place with major financial
institutions. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers. The Company
has evaluation and monitoring processes in place and writes off accounts
when they are determined to be uncollectible.
Foreign currency risk
The Company conducts business operations in the United States and has U.S.
dollar denominated indebtedness and is therefore exposed to cash flow risks
associated with fluctuations in the relative value of the Canadian and U.S.
dollar. The Company does not engage in hedging activities or use financial
instruments to reduce its risk exposure.
Interest rate risk
Certain of the Company's indebtedness bears interest at floating rates of
interest, which exposes the Company to interest rate cash flow risk. Should
the base rate of interest increase in the future, the Company's required
interest payments will also increase.
19. INCOME TAXES
Income tax expense or recovery is the sum of the Company's provision for
current income taxes and the difference between the opening and ending
balances of its future income tax assets and liabilities.
The provision for income tax differs from the result which would have been
obtained by applying the statutory income tax rate of 33.6% (2004 - 36.62%;
2003 - 38.62%) to the Company's net income (loss) before income taxes. The
difference results from the following items:
2005 2004 2003
------------ ------------ ------------
Expected tax expense (recovery) $ (1,501,971) $ (385,059) $ (132,269)
Effect of income tax rate changes on future
income taxes - (5,924) (549)
Non-deductible impairment of debt discounts 480,031 - -
Net non-deductible portion of financing costs 417,148 - -
Net unrecognized benefit of loss carryforwards 999,558 287,449 130,591
Non-deductible stock-based compensation 138,188 - -
Net effect of deductible goodwill and intangibles (377,163) - -
Other (4,611) (8,644) 15,540
------------ ------------ ------------
$ 151,180 $ (112,178) $ 13,313
============ ============ ============
-75-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
19. INCOME TAXES - continued
The tax effects of temporary differences that give rise to significant
portions of the future tax assets and liabilities at March 31, 2005 and
2004 are as follows:
2005 2004
------------- ------------
Future income tax assets
Customer accounts, with tax basis $ 199,478 $ 38,990
Share issue costs - 40,690
Other assets 33,067 55
Non capital losses 1,326,180 502,038
Computer systems and office equipment - 1,633
Valuation allowance (1,279,658) (352,141)
------------- ------------
279,067 231,265
------------- ------------
Future income tax liabilities
Goodwill (255,038) (42,519)
Customer accounts, without tax basis (340,939) (418,353)
------------- ------------
(595,977) (460,872)
------------- ------------
Net future income tax liability $ (316,910) $ (229,607)
============== ============
As at March 31, 2005, the Company has accumulated U.S. net operating losses
of approximately $ 3,132,000, which can be carried forward and charged
against future taxable income. A valuation allowance has been provided for
these future income tax assets as there is no reasonable assurance the
potential benefit of these losses will be realized. These losses expire
principally in 2024 and 2025.
20. COMMITMENTS
The Company leases office premises under operating leases that expire at
various dates during the 2006 through 2008 fiscal years. The Company's
minimum lease payments under the agreements are as follows:
2006 $ 712,203
2007 250,212
2008 27,283
-------
$ 989,698
=======
21. INTEREST AND FINANCING COSTS
2005 2004 2003
------------- ------------- -------------
Canadian operations
Interest and financing costs on Paragon
term loan repaid $ - $ 274,866 $ -
Interest on obligations under capital lease 1,410 1,701 1,870
Interest on long-term debt - - 10,961
------------- ------------- -------------
1,410 276,567 12,831
------------- ------------- -------------
U.S. operations
Amortization of discount on reclassified long-term debt 166,489 62,625 -
Interest and loan fees on long-term debt 1,596,851 186,520 272,889
Amortization of financing costs 230,199 412,887 -
Impairment of discount on reclassified long-term debt 1,428,664 - -
Impairment of deferred financing costs on reclassified
long-term debt 1,111,033 - -
Interest on obligations under capital lease 4,622 2,554 -
------------- ------------- -------------
4,537,858 664,586 272,889
------------- ------------- -------------
$ 4,539,268 $ 941,153 $ 285,720
============= ============= =============
-76-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
22. SEGMENT DISCLOSURES
The Company operates in two geographic regions, Canada and the United
States. There were no inter-segment transactions during the reporting
periods:
Twelve months ended Twelve months ended
March 31, 2005 March 31, 2004
---------------------------------------------- --------------------------------------------
Operating Segments Canada U.S. Consolidated Canada U.S. Consolidated
------------- ------------- -------------- -------------- ------------- -------------
Revenue $ 5,189,302 $ 7,871,042 $ 13,060,344 $ 5,489,636 $ 1,979,923 $ 7,469,559
Net earnings (70,047) (4,400,107) (4,470,154) (189,146) (862,352) (1,051,498)
Identifiable assets 4,198,839 17,663,500 21,862,339 5,490,449 11,373,910 16,864,359
Additions to:
Computer systems
and office equipment 7,755 58,501 66,256 21,797 44,433 66,230
Goodwill (Note 4) - 7,801,598 7,801,598 - 3,923,760 3,923,760
Depreciation and
amortization 266,328 1,037,539 1,303,867 284,211 196,814 481,025
Interest and financing costs 1,410 4,537,858 4,539,268 276,567 664,586 941,153
Computer systems and
office equipment and
goodwill 1,705,067 11,219,709 12,924,776 1,745,839 4,089,886 5,835,725
Twelve months ended
March 31, 2003
Operating Segments Canada U.S. Consolidated
------------- -------------- -------------
Revenue $ 5,175,072 $ - $ 5,175,072
Net earnings (17,657) (338,144) (355,801)
Identifiable assets 8,263,053 399,225 8,662,278
Additions to:
Computer systems
and office equipment 31,766 - 31,766
Depreciation and
amortization 609,546 - 609,546
Interest and financing costs 12,831 272,889 285,720
Computer systems and
office equipment and
Goodwill 1,787,097 - 1,787,097
23. COMPARATIVE FIGURES
Certain 2004 and 2003 comparative figures have been reclassified to conform
to the presentation used in the current year.
24. SUBSEQUENT EVENT
On June 15, 2005, the Company closed a U.S.$ 25,000,000 ($ 30,750,000)
secured debt financing arrangement with United States lenders, Bridge
Healthcare Finance, LLC and Bridge Opportunity Finance, LLC (collectively,
the "Lenders") whereby the Lenders have agreed to provide a U.S.$
25,000,000 ($ 30,750,000) five year term loan facility (the "Facility") to
the Company.
The Company can borrow an aggregate amount, not to exceed at any time
outstanding, three times the trailing twelve month adjusted Earnings Before
Interest, Income taxes, Depreciation and Amortization ("EBITDA"). The
Facility will mature on June 15, 2010. Principal repayments are based upon
an excess cash flow availability formula. Interest is payable monthly
calculated at the rate of prime plus 6.25% per annum, but at no time less
than 12% per annum, with an effective rate reduction of 1.5% and 2.5% for
new equity raised of U.S.$ 3.0 million and U.S.$ 5.0 million respectively.
As additional consideration for providing the Facility, the Company has
issued the Lenders a total of 1,439,128 warrants exercisable to purchase
1,439,128 common shares at a price of $ 0.80 per share until June 15, 2010.
-77-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
24. SUBSEQUENT EVENT - continued
The Facility has been fully guaranteed and collateralized by the Company.
The initial term loan proceeds of U.S.$ 7,527,105 were used to repay the
credit facilities that were in default as of March 31, 2005 in the amount
of U.S.$ 6,458,460 and pay the costs of U.S.$ 1,515,000 incurred in
relation to the Facility. Additional costs have been incurred for which the
amounts cannot be determined at this point in time.
The balance of the Facility may only be used to fund permitted acquisitions
within the United States.
25. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
a) The consolidated financial statements of the Company have been
prepared in accordance with GAAP. GAAP differs in certain material
respects from U.S. GAAP. The material differences between Canadian and
U.S. GAAP and their effect on the Company's consolidated financial
statements are summarized in the tables below.
Consolidated Statements of Operations
2005 2004 2003
-------------- -------------- --------------
Net loss under Canadian GAAP $ (4,470,154) $ (1,051,498) $ (355,801)
Deferred financing costs (i) 1,111,033 - -
Discounts on loans payable (i) 1,428,664 - -
Stock-based compensation (ii) - (7,713) (7,713)
Fair value of stock-based compensation (ii) (24,954) - -
-------------- -------------- --------------
Net loss under U.S. GAAP $ (1,955,411) $ (1,059,211) $ (363,514)
============== ============== ==============
Loss per share - U.S. GAAP $ (0.25) $ (0.14) $ (0.05)
============== ============== ==============
Consolidated Balance Sheets 2005 2004
--------------- ---------------
Deferred financing costs:
Balance - Canadian GAAP $ - $ 663,551
Costs impaired under Canadian GAAP (i) 1,111,033 -
--------------- ---------------
Balance - U.S. GAAP $ 1,111,033 $ 663,551
=============== ===============
Loans payable:
Balance - Canadian GAAP $ 13,551,551 $ -
Discount impaired under Canadian GAAP (i) (1,428,664) -
--------------- ---------------
Balance - U.S. GAAP $ 12,122,887 $ -
=============== ===============
Shareholders' equity:
Share capital
Balance - Canadian GAAP $ 9,895,142 $ 9,897,116
Compensation expense - Intrinsic value of stock options (ii) 1,420,337 1,420,337
Compensation expense - Escrowed shares (iii) 4,442,318 4,442,318
--------------- ---------------
Balance - U.S. GAAP 15,757,797 15,759,771
--------------- ---------------
-78-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
25. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - continued
2005 2004
--------------- ---------------
Contributed surplus
Balance - Canadian GAAP $ 667,585 $ 104,022
Compensation expense - Fair value of stock options (ii) 24,954 -
--------------- ---------------
Balance U.S. GAAP 692,539 104,022
--------------- ---------------
Retained earnings (deficit)
Balance - Canadian GAAP (8,124,638) (3,502,196)
Deferred financing costs (i) 1,111,033 -
Discount on loans payable (i) 1,428,664 -
Compensation expense - Intrinsic value of stock options (ii) (1,420,337) (1,420,337)
Compensation expense - Fair value of stock options (ii) (24,954) -
Compensation expense - Escrowed shares (iii) (4,442,318) (4,442,318)
--------------- ---------------
Balance - U.S. GAAP (11,472,550) (9,364,851)
--------------- ---------------
Due from director (40,000) (40,000)
Cumulative translation adjustment (29,120) (845)
--------------- ---------------
Shareholders' equity - U.S. GAAP $ 4,908,666 $ 6,458,097
=============== ===============
For U.S. GAAP purposes the amount due from a director (see Note 7)
is presented as a reduction in shareholders' equity.
Consolidated statements for cash flow.
There are no differences between Canadian and U.S. GAAP in respect
of the consolidated statements of cash flow.
(i) Deferred financing costs and discounts
U.S. GAAP requires that deferred financing costs and
unamortized discounts on loans payable be amortized to
earnings over the contractual period to maturity and
requires that a loss on settlement be recognized only in the
period of settlement. Canadian GAAP permits these amounts to
be charged to earnings at the time the debtor defaults under
the provisions of the lending contracts and the loans become
repayable on demand.
(ii) Stock-based compensation
The Company awards stock options which reserve common shares
for issuance to employees, directors and consultants.
Effective on April 1, 2004 the Company adopted, on a
retroactive basis without restatement as described in Note
3(a), the provisions of Section 3870, which are similar to
the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-based Compensation"
("SFAS 123"), issued by the U.S. Financial Accounting
Standards Board ("FASB"). The calculations of stock-based
compensation for 2005 and 2004 are presented in Note 16, and
for 2005 the Company's accounting treatment of stock-based
compensation under GAAP conforms to U.S. GAAP
-79-
ANTHONY CLARK INTERNATIONAL INSURANCE BROKERS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005, 2004 and 2003
(Expressed in Canadian dollars)
- --------------------------------------------------------------------------------
25. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - continued
During the years ended March 31, 2004 and 2003 the Company
awarded 334,111 and nil stock options. For U.S. GAAP
purposes for 2004 and 2003 the Company has accounted for
stock-based compensation in accordance with APB 25. Had the
Company adopted SFAS 123 for these years, the Company would
have reported the following pro forma amounts:
2004 2003
------------ ------------
Net loss under US GAAP $ (1,059,211) $ (363,514)
Intrinsic value of stock-based compensation 7,713 7,713
Fair value of stock-based compensation (177,242) (24,954)
------------ ------------
Net loss - pro-forma $ (1,228,740) $ (380,755)
============ ============
Loss per share-pro forma $ (0.16) $ (0.05)
============ ============
The fair value of the 2003 amount was estimated using the
Black-Scholes option pricing model with expected volatility
of 73%, a risk-free interest rate of 5.5% and a 5 year
expected life.
For U.S. GAAP purposes the Company adopted SFAS 123
effective on April 1, 2004 and elected to apply the modified
prospective method of adoption. As at April 1, 2004 the
Company had 132,000 stock options that were partially
vested. In connection with the vesting of these stock
options the Company will recognize stock-based compensation
expense of $ 45,821 for U.S. GAAP purposes through the 2008
fiscal year, including $ 24,954 recognized in 2005.
(iii) Escrowed shares
In accordance with securities regulations 1,767,960 Common
Shares with respect to the initial public offering were
placed in escrow with a Trustee under an Escrow Agreement.
Under the terms of the agreement the shares were to be
released from escrow on the basis of one escrowed share for
every $ 0.61 of cumulative cash flow if the minimum offering
is achieved and on the basis of one escrowed share for every
$ 0.41 of cumulative cash flow if the maximum offering is
achieved.
On July 6, 1999 1,665,581 Common shares were released from
escrow and compensation expense of $ 3,997,061 was recorded
for the fair value of the shares which related to directors
and officers (832,721 x $ 4.80).
On July 24, 2000 102,379 Common shares were released from
escrow based on the cumulative cash flows at March 31, 2000
on a $ 0.41 basis as the maximum offering was achieved. For
the purposes of reconciling to U.S. GAAP, compensation
expense was recorded as at July 24, 2000 for the fair value
of the shares released from escrow which related to
directors and officers (51,179 x $ 8.70 = $ 445,257)
b) New technical pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 153 Exchange of non-monetary
assets ("SFAS 153") which is effective for fiscal years ending after
June 15, 2005. SFAS 153 refines the circumstances under which
non-monetary transactions should be accounted for at fair value. The
adoption of SFAS 153 is not expected to have an effect on the
Company's financial position.
The FASB has also issued SFAS No. 154 Accounting changes and error
corrections - A replacement of APB Opinion No. 20 and FASB Statement
No. 3 ("SFAS 154"), which is effective for fiscal years ending after
December 15, 2005. SFAS 154 requires that changes in accounting policy
be accounted for on a retroactive basis. The adoption of SFAS 154 is
not expected to have an effect on the Company's financial position.
-80-
(B) Index to Exhibits
Exhibit
Number Description
- --------------------------------------------------------------------------------
1.1(1) Notarially certified copies of the Certificate and Articles
of Amalgamation dated February 28, 1999
1.2(4) Notarially certified copies of General By-Law No. 1
1.3(4) Copy of Shareholder Rights Plan Agreement dated as of July
3, 2001 between the Company and CIBC Mellon Trust Company as
Rights Agent
4.1(1) Copy of Sublease Agreement regarding property located at
Southport Atrium, 10333 Southport Road, S.W. Calgary,
Alberta between Valmet Automation (Canada) Ltd. and the
Company
4.2(2) Copy of Employee Stock Option Plan dated February, 2000
4.3(3) Copy of Proposal to Provide Financial Public Relations
Services to the Company by Barry Kaplan Associates dated
March 17, 2000
4.4(3) Copy of Content License Agreement between the Company and
Screaming Media dated June 20, 2000
4.5(3) Copy of Service Agreement and Fee Proposal for Co-Transfer
Agent Services dated September 1, 2000 between the Company
and Chase Mellon Shareholder Services
4.6(3) Copy of Letter of Agreement dated October 12, 2000 re
Maintenance & Support Services between the Company and Axiom
Internet Services
4.7(3) Copy of Employment Agreement dated January 1, 2001 between
the Company and Kevin Hamilton
4.8(3) Copy of Employment Agreement dated January 1, 2001 between
the Company and Tim Ogryzlo
4.9(3) Extension of Sublease dated July 20, 2001 between Valmet
Automation (Canada) Ltd. and the Company
4.10(3) Promissory Note dated June 28, 2001 from Tony Consalvo
issued to the Company
4.11(3) Share Pledge Agreement dated June 28, 2001 between Tony
Consalvo and the Company
4.12(3) General Security Agreement dated June 28, 2001 between Tony
Consalvo and the Company
4.13(4) Form of Director Stock Option Agreements
4.14(4) Form of Employee Stock Option Agreement
4.15(4) Purchase Agreement dated August 21, 2001 among the Company,
Robert Ryan and 779451 Alberta Ltd.
4.16(4) Trust Agreement dated July 29, 2002 among Demiantschuk
Milley Burke & Hoffinger, the Company and Robert Ryan
4.17(5) Employment Agreement between the Company and Primo
Podorieszach dated April 1, 2003
-81-
Exhibit
Number Description
- --------------------------------------------------------------------------------
4.18(5) Employment Agreement between the Company and Tony Consalvo
dated April 1, 2003
4.19(5) Employment Agreement between the Company and Shelly Samec
dated September 1, 2002
4.20(6) Credit Agreement between Addison York Insurance Brokers Ltd.
and Oak Street Funding LLC dated March 19, 2004
4.21(6) $15,000,000 Credit Note dated March 19, 2004 issued by
Addison York Insurance Brokers Ltd. to Oak Street Funding
LLC (included in Exhibit 4.20)
4.22(6) General Security Agreement between Addison York Insurance
Brokers Ltd. and Oak Street Funding LLC dated March 19, 2004
(included in Exhibit 4.20)
4.23(6) Guaranty of the Company to Oak Street Funding LLC dated
March 19, 2004 (included in Exhibit 4.20)
4.24(6) General Security Agreement between the Company and Oak
Street Funding LLC dated March 19, 2004 (included in Exhibit
4.20)
4.25(6) Securities Pledge Agreement between the Company and Oak
Street Funding LLC dated March 19, 2004 (included in Exhibit
4.20)
4.26(6) Waiver and First Amendment to Loan and Security Agreement
dated August 31, 2004 between Addison York Insurance
Brokers, Ltd. and Oak Street Funding LLC.
4.27(6) Purchase Agreement dated October 1, 2003 among Addison York
Insurance Brokers, Ltd., and DKWS Enterprises, Inc., Kabaker
Family Trust of July 1998, John W. Kabaker and Theolyn
Kabaker
4.28(6) Amendment to Purchase Agreement dated March 15, 2004 among
Addison York Insurance Brokers, Ltd., and DKWS Enterprises,
Inc., Kabaker Family Trust of July 1998, John W. Kabaker and
Theolyn Kabaker
4.29(6) $3,515,000 Promissory Note dated October 1, 2003 issued by
Addison York Insurance Brokers, Ltd. to Kabaker Family Trust
of July 1998 (included in Exhibit 4.27)
4.30(6) General Security Agreement dated October 1, 2003 between
Addison York Insurance Brokers Ltd. and Kabaker Family Trust
of July 1998 (included in Exhibit 4.27)
4.31(6) Amendment to General Security Agreement dated March 15, 2004
between Addison York Insurance Brokers Ltd. and Kabaker
Family Trust of July 1998
4.32(6) Agency Agreement dated October 1, 2003 among Addison York
Insurance Brokers Ltd., DKWS Enterprises, Inc. and Kabaker
Family Trust of July 1998 (included in Exhibit 4.27)
4.33(6) Purchase Agreement dated October 1, 2003 among Addison York
Insurance Brokers Ltd., Johns Insurance Agency, Inc., Johns
Revocable Trust and Frederick G. Johns Jr.
4.34(6) Agency Agreement dated October 1, 2003 among Addison York
Insurance Brokers Ltd., Johns Insurance Agency, Inc. and
Johns Revocable Trust (included in Exhibit 4.33)
4.35(6) Extension of Sublease dated February 21, 2004 between
Telvent Canada Limited and the Company
4.36(6) Loan and Security Agreement dated June 3, 2004 between
Addison York Insurance Brokers, Ltd. and FCC, LLC, d/b/a
First Capital
-82-
Exhibit
Number Description
- --------------------------------------------------------------------------------
4.37(6) Waiver and First Amendment to Loan and Security Agreement
dated August 31, 2004 between Addison York Insurance
Brokers, Ltd. and FCC, LLC, d/b/a/ First Capital
4.38(6) Guarantee of the Company to FCC, LLC, d/b/a First Capital
dated June 3, 2004
4.39(6) General Security Agreement dated June 3, 2004 between the
Company and FCC, LLC d/b/a First Capital
4.40(6) Securities Pledge Agreement between the Company and FCC, LLC
dated June 3, 2004
4.41(6) Loan and Security Agreement dated August 31, 2004 between
Addison York Insurance Brokers Ltd. and Emmett Lescroart
4.42(6) $3,250,000 Credit Note dated August 31, 2004 issued by
Addison York Insurance Brokers, Ltd. to Emmett Lescroart
4.43(6) Guarantee of the Company to Emmett Lescroart dated August
31, 2004
4.44(6) General Security Agreement dated August 31, 2004 between the
Company and Emmett Lescroart
4.45(6) Purchase Agreement dated August 31, 2004 among Addison York
Insurance Brokers, Ltd., Al Vinciguerra Ltd., Dena
Vinciguerra and Renee Woodard
4.46(6) $1,000,000 Promissory Note dated August 31, 2004 issued by
Addison York Insurance Brokers, Ltd. to Al Vinciguerra Ltd.
(included in Exhibit 4.45)
4.47(6) Security Agreement dated August 31, 2004 between Addison
York Insurance Brokers, Ltd. and Al Vinciguerra Ltd.
(included in Exhibit 4.45)
4.48(6) Debt Subordination and Intercreditor Agreement dated August
31, 2004 among Addison York Insurance Brokers, Ltd., Anthony
Clark International Insurance Brokers Ltd., Emmett
Lescroart, Al Vinciguerra Ltd., Kabaker Family Trust of July
1998, FCC, LLC, and Oak Street Funding LLC (included in
Exhibit 4.45)
4.49(6) Agency Agreement dated August 31, 2004 among Addison York
Insurance Brokers, Ltd., Al Vinciguerra Ltd., Dena
Vinciguerra and Renee Woodard (included in Exhibit 4.45)
4.50(7) Purchase Agreement dated January 1, 2005 among Addison York
Insurance Brokers, Ltd., Schuneman Insurance Agency, Inc.,
Ron Hartz and Bill N. Feather
4.51(7) Security Agreement dated January 1, 2005, between Addison
York Insurance Brokers, Ltd., and Schuneman Insurance
Agency, Inc.
4.52 Agency Agreement dated January 1, , 2005, between Addison
York Insurance Brokers, Ltd. and Schuneman Insurance Agency,
Inc.
4.53(7) Amended and Restated Loan and Security Agreement dated June
15, 2005 among Bridge Healthcare Finance, LLC, Bridge
Opportunity Finance, LLC, and certain other financial
institutions from time to time, and Addison York Insurance
Brokers, Ltd., the Company and Heritage Hill Insurance Ltd.
4.54 Warrant issued to Bridge Opportunity Finance, LLC on June
15, 2005
8.1 List of Subsidiaries (included in Item 4.C.)
11.1 Code of Ethics
-83-
Exhibit
Number Description
- --------------------------------------------------------------------------------
12.1 Certifications Required by Rule 13a-14(a) or Rule
15(d)-14(a)
13.1 Certifications Required by Rule 13a-14(b) or Rule 14d-14(b)
- --------------------
(1) Previously filed as Exhibits to the Company's Form 20-F filed on November
2, 1999.
(2) Previously filed as Exhibits to the Company's Form 20-F filed on July 27,
2000.
(3) Previously filed as Exhibits to the Company's Form 20-F filed on September
27, 2001.
(4) Previously filed as Exhibits to the Company's Form 20-F filed on August 27,
2002.
(5) Previously filed as Exhibits to the Company's Form 20-F filed on September
15, 2003.
(6) Previously filed as Exhibits to the Company's Form 20-F filed on November
18, 2004.
(7) Incorporated by reference to the Company's Form 6-K submitted on September
14, 2005.
-84-
SIGNATURES
The registrant certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
Date: October 17, 2005
ANTHONY CLARK INTERNATIONAL
INSURANCE BROKERS LTD.
Per: /s/ Primo Podorieszach
-------------------------------------
Primo Podorieszach
President and Chief Executive Officer
-85-