Nicolas MEGELAS - Garda World Security

COMPANY ANALYSIS OF GARDA (TSX:GW)

NICOLAS MEGELAS

November 29th 2010

“If you know both yourself and your hate, you will dismantle the

work of a hundred battles with a hundred

victories.”

Sun Tzu, The art of War

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Garda World Security Corporation has gone through an important acquisition process in the past few years. The fact that the company is facing so many changes as well as the economic crisis is creating uncertainty about expected future earnings of the company and the ability of the management to succeed in integrating the new comers into Garda.

In 1995, Stéphan D. Crétier took a $25 000 mortgage on his house to start up his own security firm: TransQuebec Security, which he took public in 1999 (having grown considerably). A few months later, Crétier made the acquisition of Montreal-based Garda and appropriated the name to become Garda World Security. Originally a minor league baseball umpire, Crétier is a forward thinker, constantly pushing his company to new heights, whilst instilling in his team values of integrity, excellence, top performance and social conscience (Garda plays a strong role within communities where it operates to help them improve their quality of life) to name a few.

First and foremost, for Garda, customer satisfaction always comes first. Having worked in sports, it goes without saying that Crétier values a modern managerial approach, acting as a coach rather than a chief. The company has great growth opportunities and keeps expanding in various sectors; in the long run, this could create heavy hierarchy making it quasi-impossible to keep ahead of the game. Consequently, Garda’s CEO grants its teams, executive and decision-making freedom while encouraging its high level executives to adopt a cutting edge attitude to always be ready when new business opportunities arise. This helps to keep Garda a step ahead of the competition and generate much appreciated value for stockholders. It is its competence, creativity and capacity to differentiate itself that leads Garda to surpass its competitors in more than one way.

With prospects for the economy showing relative growth over the next few years, and those of the industry showing excellent growth perspective, we found that the method used by Garda to expand its size is common within the industry. Even though the security industry is more of a defensive one, both the Canadian and the American economies having recently experienced a recession, and with the Americans especially affected by the depreciation of their exchange rate, and decrease in their GDP, we’ve seen quite a notable impact on the stock price. Although the Bank of Montreal (BMO) is expecting a growth in Canadian GDP for 2011, in Garda’s case, we cannot say the industry in which it operates (safety/security/protection industry) is cyclical, and would therefore be expected to emulate the patterns of the economy. Nonetheless we can definitely affirm that the aforementioned industry is dependant on the crises of the world (notably 9/11, the Iraq War etc.) and how much they affect the Americas.

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

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

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concern to customers. From this point of view, Garda’s great diversification does not give them as strong a competitive advantage as they may have suggested; the advantage resides in that they can reach a greater market. In the security business, trustworthiness is of primary importance so it is not surprising or unusual to find companies staying in business together for very long periods of time.

Considering Garda has only been around since 1995, the speed at which it grew is quite astounding. Nevertheless, after analyzing its growth structure, we realize Garda kept buying out its competitors (whilst maintaining each new division’s assets, learning and improving on them but also perhaps not using synergies to their full potential) to ensure its place on the global market. Consequently, its major competitors are all big multinational firms such as Securitas and Group4 Securicor.

Although Garda has undergone several mergers and acquisitions, and even though it was thought that the security industry was counter cyclical, the company’s stock price still had quite a sharp decline during the recession, but what hit Garda most was actually the bankruptcies of the market as opposed to the reorganization of operations. Analyzing the expansion of the company, we see that its cycle of growth hasn’t yet reached its end. Consequently and together with the current economic situation, we can also affirm that the company shouldn’t declare dividends in the near future. This affirmation is based on the concept that a company should only declare dividends when it reaches maturity and there are no more projects under review with positive net present value. Garda today posts an income statement loss of close to $35M and a negative ROE and ROI: this is a temporary situation, or so the management likes to think.

Looking at the evaluation of Garda’s position in the market as well as the highly involved management style and expertise of its CEO, not to mention his ability to always look out for the next growth opportunity, we can see that Garda does possess the strength and size to keep operating well beyond this crisis; Mr Crétier will certainly be able to get his empire get back to its pre-2008 level.

Appendix A

Firms representation according to size

Appendix B

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

PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. Chartered Accountants 1250 René-Lévesque Boulevard West Suite 2800 Montréal, Quebec Canada H3B 2G4 Telephone +1 514 205 5000 Facsimile +1 514 876 1502

Auditors’ Report To the Shareholders of Garda World Security Corporation We have audited the consolidated balance sheets of Garda World Security Corporation as at January 31, 2010 and 2009 and the consolidated statements of loss, comprehensive loss, deficit and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at January 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants Montreal, Québec, Canada April 29, 2010 1 Chartered accountant auditor permit No. 12300

Garda World Security Corporation Consolidated Balance sheets and Statements of Deficit For the years ended January 31, 2010 and 2009 (in thousands of dollars)

Approved by the Board of Directors (Signed) François Plamondon, Director (Signed) Stéphan Crétier, Director

Consolidated Balance sheets

2010

2009 (restated note 4)

$ $ASSETS Current assets

Cash and cash equivalent 11,857 23,993Accounts receivable (note 5) 114,612 126,271Revenue to be billed 22,965 21,143Inventories 8,018 8,125Prepaid expenses 12,954 14,002Income taxes refundable 2,611 3,241Future income taxes (note 18) 94 14,028Current assets held for sale (note 19) - 27,946

173,111 238,749 Property plant and equipment (note 6) 218,763 271,205Goodwill (note 7) 303,583 335,205Intangible assets (note 7) 47,737 57,616Other assets (note 8) 12,210 12,798Future income taxes (note 18) 48,731 28,623Long-term assets held for sale (note 19) - 41,834 804,135 986,030 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities

Bank indebtedness 9,551 876Accounts payable and accrued liabilities 123,220 140,252Income taxes payable 770 57Future income taxes liabilities (note 18) - 1,203Liabilities held for sales (note 19) - 14,122Current portion of long-term debt (note 1 and 9) 39,933 38,108

173,474 194,618 Long-term debt (note 1 and 9) 512,356 622,894Future income taxes (note 18) 9,703 13,670Others long-term liabilities (note 10) 64,228 93,665Liabilities held for sales (note 19) - 285 Shareholders’ Equity Share capital (note 11) 116,105 115,285Contributed surplus (note 12) 12,818 9,412Accumulated other comprehensive loss (note 15) (5,606) (20,148)Deficit (78,943) (43,651) 44,374 60,898 804,135 986,030 Consolidated Statements of Deficit 2010 2009 (restated note 4) $ $ Retained earnings (deficit) beginning of year, as previously reported (40,724) 56,424Change in accounting policy (note 4) (2,927) (1,927)

Retained earnings (deficit), as restated (43,651) 54,497

Net loss for the year (35,292) (98,148)

Deficit, end of year (78,943) (43,651)Contingencies (note 21) Subsequent event (note 1) See accompanying notes to consolidated financial statements.

Garda World Security Corporation Consolidated Statements of Loss and Comprehensive Loss For the years ended January 31, 2010 and 2009 (in thousands of dollars except per share amounts)

Consolidated Statement of Loss 2010 2009 (restated note 4)

$ $

Revenues 1,083,087 1,104,788Operating costs 803,001 827,785

Gross profit 280,086 277,003 Fixed costs, general and administrative expenses 151,852 160,460Operating profit 128,234 116,543 Stock based compensation (note 11 (d)) 3,712 3,757Settlement of litigation (note 21) 5,192 -Loss on disposal of property, plant and equipment 843 -Depreciation and amortization (note 13) 51,052 51,068Goodwill impairment (note 7) - 55,089Income before the following: 67,435 6,629 Financing expenses (note 14) 90,558 73,176Change in fair value of derivative instruments (note 22) 27,649 23,998

Loss before recovery of income taxes and discontinued operations (50,772) (90,545)

Recovery of income taxes (note 18) Current (822) (952)Future (22,497) (16,122) (23,319) (17,074)

Net loss from continuing operations (27,453) (73,471)

Loss from discontinued operations (note 19) (2,717) (24,677)Loss on disposal of discontinued operations (note 19) (5,122) -


Net loss per share from continuing operations

Basic and diluted (0.87) (2.34)Net loss per share total (note 16)

Basic and diluted (1.12) (3.12)

Consolidated Statement of Comprehensive Loss 2010 20092

(restated note 4)

$ $


Other comprehensive income (loss):

Gain (loss) on translation of self sustaining foreign operations (9,956) 38,649

Unrealized gains (loss) on derivatives 36,499 (3,182)

Future income taxes (12,001) 1,000

Comprehensive loss for the year (20,750) (61,681) See accompanying notes to consolidated financial statements.

Garda World Security Corporation Consolidated Statements of Cash flows For the years ended January 31, 2010 and 2009 (in thousands of dollars)

2010

2009

(restated note 4) $ $

CASH FLOW FROM OPERATING ACTIVITIES Net loss for the year (35,292) (98,148) Non-cash items

Depreciation of property, plant and equipment (note 13) 47,219 47,623 Amortization of intangible assets (note 13) 4,496 5,677 Stock based compensation (note (11 (d)) 3,712 3,757 Amortization of deferred financing costs (note 14) 3,892 3,459 Capitalized interest on long-term debt (note 14) 1,497 616 Adjustment related to carrying value of long-term debt (note 1) 20,035 - Future income taxes (note 18) (22,497) (18,068) Loss on disposal of discontinued operations (note 19) 5,122 - Goodwill impairment (note 7) - 74,111 Change in fair value of derivative instruments (note 22) 27,649 23,998 Loss on disposal of property, plant and equipment 843 -

56,676 43,025 Net change in non-cash working capital (note 17) (11,465) 37,162 45,211 80,187 CASH FLOW FROM FINANCING ACTIVITIES Increase (decrease) in bank indebtedness 8,675 (8,339) Increase in long-term debt - 10,489 Repayment of long-term debt (80,057) (48,472) Decrease in revolving facilities (1,233) (21,128) Shares issuance (note 11 (c)) 514 487 Increase in deferred financing costs (2,179) (1,587) Others (981) - (75,261) (68,550) CASH FLOW FROM INVESTING ACTIVITIES Additions to property, plant and equipment (20,077) (24,586) Proceeds from disposal of property, plant and equipment 1,446 1,077 Proceeds from disposal of discontinued operations (note 19) 42,174 - Collateral for insurance provision (note 10) (7,523) - Others (1,116) 1,322 14,904 (22,187) Foreign currency translation on cash 1,813 1,900 Net change in cash and cash equivalent during the year (13,333) (8,650) Cash and cash equivalent, beginning of the year 25,190 33,840 Cash and cash equivalent, end of year related to: Total cash and cash equivalent including discontinued operations and deposits from

customers (note 17) 11,857 25,190 Discontinued operations (note 19) - (1,197) 11,857 23,993

See accompanying notes to consolidated financial statements.

Garda World Security Corporation Notes to Consolidated Financial Statements January 31, 2010 and 2009 (All amounts are in thousands of dollars except information on number of options and shares)

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1 Nature of operations and refinancing transaction

The Corporation provides security services primarily in Canada and the United States. Its activities are carried out through two (2) main segments: physical security and cash logistics. On March 12, 2010 the Corporation successfully completed the refinancing of the majority of its long-term debt. The new facilities include as follows:

• Revolving facilities of a maximum of $125,000 bearing interest at Canadian prime rate plus 4.00% or at LIBOR or Banker’s acceptance rate plus 5.00% with reduction in relation with the leverage ratio. Repayable in full at maturity in March 2013 (note 9 (d)).

• Term loan of $215,000, bearing interest at Canadian prime rate plus 4.00% or at LIBOR or banker’s acceptance plus 5.00% with reduction in relation with the leverage ratio. Repayable in quarterly instalments of $5,000 from July 31, 2010 to April 30, 2011 and of $7,500 from July 31, 2011 to March 2013 (note 9 (d)).

• Senior notes of US $250,000 and CA $75,000 bearing interest at a fixed rate of 9.75% repayable in full at maturity in March 2017 (note 9 (d)).

The revolving facilities and term loan are secured by a general pledge as well as a movable hypothec on the universality of present and future assets of the Corporation. Senior notes rank pari-passu and are unsecured. As part of this new credit agreement the Corporation is subject to certain financial covenants which include a total leverage ratio, a senior debt leverage ratio and a fixed charges coverage ratio.

2 Significant accounting policies

Basis of presentation

These consolidated financial statements have been prepared under the assumption of going concern in accordance with Canadian generally accepted accounting principles (GAAP), which assume the realization of assets and the settlement of liabilities in the normal course of operations. Significant accounting policies are as follows:

Consolidation These consolidated financial statements include the accounts of the Corporation, its wholly owned subsidiaries and variable interest entities (VIE) if the Corporation is the primary beneficiary. All intercompany balances and transactions have been eliminated on consolidation.

Management estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allowance for doubtful accounts, valuation of goodwill and intangible assets, realization of income tax assets, certain accrued liabilities, insurance provision and residual value of property, plant and equipment. Actual results could differ from those estimates.


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Revenue recognition

Revenues are recognized when there is persuasive evidence that an agreement exists, when services have been rendered, when the price is fixed or determinable, and when collection is reasonably assured. Revenues are recorded on the basis of cyclical billings and also include revenue accrued in respect of services rendered but as yet unbilled.

Insurance

Certain United States subsidiaries maintain high retention for risks related to vehicles and worker’s compensation. These United States subsidiaries maintain non-cash insurance reserve to cover the estimated retained liability. The non-cash insurance reserve for insurance is determined by management and is based on claims filed and an estimate of claims incurred but not yet reported. Management considers a number of factors, including third party actuary valuations, when making these determinations. The United States subsidiaries maintain third party stop-loss insurance policies to cover certain liability costs in excess of predetermined retained amounts.

Translation of foreign currencies

Self-sustaining foreign operations

Assets and liabilities of self-sustaining foreign subsidiaries are translated into Canadian dollars at year-end exchange rates. Revenue and expense items are translated into Canadian dollars at the average monthly rate on which such items are recognized in income. Translation gains and losses are recorded as a component of equity in accumulated other comprehensive loss.

Translation of other foreign currency transactions

Monetary items denominated in foreign currencies other than the Canadian dollar are translated at year-end exchange rates. Revenue and expense items are translated into Canadian dollars at the average monthly rate on which such items are recognized in income. The resulting exchange gains and losses are included in the income for the year.

Cash and cash equivalent

Cash includes cash on hand and deposits from customers.

Accounts receivable and allowance for doubtful accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Corporation provides an allowance for doubtful accounts using its best estimate of the amount of probable credit losses in its existing accounts receivable. Account balances are written off against the allowance when the Corporation determines if it is probable the receivable will not be recovered.

Inventories

Inventories are valued at the lower of cost and net realizable value, cost being determined according to the specific identification method.


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Property, plant and equipment

Property, plant and equipment are recorded at cost, less related accumulated depreciation. Depreciation is calculated over their estimated useful lives according to the following methods and annual rates or periods:

Method Rate/Period

Buildings Straight-line 20 and 30 yearsOffice furniture Declining balance and straight-line 20% and 5 yearsComputer equipment Declining balance and straight-line 30% and 3 to 5 yearsEquipment Declining balance and straight-line 20% and 4 to 5 yearsVehicles Declining balance and straight-line 30% and 4 yearsAircraft and aircraft rotables Straight-line 12 years with 45% residualArmored vehicles Straight-line 6, 10 and 12 yearsUniforms Straight-line 2 yearsLeasehold improvements Straight-line 5 to 10 years

Assets under capital lease obligations

Leases that transfer substantially all of the benefits and risks of ownership of the assets to the Corporation are accounted for as capital lease obligations. An asset is recorded together with the related capital lease obligation. Assets under capital lease obligations are amortized over their estimated useful lives at the same rate as other similar assets.

Impairment of long-lived assets

Long-lived assets are reviewed for impairment when events or circumstances indicate that costs may not be recoverable. Impairment exists when the carrying value of the asset is greater than the undiscounted future cash flows expected to be provided by the asset. The amount of impairment loss is the excess of the carrying value over the fair value.

Goodwill

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. Goodwill is not amortized. On an annual basis, a goodwill impairment test is performed on January 31. This test is carried out more frequently if events or changes in circumstances indicate that goodwill might be impaired. A “step I” goodwill impairment test determines whether the fair value of a reporting unit exceeds the net carrying amount of that reporting unit as of the assessment date in order to assess if goodwill should be impaired. If the fair value is greater than the net carrying amount, no impairment is necessary. In the event that the net carrying amount exceeds the fair value, a “Step II” goodwill impairment test must be performed in order to determine the amount of the impairment charge. Fair value of goodwill is estimated in the same way as goodwill is determined at the date of acquisition in a business combination. To accomplish the Step II test, the fair value of the reporting unit’s goodwill must be estimated and compared to its carrying value. The excess of the carrying value over the fair value is recorded as an impairment charge in the year.

Goodwill is assigned as of the date of the business combination to reporting units that are expected to benefit from business combinations. Intangible assets Intangible assets consist of service contracts and client relationships and softwares. Service contracts and client relationships are recorded at cost less accumulated amortization and are amortized on a straight-line basis over periods varying from ten (10) to twenty (20) years, which represent their estimated useful lives. Software are amortized on a straight-line basis between 3 and 5 years.


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Deferred financing costs Deferred financing costs include expenses incurred by the Corporation in various financing activities and are amortized using the effective interest rate method over the terms of these financings.

Interest rate swap agreement designated as hedging instrument

The Corporation has entered into an interest rate swap agreement in order to mitigate the changes in cash flows related to the interest rate risk on a portion of its long-term debt. The Corporation formally documents all relationships between the swap agreement and long-term debt and its risk management objective and strategy for using this hedge. The Corporation does not use derivative financial instruments for speculative purposes. Changes in the fair value of these derivatives are recognized in the consolidated statements of comprehensive loss, except for any ineffective portion, which is recognized immediately in income. The changes in fair value recognized in other comprehensive loss are reclassified in the consolidated statements of loss under change in fair value of derivative instruments in the periods during which the cash flows related to the hedge item affect losses.

When the derivative financial instrument no longer qualifies as an effective hedge for accounting purposes, or when the hedging instrument is sold or terminated prior to maturity, if applicable, hedge accounting is discontinued prospectively. Accumulated other comprehensive loss related to a cash flow hedging relationship that ceases to be effective is reclassified in the consolidated statements of loss in the periods during which the cash flows related to the hedged item affect losses. Furthermore, when it is probable that the anticipated transaction will not occur within the period determined. The related accumulated other comprehensive loss is then immediately reclassified in the consolidated statements of loss.

Future income taxes

The Corporation follows the liability method of accounting for income taxes, under which future income taxes are computed based on the difference between the carrying amounts of the various assets and liabilities and their tax basis. The substantially enacted tax rate when these differences are expected to reverse is used to compute future income taxes at the balance sheet dates. Income tax assets are recognized when it is more likely than not that the assets will be realized.

Net loss per share

Net loss per share is determined using the weighted average number of shares outstanding during the year. Diluted net loss per share is determined using the treasury stock method to evaluate the dilutive effects of stock options and other instruments, when applicable. Under this method, instruments with a dilutive effect, basically when the average market price of a share for the period exceeds the exercise price, are considered to have been exercised at the beginning of the year, and the proceeds received are considered to have been used to redeem common shares of the Corporation at the average market price for the year.

Stock options

The Corporation has applied the fair value method of accounting for stock-based compensation awards granted to directors, officers, employees and other key personnel of the Corporation. This method consists of recording an expense in income based on the vesting period of the options granted. The fair value is calculated based on the Black-Scholes option pricing model, which was designed to estimate the fair value of traded options that have no vesting restrictions and are fully transferable. Any consideration paid upon exercise of the options is credited to share capital.


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Financial instruments

Financial assets, assets and liabilities held for trading and derivative financial instruments, part of a hedging relationship or not, have to be measured at fair value. The Corporation has made the following classification:

• Cash is classified as financial assets held for trading and is measured at fair value. Gains and losses related to periodical revaluation are recorded in net income.

• Accounts receivable, revenue to be billed and long-term receivables are classified as loans and receivables and are initially measured at fair value and recorded at amortized cost using the effective interest rate method.

• Bank indebtedness, accounts payable and accrued liabilities and long-term debt are classified as other liabilities and are initially measured at fair value and subsequently recorded at amortized cost using the effective interest rate method.

3 Changes in accounting policies

Adopted in the current year:

Goodwill and Intangible Assets: In February 2008, the CICA issued Handbook (“HB”) Section 3064, Goodwill and Intangible Assets, which replaced the existing HB Section 3062, Goodwill and Other Intangible Assets, and HB Section 3450, Research and Development. The new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets. This standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. The adoption of this Section was applied retroactively with restatement of consolidated financial statements of prior periods. The impact of the adoption of these standards has been included in note 4. Financial instruments – Disclosures: In June 2009, the CICA amended Section 3862, “Financial Instruments – Disclosures”, to enhance disclosure requirements about the liquidity risk of financial instruments. The amendment also includes new disclosure requirements about the fair value measurement of financial instruments. This amendment is effective for annual financial statements relating to fiscal years ending after September 30, 2009. To be adopted in future periods: Business Combinations: CICA issued HB 1582, Business Combinations, to establish new standards for accounting for business combinations. It is the Canadian equivalent to IFRS 3 (revised), Business Combinations (January 2008). The section is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. Earlier application is permitted. New HB 1582, HB 1601, Consolidated Financial Statements, and HB 1602, Non-Controlling Interests, are to be implemented concurrently. This new section requires, amongst others, that most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination be recorded at “full fair value” and acquisition-related costs are recognized as expenses as incurred and that liabilities associated with restructuring or exit activities are recognized only if they meet the definition of a liability as of the acquisition date. Consolidated Financial Statements: CICA issued HB 1601, Consolidated Financial Statements, which supersedes the like named HB 1600. This Section applies to interim and annual financial statement for fiscal years beginning on or after January 1, 2011. The Section establishes standards for the preparation of consolidated financial statements. HB 1601 carries forward the consolidated guidance previously included in HB 1600.


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Non Controlling Interests: CICA issued HB 1602, Non-Controlling Interests, to provide guidance on accounting for non-controlling interests subsequent to a business combination. The section is to be implemented concurrently with HB 1582, Business Combinations. HB 1602 is effective for fiscal years beginning on or after January 1, 2011 with earlier adoption permitted as of the beginning of a fiscal year. HB 1602 is to be applied retrospectively, with certain exceptions. HB 1602 replicates the provisions of IAS 27, Consolidated and Separate Financial Statements, other than the disclosure requirements. The key features are: non-controlling interests in subsidiaries are presented in the consolidated balance sheet with equity, separate from the parent shareholder’s equity. In income statements, non-controlling interest is not deducted in arriving at consolidated net income, but is allocated to the controlling interest and the non-controlling interest according to their percentage ownership. The Corporation does not expect these three new standards to have a material impact on the Corporation’s consolidated financial statements. Accounting changes: In June 2009, the CICA amended Section 1506, “Accounting Changes”, to exclude from the scope of this Section changes in accounting policies upon the complete replacement of an entity’s primary basis of accounting. This amendment is effective for years beginning after July 1, 2009. Financial instruments – Recognition and measurement: In June 2009, the CICA amended Section 3855, “Financial Instruments – Recognition and Measurement”, to clarify the application of the effective interest rate method after a debt instrument has been impaired. The amendment also clarifies when an embedded prepayment option is separated from its host debt instrument for accounting purposes. This amendment is effective January 1, 2011. At this point, the Corporation does not intend to early adopt this amendment. The Corporation is evaluating the impact of the adoption of this amendment.

4 Change in accounting policy – Goodwill and intangible assets

On February 1, 2009, the Corporation adopted this new standard with retrospective application. Accordingly, start-up costs incurred after obtaining certain contracts and advertising costs that were previously capitalized have been expensed as incurred. This change in accounting policy has been applied retroactively, and the consolidated statements of loss, deficit, comprehensive loss and cash flow for the year ended January 31, 2009 as well as the consolidated balance sheet as at January 31, 2009 have been restated. The effect of this change decrease the retained earnings at the beginning of the year ended January 31, 2009 by $1,927 and increased the net loss for the year ended January 31, 2009 by $1,000. The Corporation also reclassified the software from computer equipment to intangible assets. The related depreciation has also been reclassified to amortization of intangible assets. This reclassification has no impact on the Corporation’s deficit.


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The impact of these changes on the previously reported January 31, 2009 consolidated balance sheet is as follows:

As at January 31, 2009

As previously

reported $

Restatement$

As restated

$ Assets Other assets 15,725 (2,927) 12,798 Property, plant and equipment 272,319 (1,114) 271,205 Intangible assets 56,502 1,114 57,616 Shareholders’ Equity Deficit (40,724) (2,927) (43,651)

The impact on the consolidated statements of loss and comprehensive loss is as follows:

For the year ended January 31, 2009

As previously reported

$ Restatement

$

As restated

$

Capitalized deferred charges - 1,775 1,775Amortization of deferred charges 775 (775) -Amortization of intangible assets 3,385 2,292 5,677Depreciation of property, plant and equipment 49,915 (2,292) 47,623

Net loss from continuing operations (72,471) (1,000) (73,471)

Net loss for the year (97,148) (1,000) (98,148)Basic and diluted loss per share (3.09) (0.03) (3.12)

The impact on the consolidated statements of cash flows is as follows:

For the year ended January 31, 2009

As previously reported

$ Restatement

$

As restated

$

Net loss for the year (97,148) (1,000) (98,148)Depreciation and amortization 54,075 (775) 53,300Net change in non-cash working capital 35,466 1,696 37,162

Increase in deferred charges (79) 79 -


8

5 Accounts receivable

The Corporation grants credit to its customers under the ordinary course of business. Management believes that the

credit risk of accounts receivable is limited due to the following reasons:

• There is a broad base of customers with dispersion across different market segments.

• No single customer accounts for more than 10% of the Corporation’s total revenues.

• Approximately 89.6% (2009 – 90.4%) of the Corporation trade accounts receivable are less than 120 days old.

• Bad debt write-offs to total revenues have been approximately 0.2% of consolidated revenues for the last 3

years. In light of the above, the allowance for doubtful accounts at January 31, 2010 was $5.1 million (2009 –

$8.2 million). All bad debt expenses are charged to fixed costs, general and administrative expenses.


9

6 Property, plant and equipment

2010

Cost

$

Accumulated amortization

$ Net

$

Land 246 - 246 Buildings 4,189 472 3,717 Office furniture 3,074 2,150 924 Computer equipment 12,552 8,110 4,442 Equipment 29,526 17,324 12,202 Vehicles 11,071 7,297 3,774 Aircraft and aircraft rotables (1) 131,494 26,049 105,445 Armored vehicles 105,783 44,648 61,135 Uniforms 7,092 4,494 2,598 Leasehold improvements 44,468 20,188 24,280

349,495 130,732 218,763

2009

(restated note 4)

Cost

$

Accumulated amortization

$ Net

$

Land 283 - 283 Buildings 3,594 388 3,206 Office furniture 3,174 1,887 1,287 Computer equipment 11,301 6,192 5,109 Equipment 32,325 14,783 17,542 Vehicles 10,167 5,449 4,718 Aircraft and aircraft rotables (1) 145,534 19,309 126,225 Armored vehicles 111,175 35,190 75,985 Uniforms 8,933 5,765 3,168 Leasehold improvements 48,548 14,866 33,682

375,034 103,829 271,205

(1) All the aircraft are leased to a private air cargo operator. Rental revenues amounted to $21,625 for

the year ended January 31, 2010 (2009 - $15,330). As at January 31, 2010, the cost and accumulated amortization for computer equipment, vehicles, armored vehicles and aircraft held under capital leases amounted to $81,737 and $26,326 respectively (2009 – $98,616 and $21,335).


10

7 Goodwill and Intangible assets

The changes in the carrying value of goodwill and intangible assets comprise the following:

Intangible assets

(restated note 4)

$

Goodwill

$

Balance – January 31, 2008, as previously reported 51,998 379,745 Change in accounting policy (note 4) 3,406 - Balance – January 31, 2008, restated 55,404 379,745 New service contract 492 - Adjustments (1) - 2,018 Adjustments for assets held for sale (2) (2,127) (40,918) Amortization of intangible assets (note 4 and 13) (5,677) - Impairment charge - (55,089) Impairment charge for assets held for sale - (19,022) Effect in exchange rate during the year 9,524 68,471 Balance – January 31, 2009 57,616 335,205 Software addition 1,116 - Adjustment for assets held for sale 79 2,246 Amortization of intangible assets (4,496) - Effect in exchange rate during the year (6,578) (33,868) Balance – January 31, 2010 47,737 303,583

(1) During the fourth quarter of 2009, the Corporation adjusted the change in purchases prices for previous

acquisitions.

(2) As at January, 31 2009, the Corporation reclassified certain assets, including Intangible and Goodwill, as assets

held for sale.

a) The Corporation performed its goodwill impairment test as at January 31, 2010. The result of the test determined that no loss impairment was required as at January 31, 2010. The Corporation performed its goodwill impairment test as at January 31, 2009. The results determined that the carrying amount of the Corporation’s physical security and US cash logistics operating segment’s assets exceeded its fair value. Accordingly, a goodwill impairment loss of $26.5 million and $47.6 million was recognized in the physical security and US cash logistics segments respectively.

b) Intangible assets

As at January 31, 2009, the Corporation performed impairment tests of its significant amortizable intangible assets consisting of service contracts and client relationships and no impairment loss was required.

Intangible assets are shown in the balance sheet net of accumulated amortization of $14,274 (2009- $11,915).


11

8 Other assets

2010 2009 $ $

Notes receivable 8,302 8,807 Other 3,908 3,991

12,210 12,798

9 Long-term debt

2010

$ 2009

$

Authorized revolving facilities repaid in March 2010 (note 9 (a)) 24,289 27,133

Senior term loan repaid in March 2010 (note 9 (a)) 144,847 178,750 Senior term loan repaid in March 2010 (note 9 (a)) 180,130 233,035 Subordinated term loan repaid in March 2010 (note 9 (a)) 150,541 160,061 Capital leases obligations, secured by property, plant and equipment,

bearing interest at rates ranging from nil to 10.39% with an average rate of 6.49%, repayable in monthly instalments of a maximum of $1,813, including principal and interest, maturing at different dates until November 2014 45,602 66,627

Conditional sales contracts, collateralized by rolling stock, at interest rates

varying between nil and 9.4%, payable in monthly instalments of $287, principal and interest, maturing on various dates through July 2014 6,130 6,566

Balances of purchase prices payable, bearing interest at a rate of 5%,

payable in annual and quarterly instalments until October 2010 750 2,050 Deferred financing costs (note 14) - (13,220)

552,289 661,002

Less: Current portion (note 9 (a)) 39,933 38,108

512,356 622,894

a) As described in note 1, the Corporation completed the refinancing of the majority of its long-term debt

subsequent to year-end. As a result of this transaction, except for capital repayments made prior to the refinancing transaction, the amounts otherwise due on a current basis under the Corporation’s existing credit facilities as at January 31, 2010 have been presented as long-term on the consolidated balance sheet in accordance with EIC-122, “Balance Sheet Classification of Callable Debt Obligations and Debt Obligations Expected to be Refinanced”.

b) As at January 31, 2010, letters of credit amounting to $33,694 reduced the available revolving facilities.


12

c) The Corporation’s management reviews compliance with the financial covenants on a monthly basis and the Corporation’s board of director’s reviews compliance with the financial covenants on a quarterly basis.

d) Principal payments on long-term debt in accordance with note 9 (a) and capital leases obligations over the next five (5) years are as follows:

Capital payment on

long-term debt

Minimum payments on capital leases obligations

2011 18,262 23,696

2012 29,289 12,435

2013 31,015 10,196

2014 93,021 3,029

2015 170 98

2016 and thereafter 334,930 -

506,687 49,454

Minimum instalments payable for the subsequent years under capital leases obligations amounting to $49,454 of which $3,852 is interest. The current portion of capital leases obligations is $21,671 (2009 - $21,588).

e) The Corporation reassessed the carrying value of its long-term debt and deferred financing costs as at January 31, 2010 and registered an amount of $20,035 as an adjustment related to the carrying value of the long-term debt which was consistent with the refinancing transaction subsequent to year-end.

10 Other long-term liabilities

2010

$ 2009

$

Insurance provision, net of collateral of $7,523 (2009 – nil) 7,911 18,203 Fair value of swap on long-term debt to convert from a variable to a fixedaverage rate of 5.61%, covering 90% of the senior and subordinated termloans, repaid in March 2010 (note 22) 47,441 64,224 Deferred rent for tenant’s improvements 7,653 9,787 Other 1,223 1,451

64,228 93,665


13

11 Share capital

a) Capital risk management

The Corporation has defined its capital as long-term debt, share capital, contributed surplus and deficit, net of cash and bank indebtedness. The following table summarizes certain information with respect to the Corporation’s capital structure at the end of each year:

2010 2009 $ $

Cash, net of bank indebtedness (2,306) (23,117)

Long-term debt 552,289 661,002

549,983 637,885 Shareholders’ equity excluding accumulated other comprehensive loss 49,980 81,046

599,963 718,931

The Corporation’s objectives when managing capital are to maintain an optimal capital structure with the use of external long-term debt to support its growth. The Corporation normally finances fixed asset acquisitions through capital leases.

The Corporation’s management monitors the covenants on a monthly basis and the Corporation's Board of Directors reviews the covenants on a quarterly basis. The Corporation expects to meet all the covenants under the new credit facilities for the next year. Other than the covenants required by its credit facilities (note 1), the Corporation is not subject to any externally imposed capital requirements. b) Authorized – in unlimited number, without par value

Class “A” shares, voting and participating Class “B” shares, issuable in one or more series. The directors are authorized to fix the number of shares in each series and to determine the description, rights, privileges, restrictions and conditions attached to the shares of each series.

c) Issued and fully paid

Changes in share capital issued during the two (2) previous years are summarized as follows:

Number of Class “A”

shares $

Balance as at January 31, 2008 31,399,569 114,798 Issued following exercise of options (note 11 (d)) 78,313 487 Balance as at January 31, 2009 31,477,882 115,285 Issued following exercise of options (note 11 (d)) 119,416 820 Balance as at January 31, 2010 31,597,298 116,105


14

d) Options The Board of Directors of the Corporation may, by resolution, grant options to directors, officers, employees of, and service providers to, the Corporation and of its subsidiaries, provided that the total number of shares issued under the plan does not exceed ten percent (10%) of the common shares issued by the Corporation. The exercise price of the options is determined by the Board of Directors at the time of the grant of an option. The exercise price of the options shall not be lower than the closing price of the shares on the last trading day of the Toronto Stock Exchange prior to the time of the grant. The vesting period ranging from the date of the grant to five (5) years.

The following table summarizes the Corporation’s Class “A” stock option activity:

2010 2009

Number of shares

Weighted average exercise

price $

Number of shares


price $

Options granted – Beginning of year 2,471,353 15.17 2,485,668 13.69 Granted 1,165,000 4.59 603,000 12.61 Exercised (119,416) 4.31 (78,313) 3.88 Forfeited (458,250) 14.33 (539,002) 6.51 Cancelled (306,686) 16.30 - - Options granted – End of year 2,752,001 11.18 2,471,353 15.17


15

The following table summarizes information about Class “A” share stock options outstanding and exercisable as at January 31, 2010:

Options outstanding Options exercisable

Exercise price

$

Number of shares

Weighted average

remaining contractual life

(years)


price $

Number of shares


price $

8.00 8,334 0.18 8.00 - 8.00 8.50 160,000 0.35 8.50 106,661 8.50 8.60 16,667 0.28 8.60 8,333 8.60

14.00 10,000 0.82 14.00 6,666 14.00 15.00 527,500 1.39 15.00 434,999 15.00 15.18 40,000 1.04 15.18 13,333 15.18 23.40 255,000 1.62 23.40 111,662 23.40 18.00 125,000 2.65 18.00 125,000 18.00 16.98 400,000 3.23 16.98 400,000 16.98 4.00 529,500 3.46 4.00 105,000 4.00 5.00 680,000 4.41 5.00 273,750 5.00

2,752,001 2.80 11.18 1,585,404 13.40

During the year ended January 31, 2010, the Corporation granted 1,165,000 (2009 − 603,000) Class “A” share stock options at exercise prices ranging from $4.00 to $5.00 per share (2009 − $4.00 to $16.98). The fair value of options granted was estimated on the date of the grant using the Black-Scholes option pricing model on the basis of the following assumptions:

Issuance of Issuance of

June 5, 2009 &

Sept 9, 2009 May 21, 2009

Expected dividend rate Nil Nil Volatility 90.0% 90.0% Expected life of options 5 years 4 years Risk-free interest rate 3.0% 3.0% Number of options 690,000 475,000 Fair value of options $2,429 $1,064

During the year, the Corporation recorded to net loss a stock based compensation charge of $3,712 (2009 - $3,757) for the options granted since February 1, 2002, with an offsetting credit to contributed surplus.


16

12 Contributed surplus

2010

$ 2009

$

Balance – Beginning of year 9,412 5,837 Stock-based compensation (note 11 (d)) 3,712 3,757 Options exercised (306) (182) Balance – End of year 12,818 9,412

13 Depreciation and amortization

2010

2009

(restated note 4)

$ $

Depreciation of property, plant and equipment 47,219 47,623 Amortization of intangible assets 4,496 5,677

51,715 53,300 Depreciation and amortization related to

discontinued operations (note 19) (663) (2,232)

51,052 51,068

14 Financing expenses

2010 2009 $ $

Interest on long-term debt 58,233 59,410 Interest on capital lease obligation 4,185 4,430 Other interest 4,217 9,040 Amortization of deferred financing costs (note 9) 3,892 3,459 Capitalized interest on long-term debt 1,497 616 Adjustment related to carrying value of long-term debt (note 9 (e)) 20,035 - 92,059 76,955 Financing expenses related to discontinued operations (note 19) (1,501) (3,779) 90,558 73,176


17

15 Accumulated other comprehensive loss

2010

$ 2009

$

Unrealized gains (losses) on translation of financial statements of self-sustaining foreign operations (5,606) 4,350

Unrealized losses on fair value of financial instruments - (36,499) Future income taxes - 12,001 (5,606) (20,148)

16 Loss per share

The following table reconciles basic and diluted net loss per share:

2010 2009

Net loss for the year

$

(35,292)

(restated note 4)

$

(98,148) Weighted average number of shares outstanding for use

in computation of basic and diluted income per share 31,522,593 31,456,109

Basic and diluted net loss per share $(1.12) $(3.12)

As at January 31, 2010, 2,752,001 (2009 − 2,471,353) Class “A” stock options with an exercise price varying from $4.00 to $23.40 per share (2009 − $3.00 to $23.40) were excluded in computing the diluted loss per share because the effect was anti-dilutive.


18

17 Consolidated statements of cash flows

a) The change in non-cash working capital items is determined as follows:

2010 2009 (restated note 4)

$ $ Decrease (increase) in

Accounts receivable 403 15,254 Revenue to be billed (2,393) 1,384 Inventories (931) 18 Prepaid expenses (42) 438 Income taxes refundable 471 7,944

Increase (decrease) in

Accounts payable and accrued liabilities (9,871) 17,406 Income taxes payable 898 (5,282)

(11,465) 37,162

b) Additional information:

Interest paid 64,344 69,715Income taxes received (2,680) (7,341)

c) Cash and cash equivalent is detailed as follows:

Cash on hand 8,048 13,782 Deposits from customers 3,809 11,408

11,857 25,190


19

18 Income taxes

a) The income tax rate differs from the basic tax rate for the following reasons:

2010 $

2009$

Loss before recovery of income taxes and discontinued

operations (50,772) (90,545) Loss from discontinued operations before incomes taxes (3,294) (26,623) Loss on disposal of discontinued operations (5,122) - Loss before income taxes (59,188) (117,168)

Canadian statutory income tax rate 30.79% 30.74%

Income taxes calculated at statutory rate (18,226) (36,012) Increase (decrease) resulting from: Benefits arising from a financing structure (12,792) (13,546) Non-Canadian applicable income tax rate difference (980) (3,587) Change in valuation allowance (7,079) 8,134 Business disposal 13,130 - Permanent differences and other 398 299 Change in statutory rate 1,653 - Goodwill impairment - 25,692

(23,896) (19,020)

Income tax recovery attributable to loss consist of: Current (822) (952) Future (22,497) (16,122) Income taxes of discontinued operations (577) (1,946) (23,896) (19,020)

b) Future income taxes comprise the following:

Future income taxes represent the net tax effect of temporary differences between the financial statements carrying amounts and tax bases of assets and liabilities. Significant components of the Corporation’s future income tax assets (liabilities) as at January 31, 2010 and 2009 were as follows:

The tax effect of temporary differences relates to the following: 2010

$ 2009

$

Property, plant and equipment and intangible assets (29,485) (32,183) Liabilities and other provisions 15,043 26,031 Loss carryforwards 40,795 23,141 Financial instruments 12,769 19,000 Valuation allowance - (8,211)

Net future income tax assets 39,122 27,778


20

As at January 31, 2010, the Corporation and its subsidiaries have accumulated unused operating losses, from the Canadian and US operations respectively, totalling $76.2 million and US $52.5 million. The Canadian losses are set to expire between 2027 and 2030 and the US tax losses are set to expire between 2025 and 2029.

19 Business disposal and discontinued operations

The US cash logistics business is involved in the manufacturing of smart-safe units, the development and upgrading of the technology used in the product, as well as the installation and servicing of units deployed at its customer locations throughout the United States (the “CashLINK” products and services). On April 20, 2009, the Corporation sold all the assets related to the CashLINK products and services for a cash consideration based on the future sales of the products and services made by the buyer in conjunction with the cash logistics services during the next five (5) years. With the January 2006 acquisition of Vance International, the Corporation entered the US market for physical security services, which includes guarding and global risk consulting services. It also acquired a platform to offer high-threat protection services internationally. Subsequently, the Corporation acquired certain assets of Kroll in December 2006 and GSS Global in February 2007 in order to complement and enhance its high-threat protection services. During the fourth quarter of 2009, it was decided to divest the US and Mexican Guarding operations. On June 2, 2009, the Corporation concluded the sale of its US and Mexican Guarding operations for a total cash consideration of US $44.25 million. The Corporation incurred a loss of $5,122. Revenues and expenses of CashLINK products and services and of the US and Mexican Guarding operations for the years ended January 31, 2010 and 2009 have been reclassified from continuing operations to discontinued operations.


21

Summary of discontinued operations 2010 2009 $ $

CashLINK Products and

Services

US and Mexican

Guarding Operations

Total

Total

Revenues 5,756 45,751

51,507 151,426 Operating expenses 6,999 37,366 44,365 130,881

Gross profit (loss) (1,243) 8,385

7,142 20,545

Fixed costs, general and administrative expenses 1,140 7,132

8,272 22,135 Depreciation and amortization 205 458 663 2,232 Goodwill impairment - - - 19,022

Operating income (loss) before the following: (2,588) 795 (1,793) (22,844) Interest on long-term debt - 1,501 1,501 3,779 Loss before provision for (recovery of) income taxes (2,588) (706)

(3,294)

(26,623)

Provision for (recovery of) income taxes Current (908) 331 (577) - Future - - - (1,946) (908) 331 (577) (1,946) Loss from discontinued operations (1,680) (1,037) (2,717) (24,677) Loss on disposal of discontinued operations - (5,122) (5,122) - (1,680) (6,159) (7,839) (24,677) Net loss per share Basic and diluted (0.05) (0.20) (0.25) (0.78)


22

Summary of assets and liabilities sold in the fiscal year ended January 31, 2010

2010 2009 $ $

Assets Cash - 1,197 Non cash working capital 17,023 12,627 Property, plant and equipment 1,865 2,437 Intangible assets 2,067 2,344 Goodwill 31,680 37,053 Future income taxes 203 -

52,838 55,658 Liabilities Long-term debt 73 12 Other liabilities 54 273 Net assets held for sale - 55,373 Net assets disposed 52,711 - Consideration: Cash proceeds 42,174 - Balance of sale 5,415 - Total consideration 47,589 - Loss on disposal of discontinued operations 5,122 -

20 Pension plans

The Corporation has established defined contribution pension plans for a certain number of its unionized and non-unionized employees in Canada and the United States. In addition, the Corporation also contributes to a registered retirement savings plan for various employees. The pension expense for these plans is represented by the Corporation’s contribution. For the year ended January 31, 2010, the pension expense for these plans amounted to $3,763 (2009 – $5,386).

21 Contingencies

In the normal course of business, the Corporation is involved in various legal proceedings, the outcome of which cannot be determined at this time and accordingly, no provision has been recorded. The Corporation believes that the resolution of these proceedings will not have a material favorable or unfavorable effect on its financial position and income statement.

One of the divisions of the Corporation settled after the year-end a legal action from a former employee for an amount of US$3,000 related to wrongful termination allegations. As a result, the Corporation registered an expense of $5,192 of which $2,063 represents legal fees incurred.


23

22 Financial instruments

Fair value The Corporation has estimated the fair value of its financial instruments based on current interest rates, market value and current pricing of financial instruments with similar conditions. Unless otherwise indicated, the carrying value of these financial instruments is considered to approximate their fair value. The fair value hierarchy under which the Corporation’s financial instruments are valued is as follows:

• Level 1 – quoted market prices in active markets for identical assets or liabilities; • Level 2 – inputs other than quoted market prices included in Level 1 that are observable for the asset or

liability, either directly (as prices) or indirectly (derived from prices); and • Level 3 – unobservable inputs such as inputs for the asset or liability that are not based on observable

market data. The fair value of financial assets and financial liabilities measured at fair value in the consolidated balance sheet as at January 31, 2010 are as follows:

Credit risk Financial instruments which potentially subject the Corporation to significant credit risk consist principally of cash, accounts receivable, derivative instruments and revenue to be billed. The Corporation’s cash and derivative instrument are held with or issued by high credit quality financial institutions. Therefore, the Corporation considers the risk of non-performance on those instruments to be remote. The Corporation’s credit risk is principally attributable to its trade receivables. The amounts presented in the balance sheet are net of an allowance for doubtful accounts, estimated by the Corporation’s management based, in part, on the age of the specific receivable balance and the current and expected collection trends. A provision is established when the likelihood of collecting the account has significantly diminished. The Corporation believes that the credit risk of accounts receivable is limited.

Level 1

$ Level 2

$ Level 3

$ Total

$

Assets and liabilities

measured at fair value

Cash and cash equivalents 11,857 - - 11,857

Interest rate swaps - (47,441) - (47,441)

11,857 (47,441) - (35,584)

2010 2009

$ $

Allowance for doubtful accounts, beginning of year 8,234 5,605

Business disposal (859) -

Bad debt expense 2,803 2,875

Amount written off and recoveries (4,466) (1,260)

Currency translation adjustment (641) 1,014

Allowance for doubtful accounts, end of year 5,071 8,234


24

The distribution of the Corporation’s customers and the business risk management procedures have the effect of avoiding any concentration of credit risk. Generally, the Corporation does not require collateral or other security from customers for trade accounts receivable; however, credit is extended following an evaluation of creditworthiness. In addition, the Corporation performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts when accounts are determined to be uncollectible. Interest rate risk As at January 31, 2010, the Corporation’s interest rate risk is summarized as follows: Cash and cash equivalent Variable rate Accounts receivable Non-interest bearing Bank indebtedness Variable rate Accounts payable and accrued liabilities Non-interest bearing Long-term debt See note 9 Based on long-term debts at variable rates as at January 31, 2010, had interest rate been 100-basis points higher, loss before recovery of income taxes and discontinued operations would have been approximately $700 (2009 - $1,250) higher. Had interest rates been 100-basis points lower, loss before recovery of income taxes and discontinued operations would have been approximately $700 (2009 - $1,250) lower. In June 2007, the Corporation entered into interest rate swaps that will mature on the same basis as the senior and subordinated term loans. These contracts are designated as hedges of the change in cash flow related to the interest rate risk on a portion of the Corporation’s senior and subordinated term loans. In October 2008, the Corporation introduced a monthly LIBOR rate on the variation interest rate paid to the lenders. This change resulted in an ineffectiveness of the hedge relationship for its interest rate swap (derivative financial instrument). As such, the variation in the fair value of the interest rate swap is recognized in the net results since this change occurred. On March 12, 2010, the interest rate swap contracts have been terminated for a consideration of $47,441 (note 1).

The Corporation has amortized during the year the derivative loss of $36,499 recognized in the accumulated comprehensive loss as of January 31, 2009, giving the repayment of the interest rate swap in March 2010. Foreign exchange risk The Corporation has operating activities outside Canada, namely in the United States, England and the Middle East, through its wholly owned subsidiaries. It is therefore exposed to foreign exchange rate risks on the US dollar and the British pound in the net investment in its self-sustaining foreign subsidiaries. During the year ended January 31, 2010, if the US dollar had strengthened by $0.01 on average in comparison to the Canadian dollar, all other variables remaining constant, the impact on the operating income before income taxes for the year would have been marginal and the comprehensive loss would have been approximately $984 lower. Transactions recorded in US dollars relate exclusively to self-sustaining foreign operations and do not result in foreign exchange gains or losses for the Corporation. In addition, the Corporation contracted a debt denominated in US dollars in the same proportion as the cash flow stream from self-sustaining foreign operations. Consequently, the Corporation believes that its exposure to risk from currency fluctuations is low.


25

Liquidity risk Liquidity risk is the risk that the Corporation will not be able to meet its obligations as they become due or can only do so at excessive cost. The Corporation manages this risk by maintaining detailed cash flows and long-term operating and strategic plans. The contractual cash flows include the carrying value amount plus interest using the current rate. The following are the contractual maturities of financial liabilities as at January 31, 2010:

Cash flows from operations are the principal source of funding for the Corporation. On March 12, 2010 the Corporation has refinanced the majority of its long-term debt. As a result of the transaction the contractual cash flow have been calculated using the refinancing terms and conditions (note 1 and 9 (a)).

Carrying amount

$

Contractual cash flows

$

Less than one (1)

year $

Between one (1) and

two (2) years $

More than two (2) years

$

Accounts payable and accrued liabilities 123,220 123,220 123,220 - -

Long-term debt 552,289 855,012 83,982 83,595 687,435

Bank indebtedness 9,551 9,551 9,551 - -

Derivative instruments 47,441 47,441 47,441 - -

732,501 1,035,024 264,194 83,595 687,435


26

23 Commitments

The Corporation entered into operating leases of real estate expiring on various dates through May 2024 which call for lease payments of $126.3 million (2009 – $106.0 million). Minimum lease payments for the upcoming years are as follows:

2011 24,744

2012 22,523

2013 16,434

2014 13,300

2015 11,504

2016 to 2024 37,795

126,300

24 Segmented information

The Corporation provides security services primarily in Canada and the United States, and its activities are carried out through two (2) main reportable segments:

i) Physical security and other: security guard services, airport pre-board security screening services, consulting and investigation/global risk consulting services, pre-employment screening and other.

ii) Cash logistics: the Corporation offers its clients a fully integrated approach to managing the supply chain of cash, from ATM and point-of-sale services, through armored transportation, deposit processing, cash vault services, in-store cash control systems and check imaging. This business segment is operated using a combination of armored vehicles, cargo aircraft, deposit processing systems, high-speed currency processing systems and cash vault.

Activities carried on through other segments are not significant and are included in the physical security and other segment. The accounting policies of the reportable segments are the same as those used for the consolidated financial statements.


27

a) Business segment

2010

2009


Revenues Physical security and other 490,268 483,063 Cash logistics (2) 592,819 621,725

1,083,087 1,104,788

Depreciation of property, plant and equipment (1) Physical security and other 6,541 8,627 Cash logistics (3) 40,678 38,996 47,219 47,623 Amortization of intangible assets (1) Physical security and other 507 505 Cash logistics 3,989 5,172 4,496 5,677 Income before financing expenses, income taxes, discontinued

operations and change in fair value of derivative instruments Physical security and other 23,765 5,518 Cash logistics (4) 43,670 1,111

67,435 6,629

Property, plant and equipment Physical security and other 10,408 12,440 Cash logistics(5) 208,355 258,765 218,763 271,205 Goodwill Physical security and other 97,630 103,563 Cash logistics 205,953 231,642 303,583 335,205 Intangible assets Physical security and other 5,591 5,331 Cash logistics 42,146 52,285 47,737 57,616 Total assets (1) Physical security and other 234,061 255,165 Cash logistics (6) 570,074 730,865

804,135 986,030

(1) Includes amounts relating to discontinued operations

(2) The Corporation owns a fleet of cargo aircraft that are leased on a long-term basis to an american private air cargo

operator. Revenues includes lease payment of $21,625 in 2010 (2009 - $15,330) that are linked to operating profits

generated by the air cargo operator. In 2010, the total revenues and operating costs of the operator were respectively

$105,374 and $83,749 (2009 – $105,977 and $90,647) (3) Includes depreciation of aircraft in 2010 of $10,089 (2009 - $9,164) (4) Includes income before financing expenses, income taxes and discontinued operations related to air cargo in

2010 $11,536 (2009 - $6,166) (5) Includes aircraft and aircraft rotables of $105,445 in 2010 (2009 - $126,225) (6) Includes aircraft inventories, aircraft and aircraft rotables of $111,049 in 2010 (2009 – $132,326). The total assets of the

private air cargo are $9,954 (2009 – $11,541)


28

b) Geographical segment

2010

2009


Revenues Canada 493,357 482,523 United States and other 589,730 622,265

1,083,087 1,104,788

Depreciation of property, plant and equipment(1) Canada 7,529 7,950 United States and other 39,690 39,673 47,219 47,623 Amortization of intangible assets(1) Canada 594 638 United States and other 3,902 5,039 4,496 5,677 Income (loss) before financing expenses, income taxes, discontinued

operations and change in fair value of derivative instruments Canada 28,656 28,242 United States and other 38,779 (21,613)

67,435 6,629

Property, plant and equipment Canada 22,673 24,514 United States and other 196,090 246,691 218,763 271,205 Goodwill Canada 78,877 78,877 United States and other 224,706 256,328 303,583 335,205 Intangible assets Canada 6,100 5,694 United States and other 41,637 51,922 47,737 57,616 Total assets(1) Canada 204,720 158,494 United States and other 599,415 827,536

804,135 986,030

(1) Includes amounts relating to discontinued operations

25 Comparative figures

Certain comparative figures have been reclassified to conform to the new presentation adopted in the current year.

Bibliography

1. Reference books BODIE, Zvi, and al. Investments, Fifth Canandian Edition, Toronto, McGraw-Hill, 2005, 916 p.

N. MARCHON, Maurice. Prévoir l’économie pour mieux gérer, Institut d’économie appliquée, HEC Montréal, Octobre 2009.

2. Official documents In Search of Security: The Roles of Public Police and Private Agencies, Law Commission of

Canada, 2002

3. Websites Bloomberg BusinessWeek, Company overview, [web page consulted on November 10th 2010], [Online], URL address: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=GW:CN Bank of Canada, [web page consulted on November 10th 2010], [Online], URL address:

http://www.bankofcanada.ca/ Canadian International Development Agency, [web page consulted on November 10th 2010], [Online], URL address: http://www.acdi-cida.gc.ca/cidaweb/acdicida.nsf/En/Home Economic analysis, BMO Nesbitt Burns, [web page consulted on November 101h 2010], [Online],

URL address: http://www.bmonesbittburns.com/economics/focus/20060825/feature.pdf Finance Canada, [web page consulted on November 10th 2010], [Online], URL address:

http://www.fin.gc.ca/ Investigation and Security Services, Definition of the Industry, Government of Canada, [web page

consulted on November 9th 2010], [Online], URL address: http://www.hrsdc.gc.ca/asp/ gateway.asp?hr=en/hip/hrp/sp/industry_profiles/investigation_security_services.shtml&hs=hzp

Statistics Canada, [web page consulted on November 10th 2010], [Online], URL address: http://www.statcan.ca/

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Nicolas MEGELAS - Garda World Security