UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004
Commission file number 001-31902

SIRVA, INC.

(Exact name of Registrant as specified in its charter)

 

700 Oakmont Lane
Westmont, Illinois 60559
(630) 570-3000

(Address, including ZIP code, and telephone number, including
area code, of Registrant’s principal executive offices)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

At August 10, 2004, the registrant had issued and outstanding an aggregate of 73,393,409 shares of Common Stock.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SIRVA, INC.
Consolidated Balance Sheets
At June 30, 2004 and December 31, 2003
(Dollars in thousands except share data)
(Unaudited)

		June 30, 2004					December 31, 2003
Assets
Current assets:
Cash and cash equivalents			$	116,108				$	63,065
Short-term investments			6,396					7,759
Accounts and notes receivable, net of allowance for doubtful accounts of $21,830 and $21,098, respectively			404,078					333,689
Relocation properties related receivables			96,253					39,115
Mortgages held for resale			91,018					58,063
Relocation properties held for resale, net of allowance for loss on sale of $1,200 and $2,200, respectively			62,462					89,128
Deferred income taxes			37,111					37,126
Other current assets			35,513					33,207
Total current assets			848,939					661,152
Investments			102,176					90,255
Property and equipment, net			171,485					180,985
Goodwill			354,425					355,141
Intangible assets, net			230,701					228,359
Other long-term assets			32,820					33,465
Total long-term assets			891,607					888,205
Total assets			$	1,740,546				$	1,549,357
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt			$	2,585				$	560
Current portion of capital lease obligations			4,218					4,551
Short-term debt			123,281					96,430
Accounts payable			102,329					83,393
Relocation properties related payables			127,097					99,494
Accrued transportation expense			93,147					69,694
Insurance claims and reserves			78,197					80,266
Unearned premiums and other deferred credits			79,545					59,331
Accrued income taxes			12,836					6,722
Other current liabilities			97,236					108,815
Total current liabilities			720,471					609,256
Long-term debt			443,711					427,463
Capital lease obligations			16,675					18,072
Deferred income taxes			40,305					35,848
Other liabilities			63,731					63,370
Total long-term liabilities			564,422					544,753
Total liabilities			1,284,893					1,154,009
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $.01 par value, 500,000,000 shares authorized with 75,861,169 issued and 73,267,190 shares outstanding at June 30, 2004 and 73,029,346 issued and 70,435,367 shares outstanding at December 31, 2003			759					730
Additional paid-in-capital			482,439					446,522
Common stock purchase warrant			—					655
Unearned compensation expense			(2,301		)			(3,229		)
Accumulated other comprehensive loss			(18,415		)			(18,542		)
Retained earnings (accumulated deficit)			3,289					(20,670		)
			465,771					405,466
Less cost of treasury stock, 2,593,979 shares at June 30, 2004 and December 31, 2003			(10,118		)			(10,118		)
Total stockholders’ equity			455,653					395,348
Total liabilities and stockholders’ equity			$	1,740,546				$	1,549,357

 

See accompanying notes to consolidated financial statements.

2

SIRVA, INC.
Consolidated Income Statements
For the three months and six months ended June 30, 2004 and 2003
(Dollars in thousands except share and per share data)
(Unaudited)

		Three Months Ended						Six Months Ended
		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Operating revenues		$	668,766		$	579,803		$	1,197,727		$	1,053,996
Operating expenses:
Purchased transportation expense		349,076			320,072			612,415			575,985
Other direct expense		182,382			144,886			337,274			268,523
Total direct expenses		531,458			464,958			949,689			844,508
Gross margin		137,308			114,845			248,038			209,488
General and administrative expense		102,392			88,903			194,764			169,262
Intangibles amortization		1,925			1,279			3,851			2,765
Income from operations		32,991			24,663			49,423			37,461
Other income (expense)		641			(120		)	570			(142		)
Debt extinguishment expense		565			—			565			—
Interest expense		6,782			15,067			13,520			30,080
Income before income taxes		26,285			9,476			35,908			7,239
Provision for income taxes		8,749			3,264			11,949			2,493
Net income		$	17,536		$	6,212		$	23,959		$	4,746
Net income per share—basic		$	0.25		$	0.09		$	0.34		$	0.04
Net income per share—diluted		$	0.23		$	0.09		$	0.32		$	0.04
Average number of common shares outstanding—basic		70,940,651			56,537,026			70,694,529			56,547,003
Average number of common shares outstanding—diluted		75,631,919			58,594,518			75,428,211			58,341,788

 

 

See accompanying notes to consolidated financial statements.

3

SIRVA, INC.
Consolidated Statements of Cash Flows
For the six months ended June 30, 2004 and 2003
(Dollars in thousands)
(Unaudited)

		Six Months Ended
		June 30, 2004					June 30, 2003
Cash flows from operating activities:
Net income			$	23,959				$	4,746
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			26,567					25,128
Change in provision for losses on accounts and notes receivable			1,841					1,730
Deferred income taxes			4,335					5,133
(Gain) loss on sale of assets, net			(4,998		)			443
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts and notes receivable			(69,267		)			(56,844		)
Mortgages held for resale			(32,955		)			(37,050		)
Relocation properties related assets and liabilities			(2,229		)			(10,328		)
Accrued income taxes			6,004					(2,419		)
Accounts payable			17,185					(2,944		)
Other current assets and liabilities			31,740					35,252
Other long-term assets and liabilities			1,100					2,887
Net cash provided by (used for) operating activities			3,282					(34,266		)
Cash flows from investing activities:
Additions of property and equipment			(13,482		)			(9,694		)
Proceeds from sale of property and equipment			7,874					910
Purchases of investments			(52,995		)			(44,876		)
Proceeds from sale or maturity of investments			43,172					39,251
Acquisitions, net of cash acquired			(8,542		)			(30,794		)
Other investing activities			(1,096		)			(1,868		)
Net cash used for investing activities			(25,069		)			(47,071		)
Cash flows from financing activities:
Borrowings on short-term debt			775					1,597
Repayments on short-term debt			(501		)			(2,296		)
Borrowings on mortgage warehouse facilities			458,744					385,835
Repayments on mortgage warehouse facilities			(425,775		)			(351,462		)
Borrowings on relocation financing facilities			32,025					34,489
Repayments on relocation financing facilities			(39,144		)			(19,072		)
Borrowings on long-term debt			316,541					242,307
Repayments on long-term debt			(298,142		)			(203,154		)
Repayments on capital lease obligations			(2,151		)			(3,826		)
Proceeds from exercise of warrants			34,999					—
Other financing activities			(2,399		)			5,073
Net cash provided by financing activities			74,972					89,491
Effect of translation adjustments on cash			(142		)			1,995
Net increase in cash and cash equivalents			53,043					10,149
Cash and cash equivalents at beginning of period			63,065					45,480
Cash and cash equivalents at end of period			$	116,108				$	55,629

 

See accompanying notes to consolidated financial statements.

4

SIRVA, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share data)
(Unaudited)

(1)   Basis of Presentation

This report covers SIRVA, Inc. (SIRVA or the Company) and its wholly owned subsidiaries SIRVA Worldwide, Inc., CMS Holding, LLC, RS Acquisition Holding, LLC and indirect subsidiary North American Van Lines, Inc. (NAVL).

The accompanying unaudited consolidated interim financial statements should be read together with the Company’s audited consolidated financial statements for the twelve months ended December 31, 2003. Certain information and footnote disclosures normally included in the aforementioned financial statements prepared in accordance with generally accepted accounting principles are condensed or omitted. Management of the Company believes the interim financial statements include all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations for the interim periods presented. Certain reclassifications have been made to the consolidated financial statements for the prior periods presented to conform with the June 30, 2004 presentation.

On November 7, 2003, the Company’s Board of Directors approved a 3.17 for 1 stock split of the Company’s common stock, effected by means of a reclassification. The stock split became effective on November 24, 2003. In connection with the stock split, the Company filed a certificate of amendment to its certificate of incorporation on November 10, 2003, which increased the number of shares of its common stock authorized from 24,000,000 to 500,000,000. Periods presented have been restated to show the effect of the stock split.

In accordance with the provisions of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure” (SFAS 148), the Company has elected to continue to account for stock-based compensation under the intrinsic value based method of accounting described by Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (APB 25). Under APB 25, generally no cost is recorded for stock options issued to employees unless the option price is below market at the time options are granted.

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Had the Company elected to apply the provisions of SFAS 123 and SFAS 148 regarding recognition of compensation expense to the extent of the calculated fair value of stock options granted, net income would have changed as follows:

		Three Months Ended						Six Months Ended
		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income available to common stockholders as reported		$	17,536		$	5,070		$	23,959		$	2,514
Equity-based compensation expense included in net income available to common stockholders, net of tax		303			1,420			619			1,420
Pro forma compensation cost under fair value method, net of tax		(1,463		)	(100		)	(2,887		)	(204		)
Pro forma net income available to common stockholders		$	16,376		$	6,390		$	21,691		$	3,730
Basic net income per share, as reported		$	0.25		$	0.09		$	0.34		$	0.04
Basic net income per share, pro forma		$	0.23		$	0.11		$	0.31		$	0.07
Diluted net income per share, as reported		$	0.23		$	0.09		$	0.32		$	0.04
Diluted net income per share, pro forma		$	0.22		$	0.11		$	0.29		$	0.06

 

(2)   Acquisitions and Dispositions

On March 10, 2004, the Company purchased Relocation Dynamics, Inc. (RDI), a U.S.-based specialty relocation services provider, for $1,786, net of acquired cash of $200. The purchase was made with $1,986 in cash, $1,500 paid at closing and $486 paid in April 2004, and contingent consideration of up to $3,000 payable subject to the achievement of certain revenue targets over each of the next five years. The payment of any contingent consideration will be recorded as an adjustment to the purchase price and will result in additional goodwill. The preliminary allocation of RDI’s intangible assets resulted in allocations of $1,485 to customer list, $270 to covenant not to compete and $231 to goodwill. The operations of RDI are included in the Company’s consolidated results effective March 1, 2004.

On April 30, 2004, the Company purchased Rettenmayer Internationale Umzugslogistik GmbH (Rettenmayer), a Germany-based moving and relocation services business for $4,116 in cash, net of acquired cash of $239. The preliminary allocation of Rettenmayer’s intangible assets resulted in allocations of $618 to tradenames, $687 to customer list, $9 to covenant not to compete and $2,922 to goodwill. On August 2, 2004, the Company purchased for $1,202 in cash an additional branch location from the previous Rettenmayer owner to further expand its service capabilities in Germany. The operations of Rettenmayer are (excluding the additional branch location) included in the Company’s consolidated results effective May 1, 2004.

The costs of RDI and Rettenmayer have been preliminarily allocated to the net assets acquired and are subject to adjustment when asset and liability valuations are finalized. These acquisitions are part of the Company’s ongoing strategy to expand relocation and moving capabilities in major regions of the world. RDI’s New Jersey location added another service center on the East Coast to enhance the Company’s service offering to existing and new customers. The acquisition of Rettenmayer will provide the Company with a greater presence in the German market as well as complement its existing businesses in Central and Eastern Europe, and further enhance its “Relocation Redefined” offering to existing and new customers.

On March 25, 2004, the Company sold its long leasehold interest in a parcel of land at its Edinburgh, Scotland facility for $2,740 in cash resulting in a gain of $2,626. On June 30, 2004, the Company sold a fleet services maintenance location in Fontana, California for $2,550 in cash, resulting in a gain of $1,127. These

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sales were in conjunction with the Company’s ongoing plan to rationalize the infrastructure and expense base of its operations to fund incremental investments in sales, marketing and other strategic capabilities that will enable future growth. The gains associated with these sales were recorded as a component of general and administrative expense.

(3)   Income Taxes

The Company’s estimated provision for income taxes differs from the amount computed by applying the U.S. federal and state statutory rates. This difference is primarily due to differences in the statutory rates between the U.S. and countries where the Company has permanently reinvested earnings and tax incentive programs that the Company has qualified for under the laws of certain jurisdictions. At June 30, 2004 and December 31, 2003, the Company’s gross deferred tax assets totaled $89.1 million and $93.3 million, respectively, with corresponding valuation allowances of $0.7 million at both June 30, 2004 and December 31, 2003.

(4)   Cash and Cash Equivalents

Cash and cash equivalents included $46,586 and $34,547 at June 30, 2004 and December 31, 2003, respectively, primarily relating to the Company’s wholly owned insurance subsidiaries. While these cash balances may be used without limitation by the insurance subsidiaries for their operations, the payment of cash dividends by the insurance subsidiaries to the Company is principally dependent upon the amount of their statutory policyholders’ surplus available for dividend distribution. The insurance subsidiaries’ ability to pay cash dividends to the Company is, in turn, generally restricted by law or subject to approval of the insurance regulatory authorities of the states or countries in which they are domiciled. These authorities recognize only statutory accounting practices for determining financial position, results of operations, and the ability of an insurer to pay dividends to its shareholders.

(5)   Short-term Debt

Short-term debt consisted of the following:

		June 30, 2004					December 31, 2003
Mortgage warehouse facilities			$	88,479				$	55,509
Relocation financing facilities			33,678					40,073
Foreign subsidiaries’ lines of credit			1,124					848
			$	123,281				$	96,430

 

In June 2004, the Company entered into an amendment of the revolving credit facility used by its subsidiary, SIRVA Mortgage, Inc. The amendment lowered the amount available to $80,000 from $100,000 and extended the expiration date to June 1, 2005. At June 30, 2004, the Company had an outstanding balance of $58,708 against the revolving credit facility, and $29,771 outstanding against an early purchase facility. Interest on both facilities is payable monthly at a rate of London Interbank Offered Rate (LIBOR) plus 1.375% to 2.875% (effective rate of 2.96% at June 30, 2004). The Company pays a monthly commitment fee of 0.15% on the undrawn portion of the revolving credit facility in months where the average drawn balance is less than $40,000.

A subsidiary, SIRVA Finance Limited, and various subsidiaries of SIRVA Relocation LLC, maintain relocation financing lines in the amount of $72,100 with various European banks. The Company has an outstanding balance of $33,678 at June 30, 2004 and $40,073 on December 31, 2003. Interest is payable monthly or quarterly depending on the lenders, at a rate of LIBOR plus 0.60% - 1.50% (effective rate of

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5.23% - 6.13% on June 30, 2004). A commitment fee between 0% and 0.60% is charged on the undrawn balances.

Certain wholly owned foreign subsidiaries maintain credit facilities totaling $24,331 at June 30, 2004. Interest is payable monthly or quarterly at the base lending rate plus margins between .85% and 1.75% (effective rates between 3.65% and 8.55%) as of June 30, 2004. Commitment fees range from 0% to 0.625% on the non-utilized portion of an applicable credit facility. As of June 30, 2004 and December 31, 2003, the outstanding balance was $1,124 and $848, respectively. The Company has $7,436 of bank guarantees issued against these credit lines at June 30, 2004. Certain of these facilities are guaranteed by the Company.

(6)   Other Current Liabilities

Other current liabilities consisted of the following accruals:

		June 30, 2004					December 31, 2003
Compensation and benefits			$	21,474				$	29,802
Outstanding checks			13,785					13,759
Customer relocation expense			19,983					12,980
Customer and agent incentives			7,898					12,772
Sales, fuel and other non-income taxes			10,491					10,558
General and administrative			7,324					10,224
Interest and interest swap agreements			1,838					3,917
Deferred purchase price consideration			1,285					3,357
Facilities expense			2,336					909
Restructuring expense			322					392
Other			10,500					10,145
			$	97,236				$	108,815

 

(7)   Long-term Debt

Long-term debt consisted of the following:

		June 30, 2004					December 31, 2003
Term loan			$	415,000				$	415,000
Revolving credit facility			23,491					—
Senior subordinated notes			6,025					11,025
Other			1,780					1,998
Total debt			446,296					428,023
Less current maturities			2,585					560
Total long-term debt			$	443,711				$	427,463

 

The Company retired $5,000 of 13 3/8% Senior Subordinated notes on June 25, 2004. The Company paid an 8% early prepayment premium of $400 and wrote off deferred debt issuance costs of $165. The Company expects to retire the remainder of these notes by year end 2004.

The consolidated leverage ratio and interest coverage ratio, as defined in the Company’s credit agreement, at June 30, 2004 were 2.54 to 1.00 and 7.38 to 1.00, respectively, compared to required ratios of less than 3.50 to 1.00 and greater than 3.25 to 1.00, respectively.

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(8)   Stockholders’ Equity

		Stockholders’ Equity
		Total			Retained earnings (accumulated deficit)					Accumulated other comprehensive  loss					Common stock					Common stock purchase warrant					Additional paid-in- capital					Unearned compensation					Treasury  stock
Balance at December 31, 2003		$	395,348			$	(20,670	)			$	(18,542	)			$	730				$	655				$	446,522				$	(3,229	)			$	(10,118	)
Comprehensive income (loss):
Net income		23,959				23,959					—					—					—					—										—
Unrealized hedging gain, net of tax of $828		1,537				—					1,537					—					—					—										—
Net change in unrealized holding loss on available-for-sale securities, net of tax benefit of $(137)		(254		)		—					(254		)			—					—					—										—
Foreign currency translation adjustment, net of tax of $(622)		(1,156		)		—					(1,156		)			—					—					—										—
Total comprehensive income		24,086				—					—					—					—					—										—
Issuance of common stock		99				—					—					—					99					—
Stock issuance costs		(275		)		—					—					—					—					(275		)			—					—
Unearned compensation		928				—					—					—					—					—					928					—
Stock options exercised		186				—					—					—					—					186					—					—
Tax benefit of stock options exercised		282				—					—					—					—					282					—					—
Exercise of warrants		34,999				—					—					29					(655		)			35,625					—
Balance at June 30, 2004		$	455,653			$	3,289				$	(18,415	)			$	759				$	0				$	482,439				$	(2,301	)			$	(10,118	)

 

The stock issuance costs incurred during the six months ended June 30, 2004 relate to the Company’s initial public offering completed in the fourth quarter of 2003.

A secondary offering of the Company’s common stock was completed on June 15, 2004. The shares were offered by selling stockholders who, prior to the secondary offering, owned approximately 68% of the Company’s outstanding stock. The Company did not receive any proceeds from the sale of the shares offered. During the six months ended June 30, 2004, the Company incurred $1,189 of expenses related to the secondary offering, which were recorded in general and administrative expense.

In conjunction with the secondary offering, one of the selling stockholders, Exel plc, fully exercised warrants that it had previously received as part of the Allied group acquisition in November 1999. These were the Company’s only outstanding warrants. The Company received proceeds of $34,999 and issued 2,773,116 shares of common stock in connection with this exercise. Subsequent to the secondary offering and the exercise of warrants, the selling stockholders owned approximately 37% of the Company’s outstanding stock.

(9)   Commitments and Contingencies

(a)  Litigation

The Company was a defendant in a personal injury suit resulting from a 1996 accident involving one of its agent’s drivers. The case was tried in 1998, and the Company was found liable. After appeals, a final judgment of $15,229 was rendered in 2002 and fully paid by the Company and two of its insurers. After certain insurance payments and reimbursements, the Company has paid $7,637, which the Company believes is fully reimbursable by insurance; however, one of the Company’s several co-insurers of this case filed suit contesting its coverage obligation. The Company filed a counterclaim and cross-claim seeking reimbursement for all remaining amounts that the Company paid in satisfaction of the judgment and associated costs and expenses. The Company filed a motion for summary judgment in August 2003, and the court issued a final award to the Company. Both the co-insurer and the Company have filed notices of appeal. The Company has a reserve that it considers appropriate under the circumstances.

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The Company has produced and is producing records in response to grand jury subpoenas issued in July 2002 and January 2003 in connection with an investigation being conducted by attorneys in the Department of Justice Antitrust Division through a grand jury in the Eastern District of Virginia. The Company is cooperating with the investigation and understands that numerous other companies have received similar subpoenas.

Some of the Company’s moving services operations in Europe are being investigated by European antitrust regulators. The investigations are in the early stages and involve certain anti-competitive practices. The investigations could expose the Company to administrative and other penalties. The Company is cooperating with the investigations, which the Company expects will take several years to complete.

Management believes that, based on information currently available to it, the outcome of the Department of Justice and European antitrust investigations will not have a material adverse impact on the Company’s overall operations or financial condition, although there can be no assurance that it will not. Any potential penalties, however, may have a material impact on the Company’s earnings in the period in which they are recognized.

The Company and certain subsidiaries are defendants in numerous lawsuits relating principally to motor carrier operations. In the opinion of management, the amount of the Company’s ultimate liability resulting from these matters should not materially affect the Company’s financial position, results of operations or liquidity.

(b)  Environmental Matters

The Company has been named as a potentially responsible party (PRP) in two environmental cleanup proceedings brought under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or similar state statutes. Based on all known information, the Company believes that the cost to resolve liability at these sites would not be materially or significantly larger than the reserves established, which totaled $35 as of June 30, 2004 and December 31, 2003. These reserves are based upon the Company’s allocation of the total estimated cleanup costs as a de minimis contributor pursuant to agreed orders executed with the Indiana Department of Environmental Management and the U.S. Environmental Protection Agency. The Company has made no provision for expected insurance recovery. The Company could incur significant unanticipated costs, however, if additional contamination is found at these sites, or if it is named as a PRP in other proceedings.

The Company owns or has owned and leases or has leased facilities at which underground storage tanks are located and operated. Management believes that the Company has taken the appropriate and necessary action with regard to releases that have occurred. Based on its assessment of the facts and circumstances now known, management believes that it has recorded appropriate estimates of liability for those environmental matters of which the Company is aware. Further, management believes it is unlikely that any identified matters, either individually or in aggregate, will have a material effect on the Company’s financial position, results of operations or liquidity. As conditions may exist on these properties related to environmental problems that are latent or as yet unknown, there can be no assurance that the Company will not incur liabilities or costs in the future, the amount of which cannot be estimated reliably at this time.

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(c)  Purchase Commitments

Purchase commitments consisted of the following:

		June 30, 2004					December 31, 2003
Outsourcing agreements			$	150,318				$	158,954
Software licenses, transportation equipment and other			5,930					8,098
			$	156,248				$	167,052

 

On July 1, 2002, the Company entered into a ten-year purchase commitment with Covansys Corporation and Affiliated Computer Services, Inc. to provide selected outsourcing services for the Company’s domestic information systems infrastructure, including data center operations and telecommunications and certain application software development. As of June 30, 2004, the remaining purchase commitment was $150,318. For the six months ended June 30, 2004, the Company paid Covansys $4,511. Covansys Corporation is a related party, as 34.3% of its outstanding common stock is beneficially owned by Clayton, Dubilier & Rice Fund VI Limited Partnership, a Cayman Islands exempted limited partnership (Fund VI). As of June 30, 2004, Fund VI held approximately 9.7% of the capital stock of the Company. Fund VI is managed by Clayton, Dubilier & Rice, Inc., a private investment firm that is organized as a Delaware corporation, and is an affiliate of the Company’s largest stockholder, Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman Islands exempted limited partnership.

(10)   Earnings Per Share

A reconciliation of reported net income to net income available to common stockholders and a reconciliation of basic to diluted weighted average common shares are as follows:

		Three months ended June 30						Six months ended June 30
		2004			2003			2004			2003
Net income		$	17,536		$	6,212		$	23,959		$	4,746
Less preferred share dividends		—			959			—			1,901
Less accretion of redeemable common stock		—			183			—			331
Net income available to common stockholders		$	17,536		$	5,070		$	23,959		$	2,514
Basic weighted average common shares outstanding		70,940,651			56,537,026			70,694,529			56,547,003
Assumed conversion of stock options and awards		4,691,268			2,057,492			4,733,682			1,794,785
Diluted weighted average common shares outstanding		75,631,919			58,594,518			75,428,211			58,341,788
Net income per share—basic		$	0.25		$	0.09		$	0.34		$	0.04
Net income per share—diluted		$	0.23		$	0.09		$	0.32		$	0.04

 

Options to purchase 57,500 shares of common stock were outstanding at June 30, 2004 but were not included in the computation of diluted earnings per share. Warrants to purchase 2,773,116 shares of common stock were outstanding at June 30, 2003 but were not included in the computation of diluted earnings per share. These options and warrants were excluded from the computations because the options’ and warrants’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

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(11)   Operating Segments

The Company has four reportable segments—1) Relocation Solutions-North America, 2) Relocation Solutions-Europe and Asia Pacific, together forming Global Relocation Solutions, 3) Network Services, and 4) Transportation Solutions. Intersegment transactions, principally relating to international operations, are recorded at market rates as determined by management. The consolidation process results in the appropriate elimination of intercompany transactions, with revenues reflected in the segment responsible for billing the end customer.

Global Relocation Solutions

The Company’s Global Relocation Solutions business provides a combination of relocation services, global mobility services and moving and storage services that it tailors by geographic region to the specific needs of its customers. Global Relocation Solutions is comprised of the Relocation Services—North America and the Relocation Solutions—Europe and Asia Pacific reportable segments. This business provides the following services:

·       Moving and Storage Services:

·        Household Goods:  The Company provides worldwide household goods moving and storage services, including sales, packing, loading, transportation, delivery and warehousing. In the U.S. and Canada, moving and storage services are provided through a network of exclusive agents. Outside of the U.S. and Canada, the Company provides these services through a network of company owned branches throughout the U.K., Europe and the Asia Pacific region.

·        Commercial Customers:  The Company provides a broad portfolio of services to commercial customers, including office and industrial relocations and records management.

·        Transportation of High-Value Products:  The Company provides customized solutions to facilitate the movement of high-value products that require specialized transport and handling such as electronics, telecommunications and medical equipment and fine art.

·       Relocation Services:

             Relocation services include realtor services for home sales and purchases, tax and expense management, closing and destination services.

·       Global Mobility Services:

             These services include assignment management programs, destination services to identify housing, schools, and other critical client needs, as well as expatriate tax and expense management services.

Network Services

The Company’s Network Services segment offers a variety of services for truck drivers, fleet owners and agents, both inside and outside the Company’s network. Services offered include insurance coverage such as vehicle liability, occupational accident, physical damage and inland marine insurance coverage, as well as truck maintenance and repair services and group purchasing. In addition, the Company offers a suite of services including fuel, cell phone, tire services, legal assistance and retirement programs to the members of the Company’s National Association of Independent Truckers, an association of independent contract truck drivers.

Transportation Solutions

The Company provides a unique combination of third-party logistics transportation solutions designed to benefit a select market niche of customers that require transportation management, inventory visibility

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at the serialized level, and delivery solutions that are coordinated at the item level to deliver commercial goods that require specialized handling in a timely manner, and with the proper equipment to fit the situation.

The tables below represent information about operating revenues, income (loss) from operations and total assets by segment:

		Three Months Ended										Six Months Ended
		June 30, 2004					June 30, 2003					June 30, 2004			June 30, 2003
Operating Revenues
Relocation Solutions—North America			$	454,709				$	410,795			$	779,726		$	726,307
Relocation Solutions—Europe and Asia Pacific			130,551					105,174				261,792			206,463
Global Relocation Solutions			585,260					515,969				1,041,518			932,770
Network Services			56,716					39,060				103,219			74,566
Transportation Solutions			26,790					24,774				52,990			46,660
Consolidated operating revenues			$	668,766				$	579,803			$	1,197,727		$	1,053,996
Income (loss) from operations
Relocation Solutions—North America			$	18,994				$	13,530			$	21,084		$	15,419
Relocation Solutions—Europe and Asia Pacific			3,011					3,015				8,325			6,627
Global Relocation Solutions			22,005					16,545				29,409			22,046
Network Services			11,853					9,674				21,392			17,732
Transportation Solutions			1,191					844				1,663			363
Corporate			(2,058		)			(2,400		)		(3,041		)	(2,680		)
Consolidated income from operations			$	32,991				$	24,663			$	49,423		$	37,461

 

		As of
		June 30, 2004			December 31, 2003
Total assets
Relocation Solutions—North America		$	930,186			$	809,590
Relocation Solutions—Europe and Asia Pacific		455,844				449,542
Global Relocation Solutions		1,386,030				1,259,132
Network Services		329,608				267,487
Transportation Solutions		24,908				22,738
Consolidated total assets		$	1,740,546			$	1,549,357

 

(12)   Benefit Plans—Components of Net Periodic Cost

Information on the Company’s domestic and foreign defined benefit and postretirement benefit plans and amounts recognized in the Company’s consolidated income statements, based on actuarial valuation, is as follows:

				Pension Benefits
				Three Months Ended										Six Months Ended
Combined Plans Excluding United Kingdom				June 30, 2004					June 30, 2003					June 30, 2004					June 30, 2003
Interest cost					$	1,755				$	1,649				$	3,510				$	3,453
Service cost					4					4					8					8
Expected return on plan assets					(1,704		)			(1,380		)			(3,408		)			(2,893		)
Amortization of recognized actuarial loss					611					672					1,221					1,408
Net periodic benefit cost					$	666				$	945				$	1,331				$	1,976

 

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				Pension Benefits
				Three Months Ended										Six Months Ended
United Kingdom				June 30, 2004					June 30, 2003					June 30, 2004					June 30, 2003
Interest cost					$	862				$	898				$	1,738				$	1,788
Service cost					740					1,049					1,494					2,087
Expected return on plan assets					(1,102		)			(1,151		)			(2,220		)			(2,290		)
Amortization of recognized actuarial loss					59					197					117					391
Net periodic benefit cost					$	559				$	993				$	1,129				$	1,976

 

				Postretirement Benefits
				Three Months Ended										Six Months Ended
Combined Plans				June 30, 2004					June 30, 2003					June 30, 2004					June 30, 2003
Interest cost					$	278				$	253				$	557				$	507
Service cost					33					25					66					50
Amortization of prior service benefit curtailment gain					(139		)			(116		)			(278		)			(233		)
Amortization of recognized actuarial loss					90					63					180					126
Net periodic benefit cost					$	262				$	225				$	525				$	450

 

As of June 30, 2004, the Company had no 2004 funding requirements for its pension or postretirement plans; however, the Company may make voluntary contributions ranging from $1,000 to $5,000.

(13)   Restructuring

In June 2001, the Transportation Solutions operating segment established a program to exit the parts center business. The charges included severance and employee benefit costs for 293 employees, and lease and asset impairment costs to shut down and exit the parts center business by the end of 2001. Due to lease terms, certain facility lease payments will continue through September 2005. At June 30, 2004, the restructuring accrual was $322 after lease payments of $70 were made during the six months ended June 30, 2004.

(14)   Equity-Based Compensation Expense

For the three and six months ended June 30, 2004, the Company recognized $454 and $928, respectively, of non-cash equity-based compensation expense in relation to stock subscriptions and stock option grants made to certain managers and directors in 2003. For the three and six months ended June 30, 2003, the Company recognized $2,149 of expense in relation to these subscriptions and grants. The expense has been recorded as a component of general and administrative expense as the difference between the subscription or exercise price and the deemed fair value of the Company’s common and redeemable common stock on the date of grant in accordance with APB 25. The total non-cash equity-based compensation expense to be recognized by the Company in respect of these transactions is $6,766. The Company expects to recognize $292 and $272 in the three months ending September 30, 2004 and December 31, 2004, respectively.

(15)   Home Equity Advance Receivable Securitization

Effective June 30, 2004, the Company implemented a program to allow for the expansion in its SIRVA Relocation subsidiary’s home equity advance offering without a corresponding cash usage. SIRVA Relocation sells a receivable portfolio through a wholly owned special purpose vehicle SIRVA Relocation

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Credit, LLC (SRC). SRC sells the eligible receivables on a non-recourse basis to an unaffiliated third party bank. The fair value of these receivables is based on their relative fair values, taking into account the history of performance of these types of receivables, the underlying security of the collateralization and current interest rates and economic conditions. The Company retains an interest in the receivables of 15%, which is recorded in accounts and notes receivable. SRC provides servicing of the receivables under the terms of the contract.

The receivables are primarily home equity advances and other payments to transferees and corporate clients and are collateralized by promissory notes, the underlying value of the properties and contract arrangements with the corporate clients. The loans generally are due within 180 days or upon the sale of the underlying property. Under the terms of the sales agreement, the Company is responsible to service the loans during their life, including administration and collection on the receivables, on behalf of the unaffiliated third party bank. Servicing fees the Company receives under the sales agreement are deemed adequate compensation to it for performing the servicing; accordingly, no servicing asset or liability has been recognized in the accompanying financial statements. The transaction qualifies as a sale under SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.”

The Company received cash of $28,411 for the initial portfolio of receivables sold on June 30, 2004. The Company retains an interest in each securitized portfolio. The fair values of the retained interests are estimated taking into consideration both historical experience and current projections with respect to the transferred assets’ future credit losses. The key assumptions used when estimating the fair value of the retained interests include the discount rate (which generally averages approximately 5%), the expected weighted-average life (which averages approximately four months) and anticipated credit losses (which are expected to be immaterial based on historical experience). The interests retained in the transferred receivables are carried at amounts that approximate fair value and totaled $9,018 at June 30, 2004. Credit losses, net of recoveries, relating to the retained interests are not material to the consolidated financial statements. An immediate 10% or 20% adverse change in these assumptions would reduce the fair value of the retained interests at June 30, 2004 by approximately $902 and $1,804, respectively.

(16)   Related Party Transactions

The Company is a party to a consulting agreement with Clayton, Dubilier & Rice, Inc. whereby Clayton, Dubilier & Rice, Inc. receives a management fee for financial advisory and management consulting services. For the six months ended June 30, 2004, such fees were $500.

NAVL has guaranteed loans made by a third-party lender to various members of its management, including one of its executive officers in the amount of $160, in connection with their investment in SIRVA. NAVL would become liable in the event that a member of management would fail to repay the principal and interest when due. The loans were made prior to passage of the Sarbanes-Oxley Act. Subsequent to its passage, the Company adopted a policy prohibiting it or any of its subsidiaries from making loans to or guaranteeing loans of directors and executive officers.

(17)   Recent Accounting Pronouncements

In December 2002, the FASB issued a revised SFAS No. 132, “Employers’ Disclosures About Pensions and Other Postretirement Benefits.” In 2003, the Company adopted the revised disclosure requirements of this pronouncement, except for certain disclosures about estimated future benefit payments that are not required until the year ended December 31, 2004.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). In December 2003, FIN 46 was revised (FIN 46R) to clarify some of the provisions of FIN 46 and exempt certain entities from its requirements. Application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as

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special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. The adoption of FIN 46R did not result in a material impact to the Company’s consolidated balance sheets or income statements.

In December 2003, the United States Congress enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act established a prescription drug benefit under Medicare (Medicare Part D), and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the FASB issued Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-2). Management is in the process of determining the impact of this issue on their business, results of operations, financial position and liquidity. Therefore, in accordance with FSP 106-2, the accumulated postretirement benefit obligation and net period postretirement benefit cost included in the consolidated financial statements and disclosed above do not reflect the effects of the Act.

In March 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share” (EITF 03-6). This issue addressed changes in the reporting calculation and requirements of earnings per share, providing the method to be used when a company has granted, holders of any form of security, rights to participate in the earnings of the Company along with the participation rights of common stockholders. The Company has reviewed the contractual rights granted for stock warrants, options, and now-retired junior preferred stock and concluded that EITF 03-6 does not affect the Company’s reporting and disclosure requirements.

In June 2004, the EITF issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). The issue is to determine the meaning of other-than-temporary impairment and its application to debt and equity securities within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), certain debt and equity securities within the scope of SFAS No. 124, and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method of accounting. The impairment methodology for various types of investments accounted for in accordance with the provisions of APB Opinion 18, “The Equity Method of Accounting for Investments in Common Stock”, and SFAS 115 is predicated on the notion of other than temporary that is ambiguous and has led to inconsistent application. The Task Force reached a consensus that the application guidance in EITF 03-1 should be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The recognition and measurement guidance of EITF 03-1 should be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. Management is in the process of determining the impact of EITF 03-1 on their business, results of operations, financial position, and liquidity.

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