UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

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

For the fiscal year ended December 31, 2004

OR

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

Commission file number: 001-31902


SIRVA, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

52-2070058

(State of incorporation)

 

(I.R.S. Employer Identification No.)

700 Oakmont Lane

 

 

Westmont, Illinois

 

60559

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code:

(630) 570-3000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

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 o  No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was sold as of the close of business on June 30, 2005, was $416,771,931. Registrant does not have any nonvoting equity securities.

As of October 31, 2005, 73,935,717 shares of the Registrant’s common stock were outstanding.

 




TABLE OF CONTENTS

 

Page

 

PART I

ITEM 1.

BUSINESS

3

 

ITEM 2.

PROPERTIES

28

 

ITEM 3.

LEGAL PROCEEDINGS

28

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

31

 

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

32

 

ITEM 6.

SELECTED FINANCIAL DATA

33

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

38

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

83

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

85

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

184

 

ITEM 9A.

CONTROLS AND PROCEDURES

184

 

ITEM 9B.

OTHER INFORMATION

189

 

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

190

 

ITEM 11.

EXECUTIVE COMPENSATION

197

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

204

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

207

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

209

 

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

210

 

 


When we refer to “SIRVA”, “our company”, “the Company”, “our”, “we” or “us”, we are referring to SIRVA, Inc., together with its subsidiaries and their predecessors, except where the context otherwise requires.

2




ITEM 1.                BUSINESS

General

Our Securities and Exchange Commission (“SEC”) filings, which include this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all related amendments, are available free of charge on our website at www.sirva.com and can be found by clicking on “Investors” or “For Investors” and then “SEC Filings.” Our SEC filings are available as soon as reasonably practicable after we electronically submit this material to the SEC. Last year, we filed our annual Chief Executive Officer certification, dated June 1, 2004, with the New York Stock Exchange. Attached as exhibits to this Form 10-K, you will find certifications of our Chief Executive Officer and Chief Financial Officer as required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

Global Relocation Solutions

We are a world leader in the global relocation industry, providing our relocation solutions (relocation services and moving services) to a well-established and diverse customer base, including more than 10,000 corporate clients and governmental agencies, as well as thousands of individual consumers around the world. Our goal is to deliver comprehensive, customizable relocation solutions that improve transferees’ relocation experience, streamline administration, reduce risk exposure and lower relocation costs. The services that we provide include counseling to the transferee, referrals to real estate brokers and agents for assisting the transferees with the sale and purchase of their home, mortgage originations, expense management, movement of household goods, global program management and the provision of destination “settling in” services. We market and deliver these services globally under the SIRVA® Relocation brand and under a variety of household goods moving brands worldwide.

We deliver our relocation services through our operating centers located in the United States (ten centers), the United Kingdom (three centers), continental Europe (six centers), Australia, (two centers), New Zealand (one center) and Asia (five centers). In each of these locations, our customer service and account management teams interact with our corporate clients and their transferring employees on a regular basis to meet their global relocation needs. Most corporate relocations originate from the United States and the United Kingdom.

We are also a world leader in handling the movement of household goods. We operate in more than 40 countries under well-recognized brand names, including Allied®, northAmerican®, and Global® in North America; Pickfords, Hoults and Allied Pickfords in the United Kingdom; Maison Huet in France; Kungsholms in Sweden; ADAM in Denmark; Majortrans Flytteservice in Norway; Allied Arthur Pierre in Belgium, Luxembourg, Holland and France; Rettenmayer in Germany and Allied Pickfords in the Asia Pacific region. Our moving services for corporate, military/government and consumer clients are provided through our worldwide proprietary agent network. In North America, we provide moving services through our branded network of 735 agents who own the trucks and trailers used in moves and are responsible for the packing, hauling, storage and distribution of household goods. We act as a network manager for our agents, providing, among other services, brand management, sales and marketing support, interstate dispatch and planning, billing, collection and claims handling. Outside of North America, we provide moving services through a network of company-operated, agent-owned and franchised locations in Europe and the Asia Pacific region.

We are redefining the global relocation market by combining our relocation service offerings with our proprietary moving services network on a global basis. Our relocation and moving services are provided by a team of more than 6,000 employees around the world.

3




Historical Development

We were organized by Clayton, Dubilier & Rice Fund V Limited Partnership, a Cayman Islands exempted limited partnership (“Fund V”) and our largest stockholder, to acquire North American Van Lines, Inc. in March 1998. North American Van Lines, originally organized in 1933, is one of the leading providers of household goods moving services in North America. We then acquired the Allied Van Lines, Inc. (“Allied”) and the Pickfords and Allied Pickfords businesses from Exel Investments Limited (formerly NFC plc) in November 1999. Allied is a leading provider of household goods moving services in North America, and the Pickfords and Allied Pickfords brands operate in Europe and the Asia Pacific region. The combination of North American Van Lines, Allied Van Lines, Pickfords and Allied Pickfords created one of the largest household goods moving companies globally. As we expanded our moving services footprint, we identified a significant opportunity to leverage our services to become a leading provider of comprehensive relocation solutions for our corporate moving customers. To take advantage of this opportunity, in 2002, we received additional capital from Clayton, Dubilier & Rice Fund VI Limited Partnership, a Cayman Islands exempted limited partnership (“Fund VI”), to acquire the relocation services businesses of Cooperative Resource Services, Ltd (“CRS”). We acquired Rowan Simmons Relocation Ltd later in 2002, which in combination with CRS, established the basis for the Global Relocation Services segment.

We have continued to pursue strategic acquisitions since that time in order to strengthen our core operations. Through December 31, 2004, we have completed twelve acquisitions each with a purchase price exceeding $1.0 million. The latest acquisition of Executive Relocation Corporation was completed in December 2004. This acquisition significantly enhances our scale and overall market share. For a more detailed discussion on our acquisitions, please see Note 3, in the accompanying consolidated financial statements contained in Item 8 below. The table below reflects our acquisition history for the years ended December 31, 2004, 2003 and 2002.

Revenue from continuing operations

 

 

 

Type of 
Business—
Region(3)

 

Acquisition
Date

 

2004

 

Restated(1)
2003

 

Restated(1)
2002

 

North American Van Lines, Allied Van Lines, Pickfords and Allied Pickfords

 

MS—NA,
EU, AP

 

March 1998 and
November 1999

 

$

1,710.5

 

 

$

1,578.4

 

 

 

$

1,507.8

 

 

Core Moving Services Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage change from prior year

 

 

 

 

 

8.4%

 

 

4.7%

 

 

 

(11.5)%

 

 

Cooperative Resource Services (CRS)

 

RS—US

 

May 2002

 

1,448.1

 

 

986.6

 

 

 

454.5

 

 

Rowan Simmons(2)

 

RS—EU

 

July 2002

 

7.0

 

 

6.6

 

 

 

2.7

 

 

Core Relocation Services  Business

 

 

 

 

 

1,455.1

 

 

993.2

 

 

 

457.2

 

 

Insurance Services

 

NS—US

 

November 1999

 

119.7

 

 

95.9

 

 

 

74.8

 

 

Fleet and Driver Services

 

NS—US

 

March 1998

 

52.9

 

 

52.0

 

 

 

43.5

 

 

Core Network Services Business

 

 

 

 

 

172.6

 

 

147.9

 

 

 

118,3

 

 

National Association of Independent Truckers (NAIT)

 

NS—US

 

April 2002

 

24.2

 

 

21.6

 

 

 

9.3

 

 

Maison Huet

 

MS—EU

 

June 2002

 

9.2

 

 

8.5

 

 

 

4.8

 

 

Scanvan (Kungsholms, Adams, MajorTrans)

 

MS—EU

 

June 2003

 

57.6

 

 

37.0

 

 

 

 

 

PRS Europe NV

 

RS—EU

 

December 2003

 

4.1

 

 

 

 

 

 

 

Move-Pak

 

NS—US

 

December 2003

 

14.0

 

 

 

 

 

 

 

Relocation Dynamics, Inc. (RDI)

 

RS—US

 

March 2004

 

3.5

 

 

 

 

 

 

 

Rettenmayer(2)

 

MS—EU

 

April 2004

 

16.5

 

 

 

 

 

 

 

D.J. Knight & Co., Ltd. (DJK)

 

RS—US

 

September 2004

 

2.0

 

 

 

 

 

 

 

Executive Relocation Corporation (ERC)

 

RS—US

 

December 2004

 

1.0

 

 

 

 

 

 

 

Total SIRVA

 

 

 

 

 

$

3,470.3

 

 

$

2,786.6

 

 

 

$

2,097.4

 

 

 

4





(1)           SIRVA’s financial statements contained within this report have been restated to reflect the correction of errors in previously issued financial statements. For a full explanation of the restatement, together with the circumstances and processes surrounding the restatement, please refer to Item 7, Management’s Discussion and Analysis of Financial Results, Note 2 in the consolidated financial statements contained in Item 8 and in Management’s Assessment of Internal Controls located in Item 9A of this annual report on Form 10-K.

(2)           The Rowan Group PLC and SIRVA Conveyancing Limited (formerly Simmons Conveyancing Limited) are referred to collectively throughout this report as Rowan Simmons. Rettenmayer Internationale Umzugslogistik GmbH is referred to as Rettenmayer throughout this report. The primary operations of Rettenmayer were purchased in April 2004. In addition, in August 2004, we completed the purchase of the Rettenmayer operation with the acquisition of Eduard Löhle Sen. GmbH Internationaler Möbeltransport.

(3)           Regional specifications include: NA denoting North America, EU denoting Europe, US denoting United States, and AP denoting Asia Pacific. Business specifications include: MS denoting Moving Services, RS denoting Relocation Services and NS denoting Network Services.

Capital Structure

We began the initial public offering (“the Offering”) of shares of our common stock on November 25, 2003. In connection with the Offering, we refinanced our senior credit facility with a new senior credit facility, which permits us and certain of our foreign subsidiaries to borrow funds.

In connection with the Offering, we offered to repurchase all of the 133¤8% senior subordinated notes due in 2009 issued by North American Van Lines, Inc. A portion of the net proceeds from the Offering and borrowings under the new senior credit facility were used to finance the note repurchase. In connection with the tender offer, we received the requisite consents to amend the indenture governing such notes to eliminate substantially all of the restrictive covenants and certain other provisions. Approximately 93% of the notes were tendered in connection with the repurchase offer. In 2004, we redeemed the remaining $11.0 million of 133¤8% senior subordinated notes.

In June 2004, we completed a secondary public offering that consisted of shares held by our three largest stockholders, reducing their ownership from approximately 68% to 37%. We did not receive any proceeds from this offering. In conjunction with the offering, one of the selling stockholders fully exercised its warrants. These were our only outstanding warrants and resulted in proceeds to us of $35.0 million and the issuance of an additional 2,773,116 common shares.

Business Segments

In determining reportable segments, we periodically review several qualitative and quantitative factors associated with our operating segments. These factors include management reporting, organizational structure, operating revenues, income from continuing operations, assets, customers, services, operating margins and other economic characteristics. Reflecting the increasing importance that the Relocation business plays in our overall financial performance, we began in the fourth quarter of 2004 to report our results in the following five reportable segments: Global Relocation Services, Moving Services North America, Moving Services Europe and Asia Pacific, Network Services and Corporate.

Global Relocation Services

We offer our corporate customers complete outsourcing of the administration of their employee relocation programs. These services include home sale and home purchase assistance, global program consultation and management, expense tracking, compliance reporting, tax reporting and payroll interface services. We have the ability to aggregate data across all of the corporation’s relocation activities, providing clients a valuable overview of their relocation program expenses and suggest ways to cut costs and improve services.

5




Our goal is to meet the needs of transferees with a full suite of customer-focused, innovative service offerings. These services include:

Home Sale.   On behalf of our corporate customers, we appraise the value and arrange for the sale of a transferring employee’s home. In most cases, we provide an advance on the equity in the home enabling the employee to purchase a new home before the existing home is sold. In addition, under some programs, if an employee’s home is not sold within a specified time frame, we purchase the home based on an objective appraised value and continue to market the property until it is sold. We provide these services under two different product offerings. Under a traditional model, we provide all services on a cost plus basis, and any loss on the home sale and all holding costs incurred while the house is “in inventory” are borne by the corporate customer. Under a “fixed fee” model, we provide all of these services to our U.S. corporate customers for a fixed fee, set as a percentage of the transferee’s home value.

In the fixed fee offering, we take responsibility for all costs in the home sale process and agree to purchase the home if it is not sold within the pre-determined, contractual time frame agreed upon with the corporate customer or if a third-party sale falls through. When we take a home into inventory, which, in our experience, occurs approximately 11% of the time, we are responsible for all carrying costs and any loss on resale of the home. When we purchase the transferee’s home, we either continue to service the transferee’s mortgage until the home is sold or, in the case of government service agencies and some corporate clients, we immediately pay off the mortgage. We have a comprehensive and sophisticated process for minimizing our risk and cost of providing the fixed fee offering and have experienced acceptable home sale losses on individual properties over the history of the program. We believe this model better aligns our interests with those of our customer, as it is in our mutual interests to avoid holding houses in inventory for long periods of time and incurring losses on resale. Our fixed fee product has grown at a significant rate, and for the year ended December 31, 2004 represented approximately 54% of our corporate relocations. We expect this percentage to decline in the future due to the late December 2004 acquisition of Executive Relocation Corporation, which did not offer a fixed fee product at the time of acquisition.

Under both programs, we utilize our network of independent real estate brokers to assist with the transferee home sale and in the United States receive a referral fee from the broker.

Home Purchase.   Our home finding service provides transferees with the tools to empower them throughout the home purchasing process. At each stage of the process, we provide appropriate information, guidance and materials to make the transferee an informed buyer. As with the home sale process, we utilize our network of independent real estate brokers to assist corporate transferees in locating a new home at the destination location. In the United States, we provide this service at no cost to our customer, but receive a referral fee from the real estate broker for any home purchase. In Europe, we perform this service for an agreed upon set fee. We actively monitor and rate our real estate brokers to ensure cost-effective, high-quality service.

Mortgage Origination.   SIRVA Mortgage, Inc. (“SIRVA Mortgage”) focuses on the mortgage needs of the transferring employee. Our mortgage services complement our home finding services and simplify the overall relocation process for the transferee while reducing total relocation costs for our corporate client. We simplify relocation lending by providing free consultation, quick pre-approval, minimal paperwork, relocation-specific loan programs, direct bill arrangements and one-stop shopping through our multi-lender network. SIRVA Mortgage’s multi-lender approach allows us to research rates and loan options offered by national lenders and help the consumer make an informed decision. We provide mortgage services to our customers’ transferees, underwriting the mortgage for a transferee’s home purchase. Before a mortgage is underwritten, we obtain the agreement of one of various third-party financial institutions to purchase the mortgage from us. There typically is a processing lag of 20 to 30 days from the time we write the mortgages to the time we complete the sale. During this time, the mortgages

6




are carried as current assets and are financed through our mortgage warehouse facility. For the years ended December 31, 2004 and 2003, we originated $1,035.1 million and $836.6 million of mortgages, respectively.

Destination Services.   We assist corporations in making relocations more successful by providing a range of services that reduces the inconvenience to transferees (and their families) and facilitates their integration into the new location. These services include city orientation, school selection, visa and immigration management, language and cultural training and other services. We provide these services through a combination of third-party contractors and SIRVA employees, depending, in part, upon the custom for such services in the local market. In cases where we utilize third parties for these services, we typically receive a referral fee from the local service provider.

Global Services.   We have Global Service Centers in 12 countries, with a network of certified business suppliers in over 150 countries, enabling us to provide global solutions to local issues. Through these global offices, we offer a full suite of specialized global relocation services to corporate clients and assignees, including assignment management, process management, visa and immigration services, complete destination services and expense management.

Move Management.   We provide move management services to corporate transferees, coordinating the packing, storage and moving of a transferee’s household goods, as well as assistance with questions and claims. We provide these services through our own fulfillment network, described below under “Household Goods Moving Services,” or, at a corporate customer’s election, through a non-SIRVA moving company.

We provide all of these relocation services through operating centers located in and around major metropolitan areas throughout the world: ten in the United States (Cleveland, Ohio; Chicago, Illinois; Minneapolis, Minnesota; St. Louis, Missouri; Denver, Colorado; Bridgewater, New Jersey; Bethel, Connecticut; Shelton, Connecticut; New York, New York; Detroit, Michigan), three in the United Kingdom (Swindon, Leyland and Aberdeen), six in continental Europe (Brussels, Paris, Munich, Antwerp, The Hague and Geneva), two in Australia (Melbourne and Sydney), one in New Zealand (Auckland) and five in Asia (Hong Kong, Shanghai, Beijing, Singapore and Kuala Lumpur). We have a staff of over 650 key relocation specialists dedicated to serving the needs of our clients and transferees. Speaking more than 25 languages and representing many nationalities, this staff coordinates our extended network of service providers, including moving services companies, real estate brokers, appraisers and destination service providers.

Corporate clients expect a streamlined communication process between their human resource managers, transferees and us. To meet these needs, account managers provide this single point of contact and accountability for our clients. For individual transferring employees, we provide the full range of relocation services through a lead relocation counselor who draws on other specialists as needed during the relocation process.

Moving Services North America

Through our Allied, northAmerican and Global branded networks, we provide interstate moving services, including household goods packing, storage and transportation services throughout the United States and Canada and have a leadership position in the industry. Our Allied® and northAmerican® trademarks are considered two of the most widely recognized and respected brand names in moving services.

Household Goods Moving Services.   Our household goods moving services in North America are primarily provided through our network of 735 branded agents. Agents are independently-owned local moving companies that provide customers with the local packing, warehousing and the majority of the

7




hauling required to support household moves. Our network of agents and their drivers owns most of the equipment used in our moving operations. We act as a network manager for our agents, providing, among other services, brand management, sales and marketing support, interstate dispatch and planning, billing, collection and claims handling. We hold U.S. licensing authority for all interstate moves and have entered into contracts with local agents with respect to their interstate moves and recognize revenues accordingly. In contrast, our agents generally conduct intrastate moves under their own licenses using our brands, except in certain states such as Texas and California where we hold intrastate licenses. Therefore, we are not a party to most intrastate transactions and do not recognize operating revenues and associated costs in connection with such transactions.

Agent Network.   We have developed long-term relationships with our branded agent network, which on an individual basis have often extended to a multi-generation affiliation with us. Our relationship with the agent network is governed by an agency contract that defines the terms and conditions of the agents’ exclusive representation of us in all interstate household goods shipments, as well as the compensation structure for services provided. While we enter into certain short-term contracts, we will often enter into long-term contracts, which typically extend from 3 to 15 years in duration, with selected agents. Our long-term contracts provide security to both parties and ensure us long-term representation and operating revenues in key markets. We have long-term contracts in place with agents who represent approximately 81% of the 2004 operating revenues for our Moving Services North America business. Our Allied agents have been included within this classification of agents with long-term contracts. In May 2005, a new three-year contract was signed by more than 94% of our Allied agents representing 96% of the transportation revenue. As a result of these arrangements, we have historically experienced relatively low agent turnover. No single agent accounted for more than 4% of our operating revenues for our Moving Services North America business in 2004.

Owner Operators.   Owner operators are independent contractors who work with our agent network and us, and provide household goods and specialty transportation fulfillment services. In most circumstances, they own the trucks and coordinate obtaining the labor needed to service customer moves. Across our network in North America at December 31, 2004, there were approximately 2,150 owner operators contracted almost exclusively by agents in household goods moving and approximately 300 owner operators contracted by us primarily in our specialty transportation business units. Those business units include Special Products, Blanketwrap and Flatbed which provide for the transportation of non-household goods freight.

Moving Services Europe and Asia Pacific

Through our multiple brands in Europe and the Asia Pacific region, we provide international household goods packing, storage and moving services. The combination of these operations, together with our North American moving services operations, provides us with a leadership position in the moving services industry around the world.

In Europe and Asia Pacific, we provide household goods moving services, office and industrial moving, records management and storage through a combination of our company-operated locations, our proprietary agent network and our network of affiliated preferred providers. We operate a majority of the fulfillment assets in Europe and the Asia Pacific regions. During 2004, we disposed of a number of U.K. owned properties, thereby shifting towards a less capital intensive business model. We have continued this shift as we implement the use of more service providers who maintain their own equipment.

8




Customers—Global Relocation Services, Moving Services North America and Moving Services Europe and Asia Pacific

We serve a diverse range of customers around the world, including corporations of all sizes, military and government agencies and individual consumers. This diverse client base helps to lower our exposure to downturns or volatility in any one industry or region.

Corporate Customers.   Our corporate customers range from small businesses to large multinational companies. Many of our contracts with corporate customers are terminable by the customer on short notice, and generally do not specify a minimum transaction volume. Our customers cut across a variety of industries, including consumer packaged goods, automotive, manufacturing, business and financial services, retail, technology and pharmaceuticals. They are based throughout the United States, Canada, Europe and Asia Pacific. No single corporate customer accounted for more than 6% of our 2004 revenues.

Military/Government Agencies.   We provide household goods moving services to State and Federal government agencies in the United States, including the U.S. Department of Agriculture, the Drug Enforcement Administration and the Federal Bureau of Investigation, all branches of the U.S. military and government agencies of other countries around the world. These military and government agencies have traditionally represented a stable source of demand for our services and are less subject to economic cycles than our corporate customers. We also provide relocation services to certain U.S. government agencies.

Consumer Market.   We provide domestic and international household goods moving services to consumers around the world. The individual household market has traditionally been stable in terms of both volume and price. Selection of a moving company is generally driven by brand, quality, price and capacity. We also offer consumers a range of relocation services via employee programs through corporate customers and member programs through associations and member service organizations. These services currently include home buying and selling assistance, mortgage financing and moving services. We have a centralized consumer contact center in the United States, which we believe is unique in the moving industry, that facilitates direct consumer inquiries from a broad range of internet and third-party-based marketing activities. The contact center provides immediate customer response, service qualification, and real time connection to a preferred local agent. The contact center also delivers qualified leads to the agent network, and as such, has quickly grown to represent over 15% of our U.S. consumer moving volume.

Sales and Marketing—Global Relocation Services, Moving Services North America and Moving Services Europe and Asia Pacific

We believe we have the largest sales and marketing group in the relocation industry with a corporate sales and marketing team of approximately 125 members and a network of over 1,700 agent sales personnel serving the corporate and consumer channels. We address the consumer market through multiple channels, including a customer contact center, printed telephone directories and various internet-based efforts. In addition, we have a dedicated sales team for the military/government market.

While we strive to grow our business in each market, we believe our largest opportunity for continued growth is in the corporate market. Because of our long-standing moving services relationships with many of our corporate clients, we have a history of delivery that enables us to offer related relocation services to many of them. This combined offering of relocation and moving services can often reduce their costs, while maintaining or improving the quality of service, and simplifying their administrative effort.

In our corporate market, our sales and marketing groups work in conjunction with our service delivery personnel to pursue four broad objectives:

·       Attract new clients with our customizable relocation solutions that streamline administration, reduce risk exposure and reduce relocation costs;

9




·       Retain existing customers by delivering an increasing level of satisfaction;

·       Develop innovative new products and services; and

·       Continually strengthen and support our branded network of agents and their salespeople.

Competition—Global Relocation Services, Moving Services North America and Moving Services Europe and Asia Pacific

Global Relocation Services.   The relocation services business is highly competitive, and includes a number of major companies that provide a full suite of relocation services, including Cendant Mobility, Prudential Financial, Weichert Relocation, Primacy and GMAC. The remainder of the relocation business is highly fragmented, with a variety of companies, including real estate brokers, moving companies, accounting firms, mortgage firms, destination service providers and business process outsourcing firms, offering individual services.

We believe the basis for competing successfully in this market rests on a company’s ability to meet the needs of corporate customers, including high quality, low cost, low risk, simplified administration and effective knowledge management. The majority of our major competitors approach the market based on their strength in real estate. We approach the market based on our innovative service offerings and our global capabilities.

Moving Services North America.   The moving services business is highly competitive and fragmented within North America. A number of large moving companies provide national services. The remainder of the industry remains extremely fragmented with many small private companies that have strong positions in local markets. We compete primarily with national moving companies, including Unigroup (United and Mayflower), Atlas, Graebel and Bekins. In the Moving Services North America segment, we also face competition from other types of competitors. These competitors include independent movers, self-storage and self-haul service providers. Quality, customer service, price and capacity are key factors in the mover selection process.

Moving Services Europe and Asia Pacific.   Within Europe and the Asia Pacific region, the industry is also extremely fragmented among regional, national and local companies. Many of these companies may specialize in segments of the moving market such as international, domestic or office moving. Our chief competitors in the Europe and Asia Pacific regions include Crown Relocations, Santa Fe, Britannia, Team Relocations (formerly TransEuro and Amertrans), Sterling, Michael Gerson, White & Company and Interdean in corporate and consumer moving, Harrow Green, Edes and Business Moves in office moving, and Iron Mountain and Recall in records management.

Network Services

The Network Services segment offers a range of services to U.S. moving and storage agents, independent owner operators and small fleet operators to assist them in the daily operation of their businesses. Canadian-based entities are also customers when they operate in the United States. The customer base includes both those inside and outside the SIRVA network.

These services include a broad range of commercial property and casualty coverages, as well as truck maintenance and repair services, emergency breakdown assistance and group purchasing. Group purchasing opportunities include fuel and tire discounts, corrugated boxes, uniforms and other ancillary items used in our customers’ businesses. We developed these services using the knowledge of the needs of truck drivers, fleet owners, motor carriers and moving and storage agents that we have accumulated from managing our proprietary agent network, operating our own fleets and from our frequent interactions with independent owner operators.

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Insurance Services

Through Transguard Insurance Company of America, Inc. (“TransGuard”), we offer U.S. insurance services, such as auto liability, occupational accident, physical damage, worker’s compensation and inland marine coverages to moving agents, small fleet owners, and owner-operators. Due to the historical relationship with our moving services companies, TransGuard has focused on insurance services that meet the needs of our U.S. fulfillment network. We have used the market knowledge acquired from serving our network to extend insurance offerings to non-affiliated agents, drivers and small fleet owners. The acquisition of the National Association of Independent Truckers (“NAIT”) in April 2002 opened up a new customer channel of independent owner operators. Our insurance products are distributed primarily through a network of third-party insurance brokers. In November 2004, we discontinued our small fleet program, as this business offered unacceptable returns on invested capital. For the year ended December 31, 2004, this unit represented $19.3 million, or 12.5%, of operating revenue for our Network Services segment. As discussed below in “Disposal Plan,” we entered into a definitive agreement on September 21, 2005 to sell our U.S. insurance operations.

NAIT

NAIT is an association of independent owner operators, fleet owners, couriers and limo drivers. In exchange for annual membership dues, NAIT offers access to a broad array of services, designed to improve the profitability and quality of life of the independent driver. These services include fuel and tire discounts, emergency breakdown assistance, calling cards and overnight delivery. TransGuard also offers NAIT members a range of insurance services. Since we acquired NAIT in April 2002, we have been successful in selling its services both to our network and to non-affiliated customers. Membership has grown from approximately 10,700 in April 2002, when we acquired NAIT, to approximately 32,000 at December 31, 2004. NAIT membership has declined slightly to approximately 30,000 during 2005 due in part to the ratings downgrade actions taken by A. M. Best.

Fleet Services and Group Purchasing

We use the scale of our fulfillment network to offer our own, as well as non-affiliated, agents and drivers discount purchase programs and emergency breakdown assistance through a nationwide network of independent repair centers to meet their needs when on the road. Historically, we have also offered tractor/trailer maintenance and repair services through Fleet Services Operations in two owned facilities in Fontana, California and Fort Wayne, Indiana. We sold the Fontana facility in the second quarter of 2004 and the Fort Wayne facilities in the first quarter of 2005 (see “Disposal Plan” below). In early 2005, we transferred the group purchasing and emergency breakdown assistance activities into the Moving Services North America business segment, leaving the Network Services business segment to consist of solely U.S. insurance related activities and NAIT.

Competition—Network Services

Our competition in the insurance industry is composed of large, general lines insurance companies, such as AIG and Firemans’ Fund, as well as smaller companies that focus on our moving and storage and transportation markets. The basis for competition in this industry is primarily price, product offerings and perceived quality of the insurance company, including A.M. Best rating. Fleet services is a highly fragmented industry with many service providers. Competition for fleet services is on the basis of service offering, price, geographic location and geographic scope. NAIT faces competition from other membership-based organizations, most notably the Owner Operator Independent Driver Association. Competition in this membership-based area is on the basis of breadth of service offering, price and ease of use for members.

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Disposal Plan

On September 9, 2004, our Board of Directors authorized, approved and committed us to a disposal plan (the “Disposal Plan”) involving our North American High Value Products and homeExpress business (“HVP” or “High Value Products Division”), as well as certain other logistics businesses, which include Specialized Transportation in Europe (“STEU”) and our Transportation Solutions (“TS”) segment in North America. In October 2004, we completed the sale of the High Value Products Division. In December 2004, we announced that a material definitive agreement had been executed to sell STEU, and, in July 2005, we announced that a material definitive agreement had been executed to sell TS as outlined in the disposal plan. The STEU transaction closed in February 2005, while the TS transaction closed in August 2005.

While not included in the initial disposal plan authorized by the Board of Directors, we have identified purchasers for our Fleet Service operations (Network Services segment), as well as our Blanketwrap and Flatbed truckload freight operations (Moving Services North America segment). In March 2005, we completed the sale of our Fleet Service operation, which had annual revenues of $14.8 million in 2004. In May and August 2005, we completed the sale of our Blanketwrap and Flatbed truckload operations, which had annual 2004 revenues of $29.5 million and $9.1 million, respectively. This completed our exit from the former North American Van Lines’ commercial freight/logistics businesses.

In March 2005, we announced our intention to review strategic options for our U.S. insurance related businesses. The review was intended to identify alternatives that would facilitate an improvement to the financial characteristics associated with our insurance industry ratings or to otherwise maximize the value of the business for us. The strategic review resulted in the signing of a definitive agreement on September 21, 2005 to sell our U.S. insurance operations to IAT Reinsurance Company Ltd.

On October 14, 2005, we entered into a Share Sale Agreement with IM Australia Holdings Pty Ltd, IM New Zealand Holdings ULC and Iron Mountain Incorporated to sell our Australian and New Zealand operations of Pickfords Records Management, part of our Moving Services Europe and Asia Pacific segment.

The completion of our 2004 Disposal Plan, combined with the 2005 transactions referenced above, completes a strategic restructuring that allows us to focus on our Relocation Redefined® business model.

Discontinued Operations

Each of the above referenced divested business units were identifiable components of our company, as their operations and cash flows could be clearly distinguished, operationally and for financial reporting purposes, from the rest of our business. As a result of the Disposal Plan, the assets and liabilities of HVP, STEU and TS were classified as held for sale at September 30, 2004 and the results of these businesses have been reported in discontinued operations in our consolidated financial statements for all periods presented in which they were owned. As part of the classification of these businesses as discontinued operations, general corporate overhead expenses, that were previously allocated to these businesses but will remain after their disposal, have been reclassified to other segments in our consolidated financial statements for all periods presented.

As a result of the Board of Directors’ approval of the sale of Fleet Service, Blanketwrap and Flatbed operations, the assets and liabilities of those businesses will be reclassified as held for sale, and the results of these businesses will be reported in discontinued operations in our consolidated financial statements for all periods presented effective in March 2005.

As a result of the Board of Directors’ approval of the sale of our U.S. insurance related businesses, the assets and liabilities of these businesses will be reclassified as held for sale, and the results of these

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businesses will be reported in discontinued operations in our consolidated financial statements for all periods presented effective in September 2005.

Government Regulation

Our operations are subject to various federal, state, local and foreign laws and regulations that in many instances require permits and licenses. Our U.S. interstate motor carrier operations, as a common and contract carrier, are regulated by the Surface Transportation Board and the Federal Motor Carrier Safety Administration, which are independent agencies within the U.S. Department of Transportation. The Surface Transportation Board has jurisdiction similar to the former Interstate Commerce Commission over such issues as rates, tariffs, antitrust immunity and undercharge and overcharge claims. The Department of Transportation, and in particular the Federal Motor Carrier Safety Administration, also has jurisdiction over such matters as safety, the registration of motor carriers, freight forwarders and brokers, insurance (financial responsibility) matters, financial reporting requirements and enforcement of leasing and loading and unloading practices. In addition to motor carrier operations, we also conduct domestic operations as a licensed or permitted freight forwarder and property broker. Many of the licenses and permits that we hold were issued by the Interstate Commerce Commission, which was eliminated in 1996; some of its regulatory functions are now performed by the Department of Transportation, the Surface Transportation Board and the Federal Motor Carrier Safety Administration. With respect to interstate motor carrier operations, the Federal Motor Carrier Safety Administration is the principal regulator in terms of safety, including carrier and driver qualification, drug and alcohol testing of drivers, hours of service requirements and maintenance and qualification of equipment.

We are an ocean transportation intermediary pursuant to the Shipping Act of 1984, as amended. As such, we hold ocean freight forwarder licenses issued by the Federal Maritime Commission (“FMC”), and are subject to FMC bonding requirements applicable to ocean freight forwarders. We also conduct certain operations as a non-vessel-operating common carrier and are subject to the regulations relating to FMC tariff filing and bonding requirements, and under the Shipping Act of 1984, particularly with respect to terms thereof proscribing rebating practices. The FMC does not currently regulate the level of our fees in any material respect.

Our U.S. Customs brokerage activities are licensed by the U.S. Department of the Treasury and are regulated by the U.S. Bureau of Customs and Border Protection. We are also subject to similar regulations by the regulatory authorities of foreign jurisdictions in which we operate.

With respect to U.S. state and Canadian provincial licenses, the permitting and licensing structure largely parallels the U.S. federal licensing regulatory structure.

In Europe, including the United Kingdom, we hold operator licenses and international transport licenses in 11 of the countries in which we run trucks. Across Europe, we are required to comply with data protection legislation to insure the safe guarding of customers’ information. In the United Kingdom since January 2005, we are authorized and regulated under the Financial Services Authority in order to sell insurance-style products to our customers. In the United Kingdom, SIRVA Conveyancing Limited is licensed under the Administration of Justice Act 1985 to carry out the legal process for the transfer of real property. Operating licenses are not required in all European countries in which we operate. Operating licenses are approvals from the relevant local authority permitting the operation of commercial vehicles from specified bases. One of the prerequisites for these licenses is the employment by the relevant business of individuals who hold certain certificates of professional competence concerning their management of the business’s fleet of vehicles. In the United Kingdom and continental Europe, we hold licenses for bonded warehouses at certain major ports of entry in connection with our receipt of imported goods.

In the Asia Pacific region, we hold various commercial vehicle licenses. In Australia we hold licenses for international relocation for our customs, quarantine and air freight operation and to store dangerous

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goods in connection with our management and operation of gas refueling tanks. We are licensed under Australia’s Financial Services Reform Act so that we can comply with a 2004 requirement that applies to our sale of insurance-style products within our moving business. In New Zealand, we hold a goods service license to operate as a removalist, licenses for bonded warehouses at major ports of entry in connection with our receipt of imported goods, and government approvals in connection with our establishment as a customs bonded area and an approved facility for exams.

TransGuard and our other insurance subsidiaries such as The Baxendale Insurance Company Ltd., which is part of our Moving Services Europe and Asia Pacific segment, are subject to extensive supervision and regulation by insurance regulators in their respective jurisdictions, including regulations limiting the transfer of assets, loans, or the payments of dividends from such insurance subsidiaries to their affiliates, including us. Such regulation could limit our ability to draw on these insurance subsidiaries’ assets to repay our indebtedness.

SIRVA Title Agency, Inc. is licensed in Ohio and provides support to the relocations managed within SIRVA Relocation. In addition, in order to receive referral fees, SIRVA Relocation is currently licensed, through individual employees, as a real estate broker in Ohio and other states. Each state has a varying degree of regulatory and annual reporting requirements. Various governmental (including the federal, state and local jurisdictions of the many countries in which we operate) laws, rules and regulations, including, but not limited to, those laws, rules and regulations concerning tax obligations, privacy of information, financial controls and real estate also have a significant impact on our Global Relocation Services segment.

SIRVA Mortgage is authorized to conduct first lien mortgage lending activity as a mortgage banker in all fifty states and the District of Columbia and second lien mortgage activity in 42 states and the District of Columbia. SIRVA Mortgage has obtained a mortgage lending license and is licensed in good standing (or has received an exemption from regulation) in all states where required. Second lien mortgage activity may be limited in some states due to the type of license SIRVA Mortgage holds. State mortgage licensing laws and regulation activities have a significant impact on our mortgage lending activities.

Furthermore, in the United States, North American Van Lines, Allied and Global have been participants in certain collective activities, including collective rate-making with other motor carriers pursuant to an exemption from the antitrust laws as currently set forth in The Motor Carrier Act of 1980. Over the years, the scope of the antitrust exemption has decreased and there can be no assurance that such exemption from the antitrust laws will continue in the future. The loss of such exemption could result in an adverse effect on our operations for financial condition.

Any violation of the laws and regulations discussed above could increase claims and/or liabilities, including claims for uninsured punitive damages. Failure to maintain required permits or licenses, or to comply with applicable regulations could subject us to fines or, in the event of a serious violation, suspension or revocation of operating authority or criminal penalties. All of these regulatory authorities have broad powers generally governing activities such as authority to engage in motor carrier operations, rates and charges and certain mergers, consolidations and acquisitions. Although compliance with these regulations has not had a materially adverse effect on our operations or financial condition in the past, there can be no assurance that such regulations or any changes to such regulations will not materially adversely impact our operations in the future.

Our international operations are conducted primarily through local branches owned or leased by various subsidiaries, as well as franchises in over 40 countries outside the United States and in a number of additional countries through agents and non-exclusive representatives. We are subject to certain customary risks inherent in carrying on business abroad, including the effect of regulatory and legal restrictions imposed by foreign governments.

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Environmental Matters

Our facilities and operations are subject to environmental laws and regulations in the various foreign, U.S., state and local jurisdictions in which we operate. These requirements govern, among other things, discharges of pollutants into the air, water and land, the management and disposal of solid and hazardous substances and wastes, and the cleanup of contamination. In some parts of Europe, we are subject to regulations governing the extent to which we recycle waste. Some of our operations require permits intended to prevent or reduce air and water pollution and these may be reviewed, modified or revoked by the issuing authorities.

We actively monitor our compliance with environmental laws and regulations and management believes that we are presently in material compliance with all applicable requirements. Compliance costs are included in our results of operations and are not material. We will continue to incur ongoing capital and operating expenses to maintain or achieve compliance with applicable environmental requirements, upgrade existing equipment at our facilities as necessary and meet new regulatory requirements. While it is not possible to predict with certainty future environmental compliance requirements, management believes that future expenditures relating to environmental compliance requirements will not materially adversely affect our financial condition or results of operations.

We have been, and in the future may be, responsible for investigating or remediating contamination at our facilities or at off-site locations to which we sent wastes for disposal. For example, because we own or lease or have in the past owned or leased facilities at which underground storage tanks are located and operated, we are subject to regulations governing the construction, operation and maintenance of underground storage tanks and for preventing or cleaning up releases from these tanks. We have incurred, and in the future may incur, costs related to our investigation and cleanup of releases of materials from underground storage tanks, though such costs are not expected to have a materially adverse effect on our financial position or results of operations. Contaminants have been detected at certain of our present or former sites principally in connection with historical operations. We could incur significant costs if we were required to investigate and remediate these sites.

We have also 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 (“CERCLA”), or similar state statutes. Based on all known information, we estimate that the cost to resolve liability at these sites would not be materially or significantly larger than the reserves established. We are not presently able to reasonably estimate additional potential losses, if any, related to these proceedings. We could incur unanticipated costs, however, if additional contamination is found at these sites, or if we are named as a PRP in other proceedings.

Based on our assessment of facts and circumstances now known, management believes it is unlikely that any identified environmental matters, either individually or in aggregate, will have a materially adverse effect on our financial position, results of operations, or liquidity. As conditions may exist on our properties related to environmental problems that are latent or as yet unknown, however, there can be no assurance that we will not incur liabilities or costs, the amount and significance of which cannot be reliably estimated at this time.

Trademarks

We have registered the marks SIRVA®, northAmerican®, Allied®, Relocation Redefined®, Home Touch!®, and Worldtrac®. Other brand or product names used in this report are trademarks or registered trademarks of their respective companies.

We have been highly active in seeking protection for numerous marks and logos relating to the “SIRVA”, “northAmerican”, “Allied”, “Global”, “Pickfords” and several of our other brands. We have actively contested unauthorized use of the “northAmerican”, “Global” and “Allied” marks. We have

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largely been successful in protecting our marks, but in a few exceptional circumstances have tolerated some third-party use of similar marks in transport-related commerce where we felt that there was no confusion by such use and no confusion was likely to occur in the future.

Employees

At December 31, 2004, our workforce comprised approximately 7,580 employees. Of these employees, approximately 6,530 were engaged within continuing operations, while approximately 1,050 were employed within discontinued operations. Approximately 2,360 employees were covered by union agreements, while not all covered employees have elected membership within those unions. The employees covered by union agreements are located in the United Kingdom, Sweden, Norway, Denmark, Australia and New Zealand. We believe our relationships with our employees are good. We have not experienced any major work stoppages in the last ten years.

Business Risks

If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results could be materially and adversely affected. The trading price of our common stock could decline. In addition, this report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in those forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this report. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements” on page 82.

Material weaknesses in internal control over financial reporting resulted in a restatement of our financial statements, and the transitional changes to our control environment may be insufficient to effectively remediate these deficiencies.

Management has identified a number of material weaknesses in our internal control over financial reporting. As a result of these weaknesses, we have restated our audited consolidated financial statements for the years ended December 31, 2000, 2001, 2002 and 2003, as well as our unaudited condensed consolidated financial statements for the quarters ended March 31, June 30 and September 30, 2004 and all quarters in 2003. Although we have begun to remediate these weaknesses by implementing changes to our control environment, the process is not yet complete. Consequently, there remains a risk that the transitional procedures on which we currently rely will fail to be sufficiently effective to assess the effectiveness of our internal controls. The ineffectiveness of these remedial measures, or a delay in their implementation, could affect the accuracy or timing of our future filings with the SEC or other regulatory authorities. See Item 9A, “Controls and Procedures” for a further discussion on these matters.

Because we have not filed our annual report for the year ended December 31, 2004, or any of our quarterly reports in 2005 on a timely basis, we may suffer adverse business consequences, including the delisting of our common stock by the New York Stock Exchange.

We have not filed any of our periodic reports with the SEC on a timely basis since we last filed our quarterly report on Form 10-Q for the quarter ended September 30, 2004. As a result, we have had to obtain amendments to both our credit agreement and our receivables sale agreement to provide us with more time to make these filings. If we cannot meet these extended deadlines for filing our quarterly reports for 2005, we will have to seek further amendments and waivers. Although we have previously received such amendments and waivers, we cannot give assurance that we will be able to do so again.

Our continued failure to file our quarterly reports for 2005 on a timely basis also could jeopardize our relocation and moving service agreements with the U.S. military. Under the terms of these agreements, our failure to timely file such periodic reports provides the different departments of the U.S. military with the

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right to terminate such agreements. If the U.S. military were to terminate any of these agreements, our revenues would be materially and adversely impacted.

Furthermore, our continued failure to timely file our quarterly reports for 2005 exposes us to the risk that the New York Stock Exchange (the “NYSE”) may delist our common stock from trading. If our common stock were delisted from trading on the NYSE, investors would be adversely affected because our common stock would be less liquid.

In addition, we are delinquent in filing our financial statements, which are prepared on a statutory basis, with the insurance regulatory commissions of the various states in which we conduct our network services business. As a result, such state insurance commissions may impose penalties or suspend our authority to conduct our insurance business in their states. We already have received notices from certain states that indicated such penalties may be assessed. Two states, Ohio and Oregon, already have suspended our authority to renew existing policies or write new ones. We cannot give assurance that other states will not follow suit and suspend our authority to conduct our insurance business in their state.

The occurrence of any of these events, or other unanticipated events resulting from our failure to timely file our quarterly reports in 2005, could harm our overall business and financial results.

Our insurance operations expose us to some of the risks of the insurance industry.

As part of our Network Services segment, we have a wholly owned subsidiary TransGuard, which is an insurance company organized under the laws of Illinois. The potential for growth of our Network Services business may be offset by the risks of engaging in the insurance business. Investment returns are an important part of the overall profitability of our insurance business, and therefore fluctuations in the fixed income or equity markets could have a materially adverse effect on our results of operations. Our investment returns are also susceptible to changes in the general creditworthiness of the specific issuers of debt securities and equity securities held in our portfolio. Where the credit rating of an issuer falls so low that we are forced to dispose of our investment, we may realize a significant loss on our investment.

The reserves we maintain in our insurance business may prove to be inadequate to cover our actual losses sustained. Claim reserves do not represent an exact calculation of liability, but rather are estimates of the expected liability. To the extent that reserves are insufficient to cover actual losses, loss adjustment expenses or future policy benefits, we would have to add to our claim reserves and incur a charge to our current earnings.

TransGuard is a party to reinsurance agreements pursuant to which it cedes the liabilities under a portion of its issued insurance policies. These agreements may be terminated by the reinsurer upon notice or upon a change of control of our insurance subsidiary. If any of these reinsurance agreements are terminated, we cannot assure you that we can replace them on short notice or on favorable terms, in which case our exposure to claims under the underlying policies would be increased. Endurance Re, with whom we have a quota-share agreement on worker’s compensation for 80% of the first $1.0 million of exposure, recently cancelled the agreement and we agreed an effective cancellation date of September 23, 2005 due to our claims loss development and the recent downgrades by A.M. Best described below. Upon cancellation of the Endurance Re agreement, its coverage still applies to existing policies in-force and also any policies for which we are obligated to offer renewal due to our inability to comply with cancellation notification periods. For any new business or renewals that do not fit the condition previously described, we have entered into a reinsurance agreement with three participating carriers for losses of $0.75 million in excess of $0.25 million to limit our exposure for our workers compensation program.

On September 21, 2005, we announced a definitive agreement to sell the stock of TransGuard, NAIT, Vanguard Insurance Agency, Inc., and other related companies of the U.S. insurance services group to IAT Reinsurance Company Ltd. (“IAT”). At that time, we also announced that an affiliate of IAT will provide a cut-through endorsement for all lines of business, including worker’s compensation (excluding

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the small fleet program) to provide TransGuard’s customers with “A-” rated paper through closing of the transaction. The Hanover 100 percent quota share arrangement, previously put in place, will be replaced with the cut-through endorsement arrangement. Both the signing of the definitive agreement and the cut-through are intended to mitigate the marketability risk caused by the A.M. Best downgrades. Customers may react unfavorably to these arrangements and opt to move their insurance coverage to another provider.

The divestiture, which is expected to close by the end of 2005, is subject to customary closing conditions and the receipt of various regulatory approvals, including state insurance commission approval and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. If approvals are not obtained, we may not be able to close the transaction, and customers may react unfavorably.

Our U.S. insurance subsidiary is subject to financial ratings by third-party firms. Changes in these ratings expose us to loss of customers.

The A.M. Best rating of TransGuard was downgraded in 2003 from A to A- with negative implications due, in large part, to our financial leverage prior to our initial public offering. In November 2004, the negative implications element of the rating was removed. In April 2005 and again in August 2005, A.M. Best downgraded TransGuard’s rating, which now stands at B with negative implications. Any downgrade could affect the marketability of the insurance policies underwritten by TransGuard, from which we derive the vast majority of the income for our Network Services segment, and thereby adversely affect our profitability.

After the April 2005 downgrade, to reduce the impact of the rating action on its customers, TransGuard entered into two new arrangements. As a solution for its customers doing business with the military, TransGuard entered into an agreement with Avalon Risk Management to place the military portion of its Moving and Storage line with Lincoln General Insurance Company, part of the Kingsway Financial Group. We entered into a contract with Hannover Reinsurance Ltd. (“Hannover”) and E & S Reinsurance Ltd. (“E & S”) as of June 1, 2005, reinsuring our net retention for all lines other than workers compensation and transportation services. Hannover, rated “A” by A.M. Best, assumes 100 percent of TransGuard’s business risk on a first-dollar basis for coverage provided to the members of NAIT and for the moving and storage (non-military) business. We received approval by the Illinois Department of Financial and Professional Regulation, Department of Insurance (“DOI”) on September 29, 2005 and we are in the process of commutation with Hannover for a final payment amount of $2.1 million. Customers may react unfavorably to these arrangements and opt to move their insurance coverage to another provider.

We are subject to litigation and governmental investigations as a result of our operations.

We are subject to litigation resulting from our operations, including litigation resulting from accidents involving our agents and drivers. These accidents have involved, and in the future may involve, serious injuries or the loss of lives. This litigation may result in liability to us or harm our reputation. While the impact of this litigation is typically immaterial to our operations and financial condition, there can be no assurance that its impact will not be material in the future.

In addition, we are being investigated by the Department of Justice Antitrust Division, European antitrust regulators, and the Australian Competition & Consumer Commission regarding potential antitrust violations in the United States, Europe and Australia, respectively. We have established a reserve for the Department of Justice and European antitrust investigations in accordance with the guidelines set forth in SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”) that we consider appropriate in the circumstances. We have not established a reserve for the Australian antitrust investigation because an unfavorable outcome for us is considered neither probable nor remote at this time and an estimate of

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probable loss or range of probable loss cannot currently be made. We believe that, based on information currently available, the outcome of the Department of Justice, European and Australian antitrust investigations will not have a material adverse impact on our overall operations or financial condition, although there can be no assurance that they will not. Any potential penalties, however, may have a material impact on our earnings in the period in which they are recognized.

Furthermore, we are the subject of a securities class action filed in November 2004 on behalf of all persons who acquired our common stock between November 25, 2003 and November 9, 2004, as well as a second lawsuit brought by an individual plaintiff against us and certain of our directors and officers. Each complaint alleges, among other things, that we made false and misleading statements in certain SEC filings, including the prospectuses to our initial and secondary public offerings, and press releases. Each case is in the preliminary stages, the outcome of each is not predictable at this time, and we are not presently able to reasonably estimate potential losses, if any, related to either lawsuit. Therefore, no amounts have been accrued for these claims. An unfavorable outcome in either case could have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, the defense of any litigation may be costly and divert our attention from the day-to-day operations of our business.

For a more detailed discussion of these and other legal proceedings, see Item 3, “Legal Proceedings” below.

Our ability to engage in certain businesses may be impaired by the regulatory investigations described above.

The regulatory investigations described above may reduce the willingness of counterparties to engage in business with us. Uncertainty concerning the ultimate outcome of these actions and proceedings may also make our products and services less attractive in the marketplace. In addition, as discussed in Item 3, “Legal Proceedings,” we are under a formal investigation by the SEC related to our January 31, 2005 earnings guidance.

Our success depends in part on our relatively new strategy of offering a global comprehensive relocation solution to customers.

Historically, the majority of our operating revenues and income from continuing operations was derived from our moving services businesses. A significant element of our growth model, however, is our relatively new strategy of offering a global comprehensive relocation solution to customers by combining our higher-margin relocation services with our proprietary moving services network.

We have had net losses in certain years and we may not be profitable in the future.

We had net losses of $68.2 million, $22.7 million and $21.9 million for the years ended December 31, 2004, 2001 and 2000, respectively. We cannot assure you that we will not report net losses in future periods. We cannot predict what impact potential net losses might have on our ability to finance our operations in the future or on the market value of our common stock.

If we do not successfully compete within the highly competitive industries in which we operate, our operating revenues and profitability could be adversely affected.

The global relocation industry is highly competitive. Our main competitors are other corporate relocation service providers such as Prudential Financial and Cendant Mobility, who are also significant customers of our moving services business. The moving services industry is extremely fragmented. We compete primarily with national moving companies, including UniGroup (United and Mayflower), Atlas, Graebel and Bekins.

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In the moving services segment, we also face competition from other types of competitors, including independent movers, self-storage and self-haul service providers. There are many small private participants that have strong positions in local markets.

The segment of the insurance services business in which we operate is also highly competitive. Our main competitors include AIG, Fireman’s Fund and smaller companies that focus on moving and storage and transportation markets.

Competition may force us to lower our prices thereby adversely affecting our operating revenues and profitability.

Competition in the relocation solutions and insurance industries and potential new entrants into these industries may force us to lower our prices, thereby affecting our operating revenues and profitability. If we do not successfully compete within these highly competitive industries, we will lose customers, in which case our operating revenues and profitability would be adversely affected. As we are subject to intense competition, we may not be able to achieve our growth objectives in a timely fashion, if at all.

Our business and financial condition could be adversely affected by future economic downturns and other external events.

We serve numerous industries and customers that experience significant fluctuation in demand based on economic conditions and other factors beyond our control. As our operating results are subject to customer demand, a downturn in the business of our corporate customers or a decrease in the frequency of household moves could materially adversely affect the performance of our business. In the past, our results of operations have been negatively impacted by economic downturns.

The volume of U.K. home sale transactions started to decline in the third quarter of 2004 and continues to be weak. This decline, together with difficult market conditions in the European international moving market may lead to our European operations suffering price pressures as the competition attempts to capture the remaining business volume. There can be no assurance that this period of reduced moving activity will not continue to exert price pressure on our European operations, resulting in lower revenues and profitability.

Similarly, terrorist attacks or other acts of violence or war may affect the financial markets, in general, or our business, financial condition and results of operation, in particular. We cannot assure you that there will not be future terrorist attacks affecting any of the markets we serve. Any such attacks or armed conflict may directly affect our physical facilities or those of our customers and vendors. In addition, these events could cause consumer confidence and spending to decrease or could result in increased volatility in the U.S. and world financial markets and economies.

We have substantial existing debt and may incur substantial additional debt in the future, and the agreements governing our debt contain restrictions that could significantly restrict our ability to operate our business.

At December 31, 2004, we have total outstanding debt of $680.2 million and stockholders’ equity of $366.3 million. We may incur additional debt in the future, which would result in a greater portion of our cash flow from operations being dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes.

Our senior secured credit facility contains a number of significant covenants that, among other things, restrict our ability to incur additional indebtedness, pay dividends, make acquisitions or engage in mergers or consolidations and make capital expenditures. In addition, under our senior secured credit facility, we are required to comply with specified financial ratios and tests, including consolidated leverage ratio and consolidated interest coverage ratio requirements, as well as file timely financial statements with the SEC. Compliance with these covenants for subsequent periods may be difficult if current market and other economic conditions deteriorate.

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In addition, our senior secured credit facility imposes deadlines for filing our annual and quarterly reports with the SEC. Unless we further amend the terms of our senior secured credit facility, our failure to timely file our quarterly reports on Form 10-Q for the periods ended March 31, 2005, June 30, 2005 and September 30, 2005 would result in an event of default under the credit facility. Although we have been able to amend our senior secured credit facility in the past to extend these filing deadlines, we can give no assurance that we will be able to do so in the future.

Our ability to comply with the covenants and restrictions contained in our debt instruments may be affected by events beyond our control, including prevailing economic, financial and industry conditions. In addition, as discussed above, because we have not filed our annual report for the year ended December 31, 2004, or any of our quarterly reports for 2005 with the SEC on a timely basis, we may not be able to file our annual report for the year ended December 31, 2005 on a timely basis. The breach of any of these covenants or restrictions could result in a default or cross default under our debt instruments and would permit the lenders to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest, and the commitments of our senior secured lenders to make further extensions of credit under our senior secured credit facility could be terminated. If we were unable to repay our indebtedness to our senior secured lenders, these lenders could proceed against the collateral securing that indebtedness.

The recent downgrades in SIRVA’s and SIRVA Worldwide’s credit ratings will increase our borrowing costs.

In July and August 2005, the major ratings agencies downgraded our debt ratings. Moody’s Investors Services lowered the SIRVA Worldwide, Corporate Family (previously called Senior Implied) Rating to B2 from Ba3, with a negative outlook. Standard & Poor’s Ratings Services lowered its ratings on SIRVA and SIRVA Worldwide to B+ from BB, with all ratings on CreditWatch with negative implications. These ratings are current opinions of the ratings agencies, and may be changed, suspended or withdrawn at any time by the agencies. Because we rely on external sources of financing to fund our operations, the recent downgrades and any future downgrades in our debt ratings will increase our borrowing costs or potentially reduce our liquidity and therefore adversely affect our results of operations.

Our Global Relocation Services business exposes us to some of the risks of the real estate industry, including risks relating to the purchase, ownership and resale of transferred employees’ homes at a loss.

The growth of our relocation solutions business exposes us to the risks of engaging in the real estate business. As part of our global relocation solutions package, we offer corporate customers home purchase and sale services for their employees. If a transferee’s home cannot be sold within a given period of time, we may have to purchase the home for our own account and we may ultimately have to sell the home to a third-party at a loss. In addition, a decline in the volume or value of existing home sales due to adverse economic changes could increase the number of homes that we may have to purchase and we may have to sell those homes at our loss or carry these homes for longer periods of time, thereby adversely affecting our results of operations.

We may not be able to recruit and retain a sufficient number of agents, representatives or owner operators to carry out our growth plans.

Our Moving Services North America operations rely on the services of agents to market our services and to act as intermediaries with customers, and on agents and owner operators to provide a significant portion of our packing, warehousing and hauling services. Although we believe our relationships with our agents and owner operators are good, we have had some difficulty obtaining or retaining qualified owner operators in the past due to industry conditions.

Our agents are independent businesses that provide moving and storage services to our and their own customers, and 20 of our 735 agents account for approximately 32% of our moving and storage business in

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North America. If an agent were to terminate its relationship with us, we might not be able to recruit a replacement to service the same geographic region. Generally, there are few additional new entrants into this business and thus recruiting new agents often requires a conversion of an agent from a competing van line. Competing companies also recruit our agents.

Owner operators are independent contractors who own their own trucks and provide hauling and other services. Fluctuations in the economy and fuel prices, as well as a lifestyle that requires drivers to often be away from home from four to eight weeks at a time, create challenges for new entrants to that business. Further, competition for long haul owner operators is strong among competing moving companies.

We cannot assure you that we will be successful in retaining our agents or owner operators or that agents or owner operators that terminate their contracts can be replaced by qualified personnel. A loss in the number of experienced drivers could lead to an increased frequency of accidents, potential claims exposure and result in increased insurance costs. Because agents have the primary relationship with customers, we expect that some customers would terminate their relationship should there be a separation between the agent and ourselves. In addition, a loss of agents could impair our ability to guarantee moving capacity to our relocation customers.

Actions taken by our agents may harm our brands or reputation, or result in legal actions against us.

We believe that our strong brand names, including Allied® and northAmerican®, are among our most valuable assets. Our proprietary network of agents in North America operate their businesses using our brand names and, in the case of most intrastate moves, without our involvement. Our agents are independent third parties with their own financial objectives, and actions taken by them, including breaches of their contractual obligations to us, could harm our brands or reputation, or result in legal actions against us. Any negative publicity associated with our agents may affect our reputation and thereby adversely impact our results of operations.

We are a holding company with no significant independent operations and therefore rely on our subsidiaries to make funds available to us.

We are a holding company with no significant independent operations and no significant assets other than the capital stock of our subsidiaries, including SIRVA Worldwide. Therefore, we are dependent upon the receipt of dividends or other distributions from our subsidiaries. SIRVA Worldwide’s senior secured credit facility contains restrictions on distributions from SIRVA Worldwide to us, other than for certain specified purposes. Our inability to receive funds from our operating subsidiaries could adversely affect our ability to meet our obligations and to make dividend payments and other distributions to holders of our common stock.

Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. In addition, an increase in liability, property or casualty insurance premiums could cause us to incur significant costs.

We use the services of a significant number of drivers in connection with our pick-up and delivery operations, and from time to time these drivers are involved in accidents, including accidents occurring in operations that do not involve us. Potential liability associated with accidents in the trucking industry may be severe and occurrences are unpredictable. We are also subject to substantial exposure due to workers’ compensation and cargo claims expense, whether or not injuries or damage occur in the context of a traffic accident.

We carry insurance to cover liability and workers’ compensation claims. We cannot assure you, however, that our insurance will be adequate to cover all of our liabilities. To the extent we were to

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experience a material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims, or in the unfavorable resolution of existing claims, we might be required to incur substantial costs to cover these claims. In addition, our results of operations would be adversely affected if our liability, workers’ compensation and casualty premiums were to increase substantially.

If we lost one or more of our government licenses or permits or became subject to more onerous government regulations, including the recent federal safety rules on truck driver work hours and the recent federal consumer protection regulations governing the moving industry, we could be adversely affected.

Our operations are subject to a number of complex and stringent transportation, environmental, labor, employment, insurance and other laws and regulations. These laws and regulations generally require us to maintain a wide variety of certificates, permits, licenses and other approvals. For example, in the United States, we maintain licenses and permits issued by the Surface Transportation Board, the Federal Motor Carrier Safety Administration and the Department of Transportation, as well as the Federal Maritime Commission and insurance and banking regulators.

In Europe, we hold operator licenses and international transport licenses issued by the relevant local authorities in 11 countries. Across Europe, we are required to comply with data protection legislation ensuring the safeguarding of customers’ information. In the United Kingdom, we are licensed by the Financial Services Authority to sell insurance to our customers. In the United Kingdom, we also are licensed under the Administration of Justice Act of 1985 to carry out the legal process for the transfer of property. In the Asia Pacific region, we hold various commercial vehicle licenses, as well as other licenses for international relocation. In certain European and Asia Pacific countries, we also hold licenses permitting us to sell insurance.

Our failure to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations, could result in substantial fines or possible revocation of our authority to conduct our operations, which in turn could restrict our ability to conduct our business effectively and to provide competitive customer services and thereby have an adverse impact on our financial condition.

We cannot assure you that existing laws or regulations will not be revised or that new more restrictive laws or regulations will not be adopted or become applicable to us. For example, new federal safety rules on truck driver work hours became effective on January 4, 2004 and were reissued on October 1, 2005. These rules, among other things, increased the time that truck drivers must rest while off duty, and decreased the total time that truck drivers could be on duty. In addition, new federal consumer protection regulations that became effective on August 11, 2004, and a new federal statute enacted on August 20, 2005, deal with consumer moving transactions, and changed, among other things, the requirements relating to estimation and collection practices of movers. We cannot assure you that new, more restrictive laws or regulations, including these new rules and regulations, will not materially and adversely affect our productivity and efficiency. We also cannot assure you that we will be able to recover from our customers any or all increased costs of compliance or that our business and financial condition will not be materially and adversely affected by these or future changes in applicable laws and regulations.

Furthermore, in the United States, North American Van Lines, Allied and Global have been participants in certain collective activities, including collective rate-making with other motor carriers pursuant to an exemption from the antitrust laws as currently set forth in The Motor Carrier Act of 1980. Over the years, the scope of the antitrust exemption has decreased and there can be no assurance that such exemption from the antitrust laws will continue in the future. The loss of such exemption could result in an adverse effect on our operations or financial condition.

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Any difficulties with our information systems or our information systems providers could delay or disrupt our ability to service our customers and impair our competitiveness.

Sophisticated information systems are vital to our growth and our ability to manage and monitor the flow of goods that we are transporting and to provide solutions services, which depend on technologically advanced systems. As these systems continue to rapidly evolve, we will need to continually enhance them. We may encounter difficulties in enhancing these systems or in integrating new technology into our systems in a timely and cost-effective manner. These difficulties could have a materially adverse effect on our ability to operate efficiently and to provide competitive customer service.

To compete effectively, we must anticipate and adapt to technological changes and offer, on a timely basis, competitively priced services that meet evolving industry standards and customer preferences. We may choose new technologies that later prove to be inadequate, or may be forced to implement new technologies at substantial cost to remain competitive. In addition, competitors may implement new technologies before we do, allowing them to provide lower priced or enhanced services and superior quality compared to those we provide. This development could have a materially adverse effect on our ability to compete.

In the United States, two third-party vendors together provide 100% of our domestic moving services information systems infrastructure and our application software development. We provide information systems infrastructure and our application software development resources for Global Relocation Services. In Europe and Asia Pacific, the information systems infrastructure and application software development are provided through a combination of third-party vendors and company-owned networks and employees. While we have a disaster recovery plan in conjunction with these vendors, we can provide no assurance that the plan will be adequate in the event of an actual disaster. Adverse conditions affecting the financial condition and other important aspects of these vendors’ operations may adversely affect our ability to operate efficiently or to continue operations under certain adverse conditions.

We depend on our highly trained executive officers and employees. Any difficulty in maintaining our current employees or in hiring equally qualified employees would adversely affect our ability to operate our business.

Our operations are managed by a small number of key executive officers. The loss of any of these individuals could have a materially adverse effect on us. In addition, our success depends on our ability to continue to attract, recruit and retain sufficient qualified personnel as we grow. Competition for qualified personnel is intense. We cannot assure you that we will be able to retain senior management, integrate new managers or recruit qualified personnel in the future.

If we acquire any companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value or have an adverse effect on our results of operations.

We intend to expand our business through the combination of internal growth and strategic acquisitions. The execution of future acquisitions could involve numerous risks including:

·       potential disruption of our ongoing business and distraction of management;

·       difficulty integrating the operations and products of the acquired business;

·       unanticipated expenses related to technology integration;

·       exposure to unknown liabilities, including litigation against the companies we may acquire;

·       additional costs due to differences in culture, geographic locations and duplication of key talent; and

·       potential loss of key employees or customers of the acquired company.

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If we make acquisitions in the future, acquisition-related accounting charges may affect our balance sheet and results of operations. We may not be successful in addressing these risks or any other problems encountered in connection with any acquisitions.

A few significant stockholders exercise significant influence over the direction of our business. If the ownership of our common stock continues to be highly concentrated, it will prevent you and other stockholders from influencing important corporate decisions.

Fund V and Fund VI beneficially own approximately 23.1% and 9.6%, respectively, of the outstanding shares of our common stock. As a result, Fund V, together with Fund VI, will continue to exercise significant influence over matters requiring stockholder approval and over our policy and affairs. In addition, Clayton, Dubilier & Rice, Inc. (“CD&R”), which manages Fund V and Fund VI, will continue to provide us with financial advisory and management consulting services for which it will be entitled to receive fees, including financial advisory fees, in the future.

The concentrated holdings of Fund V and Fund VI and the presence on our board of directors of Fund V designees may result in a delay or the deterrence of possible changes in control of our company, which may reduce the market price of our common stock. The interests of our principal stockholders may conflict with the interests of our other stockholders. Our board of directors has adopted corporate governance guidelines that require each director to avoid taking actions or having interests that might result in a conflict of interest with our company. Each director is required to ethically handle all actual or apparent conflicts of interest between personal and professional relationships, including promptly informing the corporate secretary if such a conflict arises and recusing himself or herself from any discussion or decision affecting his or her personal interests. Accordingly, our directors who are employees of CD&R will be required to recuse themselves from any discussion or decision regarding any transaction with our principal stockholders. In addition, we have adopted a code of business conduct that, among other things, requires our employees to avoid actions or relationships that might conflict or appear to conflict with their job responsibilities or the interests of SIRVA, and to disclose their outside activities, financial interests and relationships that may present a possible conflict of interest or the appearance of a conflict to management or corporate counsel. These guidelines and code do not, by themselves, prohibit transactions with our principal stockholders.

Fuel is a significant cost element in the trucking transportation industry. Fuel prices are currently high and may continue to rise. Fuel prices and the availability of fuel have been subject to volatility in the past.

We utilize numerous trucks and tractor trailers that are dependent upon fuel in the performance of day to day services in the household goods and office moving lines of our business, which are parts of our Moving Services North America and Moving Services Europe and Asia Pacific segments. We often employ the services of third-party transportation providers, particularly owner operators in the U.S. domestic moving business, who also depend on fuel and as a result are subject to variations in fuel prices. We cannot assure you that fuel prices will remain stable, or that supplies of fuel will always be available. Should costs escalate, we may be unable to fully recover the cost increase by increasing the price for our services. Third parties who provide transportation services to us may be unwilling to continue to do so without an increase in compensation. As a result, our operating margins could decrease, thereby adversely affecting our profitability.

Contingent or future environmental liabilities could cause us to incur significant costs and adversely affect our operations.

We are subject to a wide range of environmental laws and regulations under the foreign, U.S., state and local laws that govern our operations. Among other things, these requirements regulate discharges of pollutants into the water, air and land, the use, management and disposal of hazardous substances, and the

25




cleanup of contaminated sites. In certain European locations, we are required to recycle specified portions of our waste products. We could incur substantial costs, including cleanup costs, fines and civil or criminal penalties, third-party property damage or personal injury claims, or the reduction or suspension of our operations as a result of violations of or liabilities under environmental laws or non-compliance with the environmental permits required at our facilities. Contaminants have been detected at some of our present or former sites, principally in connection with historical operations. In addition, we own or lease, or in the past have owned or leased, facilities at which underground storage tanks are located, some of which have leaked in the past. We have been, and may in the future be responsible for, investigating and remediating contamination at these sites, or at off-site locations where we sent hazardous wastes for disposal. While we regularly make capital and operating expenditures to stay in compliance with environmental laws, future or contingent environmental liabilities, including remediation costs, could have a material effect on our business. See “Environmental Matters.”

Our business is highly seasonal, which leads to fluctuations in our operating results and working capital needs.

The relocation and moving businesses are highly seasonal due to the increase in moving activity during the summer months. Our results of operations and cash flow fluctuate significantly from quarter to quarter due to the higher shipment and home closing amounts experienced in the summer months. Certain of our operating expenses are fixed, and cannot be reduced during the fall and winter months, when there is decreased demand for relocation and moving services. If we are unable to capitalize on the peak summer season or successfully manage the decreased activity during other parts of the year, our annual performance may be materially adversely affected. The seasonal nature of the relocation and moving businesses results in increased short-term working capital requirements in summer months.

Our owner operators are currently not considered to be employees by taxing and other regulatory authorities. Should these authorities change their position and consider our owner operators to be our employees, our costs related to our tax, unemployment compensation and workers’ compensation obligations could increase significantly.

From time to time, certain parties, including the Internal Revenue Service, state authorities and the owner operators themselves, have sought to assert that owner operators in the trucking industry are employees rather than independent contractors. To date, these parties have not been successful in making these assertions against us. We consider all of our owner operators to be independent contractors. We cannot assure you that tax authorities will not successfully challenge this position, that interpretations supporting our position will not change, or that federal and state tax or other applicable laws will not change. If owner operators were deemed to be employees, our costs related to tax, unemployment compensation, and workers’ compensation could increase significantly. In addition, these changes may be applied retroactively, and if so we may be required to pay additional amounts to compensate for prior periods.

Our ownership of insurance subsidiaries imposes limits on the amount of our common stock that investors may purchase and of the cash that can be distributed to us.

Under the Illinois Insurance Code, no person may acquire control of SIRVA, and thus indirect control of TransGuard, without the prior approval of the Illinois Director of Insurance. Under the Illinois Insurance Code, any person who acquires ownership of 10% or more of our outstanding shares of common stock would be presumed to have acquired control, unless the Illinois Director of Insurance upon application determines otherwise. In addition, persons who do not acquire ownership of more than 10% of our outstanding shares of common stock may be deemed to have acquired control if the Illinois Director of Insurance determines that these persons, directly or indirectly, exercise a controlling influence over the management or policies of TransGuard.

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In addition, TransGuard and our foreign insurance subsidiaries, such as The Baxendale Insurance Company Ltd., are subject to extensive supervision and regulation by insurance regulators in their respective jurisdictions, including regulations limiting the payments of dividends from these insurance subsidiaries to their affiliates, including us.

Our certificate of incorporation, by-laws and Delaware law may discourage takeovers and business combinations that our stockholders might consider in their best interests.

Provisions in our restated certificate of incorporation and amended and restated by-laws may delay, defer, prevent or render more difficult a takeover attempt that our stockholders might consider in their best interests. These provisions include:

·       authorization of the issuance of preferred stock, the terms of which may be determined at the sole discretion of the board of directors;

·       establishment of a classified board of directors with staggered, three year terms;

·       provisions giving the board of directors sole power to set the number of directors;

·       limitation on the ability of stockholders to remove directors;

·       prohibition on stockholders from calling special meetings of stockholders;

·       establishment of advance notice requirements for stockholder proposals and nominations for election to the board of directors at stockholder meetings; and

·       requirement of the approval by the holders of at least 75% of our outstanding common stock for the amendment of our by-laws and provisions of our certificate of incorporation governing:

·        the classified board of directors,

·        the removal of directors only for cause by holders of at least 75% of our outstanding common stock,

·        the liability of directors, and

·        the elimination of stockholder actions by written consent.

These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

Our restated certificate of incorporation and amended and restated by-laws may also make it difficult for stockholders to replace or remove our management. These provisions may facilitate management entrenchment that may delay, defer or prevent a change in our control, which may not be in the best interests of our stockholders.

The international scope of our operations may adversely affect our business.

We face certain risks because we conduct an international business, including:

·       restrictions on foreign ownership of subsidiaries;

·       tariffs and other trade barriers;

·       political risks; and

·       potentially adverse tax consequences of operating in multiple jurisdictions.

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In addition, an adverse change in laws or administrative practices in countries within which we operate or where our information systems support and application software development is performed could have a materially adverse effect on us.

We are exposed to currency fluctuations, which may have an adverse effect on us.

A large portion of our operating revenues are from operations outside of the United States. These operating revenues are denominated in the local currency of the country in which our international subsidiaries own their primary assets. Although the majority of expenses are incurred in the same currency in which corresponding operating revenues are generated, we are exposed to fluctuation in foreign currencies in the translation of the applicable currencies into U.S. dollars. We utilize foreign currency forward contracts in the regular course of business to manage our exposure against foreign currency fluctuations, however, any appreciation in the value of the U.S. dollar relative to these currencies could have an adverse effect on us.

ITEM 2.                PROPERTIES

We lease executive and administrative office space at our headquarters at 700 Oakmont Lane, Westmont, Illinois. We also own executive and administrative office space at 5001 U.S. Highway 30 West, Fort Wayne, Indiana. We also own or lease major facilities in Mayfield Heights, Ohio, used by our relocation services operations, in Canada, used by Moving Services North America, and throughout Europe, Australia and New Zealand, each used by Moving Services Europe and Asia Pacific, and own or lease facilities at significant Global Relocation Services and Moving Services locations in many countries throughout the world. All the other properties used in our operations consist of freight forwarding offices, administrative offices and warehouse and distribution facilities.

At December 31, 2004, we had 276 facilities around the world, 21 of which were owned and 255 of which were leased. The following table sets forth our owned or leased properties by location.

Location

 

 

 

Owned

 

Leased

 

Total

 

United States and Canada

 

 

1

 

 

 

48

 

 

 

49

 

 

United Kingdom and continental Europe

 

 

20

 

 

 

130

 

 

 

150

 

 

Australia and New Zealand

 

 

 

 

 

63

 

 

 

63

 

 

Asia (including United Arab Emirates)

 

 

 

 

 

14

 

 

 

14

 

 

Total

 

 

21

 

 

 

255

 

 

 

276

 

 

 

We believe that our office, warehouse and distribution facilities are generally well maintained and suitable to support our current and planned business needs.

ITEM 3.                LEGAL PROCEEDINGS

Suit Against Insurers

We were a defendant in a personal injury suit resulting from a 1996 accident involving one of our agent’s drivers. The case was tried in 1998, and we were found liable. After appeals, a final judgment of $15.2 million was rendered in 2002, which has been fully paid. After insurance payments and reimbursements, we have paid $7.6 million, which we believe is fully reimbursable by insurance; however, TIG Insurance Co., one of our excess insurers, filed suit against us, one of our subsidiaries and several other parties in the 191st Judicial District of Dallas County, Texas in September 2002, contesting TIG’s coverage obligation and seeking declaratory judgment. We filed a counterclaim against TIG, seeking reimbursement for all remaining amounts that we paid in satisfaction of the judgment and associated costs and expenses. We filed a motion for summary judgment in August 2003, and in December 2003, the court rendered a judgment awarding us $2.4 million plus interest and attorneys’ fees. We recorded an amount

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receivable to reflect this judgment at December 31, 2003. TIG filed an appeal with the Fifth Court of Appeals in Dallas, Texas, and we filed a cross-appeal. The appeals court issued a decision on August 26, 2005 and lowered the trial court’s award to $0.3 million, plus interest and attorney’s fees. We adjusted the amount receivable at December 31, 2004 to reflect the reduced award.

Governmental Investigations—Department of Justice

We have produced 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 (“DOJ”) Antitrust Division through a grand jury in the Eastern District of Virginia. We are cooperating with this investigation and understand that numerous other companies have received similar subpoenas. We believe that the investigation relates to the transportation of U.S. military members’ household goods between the United States and foreign countries, which is managed and administered by the Military Transportation and Management Command of the U.S. Army, utilizing private moving companies.

The revenues that we derived from our international military business during the years ended December 31, 2004, 2003, and 2002 were small and declining, representing less than 2% of our consolidated operating revenues in 2002, and declining to less than 1% in 2004. While the investigation is ongoing and potentially exposes us to potential criminal, civil, and administrative penalties, it is difficult to predict its outcome with certainty at this time before the government makes its decisions and advises us of them.

For the year ended December 31, 2004, we incurred legal fees and expenses that were not material in relation to this matter. In addition, we have established a reserve in accordance with the guidelines set forth in SFAS No. 5, “Accounting for Contingencies,” that we consider appropriate in the circumstances. We are also subject to other issues that may be raised by government agencies in connection with our government contracts.

Management believes that, based on information currently available to it, the investigation’s outcome will not have a materially adverse impact on our overall operations or financial condition, although there can be no assurance that it will not. We recently engaged in settlement discussions with the DOJ and anticipate that a resolution of the matters under investigation will be reached.

Governmental Investigations—European Union

Some of our moving services operations in Europe are being investigated by European antitrust regulators. The investigations involve certain anticompetitive practices and may expose us to administrative and other penalties.

In Europe, antitrust regulators have the authority to levy fines. The total amount of any fine levied by a regulator for a particular infringement cannot exceed 10% of the total turnover of the entity on which the fine is levied in the year preceding the levying of the fine. The amount of any fine takes account of the scale of the infringing entity and is computed based on the gravity of the infringement and its duration. It is adjusted to take account of any aggravating or attenuating circumstances, and may be reduced to reflect cooperation with the investigative process. Any fine is imposed by way of a regulatory decision, which is preceded by the issuing of a statement of objections in which the regulator sets out its preliminary findings on any infringement. The addressee of the statement of objections is given the opportunity to respond to the findings set out in the statement of objections. No statements of objections have been received, although we believe that it is likely that a statement of objections will be issued.

We are cooperating with the investigations. For the year ended December 31, 2004, we incurred $1.0 million in legal fees and expenses in relation to this matter, and have established a reserve that we consider appropriate in the circumstances.

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We believe that, based on information currently available, the outcome of the European antitrust investigation will not have a material adverse impact on our 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 our earnings in the period in which they are recognized.

Governmental Investigation—Australia

In August 2004, our Australian moving subsidiary, SIRVA (Australia) Pty. Ltd. (“SIRVA Australia”), received notice from the Australian Competition & Consumer Commission (the “Commission”) stating that the Commission is aware of allegations that SIRVA Australia may have been involved in, or may have documents or information in relation to, collusive arrangements or understandings to fix prices and share tenders with respect to moves within and from the Australian Capital Territory, which were let by and on behalf of certain Australian government agencies. The Commission’s notice identified a number of other companies that are alleged to have been involved in the arrangements that are the subject of the investigation. SIRVA Australia has produced records in response to this notice. No legal proceedings have been commenced, however, if the investigation does result in legal proceedings, this could expose SIRVA Australia to pecuniary penalties and other civil remedies. We are cooperating with the investigation, but do not know when it will be completed. As of the date of this report, we understand that the matter is still being investigated by the Commission. For the year ended December 31, 2004, we incurred approximately $0.3 million in legal fees and expenses in relation to this matter.

Management believes that, based on information currently available, the outcome of the Australian antitrust investigation will not have a material adverse impact on our overall operations or financial condition, although there can be no assurance that it will not. An unfavorable outcome for us is considered neither probable nor remote by management at this time and an estimate of probable loss or range of probable loss cannot currently be made. Any potential penalties, however, may have a material impact on our earnings in the period in which they are recognized.

Securities Class Action

In November 2004, two purported securities class action complaints were filed in the U.S. District Court for the Northern District of Illinois against us and certain of our current and former officers and directors. Titled Central Laborers’ Pension Fund v. SIRVA Inc., et al., No. 04-CV-7644, and Hiatt v. SIRVA, Inc., et al., No. 04-CV-7532, both complaints purported to be brought on behalf of all persons who acquired our common stock between November 25, 2003 and November 9, 2004. On January 25, 2005, the plaintiff in Hiatt v. SIRVA, Inc. voluntarily dismissed his suit. On March 29, 2005, the court appointed Central Laborers’ Pension Fund lead plaintiff in the remaining case, and approved its choice of counsel, Milberg Weiss Bershad & Schulman LLP, as lead plaintiff’s counsel. On May 13, 2005, plaintiff filed a “corrected” complaint, retaining the same class period, and alleging, among other things, that defendants had made false and misleading statements in certain SEC filings, including the prospectuses to our initial and secondary public offerings, and press releases. The statements subject to the complaint generally relate to our insurance claims reserves, European operations, and restatement accounts and are said to constitute violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiff seeks unspecified damages. On October 11, 2005, plaintiff filed its Consolidated Amended Class Action Complaint (“Amended Complaint”), a corrected version of which was filed on October 19, 2005. The Amended Complaint adds ten new defendants, including an additional director, the seven underwriters which participated in the initial and secondary public offerings, our independent auditor and our controlling shareholder. The Amended Complaint extends the class period, purporting to be brought on behalf of all those who acquired our common stock between November 25, 2003 and January 31, 2005. It retains all causes of action contained in the prior Complaint and adds a new claim against our controlling shareholder for violation of Section 20A of the Securities Exchange Act of 1934. The Amended Complaint also contains additional allegations relating to

30




the following areas: our restatement of financial statements and accounting errors for years 2000 through 2003 and the first nine months of 2004, problems in our European operations, insurance reserves, financial forecasting and internal controls. The case is in the preliminary stages, the outcome is not predictable at this time, and we are not presently able to reasonably estimate potential losses, if any, related to this lawsuit. Therefore, no amounts have been accrued for these claims. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, the defense of any litigation may be costly and divert our attention from the day-to-day operations of our business.

Dr. Richard Bassin filed a Complaint on February 17, 2005 against us and certain of our directors and officers in the Circuit Court for St. Clair County, Illinois alleging violations of Sections 11 and 15 of the 1933 Act. Bassin v. SIRVA, Inc., et al., No. 05 L 120 (the “Bassin case”). The complaint alleges facts similar to the Central Laborers’ case. On April 28, 2005, all defendants in the Bassin case filed a joint removal petition in the U.S. District Court for the Southern District of Illinois under the Securities Law Uniform Standards Act (“SLUSA”), 15 U.S. C. § 77v.(a). Bassin v. SIRVA, Inc., et al., No. 05-314-GPM. Plaintiffs subsequently filed a motion to remand the case to state court. Defendants later filed a motion to transfer the case to the Northern District of Illinois under 28 U.S. C. § 1404. On October 7, 2005, counsel for the plaintiff withdrew its motion to remand, and counsel for all parties notified the Court of an agreement to transfer the Bassin case to the U.S. District Court of the Northern District of Illinois. The case is in the preliminary stages, the outcome is not predictable at this time, and we are not presently able to reasonably estimate potential losses, if any, related to this lawsuit. Therefore, no amounts have been accrued for these claims. An unfavorable outcome in this case could have a material adverse effect on our business, financial condition, results of operations and cash flow. In addition, the defense of any litigation may be costly and divert our attention from the day-to-day operations of our business.

Environmental Cleanup Proceedings

We have been named as a PRP in two environmental cleanup proceedings brought under CERCLA or similar state statutes. Based on all known information, we estimate that the cost to resolve liability at these sites would not be materially or significantly larger than the reserves established. We are not presently able to reasonably estimate additional potential losses, if any, related to these proceedings. We could incur significant unanticipated costs, however, if additional contamination is found at these sites, or if we are named as a PRP in other proceedings.

Other

We are involved from time to time in other routine legal matters incidental to our business, including lawsuits relating to conduct of our agents and drivers. Such accidents have included, and in the future may include, serious injuries or the loss of lives. While we may be liable for damages or suffer reputational harm from litigation, we believe that legal proceedings will not have a materially adverse effect on our financial position or results of operations.

SEC Investigation

In February 2005, we received notice of an informal inquiry from the SEC related to our January 31, 2005 earnings guidance announcement for the fourth quarter and full year ended December 31, 2004. In June 2005, the SEC staff informed us that the inquiry had been converted into a formal investigation. We are cooperating with the investigation.

ITEM 4.                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of 2004 to a vote of security holders.

31




PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “SIR.” At October 31, 2005, there were 149 stockholders of record. The following table sets forth, for the period indicated, the high and low sale prices, as reported on the NYSE.

 

 

High

 

Low

 

2005

 

 

 

 

 

Fourth Quarter (through November 18, 2005)

 

$

8.06

 

$

6.41

 

Third Quarter

 

$

11.11

 

$

7.07

 

Second Quarter

 

$

9.95

 

$

6.34

 

First Quarter

 

$

19.60

 

$

6.88

 

 

 

 

High

 

Low

 

2004

 

 

 

 

 

Fourth Quarter

 

$

24.65

 

$

15.81

 

Third Quarter

 

$

24.60

 

$

19.36

 

Second Quarter

 

$

26.00

 

$

21.22

 

First Quarter

 

$

24.50

 

$

19.60

 

 

 

 

High

 

Low

 

2003*

 

 

 

 

 

Fourth Quarter (Beginning November 25, 2003)

 

$

19.69

 

$

17.68

 


*                    Our common stock began trading on the NYSE on November 25, 2003.

We have not paid, and do not expect for the foreseeable future to pay, dividends on our common stock. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business and the repayment of debt. The payment of dividends by us to holders of our common stock is limited by our credit agreements, which restrict our operating subsidiaries’ ability to pay dividends to SIRVA. Any future determination to pay dividends on our common stock is subject to the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, liquidity requirements, restrictions imposed by applicable law and our contracts, and other factors deemed relevant by our Board of Directors.

We maintain a corporate governance page on our website that includes key information about our corporate governance initiatives. That information includes our Corporate Governance guidelines, Code of Business Conduct and charters for our Audit, Compensation, Nominating and Governance, and Executive Committees. The corporate governance page can be found at www.sirva.com, by clicking on “For Investors” and then “Corporate Governance.” You may also obtain copies of the code and these charters by contacting our Corporate Secretary, 700 Oakmont Lane, Westmont, Illinois 60559, or by calling 630-570-3000. The information on our website is not a part of this report.

During the period covered by this report, there were no repurchases of common stock, sales of unregistered securities or proceeds from the sale of registered securities required to be disclosed in this annual report.

32




ITEM 6.                SELECTED FINANCIAL DATA

We derived our selected consolidated financial data for the years 2000 through 2004 from our audited financial statements for the periods then ended. As discussed in Note 2 to the consolidated financial statements contained in Item 8 of this annual report, we restated our financial statements for the years ended December 31, 2003, 2002, 2001 and 2000 and for periods prior to 2000 due to accounting errors.

The presentation of selected historical financial data is only a summary and you should read it together with our historical financial statements and related notes. Share and per share information set forth below have been adjusted to reflect the split of each share of our common stock into 3.17 shares of common stock by way of reclassification that was approved by our Board of Directors on November 7, 2003 and that became effective on November 24, 2003.

33




 

 

 

Years Ended December 31,

 

 

 

 

 

Restated(a)

 

Restated(a)

 

Restated(b)

 

Restated(b)

 

 

 

     2004     

 

     2003     

 

     2002     

 

     2001     

 

     2000     

 

 

 

(Dollars in millions except percentage, share and per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from continuing operations(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Relocation Services

 

 

$

1,465.6

 

 

 

$

993.2

 

 

 

$

457.2

 

 

 

$

2.1

 

 

 

$

1.8

 

 

Moving Services North America

 

 

1,311.1

 

 

 

1,222.4

 

 

 

1,162.4

 

 

 

1,340.0

 

 

 

1,473.3

 

 

Moving Services Europe and Asia Pacific

 

 

482.8

 

 

 

401.5

 

 

 

350.2

 

 

 

330.4

 

 

 

323.4

 

 

Network Services

 

 

210.8

 

 

 

169.5

 

 

 

127.6

 

 

 

84.6

 

 

 

75.6

 

 

 

 

 

$

3,470.3

 

 

 

$

2,786.6

 

 

 

$

2,097.4

 

 

 

$

1,757.1

 

 

 

$

1,874.1

 

 

Purchased transportation expense(1)

 

 

$

1,214.9

 

 

 

$

1,110.9

 

 

 

$

1,042.5

 

 

 

$

1,195.3

 

 

 

$

1,306.5

 

 

Cost of homes sold

 

 

1,232.3

 

 

 

830.8

 

 

 

374.7

 

 

 

 

 

 

 

 

Other direct expense

 

 

602.4

 

 

 

452.0

 

 

 

343.8

 

 

 

277.6

 

 

 

284.8

 

 

Gross margin from continuing operations

 

 

$

420.7

 

 

 

$

392.9

 

 

 

$

336.4

 

 

 

$

284.2

 

 

 

$

282.8

 

 

Operating income (loss) from continuing operations(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Relocation Services

 

 

$

27.4

 

 

 

$

18.5

 

 

 

$

10.1

 

 

 

$

(1.5

)

 

 

$

0.0

 

 

Moving Services North America

 

 

32.8

 

 

 

37.9

 

 

 

34.5

 

 

 

10.1

 

 

 

0.5

 

 

Moving Services Europe and Asia Pacific

 

 

8.0

 

 

 

29.7

 

 

 

24.8

 

 

 

25.0

 

 

 

22.5

 

 

Network Services

 

 

(61.2

)

 

 

33.8

 

 

 

22.3

 

 

 

18.5

 

 

 

16.9

 

 

Corporate

 

 

(10.7

)

 

 

(4.6

)

 

 

(1.3

)

 

 

(1.0

)

 

 

(0.1

)

 

 

 

 

$

(3.7

)

 

 

$

115.3

 

 

 

$

90.4

 

 

 

$

51.1

 

 

 

$

39.8

 

 

Income (loss) from continuing operations before cumulative effect of accounting change(2)(3)

 

 

$

(35.3

)

 

 

$

16.0

 

 

 

$

37.6

 

 

 

$

(17.0

)

 

 

$

(22.7

)

 

Income (loss) from discontinued operations

 

 

(32.9

)

 

 

(1.5

)

 

 

(5.1

)

 

 

(5.4

)

 

 

0.8

 

 

Cumulative effect of accounting change, net of tax(4)

 

 

 

 

 

 

 

 

 

 

 

(0.3

)

 

 

 

 

Net income (loss)(2)(3)(6)

 

 

$

(68.2

)

 

 

$

14.5

 

 

 

$

32.5

 

 

 

$

(22.7

)

 

 

$

(21.9

)

 

Per Share Data(2)(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share—continuing operations(5)

 

 

$

(0.49

)

 

 

$

0.24

 

 

 

$

0.66

 

 

 

$

(0.48

)

 

 

$

(0.66

)

 

Diluted income (loss) per share—continuing operations

 

 

$

(0.49

)

 

 

$

0.23

 

 

 

$

0.66

 

 

 

$

(0.48

)

 

 

$

(0.66

)

 

Basic income (loss) per share—discontinued operations

 

 

$

(0.46

)

 

 

$

(0.02

)

 

 

$

(0.10

)

 

 

$

(0.13

)

 

 

$

0.02

 

 

Diluted income (loss) per share—discontinued operations

 

 

$

(0.46

)

 

 

$

(0.02

)

 

 

$

(0.10

)

 

 

$

(0.13

)

 

 

$

0.02

 

 

Basic net income (loss) per share(5)(6)

 

 

$

(0.95

)

 

 

$

0.22

 

 

 

$

0.56

 

 

 

$

(0.61

)

 

 

$

(0.64

)

 

Diluted net income (loss) per share(5)(6)

 

 

$

(0.95

)

 

 

$

0.21

 

 

 

$

0.56

 

 

 

$

(0.61

)

 

 

$

(0.64

)

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

72,122

 

 

 

58,105

 

 

 

51,713

 

 

 

42,308

 

 

 

39,066

 

 

Diluted

 

 

76,172

 

 

 

60,934

 

 

 

51,832

 

 

 

42,446

 

 

 

39,363

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

72.1

 

 

 

$

60.2

 

 

 

$

44.1

 

 

 

$

32.1

 

 

 

$

43.5

 

 

Property and equipment

 

 

162.2

 

 

 

181.0

 

 

 

171.1

 

 

 

165.3

 

 

 

158.6

 

 

Total assets

 

 

1,793.1

 

 

 

1,582.9

 

 

 

1,406.1

 

 

 

1,081.8

 

 

 

1,210.2

 

 

Short-term debt(7)

 

 

129.5

 

 

 

100.2

 

 

 

99.7

 

 

 

68.2

 

 

 

99.1

 

 

Long-term debt(8)

 

 

550.7

 

 

 

445.5

 

 

 

571.8

 

 

 

505.0

 

 

 

504.8

 

 

Total liabilities

 

 

1,426.8

 

 

 

1,191.5

 

 

 

1,244.2

 

 

 

1,003.2

 

 

 

1,084.5

 

 

Redeemable common stock(9)

 

 

 

 

 

 

 

 

7.6

 

 

 

3.5

 

 

 

10.0

 

 

Redeemable junior preferred stock(10)

 

 

 

 

 

 

 

 

30.4

 

 

 

28.3

 

 

 

26.4

 

 

Stockholders’ equity(c)

 

 

366.3

 

 

 

391.4

 

 

 

123.9

 

 

 

46.8

 

 

 

89.3

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA from continuing operations(11)

 

 

$

40.0

 

 

 

$

117.1

 

 

 

$

124.3

 

 

 

$

89.2

 

 

 

$

83.2

 

 

Depreciation and amortization(12)

 

 

44.9

 

 

 

38.8

 

 

 

34.6

 

 

 

38.7

 

 

 

43.0

 

 

Gross margin as a percentage of operating revenues

 

 

12.1

%

 

 

14.1

%

 

 

16.0

%

 

 

16.2

%

 

 

15.1

%

 


(a)              See Note 2 to the consolidated financial statements contained in Item 8 of this report for a discussion of the restatement.

34




(b)             The effect of the restatement adjustments on selected line items from our consolidated statements of operations for the years ended December 31, 2001 and 2000, respectively, has been summarized in the table below. Such information has been restated for items similar to those described in Note 2 to the consolidated financial statements contained in Item 8 of this report.

 

 

As Previously
Reported

 

Restated

 

As Previously
Reported

 

Restated

 

 

 

2001

 

2001

 

2000

 

2000

 

 

 

(Dollars in millions)

 

Operating revenues

 

 

$

1,772.2

 

 

 

$

1,757.1

 

 

 

$

1,854.5

 

 

 

$

1,874.1

 

 

Purchased transportation expense

 

 

1,210.8

 

 

 

1,195.3

 

 

 

1,286.7

 

 

 

1,306.5

 

 

Total direct expenses

 

 

1,488.0

 

 

 

$

1,472.9

 

 

 

1,571.5

 

 

 

1,591.3

 

 

General and administrative expenses

 

 

227.7

 

 

 

222.7

 

 

 

229.1

 

 

 

229.2

 

 

Operating income from continuing operations

 

 

51.2

 

 

 

51.1

 

 

 

44.2

 

 

 

39.8

 

 

(Loss) income from continuing operations before cumulative effect of accounting change

 

 

(13.3

)

 

 

(17.0

)

 

 

(21.9

)

 

 

(22.7

)

 

Net income (loss)

 

 

$

(16.9

)

 

 

$

(22.7

)

 

 

$

(21.9

)

 

 

$

(21.9

)

 

 

(c)     A reconciliation of stockholder’s equity, as previously reported to stockholder’s equity, as restated at December 31, 2001 and 2000, respectively, is as follows:

 

 

2001

 

2000

 

Stockholder’s equity at December 31, as previously reported

 

$

61.9

 

$

94.0

 

Reclassification between redeemable common stock and treasury stock

 

 

(3.9

)

Cumulative effect of restatements on stockholder’s equity

 

(15.1

)

(0.8

)

Stockholder’s equity at December 31, as restated

 

$

46.8

 

$

89.3

 

 

(1)             Our operating revenues represent fees due from our customers for all aspects of the services that we provided. Where we fulfill the transportation service element using our independent agent network or other third-party service providers, we incur purchased transportation expense, or PTE, which is included in the fees due from our customer. The level of PTE generally increases or decreases in proportion to the operating revenues generated from our transportation services.

(2)             For the years ended December 31, 2004 and 2003, we recognized $3.4 million and $3.5 million, 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 and for option vesting extensions granted to terminated employees per the terms of their severance agreements. The expense has been recorded as the difference between the subscription or exercise price and the deemed fair value of our 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 us in respect of these transactions is $6.0 million with an additional expense amount of $2.3 million in regards to the option vesting extensions provided to certain terminated employees. We expect to recognize $0.7 million, $0.4 million, $0.2 million and $0.1 million in each of 2005, 2006, 2007 and 2008, respectively.

For the year ended December 31, 2004, we recognized $1.8 million of debt extinguishment expenses consisting of $0.8 million of early prepayment premium and $1.0 million of deferred debt issuance costs on the retirement of $11.0 million of 133¤8% senior subordinate loans.

(3)             For the year ended December 31, 2003, we recognized $37.6 million of debt extinguishment expense, consisting of $25.0 million of bond tender premium on the 133¤8% senior subordinated notes and a $12.6 million write-off of deferred debt issuance costs on the prior senior credit facility and indenture. In addition, we recorded a $1.3 million write-off of unrecognized interest rate hedging losses in connection with our debt refinancing.

(4)             Effective January 1, 2001 we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, which resulted in a change in method of accounting. The cumulative effect of this accounting change was a loss of $0.5 million ($0.3 million, net of tax), or $0.01 per share, both on a basic and diluted basis. In 2001, basic and diluted loss per share before cumulative effect of accounting change was $0.47.

(5)             Earnings per share and weighted-average common shares outstanding give effect to the split of each share of our common stock by way of reclassification into 3.17 shares of common stock that became effective on November 24, 2003. Income available to common stockholders is reduced by preferred share dividends of $1.9 million, $3.6 million, $3.4 million and $3.1 million in each of 2003, 2002, 2001 and 2000, respectively. There were no preferred share dividends recognized in 2004.

(6)             We adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), with effect from January 1, 2002. In accordance with SFAS 142, we no longer amortize goodwill and indefinite-lived intangibles, but rather test such assets at least annually for impairment. We completed the impairment test under the transitional requirements of SFAS 142 and no

35




impairment of goodwill or indefinite-lived intangibles was indicated at that time. However, at September 30, 2004, we determined that goodwill associated with discontinued operations was impaired. Such impairment resulted from an analysis of expected business unit sale proceeds compared to the carrying value of the underlying assets to be sold. In addition, at December 31, 2004, we determined that goodwill associated with the Network Services segment was impaired. Such impairment resulted from deteriorating operating results during 2004 and the consequences of anticipated additional capital requirements necessary to continue to support operations and maintain insurance ratings. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill and indefinite-lived intangibles amortization for the years ended December 31, 2004 and 2003 is presented below for the periods reported prior to adoption of SFAS 142. Earnings per ordinary share adjusted for goodwill charges is calculated by adding back the goodwill and indefinite-lived intangibles charges to net income and dividing by the weighted-average ordinary shares outstanding for all periods presented.

 

 

Restated

 

Restated

 

 

 

    2001    

 

    2000    

 

 

 

(Dollars in millions
except per share data)

 

Net income (loss), as reported

 

 

$

(22.7

)

 

 

$

(21.9

)

 

Amortization of goodwill and trade names

 

 

9.8

 

 

 

9.8

 

 

Income tax (provision) benefit

 

 

5.0

 

 

 

(3.5

)

 

Adjusted net income (loss)

 

 

$

(7.9

)

 

 

$

(15.6

)

 

Basic net income (loss) per share, as reported

 

 

$

(0.61

)

 

 

$

(0.64

)

 

Amortization of goodwill and trade names

 

 

0.23

 

 

 

0.25

 

 

Income tax (provision) benefit

 

 

0.12

 

 

 

(0.09

)

 

Adjusted basic net income (loss) per share

 

 

$

(0.26

)

 

 

$

(0.48

)

 

Diluted net income (loss) per share, as reported

 

 

$

(0.61

)

 

 

$

(0.64

)

 

Amortization of goodwill and trade names

 

 

0.23

 

 

 

0.25

 

 

Income tax (provision) benefit

 

 

0.12

 

 

 

(0.09

)

 

Adjusted diluted net income (loss) per share

 

 

$

(0.26

)

 

 

$

(0.48

)

 

 

(7)             Short-term debt consists of the current portion of long-term debt, amounts outstanding under our mortgage warehouse credit facility and our relocation financing facility, and other short-term debt.

(8)             Long-term debt consists of long-term debt and capital lease obligations excluding the current portions of long-term debt and capital lease obligations.

(9)             Prior to the initial public offering of SIRVA common stock, which began on November 25, 2003, certain of our key employees could have required us to repurchase all of the shares and the exercisable portion of options held upon death, disability, retirement at normal age or termination without “Cause” (as defined in the SIRVA, Inc. Stock Incentive Plan). Such securities were classified as “Redeemable Shares of Common Stock” within mezzanine equity. This repurchase right terminated upon the consummation of the initial public offering and as a result, these securities were reclassified to common stock.

(10)       In connection with the acquisition of the Allied and Pickfords businesses, we issued 24,500 shares of redeemable junior preferred stock, due in 2010, to an affiliate of Exel plc. Effective July 1, 2003, we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which resulted in a reclassification of our redeemable junior preferred stock from mezzanine equity to a liability. The dividend rate on this redeemable junior preferred obligation, which was redeemed with the proceeds of the initial public offering, was 12.4% compounded quarterly and was cumulative.

(11)       EBITDA from continuing operations is defined as net income (loss) before loss on discontinued operations, interest, taxes, depreciation and amortization. We believe that EBITDA from continuing operations is a relevant measurement for assessing performance since it attempts to eliminate variances caused by the effects of differences in taxation, the amount and types of capital employed, the results of discontinued operations and depreciation and amortization policies. EBITDA from continuing operations is not a measure determined in accordance with generally accepted accounting principles and should not be considered by investors as an alternative to income from continuing operations or net income as an indicator of our performance. The EBITDA from continuing operations disclosed here is not necessarily comparable to EBITDA from continuing operations disclosed by other companies because EBITDA from continuing operations is not uniformly defined.

36




EBITDA from continuing operations is calculated as follows:

 

 

 

 

Restated(a)

 

Restated(a)

 

Restated(b)

 

Restated(b)

 

 

 

 

2004

 

      2003      

 

      2002      

 

      2001      

 

      2000      

 

 

 

 

(Dollars in millions)

 

 

Net income (loss)

 

$

(68.2

)

 

$

14.5

 

 

 

$

32.5

 

 

 

$

(22.7

)

 

 

$

(21.9

)

 

(Income) loss on discontinued operations

 

32.9

 

 

1.5

 

 

 

5.1

 

 

 

5.4

 

 

 

(0.8

)

 

Interest expense

 

25.4

 

 

54.4

 

 

 

55.2

 

 

 

62.8

 

 

 

66.4

 

 

Provision (benefit) for income taxes

 

5.0

 

 

7.9

 

 

 

(3.1

)

 

 

5.0

 

 

 

(3.5

)

 

Depreciation and amortization

 

44.9

 

 

38.8

 

 

 

34.6

 

 

 

38.7

 

 

 

43.0

 

 

EBITDA from continuing operations 

 

$

40.0

 

 

$

117.1

 

 

 

$

124.3

 

 

 

$

89.2

 

 

 

$

83.2

 

 

 

(a)    See Note 2 to the consolidated financial statements included in Item 8 of this report for a discussion of the restatement.

(b)    Information has been restated for items similar to those described in Note 2 to the consolidated financial statements included in Item 8 of this report. The effect of the restatement adjustments on EBITDA from continuing operations for the years ended December 31, 2001 and 2000 has been summarized in the table below.

 

 

As Previously
Reported

 

Restated

 

As Previously
Reported

 

Restated

 

 

 

2001

 

2001

 

2000

 

2000

 

 

 

(Dollars in millions)

 

Net income (loss)

 

 

$

(16.9

)

 

 

$

(22.7

)

 

 

$

(21.9

)

 

 

$

(21.9

)

 

(Income) loss on discontinued operations 

 

 

3.2

 

 

 

5.4

 

 

 

1.2

 

 

 

(0.8

)

 

Interest expense

 

 

62.7

 

 

 

62.8

 

 

 

66.4

 

 

 

66.4

 

 

Provision (benefit) for income taxes

 

 

1.7

 

 

 

5.0

 

 

 

(2.7

)

 

 

(3.5

)

 

Depreciation and amortization

 

 

38.6

 

 

 

38.7

 

 

 

42.9

 

 

 

43.0

 

 

EBITDA from continuing operations

 

 

$

89.3

 

 

 

$

89.2

 

 

 

$

85.9

 

 

 

$

83.2

 

 

 

(12)       Includes depreciation expense for property and equipment and amortization expense for intangible assets and deferred agent contract expenditures. Excludes amortization expense for deferred debt issuance costs, which are recorded as part of interest expense.

37




ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a world leader in the global relocation industry, providing our solutions to a well-established and diverse customer base, including transferring corporate and government employees and moving individual consumers. We operate in more than 40 countries under well-recognized brand names including SIRVA®, Allied®, northAmerican®, Global® and SIRVA Relocation in North America; Pickfords in the United Kingdom; Maison Huet in France; Kungsholms in Sweden; ADAM in Denmark; Majortrans Flytteservice in Norway; Rettenmayer in Germany; Allied Arthur Pierre in Belgium, France, Luxembourg and Holland and Allied Pickfords in the Asia Pacific region. We are redefining the global relocation market by combining our relocation service offerings with our proprietary moving services network on a worldwide basis. This combination is driving our growth by addressing our corporate and government customers’ needs for a comprehensive service offering with global reach from a single supplier. In addition, we offer a variety of services targeted at meeting the needs of truck drivers, fleet owners and agents, both inside and outside our proprietary agent network.

The demand for our services is subject to changes in the economy, which can impact our profitability. Since September 2004, we have observed market weakness in the European region, which affects operating results for our Moving Services Europe and Asia Pacific business segment. This market weakness is due to a slowdown in overall housing sales, most particularly in the United Kingdom. While not worsening, we expect the sluggish pace of home sales in the United Kingdom and difficult market conditions in the European international moving market to continue in the near term. To address these market challenges, we initiated a restructuring of our European operations in the second quarter of 2005. These restructuring initiatives included a reduction in personnel, facilities, equipment and other overhead expenses. As a result of these initiatives, we expect to incur approximately $12 million of additional restructuring charges in 2005, but then expect to generate ongoing cost savings of approximately $15 million in 2006 and thereafter.

In addition, our 2005 operating results will be negatively impacted by the cost of professional services related to the independent and internal reviews described below and increased claim accruals and re-insurance costs within our insurance operation. The latter of these was in large part a result of the A.M. Best downgrades of our TransGuard insurance business in April and August of 2005. Going forward, we do not expect to incur any additional significant expenses relating to the independent and internal reviews. Furthermore, we expect to complete the divestiture of our TransGuard and other U.S insurance-related businesses in the fourth quarter of 2005.

During the first half of 2005, we have also observed some signs of weakness in the number of U.S. corporate relocations on a year-over-year basis. We are carefully monitoring this and other economic indicators. However, this softening is mitigated by our Global Relocation Services segment’s continued ability to gain new customers and thus increase its revenue despite this recent market weakness.

Overall, based on the projected benefits of our European restructuring, the non-recurring nature of the expenses incurred during the independent and internal reviews discussed below, the pending sale of our U.S. insurance businesses, and the expectation that we will be able to continue our new customer growth in our Global Relocation Services segment, we expect our overall performance to improve.

Our Historical Development

In 1998, Clayton, Dubilier & Rice Fund V Limited Partnership organized us to acquire North American Van Lines, Inc. from Norfolk Southern Corporation. As measured by the number of shipments, North American Van Lines was one of the largest U.S. moving services companies and was a significant provider of specialty transportation services. In 1999, we acquired the Allied and Pickfords businesses from NFC plc, now known as Exel Investments Limited. The integration of this acquisition drove substantial

38




operating synergies as a result of back-office rationalization, significant economies of scale and an expanded international service offering. The Allied and Pickfords acquisition also brought us additional specialized transportation businesses and TransGuard, a provider of insurance services to moving agents, fleet owners and owner operator drivers. We have since completed a number of acquisitions to fill out our global moving footprint. In June 2002, we acquired Maison Huet, solidifying our market position in France. In June 2003, we acquired Scanvan, a leading moving services company in Scandinavia, operating with the brand names of Kungsholms in Sweden, ADAM in Denmark and Majortrans Flytteservice in Norway and employing a more asset light model than the rest of Europe. In April 2004, we acquired Rettenmayer Internationale, a German-based moving and relocation business. The integration of these market-leading businesses into a single company has created a proprietary moving services fulfillment network with superior global reach and capabilities.

In the late 1990s, we recognized an increasing trend for corporate customers to outsource all aspects of an employee relocation, including household goods relocation, to relocation service providers. We viewed this trend as an opportunity to offer our customers higher-value services, deepen our customer relationships and move into a complementary and growing market. Consequently, we began a thorough review of the industry for an acquisition candidate that would both meet our requirements for innovative, high-quality services and make us a leader in providing comprehensive relocation services to corporate customers.

As a result of this effort, we acquired the relocation services business of Cooperative Resource Services, Ltd., or CRS, in May 2002. CRS was a leading independent provider of outsourced relocation services with an innovative and differentiated fixed-fee product offering. Later that year, we acquired Rowan Simmons, a leading independent provider of outsourced relocation services in the United Kingdom. In 2003, we expanded our relocation offerings with the opening of our office in Hong Kong and the December 2003 acquisition of PRS Europe, a Belgium-based relocation services provider. We further enhanced our relocation services offerings in 2004 through the acquisition of specialty relocation services provider Relocation Dynamics, Inc. (“RDI”) in March 2004, the acquisition of the specialty residential brokerage and relocation services business of D.J. Knight in September 2004 and the acquisition of Executive Relocation Corporation (“ERC”), a U.S.-based full service relocation management firm, in December 2004. Through these acquisitions, and the growth they have generated, we have developed a global relocation services capability that, when combined with our worldwide moving services network, is unique in the industry.

In addition, we also made two acquisitions to help support continued growth in our Network Services segment. Historically, the primary market for our insurance programs and other services provided to truck drivers, fleet owners and agents was our own network. With the acquisitions of the National Association of Independent Truckers (“NAIT”), an association of independent contract truck drivers, in April 2002 and the purchase of Move-Pak, a program administrator for a moving and storage insurer, in December 2003, we opened up new customer channels for our Network Services segment.

In November 2003, we completed an initial public offering of shares of our common stock. Our common stock is listed on the New York Stock Exchange under the symbol “SIR.”

In June 2004, we completed a secondary public offering of our common stock with shares offered for sale by our three largest stockholders, reducing their ownership from approximately 68% to 37%. We did not receive any proceeds from the sale of these offered shares. We incurred $1.2 million 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 fully exercised its warrants. These were our only outstanding warrants and resulted in proceeds to us of $35.0 million and the issuance of an additional 2,773,116 common shares.

39




On September 9, 2004, our Board of Directors authorized, approved and committed us to a disposal plan involving our North American high-value products and homeExpress businesses (High Value Products Division), as well as certain other logistics businesses, which include Specialized Transportation in Europe and our Transportation Solutions segment in North America.

In April 2005, A.M. Best downgraded TransGuard’s rating from A-u (under review) to B++u (under review) with negative implications. In August 2005, the A.M. Best rating was further downgraded from B++u (under review) to Bu (under review).

Independent Review by Audit Committee

In early January 2005, the Audit Committee of our Board of Directors formally initiated a comprehensive, independent review after we received a letter sent on behalf of our former chief financial officer (the “Independent Review” or “Review”). At that time, the Audit Committee engaged the services of Cleary Gottlieb Steen & Hamilton LLP (“Cleary Gottlieb”), led by former Securities and Exchange Commission (“SEC”) general counsel David M. Becker, to advise it in connection with the Review. Cleary Gottlieb retained Deloitte & Touche LLP as forensic accountants to assist in the Review. The Audit Committee instructed Cleary Gottlieb to exercise its independent judgment on all matters involved in the Review. Furthermore, the Audit Committee directed Cleary Gottlieb to bring to its attention indications of any improprieties.

The Audit Committee expanded the scope of its Review in February 2005 to address certain allegations regarding the adequacy of our accounting practices which were contained in a pseudonymous email sent to PricewaterhouseCoopers LLP, our independent registered public accountants (“PwC”). This expanded review closely examined the basis for these allegations, including the relevant Company accounting records and related disclosures, and accordingly required additional time to complete.

The Audit Committee further expanded the scope of its Review in March 2005 by requesting Cleary Gottlieb to review the circumstances giving rise to the accounting entries that were the basis for the Board of Director’s decision to restate our previously issued financial statements for the years 2000 through 2003 and the first nine months of 2004. In total, Cleary Gottlieb reviewed approximately 25 million pages of electronic documents, 300 boxes of physical documents, and interviewed approximately 160 current and former employees, members of senior management and the Board of Directors.

Throughout the course of the Audit Committee’s Independent Review, PwC was kept informed of the Review’s progress and interim results. PwC also was consulted on the scope of the Independent Review for certain matters and reviewed the conclusions of the Independent Review.

Internal Review by Management

In addition to the Independent Review, our management conducted an internal review in connection with the preparation of our consolidated financial statements included in this report. This review was undertaken in connection with implementing procedures to comply with Section 404 of the Sarbanes-Oxley Act, the disappointing performance of our Insurance and European businesses in the third quarter of 2004, and as part of our year-end closing process.

In January 2005, management substantially expanded its internal review and engaged FTI Consulting, Inc., who have extensive financial experience and expertise in generally accepted accounting principles (“GAAP”), to supplement management’s efforts. Their combined effort was conducted under the direction of senior financial management with the oversight of the Audit Committee. This internal review covered all of our major business units globally, and included a review of our 2004 year-end balance sheets, as well as a review of numerous transactions, account reconciliations, and other relevant information. The results of the internal review provided the basis for the Board of Director’s decision to

40




restate the previously issued financial statements for the years 2000 through 2003 and the first nine months of 2004.

Summary Conclusions

Management’s conclusions regarding the findings of both the Independent Review and its own internal review are summarized in the following paragraphs. A more detailed summary of Clearly Gottlieb’s findings, conclusions and recommendations to the Audit Committee is incorporated herein by reference to Exhibit 99.1 of our current report on Form 8-K filed with the SEC on September 21, 2005.

The Independent Review did not reveal a scheme to misstate our financial statements. However, both the Independent Review and the internal review did reveal material weaknesses in our control environment, organizational structure and in our consistent application of GAAP. We are using the conclusions of the reviews as a basis to drive improvements in these areas across each of our business units. A more detailed discussion of these material weaknesses appears below in Item 9A, “Controls and Procedures.”

In addition, the Audit Committee has been taking appropriate disciplinary actions, including the termination or re-assignment of certain employees, and is implementing Board level governance changes. Furthermore, the Audit Committee has adopted the recommendations of the Independent Review and directed us to implement a remedial action plan. This plan, among other matters, suggests making significant changes to our organizational structure and to the development, documentation, and delivery of policies and procedures. The plan also emphasizes and reaffirms our ongoing commitment to training our management team and employees in both technical skills and compliance with corporate governance policies.

Financial Statement Adjustments

Restatements

As discussed above, the Audit Committee of the Board of Directors and our management conducted comprehensive reviews of our accounting practices and policies in relation to our previously issued financial statements. The results of those reviews have prompted us to restate our financial statements for the years ended December 31, 2003 and 2002 and the quarters ended March 31, June 30 and September 30, 2004 and 2003 and the quarter ended December 31, 2003. See Note 2 to the consolidated financial statements contained in Item 8 of this report for a reconciliation of previously reported amounts to the restated amounts.

The table below reflects errors impacting operating income by segment, as well as the year impacted by the restatement. We also identified certain corrections that did not affect net income, but did result in correction to the presentation of previously reported balances in the consolidated statements of operations or consolidated balance sheets. Further description of the material adjustments on an individual basis is also included in Note 2 to the consolidated financial statements contained in Item 8 of this report.

Income (Expense)

 

 

 

2003

 

2002

 

Total

 

%

 

Network Services

 

$

(2.7

)

$

(4.0

)

$

(6.7

)

53.2

%

Moving Services Europe and Asia Pacific

 

(1.5

)

(1.1

)

(2.6

)

20.6

%

Moving Services North America

 

(1.9

)

(0.7

)

(2.6

)

20.6

%

Discontinued Operations

 

(0.9

)

 

(0.9

)

7.1

%

Corporate

 

 

 

 

0.0

%

Global Relocation Services

 

(1.2

)

1.4

 

0.2

 

(1.5

)%

Operating income impact

 

$

(8.2

)

$

(4.4

)

$

(12.6

)

100.0

%

Net income (loss) impact

 

$

(4.5

)

$

11.7

 

 

 

 

 

Earnings per share impact

 

$

(0.07

)

$

0.23

 

 

 

 

 

 

41




Fourth Quarter 2004 Changes in Estimates

As we conducted our year-end closing procedures and our internal review, we identified the need to increase certain accruals, or otherwise record expenses which had not been anticipated at the time we had provided earnings guidance with respect to the fourth quarter of 2004. As we became aware of these unanticipated pre-tax charges, we disclosed them in press releases dated January 31, 2005, March 15, 2005 and June 20, 2005. We determined that these net unanticipated pre-tax charges amount to $53.9 million, $17.8 million of which were properly recorded in the fourth quarter of 2004. The balance of $36.1 million represents accounting errors that require restatement of prior quarterly and annual financial statements, $33.7 million of which relate to continuing operations.

Approximately $17.8 million of the unanticipated pre-tax charges, which relate to fourth quarter operating activities or changes in estimates, will be included within reported results for the quarter ended December 31, 2004. A brief explanation of the cause for these charges is summarized below. Material items are also noted, as appropriate, below.

·       $6.3 million related to updated information and analysis that indicated the need to further increase the loss reserves in our insurance business.

·       $2.7 million of fees associated with the expansion of the securitization facility for our relocation-related receivables.

·       $2.1 million related to recent developments with respect to certain legal matters.

·       $2.2 million write-off of a European receivable related to a previous asset sale due to an unanticipated obligor bankruptcy.

·       $1.8 million for restructuring and other charges relating to our European operations.

·       $2.0 million of corporate charges related to certain severance agreements.

·       $0.7 million to impair certain non-insurance assets within our Network Services segment that were divested in the first quarter of 2005, and other miscellaneous items identified through our year-end review.

In addition, during the fourth quarter of 2004, we recorded a $66.4 million impairment charge to write-down goodwill associated with our U.S. insurance group. The impairment was partly due to lower 2004 operating results associated with adverse claims development and reinsurance, commission and bad debt expenses identified during our internal 2004 year-end review. The lower operating outlook, and consideration of the estimated financial impact of a likely ratings downgrade of our U.S. insurance operations, caused us to perform a critical assessment of the fair value of our U.S. insurance group at December 31, 2004. The analysis revealed that the fair value of the U.S. insurance group was less than its carrying value, causing the impairment write-down described above.

Operating Segments

In determining reportable segments, we periodically review several qualitative and quantitative factors associated with our operating segments. These factors include management reporting, organizational structure, operating revenues, income from continuing operations, assets, customers, services, operating margins and other economic characteristics. Reflecting the increasing importance that the Relocation business plays in our overall financial performance, we began in the fourth quarter of 2004 to report our results in the following five reportable segments: Global Relocation Services, Moving Services North America, Moving Services Europe and Asia Pacific, Network Services and Corporate. Moving Services Europe and Moving Services Asia Pacific are separate operating segments. However, given their similar economic characteristics, services provided, processes, types of customers, methods of service delivery,

42




regulatory environments and meeting certain quantitative thresholds, we concluded these two operating segments should be combined into a single reportable segment, Moving Services Europe and Asia Pacific. The table below summarizes the components of our previous reportable segments and our new reportable segments.

Previous Segment

 

Business Unit

 

 

 

New Segment

 

Business Unit

 

Relocation Solutions North America

 

Relocation Services North America

 

 

 

Global Relocation Services

 

Relocation Services North America

 

Relocation Solutions North America

 

Moving Services North America

 

 

 

Global Relocation Services

 

Relocation Services Europe

 

Relocation Solutions North America

 

Special Products

 

 

 

Global Relocation Services

 

Relocation Services Asia Pacific

 

Relocation Solutions Europe and Asia Pacific

 

Moving Services Europe

 

 

 

Moving Services North America

 

Moving Services North America

 

Relocation Solutions Europe and Asia Pacific

 

Relocation Services Europe

 

 

 

Moving Services North America

 

Special Products

 

Relocation Solutions Europe and Asia Pacific

 

Moving Services Asia Pacific

 

 

 

Moving Services Europe and Asia Pacific

 

Moving Services Europe

 

Relocation Solutions Europe and Asia Pacific

 

Relocation Services Asia Pacific

 

 

 

Moving Services Europe and Asia Pacific

 

Moving Services Asia Pacific

 

Network Services

 

Insurance Services

 

 

 

Network Services

 

Insurance Services

 

Network Services

 

Client Services

 

 

 

Network Services

 

Client Services

 

Corporate

 

Corporate

 

 

 

Corporate

 

Corporate

 

 

Global Relocation Services:   We offer a comprehensive suite of relocation solutions to thousands of corporate and government customers around the world. We offer a wide variety of employee relocation services, including the sale of employees’ homes, movement of their household goods, purchase of their new homes and provision of destination services. Our relocation solutions are provided by a team of over 1,000 employees around the world and a network of real estate agents and other service providers.

Moving Services North America:   We provide our moving services through our proprietary branded network of 735 agents who own the trucks and trailers used in moves and are responsible for packing, hauling and storage, and distribution of household goods. We act as a network manager for our agents, providing, among other things, brand management, load optimization, billing, collection and claims handling.

Moving Services Europe and Asia Pacific:   We provide moving services through a network of company-owned and agent-owned locations in the United Kingdom, continental Europe and the Asia Pacific region.

Network Services:   We offer a variety of services for truck drivers, fleet owners and agents, both inside and outside of our network. Services offered include U.S. 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, we offer a suite of services, including fuel, cell phone, tire services, legal assistance and retirement programs to the members of NAIT. At December 31, 2004, the association had approximately 32,000 owner operator members.

Corporate:   This segment contains costs associated with corporate governance activities that are not allocated to the other four operating segments. These costs include board of director expenses, stock compensation expenses, Sarbanes-Oxley compliance costs and other costs of a corporate nature.

Prior year segment information has been restated to conform to our new segment presentation.

Critical Accounting Policies

Our accounting policies are described in Note 1 to our consolidated financial statements included in Item 8 of this report. The preparation of financial statements requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

43




Revenue recognition:   For our moving services, we recognize gross operating revenues to be invoiced to the transportation customer and all related transportation expenses on the date a shipment is delivered or services are completed.

In our relocation services operations, fees are paid to us by corporate customers at either a set price per transferred employee (“traditional product”) or based upon a fixed percentage of the home’s selling price (“fixed fee product”) The traditional product revenue is recognized at the date the home is sold to a third-party buyer. The fixed fee product revenue is recognized at the date we purchase the home from a transferee. When we purchase a property from a transferee, the property enters our inventory. We record the sale of the inventory home as revenue on a gross basis when we close on the home sale to a third-party buyer. Additionally, we receive fees from company-qualified real estate agents for the listing or home purchase referral of a transferred employee. The listing referral fee revenue is recognized when we close on the home sale to a third-party buyer. The home purchase referral fee revenue is recognized when a transferee closes on the purchase of a destination home from a third-party seller.

In addition, within relocation services, we recognize gains or losses on the sale of mortgage loans at the date the loans are funded by purchasers pursuant to the existing sales commitment. The gain or loss equals the difference between the basis in the loan and the net proceeds received and are included in operating revenues in the consolidated statement of operations. Sales of loans are made without recourse, provided the loans meet predetermined specifications, as defined in the agreements with investors. We do not currently service mortgage loans.

Within our Network Services segment in the insurance services unit, we recognize premium revenue evenly over the term of the insurance policy. In addition, Network Services has monthly policies that are earned as billed.

We periodically review our different revenue streams to assess the appropriate presentation of each source of revenue. We recognize the majority of our operating revenues on a gross basis.

U.S. insurance loss reserves.   Claim and claim adjustment expense reserves related to our U.S. operations, except reserves for structured settlements, are not discounted and are based on 1) case basis estimates for losses reported on direct business; 2) estimates of incurred but not reported losses; 3) estimates of losses on assumed reinsurance; 4) estimates of future expenses to be incurred in the settlement of claims; 5) estimates of salvage and subrogation recoveries and 6) estimates of amounts due from insureds related to losses under high deductible policies. We consider current conditions and trends as well as past Company and industry experience in establishing these estimates. The effects of inflation, which can be significant, are implicitly considered in the reserve process and are part of the recorded reserve balance.

Foreign insurance loss reserves:   Our non-U.S. insurance operations include the Baxendale Insurance Company Ltd. (“Baxendale”) and SIRVA U.K. Baxendale records reserves for unpaid losses and loss adjustment expenses related to its storage, fire, marine cargo and premise damage lines of business. The reserve is based on estimates calculated by us based on actual historical claims data and includes a provision for incurred but not reported claims. The reserve is reviewed by us monthly and changes in the reserves are reflected in current operations. SIRVA U.K. records reserves for unpaid losses and loss adjustment expenses related to vehicle accidents, employer liability and professional indemnity lines of business. The reserve is based on estimates calculated by third-party insurers. The reserve is reviewed by us monthly and changes to the reserves are reflected in current operations.

At December 31, 2004 and 2003, our combined U.S. and foreign insurance loss reserves totaled $87.1 million and $52.5 million, respectively; however, actual results may be materially different from our current estimates. The increase in loss reserves is due to higher levels of insurance business volume and adverse claim development.

44




Cargo claims reserves:   We estimate claims relating to cargo damage and loss based principally on actuarial methods applied to historical trends. A cargo claims analysis is performed each quarter comparing open and closed claim costs, as well as estimates for incurred but not reported claim costs, to the original estimates and changes to those estimates are recorded.

Cargo claims expense was $37.6 million, $29.6 million and $24.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. At December 31, 2004 and 2003, our cargo claims reserves totaled $24.9 million and $21.7 million, respectively; however, future actual results may be materially different from our current estimates. Historical cargo claims metrics are used to record a provision in the current period for the cost to settle claims that have been incurred but will be settled in future periods. The customer generally files a claim for damage shortly after the service is completed, but the settlement process can extend from a period of a few months to several years. As a result of the length of the settlement cycle, it is necessary to utilize frequency and severity trends to estimate current period claims expenses that are derived from prior years, as these years contain more fully developed claims experience. An analysis is performed each quarter comparing open and closed claim costs, as well as estimates for incurred but not reported claim costs, to the original estimates, and changes to those estimates are recorded as appropriate.

Customer and agent incentives:   We offer certain incentives to our moving agents and corporate customers. Incentives offered to moving agents are based upon revenue growth targets. These are recognized ratably over the period of the incentive agreement as a component of other direct expense. Incentives offered to corporate customers are based upon meeting certain revenue thresholds, and are recognized as a reduction in operating revenues ratably over the period of incentive. We estimate and accrue both incentives based upon actual progression towards achievement of the incentive targets. We recognized moving agent incentives of $3,633, $3,459 and $3,273 for the years ended December 31, 2004, 2003 and 2002, respectively. In addition, we recognized customer incentives of $6,463, $6,750 and $7,144 for the years ended December 31, 2004, 2003 and 2002, respectively.

Allowance for doubtful accounts:   An allowance for doubtful accounts and notes receivable is maintained for estimated losses resulting from the inability of our customers or agents to make required payments. If the financial condition of our customers and agents were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our allowances for doubtful accounts and notes receivable at December 31, 2004 and 2003 amounted to $24.8 million and $21.8 million, representing 6.8% and 6.0% of our accounts receivable balances, respectively. Actual results may be materially different from our current estimates.

Relocation properties held for resale:   Relocation properties held for resale are recorded at net realizable value. Adjustments to record the properties at net realizable value include an estimate for loss on sale and costs to sell the property. If we experience a further reduction in the market value of the homes in inventory, additional adjustments may be required. Our adjustments related to properties in inventory at December 31, 2004 and 2003 amounted to $12.8 million and $8.2 million, respectively.

Investments:   Investments consist of U.S. Treasury and corporate debt and equity securities, retained interests in securitized receivables and interests in joint ventures. Investments classified as held-to-maturity with a maturity date greater than one year are considered noncurrent, while all other investments are considered current. Interest and dividends on debt and equity securities are included in operating revenues. Except for certain convertible securities, we classify our debt securities in one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities in which we have the ability and intent to hold the securities until maturity. All other securities are classified as available-for-sale. Available-for-sale securities are restricted as to use by our U.S. insurance subsidiary. Our policy is to classify these securities as current assets since these securities represent the investment of funds available for current operations of our U.S. insurance subsidiary.

45




Since October 1, 2004, purchases of convertible bonds and stock are classified as trading securities. These securities are recorded at fair value in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” All convertible bonds and stocks purchased prior to October 1, 2004 continue to be classified as available-for-sale.

Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive loss until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.

On a quarterly basis, we perform a review to determine if any securities have incurred an other than temporary loss. Any such securities identified are written down to their fair value at the time that it is determined they are impaired with the adjustment recognized in current earnings.

We utilize a receivables securitization program to sell certain receivables generated by our Global Relocation Services segment to independent third-party financial institutions. The receivable sales are accounted for as sales of financial assets according to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” The fair value of the retained interest is estimated by considering the history of performance of these types of receivables, the underlying security, the subordinate position of the retained interest, current interest rates and economic conditions. The retained interest is classified as a current investment due to the current nature of the underlying receivable. Any gains or losses on the transfer to the independent third-party financial institution are recognized in current earnings.

Goodwill and intangible assets:   We adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), on January 1, 2002. SFAS 142 requires that an annual impairment review be performed, which requires us to place a fair value on the individual reporting units of the business. We perform the impairment review during the fourth quarter. This requires us to select an appropriate method of valuation for the business using discounted estimated cash flows and to assess assumptions inherent in such a method on an annual basis. These assumptions include identifying an appropriate discount rate, estimating future cash flows and forecasting capital requirements. Discount rates are based on comparable companies and relative capital structures, while cash flows and capital requirements are based on management’s best estimates. In addition, whenever events or changes in circumstances indicate that the carrying value of goodwill and other indefinite-lived intangible assets might not be recoverable, we will perform an impairment review. The judgments made in determining whether goodwill and other intangible assets are impaired will directly affect reported operating income, since any time we determine that any of these assets are impaired, a charge will be recognized in the statement of operations equal to the decline in value of such assets.

Our goodwill and other intangible assets totaled $619.9 million at December 31, 2004 and $590.4 million at December 31, 2003, which included $352.4 million and $398.2 million, respectively, related to the original purchase of North American Van Lines, Inc. and the Allied and Pickfords businesses.

Intangible assets with finite lives are amortized over their useful lives using a straight-line amortization method for all time periods presented. For customer and member relationships, those lives range from 5 to 18 years and for covenants not to compete, lives range from 1 to 5 years. Commencing October 1, 2003, we amortized customer and member relationship intangible assets over their remaining useful lives using an accelerated amortization method to more closely reflect the pattern in which economic benefits of the intangible assets are utilized. Under this method, approximately 56% of the intangible asset will be amortized over the first 5 years of their respective useful lives, which average 14.9

46




years, thereby resulting in approximately half of the amortization expense being recognized over the first third of the intangible’s useful life.

Pensions and other postretirement benefits:   We provide a range of benefits to our current and retired employees, including defined benefit retirement plans, postretirement medical and life insurance benefits and postemployment benefits (primarily severance). We record annual amounts relating to these plans based on calculations specified by generally accepted accounting principles (“GAAP”), which include various actuarial assumptions, such as discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. As required by GAAP, the effect of the modifications is generally recorded or amortized over future periods. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and advice from our actuaries.

Impairment of long-lived assets:   We periodically assess impairments of our long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”). An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered by us include, but are not limited to, significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for our overall business; and significant negative industry or economic trends. When we determine that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above impairment indicators, we estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of these expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, we calculate an impairment loss. An impairment loss is equal to the difference between the fair value of the asset and its carrying value. Fair value is generally determined using a discounted cash flow methodology.

Commitments and contingencies:   We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, “Accounting for Contingencies” and record accruals when the outcome of these matters is deemed probable and the liability is reasonably estimable. We make these assessments based on the facts and circumstances and in some instances based in part on the advice of outside counsel.

Income taxes:   We account for income taxes using the asset and liability method in accordance with SFAS 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted laws and tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. In addition, the amounts of any future tax benefits are reduced by a valuation allowance to the extent such benefits are not expected to be realized on a more likely than not basis. To the extent that a valuation allowance is established or increased in a period, we must include an expense within the tax provision in the statements of income.

Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets. We recorded a valuation allowance of $4.0 million on $14.4 million of foreign deferred tax assets at December 31, 2004, due to uncertainties related to our ability to utilize some of the deferred tax assets in jurisdictions outside the United States. The amount of the valuation allowance has been determined based on our estimates of taxable income by each jurisdiction in which we operate over the periods in which the deferred tax assets will be recoverable.

47




We concluded that a valuation allowance on the remaining $107.9 million of U.S. deferred tax assets at December 31, 2004 was not required. Our methodology for determining the realizability of deferred tax assets involves estimates of future taxable income from our core business of Global Relocation Services, as well as estimated operating expenses to support that anticipated level of business and the expiration dates and amounts of net operating loss carryforwards. These estimates are projected through the life of the related deferred tax assets based on assumptions that we believe to be reasonable and consistent with current operating results.

In concluding that a valuation allowance was not required on the U.S. deferred tax assets, we considered both the positive and negative evidence regarding our ability to generate sufficient taxable income to realize our deferred tax assets. Positive evidence included having achieved profitability for financial reporting purposes in the core business of Global Relocation Services since 2002. Other positive evidence included projected earnings (including the negative impact of interest expense) of at least $288.0 million attributable to the core business through 2009. Further positive evidence included the fact that the U.S. net operating losses will not begin to expire until 2019, while projected earnings indicate that the deferred tax assets will be offset by taxable earnings a full ten years prior to that expiration. Negative evidence included a history of net operating losses in the core business prior to 2002, as well as a history of losses due to special charges and discontinued operations in the current and prior years as well as additional projected losses from special charges and discontinued operations in 2005. Negative evidence also included the Business Risks described in Item 1 of this Annual Report, entitled “Business”. This additional negative evidence includes, but is not limited to the material weakness in internal controls over financial reporting, ongoing litigation and governmental investigations, acceptance of our relatively new strategy of offering a global comprehensive relocation solution to customers, and the presence of substantial existing debt and the prospect of incurring substantial additional debt in the future.

In weighing the positive and negative evidence above, we considered the “more likely than not” criteria pursuant to Statement of Accounting Standards (SFAS) 109 as well as the risk factors related to its future business described above. Based on this analysis we concluded that it was more likely than not that the U.S. deferred tax assets of $107.9 million would be realized. At December 31, 2004, we would require approximately $280.0 million in cumulative U.S. taxable income to be generated at various times over the next fifteen years to realize the U.S. deferred tax assets recognized at December 31, 2004.

48




Seasonality

Our operations are subject to seasonal trends. Operating revenues and operating income from continuing operations for the quarters ending in March and December are typically lower than the quarters ending in June and September. The stronger performance in the second and third quarters is due to the higher moving shipment count and relocation initiations associated with the summer moving season, which also allows for somewhat higher pricing than in the winter months.

The seasonal impact on our quarterly operating revenues and operating income from continuing operations is illustrated by the following table showing quarterly operating revenues and operating income from continuing operations as a percent of the total for the indicated full fiscal years. All quarters of 2003 and the first three quarters of 2004 have been restated to reflect changes to the historically presented financial statements. The restatement has been explained more fully in Items 1 and 7 of this annual report, as well as Note 2 to the consolidated financial statement contained in Item 8 of this report.

 

 

2004

 

2003

 

 

 

Restated

 

 

 

Restated

 

 

 

Q1

 

Q2

 

Q3

 

Q4

 

Q1

 

Q2

 

Q3

 

Q4

 

Operating revenues

 

18

%

26

%

32

%

24

%

 

18

%

 

 

25

%

 

 

33

%

 

 

24

%

 

Operating income from continuing operations

 

N/M

 

N/M

 

N/M

 

N/M

 

 

11

%

 

 

19

%

 

 

50

%

 

 

20

%

 

 

Because the 2004 earnings from continuing operations is a small loss, calculation of quarterly earnings as a percentage of total annual earnings is not meaningful (N/M).

Foreign Currency Translation

The future magnitude and direction of foreign currency translation adjustments depends on the relationship of the U.S. dollar to other foreign currencies. The effects of foreign currency fluctuations in our foreign operations are somewhat mitigated by the fact that the vast majority of our operations incur expenses in the same currency in which the corresponding operating revenues are generated. As a consequence, the effects of foreign currency fluctuations on our operating results are limited principally to the translation of our activities outside of the United States from their local currency into the U.S. dollar. Income from continuing operations for 2004 from non-U.S. operations amounted to $8.5 million, or 13.9%, of our consolidated income from continuing operations. In addition, a total of 37.4% of our long-lived assets at December 31, 2004, were denominated in currencies other than the U.S. dollar. The functional currency for our non-U.S. subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. We have operations in several foreign countries, including those that use the Canadian dollar, the British pound sterling, the Australian dollar or the euro as their functional currencies.

The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The effect of U.S. dollar currency exchange rates in Canada, the United Kingdom, the Euro zone, Australia and other countries in which we operate produced net currency translation adjustment gain of $19.6 million, net of tax, which was recorded as an adjustment to stockholders’ equity as an element of other comprehensive income for the year ended December 31, 2004.

Taxation

For the year ended December 31, 2004, our estimated provision for income taxes was higher than the amount computed by applying the U.S. federal and state statutory rates. This unfavorable difference is due

49




to the impairment of non-deductible goodwill associated with our U.S. insurance group. For the year ended December 31, 2003, our estimated provision for income taxes was lower than the amount computed by applying the U.S. federal and state statutory rates. This favorable difference was due primarily to differences in the mix of the statutory rates between the United States and countries where we have permanently reinvested earnings and tax incentive programs that we have qualified for under the laws of certain jurisdictions.

Results of Continuing Operations

The following table sets forth information concerning our results of continuing operations for the years ended December 31, 2004, 2003 and 2002, also expressed as a percentage of our operating revenues for the respective periods.

 

 

 

 

Restated

 

Restated

 

 

 

Restated

 

Restated

 

 

 

2004

 

2003

 

2002

 

2004

 

2003

 

2002

 

 

 

(Dollars in millions)

 

(Percentage of operating revenues)

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenue

 

$

2,243.0

 

$

1,959.6

 

$

1,724.6

 

64.6

%

 

70.3

%

 

 

82.2

%

 

Home sale revenue

 

1,227.3

 

827.0

 

372.8

 

35.4

%

 

29.7

%

 

 

17.8

%

 

Total operating revenues

 

3,470.3

 

2,786.6

 

2,097.4

 

100.0

%

 

100.0

%

 

 

100.0

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased transportation expense

 

1,214.9

 

1,110.9

 

1,042.5

 

35.0

%

 

39.9

%

 

 

49.7

%

 

Cost of homes sold

 

1,232.3

 

830.8

 

374.7

 

35.5

%

 

29.8

%

 

 

17.9

%

 

Other direct expenses

 

602.4

 

452.0

 

343.8

 

17.4

%

 

16.2

%

 

 

16.4

%

 

Gross margin

 

420.7

 

392.9

 

336.4

 

12.1

%

 

14.1

%

 

 

16.0

%

 

General and administrative expense

 

350.0

 

275.2

 

244.0

 

10.1

%

 

9.9

%

 

 

11.6

%

 

Intangibles amortization

 

8.4

 

6.2

 

3.9