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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20509
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 0-24762
FIRSTSERVICE CORPORATION
(Exact name of registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
FIRSTSERVICE BUILDING
1140 BAY STREET, SUITE 4000 M5S 2B4
TORONTO, ONTARIO, CANADA (Postal Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (416) 960-9500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
SUBORDINATE VOTING SHARES
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] or No [ ]
Indicate be 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 the 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. [X]
The aggregate market value of Subordinate Voting Shares held by
non-affiliates of the Registrant as of May 31, 2000 was $130,890,700 U.S. The
number of shares outstanding of the Registrant's Subordinate Voting Shares as of
May 31, 2000 was 12,420,743, and the closing market price of such shares on that
date was $12.125 U.S. The number of Multiple Voting Shares outstanding on May
31, 2000 was 662,847.
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FIRSTSERVICE CORPORATION
ANNUAL REPORT ON FORM 10-K
MARCH 31, 2000
INDEX
PAGE
----
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S SHARES AND
RELATED SHAREHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45
ITEM 11. EXECUTIVE COMPENSATION 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 53
SIGNATURES 56
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PART I
ITEM 1. BUSINESS
UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS IN THIS FORM 10-K ARE
EXPRESSED IN UNITED STATES DOLLARS.
This annual report is prepared on Form 10-K and is filed by
FirstService Corporation, an Ontario company (hereinafter sometimes referred to
as the "Registrant"). The Registrant and its subsidiaries are referred to as
"FirstService" or the "Company". The Registrant is a "foreign private issuer" as
defined under Rule 405 of Regulation C under the Securities Act of 1933, as
amended. However, effective for the year ended March 31, 2000 ("Fiscal 2000"),
the Registrant elected to file its annual, quarterly and current reports on
forms designated for U.S. domestic issuers and consequently, this Form is its
initial 10-K filing.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains or incorporates by reference
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company intends that such forward-looking
statements be subject to the safe harbors created by such legislation. Such
forward-looking statements involve risks and uncertainties and include, but are
not limited to, statements regarding future events and the Company's plans,
goals and objectives. Such statements are generally accompanied by words such as
"intend", "anticipate", "believe", "estimate", "expect" or similar statements.
The Company's actual results may differ materially from such statements. Among
the factors that could result in such differences are the impact of weather
conditions, increased competition, labor shortages, the condition of the United
States and Canadian economies, and the ability of the Company to make
acquisitions at reasonable prices. Although the Company believes that the
assumptions underlying its forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in such forward-looking statements will be
realized. The inclusion of such forward-looking statements should not be
regarded as a representation by the Company or any other person that the future
events, plans or expectations contemplated by the Company will be achieved. The
Company notes that past performance in operations and share price are not
necessarily predictive of future performance.
OVERVIEW
FirstService is a leader in the rapidly growing service sector,
providing a variety of Property and Business Services to consumers and
corporations throughout North America. Each service line operated by the Company
generates a high level of recurring revenues, has strong cash flows, and
generates high returns on invested capital and each has the ability to be
leveraged through margin enhancement, cross-selling or consolidation.
Throughout the FirstService organization, managers and employees are
financially motivated to identify and realize synergies and growth opportunities
through share ownership and performance-based compensation.
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Over the last five years, FirstService has grown its earnings and
earnings per share by more than 25% annually on the strength of strong internal
growth and by completing and successfully integrating strategic acquisitions in
Canada and, predominantly, the United States.
HISTORY
The roots of the Company date back to 1972, when Jay S. Hennick, the
President and Chief Executive Officer, founded a pool and recreational facility
management company that became known as Superior Pool, Spa and Leisure, Ltd.
("Superior"). FirstService Corporation was formed in July 1988 under the laws of
the Province of Ontario, Canada, with Mr. Hennick exchanging his interest in
Superior for FirstService shares. The Company completed its initial public
offering on the Toronto Stock Exchange in June 1993 and currently its
Subordinate Voting Shares trade on the NASDAQ National Market (symbol: FSRV) and
the Toronto Stock Exchange (symbol: FSV).
For a detailed history of the Company, please refer to the exhibit
entitled "Annual Information Form" contained in Form 6-K for the month of August
1999, filed on August 12, 1999.
BUSINESS STRATEGY
The Company's objective is to continue building a diversified property
and business services company that can generate consistent growth in annual cash
flow and earnings per share. Management believes that the Company's operating
strategy and entrepreneurial culture support and encourage the effective
management of its businesses, thereby increasing profitability and contributing
to successful acquisitions.
OPERATING STRATEGY
The goal of the Company's operating strategy is to increase the
revenues, profitability and market position of each operating company, while
maintaining the highest level of service to its customers. Key elements of the
Company's operating strategy are:
SENIOR MANAGEMENT OWNERSHIP. The Company strongly believes that
management ownership at each of its primary operating units has
contributed significantly to its ability to grow its businesses. As a
result, the Company expects to continue its practice of allowing
management to hold a minority equity interest in the business they
operate, generally in the form of a non-transferable direct equity
ownership position. In all cases, the Company retains the right to
purchase the minority interest at a pre-determined formula price.
Management believes that its strategy of aligning the interests of
operating management with those of the Company and its shareholders
provides a powerful incentive to deliver superior financial
performance.
PERFORMANCE-BASED COMPENSATION. The Company uses performance-based
compensation programs throughout each of its businesses to attract,
retain and motivate its employees. In general, senior managers receive
bonuses that are based on a percentage of the amount by which their
results exceed budgeted earnings before interest, taxes, depreciation
and amortization ("EBITDA"). Lower level managers' incentives are also
linked to EBITDA targets, but may include other measures deemed
important for growing their business. The
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Company believes these programs are effective incentives to operating
management and employees to deliver consistent, high-quality service in
a cost effective manner.
OPERATING EFFICIENCIES. The Company has been able to obtain significant
operating efficiencies, increase margins and improve on its competitive
advantage through the implementation of a variety of best practices.
The Company attempts to identify and refine its best practices across
all business units to benefit from the most innovative and effective
management systems and techniques. The implementation of these best
practices has resulted in improved labor management, customer service
and management information systems. The Company also achieves
significant savings through the volume purchasing of vehicles,
insurance, group benefits, advertising and professional and financial
services.
MARKET PENETRATION AND CROSS-SELLING INITIATIVES. The Company
capitalizes on the complementary nature of its businesses by
introducing new or additional services to customers with which it
already has long-term contractual relationships. The complementary
nature of the Company's businesses also provides certain advantages
when introducing a new service in a market where the Company has
existing operations. These advantages include significant market
knowledge, demographic information and the ability to share the
established overhead of another Company operation.
ACQUISITION STRATEGY
The goal of the Company's acquisition strategy is to systematically
acquire companies in existing or complementary service areas that will enhance
its market position, extend its geographic reach or expand the breadth of its
service offerings.
The service sector is highly fragmented, consisting primarily of small
business owners that often have limited access to capital and few options for
liquidity. The Company has demonstrated that it can, through a targeted
acquisition plan, meet the capital and liquidity needs of such owners, as
illustrated by the Company's successful track record of acquiring and
integrating over 60 businesses. The Company believes that acquisition
opportunities will continue to be available to it across all of its service
lines. Despite these opportunities, the Company is committed to a controlled
growth acquisition strategy, limiting acquisitions to those that can be
purchased at a fair price and can easily be integrated into existing operations
without overburdening managers or systems.
Key elements of the Company's acquisition strategy are:
EXPANSION OF SERVICE OFFERINGS OR GEOGRAPHIC REACH. The Company intends
to continue to acquire "platform" service businesses that have
well-developed market positions that complement existing services or
extend the Company's geographic reach. When entering a new service area
or geographic market, the Company generally pursues larger operations
with leading market positions, a history of consistent profitability
and cash flow, experienced management and whose performance can be
leveraged through margin enhancement, cross-selling or consolidation.
INCREASE MARKET PENETRATION. Once the Company has established a leading
market position in a new geographic market, it will also pursue
"tuck-under" acquisitions of smaller companies whose customer bases,
operating assets and service personnel can be easily incorporated into
existing operations without a significant increase in selling, general
and administrative expenses.
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EMPHASIZE INTEGRATION. While the Company is confident that there are
significant opportunities to grow rapidly through strategic
acquisitions, management places a large focus on properly integrating
new acquisitions. The Company has a dedicated integration and margin
enhancement team consisting of experienced business process
professionals. Their role is to assist operating management to
effectively assimilate newly acquired operations into the organization.
DESCRIPTION OF SERVICE LINES
The Company's operations are conducted through two principal operating
divisions, Property Services and Business Services. The following diagram
depicts FirstService's organizational structure:
[CHART]
* Includes both franchised and company-owned services.
- ------------------------------------------ ----------------- ---------------- ----------------
REVENUE BY SERVICE LINE YEAR ENDED YEAR ENDED YEAR ENDED
(In thousands of U.S. dollars) MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
- ------------------------------------------ ----------------- ---------------- ----------------
Property Services
Management Services $ 133,782 $ 90,649 $ 62,958
Consumer Services 71,330 61,618 46,984
Security Services 61,539 52,827 49,914
Business Services 73,198 58,162 36,615
Other 186 105 17
-------- --------- --------
TOTAL $340,035 $ 263,361 $196,488
======== ========= ========
- ------------------------------------------ ----------------- ---------------- ----------------
Please note that: (i) Management Services was previously disclosed as
Community Association Management and (ii) Consumer Services was formed to
aggregate the operations previously disclosed as Franchised Services and Lawn
Care.
Note 15 to the Consolidated Financial Statements included herein under
Part II contains further details regarding the operating profit and total assets
of the operating segments of the Company.
PROPERTY SERVICES DIVISION
MANAGEMENT SERVICES
FirstService is the largest manager of private residential communities
in North America. Private residential communities include condominiums,
cooperatives, gated communities and a variety of other residential developments
governed by multiple unit residential community associations. In total, the
Company manages more than 325,000 residential units in 1,600
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communities in the States of Florida, Pennsylvania, New York, New Jersey,
Delaware, Maryland, Virginia, District of Columbia and Arizona. The Management
Services operations are carried out through the following subsidiaries: The
Continental Group, Ltd., Prime Management Group, Inc., The Wentworth Group,
Inc., and Rossmar & Graham Community Association Management Company.
In addition, through its subsidiary American Pool Enterprises, Inc.
("American Pool"), FirstService is the largest manager of commercial swimming
pools and recreation facilities in North America. American Pool currently serves
more than 1,400 commercial swimming pools and recreation facilities and more
than 5,500 residential swimming pools in ten U.S. States and in Canada,
providing recreational facility management, staffing, maintenance, and
restoration services. The operations of American Pool, outside of the Florida
and Arizona markets, are seasonal in nature with the majority of revenues being
earned in the Company's first and second quarters.
There are two types of professional property management companies:
traditional property managers and full-service property managers. Traditional
property managers primarily handle administrative property management functions,
such as collecting maintenance fees, paying suppliers, preparing financial
statements and contracting out support services. Full-service property managers
provide the same services as traditional property managers but also provide a
variety of other services under one exclusive contract. FirstService is a
full-service property manager providing a full range of services including
landscaping, pest control, irrigation, real estate sales and leasing, painting
and restoration, heating, air conditioning and plumbing services and swimming
pool maintenance.
CONSUMER SERVICES
In Consumer Services, FirstService provides a variety of brand leading
residential and commercial services through its network of over 1,700
company-owned and franchised locations across North America and internationally
and generates customer level revenues of approximately $450 million per annum.
The principal subsidiaries in its Consumer Services group include The Franchise
Company, Inc. ("The Franchise Company") and Greenspace Services Ltd.
("Greenspace").
The Franchise Company is the owner-operator of several property service
franchise systems. Its franchise systems offer closet design and installation
services through the "California Closets" brand; residential and commercial
insurance restoration services through the "Paul Davis Restoration" brand;
commercial and residential painting services through the "Certa ProPainters" and
"College Pro Painters" brands; home decorating services through the "Stained
Glass Overlay" or "SGO" brand; and residential and commercial lawn care services
through the "Nutri-Lawn" brand. Currently, The Franchise Company operates
through approximately 1,700 franchisees employing approximately 7,300 seasonal
and full-time staff.
California Closets is the largest provider of installed closet and home
storage systems in the world. Headquartered in San Rafael, California,
California Closets has approximately 125 franchises in the United States and
Canada as well as master franchises in other countries around the world.
California Closets receives a royalty from franchisees based on a percentage of
revenues.
Paul Davis Restoration is a Florida-based franchisor of residential and
commercial restoration services primarily serving the insurance restoration
industry in the United States. The franchise system currently has approximately
230 franchisees across the U.S. with system wide
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sales exceeding $220 million. Paul Davis Restoration receives a royalty based on
a percentage of franchisee revenues.
Certa ProPainters is a residential and commercial painting franchise
system with approximately 210 franchisees operating in major markets across the
United States and Canada as well as master franchises in other countries around
the world. Certa ProPainters focuses on high-end residential, commercial and
industrial exterior painting and decorating work and other programs for property
managers who have portfolios of condominium and commercial properties.
Franchisees pay Certa ProPainters a fixed fee royalty, plus administrative fees
for various ancillary services.
College Pro Painters operates a seasonal exterior residential painting
franchise system in 24 US States and across Canada through approximately 750
franchisees. It recruits students and trains them to operate the business,
including price estimating, marketing, operating procedures, hiring, customer
service and safety. College Pro Painters receives a royalty from each franchisee
based on a percentage of revenues. In addition, College Pro Painters sells
business items such as signs, business kits and mailing materials to each
franchisee.
Franchise agreements are generally for a term of ten years, with the
exception of College Pro Painters, where the agreements are for a term of 1
year.
In addition, the Company through its Greenspace subsidiary provides
residential and commercial lawn care and landscape services, primarily in
Canada, under the "ChemLawn", "Sears Lawn Care" and "Green Lawn Care" brands.
Greenspace serves more than 120,000 customers from 14 branches and has
the largest share of the Ontario and Quebec markets with an estimated 40% market
share among households who purchase lawn care services, excluding mowing.
Services to residential customers include fertilization, weed and pest control
for lawns, trees and shrubs, and lawn aeration. Services to commercial customers
include all of the services provided to residential customers plus mowing,
landscaping, irrigation and other services comprising comprehensive grounds
maintenance. Greenspace's operations are seasonal in nature, with the majority
of its revenues earned during the Company's first and second quarters.
SECURITY SERVICES
FirstService operates one of the largest integrated security operations
in North America through its subsidiary, Intercon Security Limited ("Intercon
Security"). Intercon Security is a leading provider of integrated electronic
systems and security personnel to office buildings, shopping malls and
residential communities across Canada and in six U.S. states from branch
operations in Toronto, Chicago, New Jersey, Milwaukee, Jacksonville, Vancouver,
and Calgary.
Intercon Security's electronic security systems include access control
systems, closed circuit television systems and intrusion alarms. Intercon
Security designs and manages security systems using security officers,
monitoring devices, access card readers and elevator controllers interfaced with
closed circuit television systems, in combination or individually, as a client's
situation demands.
BUSINESS SERVICES DIVISION
FirstService's Business Services division provides a variety of
customer support and fulfillment services to Fortune 1000 companies through 11
branches occupying more than 1.8
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million square feet throughout the United States and Canada. The principal
Business Services operating subsidiaries are BDP Business Data Services Limited
("BDP") and DDS Distribution Services Ltd. ("DDS").
BDP has developed expertise in performing services that require
significant labor in coordination with technology, such as the administration
and processing of consumer and student loans, insurance claims and credit and
loyalty cards. Through the use of efficient labor management practices and by
leveraging technology, BDP offers these services to its clients as an
integrated, cost-effective and high-quality solution.
DDS provides integrated business-to-business fulfillment and
distribution services to blue chip clients in the consumer goods, retail,
automotive and pharmaceutical sectors. Services offered include, warehousing,
order processing, order assembly and shipping, customer support, inventory
management and client profiling. DDS works with its clients to create
fulfillment channels that meet their needs, which can include the integration of
DDS' proprietary order processing software, the development of customized
e-commerce sites, the use of DDS' call center, and the coordination of
activities across DDS' eight North American fulfillment centers.
DDS takes orders from its clients, as well as directly from its
clients' customers, and assembles, packages and delivers materials to the
appropriate parties. Orders are received through each client's customized
fulfillment channels. With its information management systems, DDS tracks the
materials it warehouses and delivers and compiles data to profile its clients'
customers. DDS provides its clients an array of data reporting options, and this
information is used to track inventory and as a valuable marketing tool. DDS
charges storage fees as well as processing fees for orders fulfilled.
INDUSTRY POSITION, COMPETITION AND CUSTOMERS
The following information is based solely on estimates made by
management of the Company and cannot be verified. In considering the Company's
industry and competitive position, it should be recognized that FirstService
competes with many other companies in the sale of its services, franchises and
products and that some of these competitors are larger and may have greater
financial and marketing strength than FirstService.
PROPERTY SERVICES DIVISION
MANAGEMENT SERVICES
Based on the most recent available industry data, the Company
estimates that: (i) more than 42 million Americans, representing
approximately 16 million households, live in condominiums, cooperatives,
planned communities and other residential developments governed by multiple
unit residential community associations; (ii) more than 50% of new homes
being built in and around major metropolitan areas in the United States are
within these categories; (iii) there are approximately 205,000 community
associations in the United States; and (iv) the total annual fees for
operating expenses for all community associations in the U.S. approaches $25
billion.
Typically, owners of privately owned residential units are required to
pay quarterly or monthly fees to cover the expenses of managing the condominium
or homeowner association's business activities and maintaining community
properties. Historically, decision making for communities was delegated to
volunteer boards of directors elected by the owners. Increasingly,
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these volunteer boards have outsourced the responsibility to manage the
day-to-day operation and maintenance of community property to professional
property management companies.
The residential property management industry is fragmented and
dominated primarily by numerous local and regional management companies. Only a
small number of such companies, however, have the expertise and capital to
provide both traditional property management services as well as the other
support services provided by full-service property managers. The Company is the
largest full-service manager of private residential communities in the United
States.
The Company's Management Services business is subject to regulation by
the States in which it operates. For example, the Florida Department of
Professional Regulation requires that property managers must be licensed which
involves certain examinations and continuing education. In addition, the
division's real estate sales and leasing operations are subject to regulation as
a real estate brokerage by the various States in which it operates.
SECURITY SERVICES
Growth in the security industry has been significant over the last
several years and is expected to continue due to a number of factors, including
heightened public anxiety over crime and violence. The security industry is
highly fragmented, but undergoing consolidation. In the United States alone,
there are approximately 10,000 security manpower companies and 2,500
alarm-monitoring companies. The security manpower business has low barriers to
entry and is cost competitive.
Intercon Security differentiates itself by providing highly trained
security officers to commercial enterprises willing to pay more for quality
services and by integrating its security officer services with its security
systems. Service and monitoring contracts are less sensitive to price
competition than are security officer services. Intercon Security has a large
market share in the Canadian cities in which it operates, but a small market
share in the United States.
The Company believes that Intercon Security is unique in its ability to
offer a complete range of security systems and personnel that can be integrated
and customized for the specific protection services required by its clients.
CONSUMER SERVICES
The residential and commercial service industry is highly fragmented,
consisting principally of a large number of smaller, single-service or
single-concept companies. Due to the large size of the overall market for these
services, dominant market share is not considered necessary for becoming a major
player in the industry. However, because of the low barriers to entry in this
segment, the Company believes that brand name recognition among consumers is a
critical factor in achieving long term success in the businesses in which it
operates.
In terms of franchising, the Company believes that the largest
franchise companies in North America have been successful because of their
ability to realize economies of scale through the centralization and successful
application of certain administrative functions such as finance, marketing,
purchasing, training and support staffing.
The Company's franchise businesses are subject to United States Federal
Trade Commission regulation and State and provincial laws that regulate the
offering and sale of franchises. To date, these provisions have not had an
adverse effect on the performance of the Company. Presently, the Company is
authorized to sell franchises in 49 U.S. states, in all
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Canadian provinces and in several other countries around the world. In all
jurisdictions, the Company endeavors to have its franchisees meet or exceed
regulatory standards.
In terms of lawn care, the professional lawn care industry is estimated
to be an $8 billion market (including mowing) in North America, and despite some
consolidation, is still highly fragmented. Local and regional competitors, as
well as do-it-yourself homeowners, provide strong competition in the Canadian
lawn care industry, the primary market for the Company's lawn care operations
carried out through Greenspace.
Federal and Provincial environmental laws are applicable in the
jurisdictions in which Greenspace operates. These regulations dictate which
products and methods may be used and require employees to be properly trained
and licensed in the use of pesticides and herbicides. These laws, together with
municipal bylaws, may limit or restrict the use of certain lawn care practices
and if such laws change, Greenspace's business may be adversely affected.
BUSINESS SERVICES DIVISION
The business outsourcing market has a number of distinct segments. The
two most closely associated with BDP's market are information technology and
personnel services. These companies seek out contracts within large
organizations to provide either information systems or personnel, which are
managed by clients. In contrast, BDP combines technology and people in a process
that targets the outsourcing of back-office and administrative applications.
BDP's customers are comprised of leading Canadian banks, health
insurance companies, and consumer products companies. The in-house data
processing departments of these customers are BDP's major competitors, and BDP
differentiates itself through quality of service and price.
DDS focuses on the fulfillment of printed materials and specialty
products including promotional displays, marketing materials, medical
information, educational materials and pharmaceutical samples. Many companies
now are outsourcing this function to third-party fulfillment companies such as
DDS. DDS is one of the largest providers of such services in North America. A
number of DDS's competitors also engage in other businesses such as printing,
creative communications services, or logistics. However, DDS positions itself as
a specialist services company focused on the fulfillment of specialty materials
and products as described above.
RECURRING REVENUE
A common theme and key focus across the FirstService companies is
recurring, contractual revenue. This is driven by the essential nature of the
services provided by the Property Services and Business Services divisions.
In the Property Services Division, property management contracts are
generally for terms of one to three years, and Security Services contracts are
generally one year in duration. Contracts with franchisees in Consumer Services
are primarily for ten-year periods. In the Business Services Division, contracts
have terms of one to five years, with larger contracts having longer terms.
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CURRENT YEAR DEVELOPMENTS
In April 1999, the Company amended and restated its lending agreement
to increase credit availability and to split its senior debt facility into a
$50.0 million Cdn. ($34.5 million U.S.) and a $130.0 million U.S. tranche. This
revolving facility is available to finance acquisitions and working capital.
In June 1999, the Company expanded its Management Services operations
through the acquisition of American Pool, which is based in Beltsville, Maryland
and operates in ten US States and in Canada.
In July 1999, the Company expanded its Business Services division by
acquiring Dallas based Southwest Distribution Services Group (now named DDS
Southwest Distribution Services, Ltd.), a educational materials and textbook
fulfillment business, through its subsidiary, DDS Distribution Services,
Limited.
The Company also made six smaller "tuck-under" acquisitions during the
year. No material dispositions of business assets occurred during the year ended
March 31, 2000.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Notes 10 and 15 to the Consolidated Financial Statements included
herein under Part II contain information regarding revenues, net income before
taxes and minority interest, and total assets, by geographic region.
MINORITY SHAREHOLDERS OF SUBSIDIARIES
The Company owns a majority interest (on average, 85% of the equity) in
all of its subsidiaries, while the operating management of each subsidiary owns
the remaining shares. This structure was designed to maintain control by
FirstService while providing significant incentives to management at the
operating companies. In all cases, the Company has the right to repurchase the
management's shares at a predetermined formula price, usually payable at the
Company's option with any combination of Subordinate Voting Shares or cash. The
Company may also be obligated to acquire certain of these minority interests in
the event of the death, disability or cessation of employment of an operating
manager or if shares are required to be purchased pursuant to the right of the
minority shareholders to require the Company to repurchase their shares. These
arrangements provide significant flexibility to the Company in connection with
management succession planning and shareholder liquidity matters.
MAJOR CUSTOMERS
FirstService has no single customer which accounts for more than 2% of
its total revenues. No part of the Company's business is dependent on a single
customer or a few customers, the loss of which would have a material adverse
effect on the Company as a whole. Revenues from governmental sources are not
material.
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EMPLOYEES
The Company has approximately 7,000 full-time employees, rising to a
total of 13,000 in the spring and summer months with seasonal employees.
TRADEMARKS
FirstService's trademarks are important for the advertising and brand
awareness of all of its businesses and franchises. Trademarks are renewed at
each registration expiry date.
ITEM 2. PROPERTIES
The head office of the Registrant is a 20,000 square foot owned
building located at 1140 Bay Street, Toronto, Ontario, Canada, M5S 2B4,
approximately three-quarters of which is leased to third party tenants.
BUSINESS SERVICES DIVISION
DDS leases approximately 1.7 million square feet of warehouse and
office space in connection with its fulfillment and warehousing operations.
Principal warehouse locations include 380,000 square feet in Norristown,
Pennsylvania; 360,000 square feet in Elyria, Ohio; 250,000 square feet in
Strongsville, Ohio; 175,000 square feet in Toronto, Ontario; 150,000 square feet
in Dallas, Texas; 115,000 square feet in Whittier, California; and 88,000 square
feet in Chicago, Illinois.
BDP leases approximately 100,000 square feet of office space,
consisting of 65,000 square feet in Toronto, Ontario; 25,000 square feet in
Orangeville, Ontario; and 10,000 square feet in Ottawa, Ontario.
PROPERTY SERVICES DIVISION
FirstService owns a 38,000 square foot office and warehouse building
located in Boca Raton, Florida, most of which is occupied by Prime Management
Group, Inc., part of which is occupied by the U.S. corporate offices of the
Company and part of which is leased to a third party. The Company also owns a
22,000 square foot office and warehouse building in Hollywood, Florida, which is
occupied by The Continental Group, Ltd.
To house the operations of The Franchise Company, the Company leases
approximately 40,000 square feet of office and warehouse space, comprised
principally of the offices of Paul Davis Restoration in Jacksonville, Florida
(12,000 square feet); the offices of Certa ProPainters in Valley Forge,
Pennsylvania (9,000 square feet); the head office of The Franchise Company in
Mississauga, Ontario (6,000 square feet); and the offices of California Closets
in San Rafael, California (5,000 square feet).
Intercon Security leases approximately 75,000 square feet of office
space, consisting of primarily the following locations: Toronto, Ontario -
46,000 square feet (includes 12,000 square feet of warehouse and manufacturing
space); Vancouver, British Columbia - 13,000 square feet; Oakbrook, Illinois -
7,000 square feet; and Forked River, New Jersey - 6,000 square feet.
-14-
All of the Company's remaining operations are carried out from leased
premises located across United States and Canada, none of which is material to
the Company. The Company believes its existing premises, as described above, are
sufficient to meet its current operating requirements.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, FirstService may become involved in
legal proceedings with private parties and/or governments. As at June 16, 2000,
these proceedings included a number of general liability actions, none of which
are material to the company, and no environmental actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Fourth Quarter of the year ended March 31, 2000, no matters
were submitted to a vote of security holders.
-15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS
The Registrant's Subordinate Voting Shares are traded on the NASDAQ
National Market ("NASDAQ") (symbol: FSRV) and the Toronto Stock Exchange ("TSE")
(symbol: FSV). The Registrant's Multiple Voting Shares are not traded on any
established public trading market.
The following table sets forth the highest and lowest closing prices of
the Registrant's Subordinate Voting Shares in each quarter of the two years
ending March 31, 2000 and 1999:
---------------------- ------------- -------------- ------------- --------------
NASDAQ NASDAQ TSE TSE
QUARTERLY QUARTERLY QUARTERLY QUARTERLY
HIGH PRICE LOW PRICE HIGH PRICE LOW PRICE
QUARTER ($ US) ($ US) ($ CDN) ($ CDN)
---------------------- ------------- -------------- ------------- --------------
FISCAL 1999 Q1 $13.88 $11.88 $20.25 $17.05
Q2 13.13 10.38 18.75 16.00
Q3 12.25 11.00 18.30 16.75
Q4 13.75 11.88 20.70 18.00
---------------------- ------------- -------------- ------------- --------------
FISCAL 2000 Q1 17.00 13.06 25.85 19.65
Q2 15.31 12.00 23.00 17.75
Q3 13.69 11.00 19.90 16.25
Q4 13.13 11.03 20.50 16.05
---------------------- ------------- -------------- ------------- --------------
As of May 31, 2000, in relation to the Subordinate Voting Shares, there
were approximately 300 shareholders of record and approximately 4,000 persons
who held shares in the names of nominees. One shareholder, the President and
Chief Executive Officer of the Company, held all of the Multiple Voting Shares.
No dividends were declared by the Registrant during the two Fiscal
years ending March 31, 2000 and 1999. The Company's lending agreement with its
lenders prohibits the Company from declaring dividends without the prior
approval of the lenders.
TAXATION
The following discussion summarizes certain tax considerations relevant
to an investment by individuals and corporations who, for income tax purposes,
are resident in the United States and not in Canada, hold shares as capital
property, and do not use or hold the shares in carrying on business through a
permanent establishment or in connection with a fixed base in Canada
(collectively, "Unconnected U.S. Shareholders"). The Canadian tax consequences
of investment in the shares by investors who are not Unconnected U.S.
Shareholders may be expected to differ substantially from the tax consequences
discussed herein. This discussion is based on upon the provisions of the Income
Tax Act (Canada) (the "Tax Act"), the Convention between Canada and the United
States of America with respect to taxes on Income and Capital (the "Convention")
and the published administrative practices of the Canada Customs and Revenue
Agency and judicial decisions, all of which are subject to change. This
discussion does not take into account the tax laws of the various provinces or
territories of Canada.
-16-
This discussion is intended to be a general description of the Canadian
tax considerations and does not take into account the individual circumstances
of any particular shareholder.
Any cash and stock dividends on the shares payable to Unconnected U.S.
Shareholders generally will be subject to Canadian withholding tax. Under the
Convention, the rate of withholding tax generally applicable to Unconnected U.S.
Shareholders is 15%. In the case of a United States corporate shareholder owning
10% or more of the voting shares of the Company, the applicable withholding tax
under the Convention is 5%.
Capital gains realized on the disposition of shares by Unconnected U.S.
Shareholders will not be subject to tax under the Tax Act unless such shares are
taxable Canadian property within the meaning of the Tax Act. Shares will not be
taxable Canadian property to a holder unless, at any time during the five-year
period immediately preceding the disposition, the holder, or persons with whom
the holder did not deal at arm's length, or any combination thereof, owned 25%
or more of the issued shares of any class or series of the Company. If the
shares are considered taxable Canadian property to a holder, the Convention will
generally exempt Unconnected U.S. Shareholders from tax under the Tax Act in
respect of a disposition of shares provided the value of the shares of the
Company is not derived principally from real property situated in Canada.
-17-
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(in thousands of U.S. Dollars, except per share amounts) - in accordance with
United States generally accepted accounting principles.
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
YEAR ENDED MARCH 31 2000 1999 1998 1997 1996
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------
OPERATIONS
Revenue $340,035 $263,361 $196,488 $131,084 $90,008
EBITDA (1) $37,977 $28,767 $18,608 $12,117 $7,515
Net earnings $9,868 $7,222 $4,435 $2,708 $1,699
FINANCIAL POSITION
Total assets $230,887 $184,306 $126,019 $76,624 $45,183
Long-term debt (2) $102,177 $84,516 $38,163 $28,737 $11,149
Shareholders' equity $68,338 $59,020 $44,807 $20,088 $16,704
Book value per share $5.26 $4.57 $3.65 $2.12 $1.90
SHARE DATA
Net earnings per share
Basic $0.76 $0.57 $0.43 $0.30 $0.21
Diluted $0.72 $0.54 $0.41 $0.30 $0.21
Weighted average shares (thousands)
Basic 12,948 12,564 10.370 9,070 7,911
Diluted 13,708 13,475 10,936 9,167 8,040
Cash dividends per share - - - - -
- -------------------------------------------- ------------- ------------- ------------- ------------- -------------
NOTES
(1) Earnings before interest, taxes, depreciation and amortization.
(2) Excluding current portion of long-term debt.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2000
Consolidated revenues for the year ended March 31, 2000 were $340.0
million; a 29.1% increase from the $263.4 million reported for the year ended
March 31, 1999. Approximately $45.0 million of the increase resulted from the
acquisitions of American Pool Enterprises Inc. ("American Pool"), Southwest
Distribution Services Group ("DDS SW"), several smaller tuck-under companies and
the full-year impact of acquisitions completed in Fiscal 1999. The balance
resulted from internal growth of approximately 13%.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") increased 32.0%, to $38.0 million from $28.8 million in the prior
year, while EBITDA margins increased 25 basis points to 11.2% of revenue. The
increased margins reflect productivity improvements, overhead leveraging and the
impact of certain acquisitions including California Closet Company, Inc.
("California Closets"), which carry higher EBITDA margins.
Depreciation for the year ended March 31, 2000 was $6.5 million, up
20.2% from the previous year due largely to acquisitions. However, the increase
also reflects a sharp step-up in capital investment in management information
systems over the past three years. Generally, these investments are depreciated
over a short time frame relative to the Company's other pool of assets.
Amortization for the year was $3.6 million, up 31.7% over Fiscal 1999 due to the
-18-
significant amount of goodwill that has resulted from the acquisitions completed
during the years ended March 31, 2000 and 1999.
Interest expense increased 40.4% over prior year levels to $7.8 million
as a result of increased borrowings related to acquisitions completed during
Fiscal 2000 and 1999 and higher interest rates. All acquisitions completed
during the last two Fiscal years have been financed through the Company's credit
facilities.
The income tax provision for the year ended March 31, 2000 was
approximately 39.9% of earnings before taxes, compared with 42.6% for the year
ended March 31, 1999. The lower tax provision reflects a more efficient
cross-border tax structure resulting from amendments to the Company's credit
facilities on April 1, 1999, which split the facilities into separate Canadian
and US tranches. The Company expects its effective tax rate for Fiscal 2001 to
closely reflect the rate experienced in Fiscal 2000.
Minority interest expense increased to $2.2 million or 18.0% of
earnings before minority interest from $1.4 million, or 16.3% in the prior year.
The increase reflects a change in the mix of earnings relative to the prior year
as certain operations having higher minority shareholdings contributed more to
consolidated earnings. In the future, the Company expects minority interest as a
percentage of earnings before minority interest to approximate the rate
experienced in Fiscal 2000. In those operations where operating management are
also minority owners, the Company is party to a shareholders' agreement. These
agreements allow the Company to "call" the minority position for a predetermined
formula price, which is usually equal to the multiple of earnings paid by the
Company for the original acquisition. While it is not management's intention to
acquire outstanding minority interests, this step would materially increase
earnings per share. Minority owners may also "put" their interest to the Company
at the same price, with certain limitations. The purchase price may, at the
option of the Company, be paid primarily in Subordinate Voting Shares of the
Company.
Net earnings were $9.9 million, a 36.6% increase over the prior year,
while diluted earnings per share increased 33.3% to $0.72. Diluted earnings per
share reflect a 1.7% increase in the weighted average number of shares
outstanding primarily as a result of the shares issued for the acquisition of an
additional 34.9% interest in Intercon Security Ltd. ("Intercon Security") in
December 1998.
Revenues for the Property Services division were $266.7 million, an
increase of $61.6 million or 30% over the prior year. Approximately $35.0
million of the revenue increase resulted from the acquisitions of American Pool
and several tuck-under companies in Fiscal 2000 in addition to the full year
impact of acquisitions completed during Fiscal 1999. The balance of the increase
resulted from internal growth.
Property Services EBITDA grew 36.3% to $27.2 million or 10.2% of
revenue compared to an EBITDA margin of 9.7% in the prior year. The margin
increase reflects productivity improvements, some price increases and the impact
of the higher margin American Pool operations offset in part by strong growth in
the lower margin security and community association management operations.
Revenues for the Business Services division were $73.2 million, an
increase of 25.8% or $15.0 million over 1999, a consequence of strong
double-digit internal growth and the impact of the acquisition of DDS SW. Strong
internal growth primarily reflected increases in the scope of services provided
to several clients at both BDP and DDS.
-19-
Business Services EBITDA grew 22.5% to $14.7 million, while margins
fell slightly to 20.1% from 20.5%, primarily reflecting higher expenses at DDS
relating to capacity expansion.
Corporate expenses increased to $4.0 million in Fiscal 2000 from $3.2
million as a result of higher staffing levels and increased travel and legal
costs related, in part, to the investigation of prospective acquisitions that
were not completed.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999
Consolidated revenues for the year ended March 31, 1999 were $263.4
million; a 34% increase from the $196.5 million reported for the year ended
March 31, 1998. Approximately $41.8 million of the increase resulted from the
acquisitions of the Harris Fulfillment and Harris Direct Mail divisions of
Telespectrum Worldwide Inc. ("DDS Harris"), California Closets, several smaller
tuck-under companies and the full-year impact of acquisitions completed in
Fiscal 1998. The balance resulted from internal growth of approximately 13%.
Earnings before interest, taxes, depreciation and amortization
increased 55%, to $28.8 million from $18.6 million in the prior year, while
EBITDA margins increased 140 basis points to 10.9% of revenue. The increased
margins reflect approximately 25 basis points of enhancement primarily from
overhead leveraging and productivity improvements. The balance of the increase
in consolidated margins reflects the impact of acquisitions including Paul W.
Davis Systems, Inc. ("Paul Davis"), DDS Harris and California Closets, which
carry higher EBITDA margins.
Depreciation for the year ended March 31, 1999 was $5.4 million, up 52%
from the previous year due largely to acquisitions. However, the increase also
reflected a sharp step-up in capital investment in management information
systems over the past two years. Amortization for the year was $2.7 million, up
60% over Fiscal 1998 due to the significant amount of goodwill that has resulted
from the acquisitions completed during the years ended March 31, 1999 and 1998.
Interest expense increased 73% over prior year levels to $5.6 million
as a result of increased borrowings related to acquisitions completed during
Fiscal 1999 and 1998.
The income tax provision for the year ended March 31, 1999 was
approximately 42.6% of earnings before taxes, compared with 39.2% for the year
ended March 31, 1998. The higher tax provision resulted from the
non-deductibility of goodwill related to several acquisitions in 1999 and 1998.
Minority interest expense decreased to $1.4 million from $1.7 million,
reflecting the following increases in the Company's ownership positions in
subsidiary companies: The Franchise Company from 76% to 80%; DDS Distribution
Services Ltd. from 80% to 89%; The Wentworth Group, Inc. from 60% to 80%; and
Intercon Security from 50.1% to 85%.
Net earnings were $7.2 million, a 63% increase over the prior year,
while diluted earnings per share increased 32% to $0.54. Diluted earnings per
share reflect a 23% increase in the weighted average number of shares
outstanding primarily as a result of the full year impact of the November 26,
1997 public offering of 2.5 million shares.
-20-
Revenues for the Property Services division were $205.1 million, an
increase of $45.2 million or 28% over the prior year. Approximately $28.6
million of the revenue increase results from the acquisitions of California
Closets and several smaller community association management companies, and the
full year impact of acquisitions completed during Fiscal 1998. The balance of
the increase resulted from internal growth.
Property Services EBITDA grew 44% to $20.0 million or 9.7% of revenue
compared to an EBITDA margin of 8.7% in the prior year. The margin increase
reflects productivity improvements, some price increases and the impact of the
higher margin Paul Davis and California Closets operations offset in part by
strong growth in the lower margin security and community association management
operations.
Revenues for the Business Services division were $58.2 million, an
increase of 59% over 1998, a consequence of internal growth of greater than 25%
and the impact of the Harris Fulfillment acquisition. Strong internal growth
reflected the impact of a large student loan processing contract secured early
in the Fiscal year by BDP and significant increases in the scope of services
provided to several clients at both BDP and DDS.
Business Services EBITDA grew 67% to $12.0 million, while margins grew
to 20.5% from 19.6%, primarily as a result of productivity improvements.
Corporate expenses increased to $3.2 million in 1999 from $2.5 million
primarily as a result of higher salary costs.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Certain segments of the Company's operations, which in the aggregate
comprise approximately 15% of revenues, are subject to seasonal variations.
Specifically, the demand for residential lawn care services, exterior painting
services, and commercial pool maintenance in the northern United States and
Canada is highest during late spring, summer and early fall and very low during
winter. As a result, these operations generate a large percentage of their
annual revenues between April and September. The Company has historically
generated lower profits or net losses during its third and fourth fiscal
quarters, from October to March. The community association management, security,
business services and many of the franchise systems generate revenues
approximately evenly throughout the Fiscal year.
The seasonality of the lawn care, painting and pool maintenance
operations results in variations in quarterly EBITDA margins. Variations in
quarterly EBITDA margins can also be caused by acquisitions that alter the
consolidated service mix. The Company's non-seasonal businesses typically
generate a consistent EBITDA margin over all four quarters, while the Company's
seasonal businesses experience high EBITDA margins in the first two quarters,
offset by negative EBITDA in the last two quarters. As non-seasonal revenues
increase as a percentage of total revenues, the Company's quarterly EBITDA
margin fluctuations should be reduced.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended March 31,
2000 was $19.7 million, up approximately 140% over the prior year. The
significant increase in cash flow is the result of a concerted effort by
operating management to more effectively manage working
-21-
capital. Working capital investment increased by only $4.0 million during Fiscal
2000 compared to a $9.4 million increase during Fiscal 1999.
Bank borrowings and cash flow from operations have historically been
the primary funding sources for working capital requirements, capital
expenditures and acquisitions. Management believes that funds from these sources
and proceeds from capital stock issues will remain available and are adequate to
support ongoing operational requirements and near-term acquisition growth.
In December 1996, FirstService entered into a lending agreement with a
syndicate of banks. The agreement - amended and restated in October 1997, again
in June 1998 and most recently on April 1, 1999, currently provides six-year
committed revolving credit facilities of $50 million Cdn. and $130 million U.S.
to fund acquisitions. Outstanding indebtedness under the facilities bears
interest at a rate based on competitive floating reference rates, as selected by
the Company, such as LIBOR, plus a margin of 1.00% to 1.50% per annum, depending
on certain leverage ratios. The agreement requires the Company to meet specific
financial ratios and places certain limitations on additional borrowing and the
ability to pay dividends or sell assets. As of March 31, 2000, the Company had
drawn $99.4 million U.S. and was in compliance with all financial covenants.
Net borrowings increased by approximately $19.0 million from March 31,
1999 to March 31, 2000, however all key financial coverage ratios showed
significant improvement.
At March 31, 2000, the Company had an interest rate swap contract to
December 31, 2002 at a fixed rate of 5.3% in the amount of approximately $14
million to hedge against interest rate exposure on a portion of its revolving
facilities. On April 1, 2000 the Company cancelled the swap contract for a gain
of $251,000.
The Company is exposed to certain foreign currency exchange risks. The
Company's exposure to losses may be mitigated as the lending agreement provides
that it may borrow in Canadian or U.S. funds.
During Fiscal 2000, capital expenditures totaled $8.8 million
comprising approximately $4.0 million in expenditures on management information
systems with the balance split between vehicles and production equipment. For
the upcoming year, capital expenditures are expected to approximate Fiscal 2000
levels with reduced spending anticipated for information systems offset by
increased expenditures for facilities and leasehold improvements to support
expansion requirements in the Business Services division.
Acquisition expenditures during the year totaled $22.0 million. All of
the acquisition consideration was in the form of cash. In connection with
certain acquisitions, the Company has agreed to pay additional consideration
contingent on the future operating results of the acquired entity. The payment
of any such amounts would be in cash and would result in an increase in the
purchase prices for such acquisitions and, as a result, additional goodwill.
YEAR 2000
The Company has addressed the Year 2000 issue, which is the result of
computer programs being written using two digits rather than four to define the
applicable year. As a result, computer applications and software may have
recognized an input of two zeros (00) as the
-22-
year 1900. This incorrect date recognition could have caused systems and
software malfunctions that may have had a material adverse effect on business
operations. This potential problem could have affected not only the Company's
internal information systems and other infrastructure containing embedded
technology, but also those of third parties, such as customers and suppliers
using systems that may interact with or affect the Company's operations or, in
the case of the Company's security operation, systems supplied by the Company.
Beginning in late Fiscal 1997 the Company undertook a comprehensive
review of its software applications and computer infrastructure and other
infrastructure containing embedded technology that were likely to be affected by
the Year 2000 issue. The review was completed in Fiscal 1999 using the Company's
employees and various computer consultants.
As a result of this review, new systems or upgrades were implemented at
several of the operations during Fiscal 1998, Fiscal 1999 and the first half of
Fiscal 2000.
The Company experienced no material difficulties with its internal
systems in the transition from the year 1999 to the year 2000. The Company also
did not experience any material Y2K-related difficulties with its providers of
goods and services and it did not experience any material difficulties in
facilities in which the Company was providing systems or services.
Many of the systems upgrades that dealt with the Y2K issue would have
occurred in the normal course of business. In other cases, the Company
accelerated normal course systems replacements or upgrades in view of the Y2K
issue. The costs incurred to replace non-compliant systems that would not
otherwise have been replaced were not material. All Year 2000 costs were funded
with cash from operations.
FORWARD-LOOKING STATEMENTS
This Management Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
intends that such forward-looking statements be subject to the safe harbors
created by such legislation. Such forward-looking statements involve risks and
uncertainties and include, but are not limited to, statements regarding future
events and the Company's plans, goals and objectives. Such statements are
generally accompanied by words such as "intend", "anticipate", "believe",
"estimate", "expect" or similar statements. The Company's actual results may
differ materially from such statements. Among the factors that could result in
such differences are the impact of weather conditions, increased competition,
labor shortages, the condition of the United States and Canadian economies, and
the ability of the Company to make acquisitions at reasonable prices. Although
the Company believes that the assumptions underlying its forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking statements should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company notes that past
performance in operations and share price are not necessarily predictive of
future performance.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Set forth below is the report of PricewaterhouseCoopers LLP dated May
9, 2000, the consolidated balance sheets of FirstService Corporation as at March
31, 2000 and 1999, the consolidated statements of earnings, shareholders' equity
and cash flows for the three-year period ended March 31, 2000 and the notes to
the financial statements.
-24-
FIRSTSERVICE CORPORATION
FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS AND IN ACCORDANCE WITH
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES)
MARCH 31, 2000
-25-
AUDITORS' REPORT
TO THE SHAREHOLDERS OF FIRSTSERVICE CORPORATION
We have audited the consolidated balance sheets of FirstService Corporation as
at March 31, 2000 and 1999 and the consolidated statements of earnings,
shareholders' equity and cash flows for each year in the three-year period ended
March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 2000
and 1999 and the results of its operations and cash flows for each year in the
three-year period ended March 31, 2000 in accordance with United States
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
May 9, 2000
-26-
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of U.S. Dollars, except per share amounts) - in accordance with
United States generally accepted accounting principles.
For the years ended March 31 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
Revenues $340,035 $263,361 $196,488
Cost of revenues 226,154 176,089 130,645
Selling, general and administrative expenses 75,904 58,505 47,235
Depreciation and amortization 10,107 8,145 5,277
Interest 7,849 5,589 3,232
- -------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority
interest 20,021 15,033 10,099
Income taxes (note 10) 7,989 6,402 3,960
- -------------------------------------------------------------------------------------------------------
Earnings before minority interest 12,032 8,631 6,139
Minority interest share of earnings 2,164 1,409 1,704
- -------------------------------------------------------------------------------------------------------
NET EARNINGS $ 9,868 $ 7,222 $ 4,435
=======================================================================================================
Earnings per share (note 11)
NET EARNINGS:
BASIC $ 0.76 $ 0.57 $ 0.43
DILUTED $ 0.72 $ 0.54 $ 0.41
=======================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-27-
FIRSTSERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars) - in accordance with United States generally
accepted accounting principles.
As at March 31 2000 1999
- --------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,297 $ 4,627
Accounts receivable, net of an allowance of $3,273 (1999 - $2,620) 53,170 41,360
Inventories (note 4) 8,929 7,969
Prepaids and other 8,491 6,759
Deferred income taxes (note 10) 1,063 1,716
- --------------------------------------------------------------------------------------------------------
74,950 62,431
- --------------------------------------------------------------------------------------------------------
Other receivables (note 5) 4,405 3,425
Fixed assets (note 6) 29,693 25,847
Other assets (note 6) 4,074 3,429
Deferred income taxes (note 10) 270 410
Goodwill (note 7) 117,495 88,764
- --------------------------------------------------------------------------------------------------------
155,937 121,875
- --------------------------------------------------------------------------------------------------------
$ 230,887 $ 184,306
========================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 11,752 $ 8,156
Accrued liabilities 23,013 17,857
Income taxes payable 2,879 1,181
Unearned revenue 10,725 6,099
Long-term debt - current (note 8) 2,733 1,726
Deferred income taxes (note 10) 459 543
- --------------------------------------------------------------------------------------------------------
51,561 35,562
- --------------------------------------------------------------------------------------------------------
Long-term debt less current portion (note 8) 102,177 84,516
Deferred income taxes (note 10) 1,836 319
Minority interest 6,975 4,889
- --------------------------------------------------------------------------------------------------------
110,988 89,724
- --------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (note 9) 53,849 53,654
Issued and outstanding 12,326,683 (1999 - 12,256,208)
Subordinate Voting Shares and 662,847 convertible Multiple
Voting Shares (1999 - 662,847)
Receivables pursuant to company's share purchase plan (note 9) (3,294) (3,294)
Retained earnings 15,614 6,168
Cumulative other comprehensive earnings 2,169 2,492
- --------------------------------------------------------------------------------------------------------
68,338 59,020
- --------------------------------------------------------------------------------------------------------
$ 230,887 $ 184,306
========================================================================================================
Commitments and contingencies (note 14)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Signed on behalf of the Board
Director Director
-28-
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars) - in accordance with United States generally
accepted accounting principles.
Receivables Cumulative
Issued and pursuant to other
outstanding Capital share Retain comprehensive Total
shares stock purchase earnings earnings shareholders'
(note 9) (note 9) plan (deficit) (deficit) equity
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 9,456,444 $ 27,033 $(1,584) $ (4,818) $ (543) $ 20,088
- ----------------------------------------------------------------------------------------------------------------
Comprehensive earnings:
Net earnings -- -- -- 4,435 -- 4,435
Foreign currency
translation
adjustments -- -- -- -- (302) (302)
--------
Comprehensive earnings 4,133
--------
Subordinate Voting Shares
Issued for purchase of
Minority interest 110,235 857 -- -- -- 857
Stock options exercised 154,159 644 -- -- -- 644
Issued under share
purchase plan 115,000 902 (902) -- -- --
Purchased for
cancellation (50,300) (146) -- -- -- (146)
Issued under public
offering 2,500,000 19,206 -- -- -- 19,206
Cash payments on share
purchase plan -- -- 157 -- -- 157
Cost of shares repurchased
in excess of stated
capital -- -- -- (132) -- (132)
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 12,285,538 48,496 (2,329) (515) (845) 44,807
- ----------------------------------------------------------------------------------------------------------------
Comprehensive earnings:
Net earnings -- -- -- 7,222 -- 7,222
Foreign currency
translation
adjustments -- -- -- -- 3,337 3,337
--------
Comprehensive earnings 10,559
--------
Subordinate Voting Shares
Issued for purchase
of Minority interest 239,437 2,823 -- -- -- 2,823
Stock options exercised 358,380 1,375 -- -- -- 1,375
Issued under share
purchase plan 97,500 1,166 (1,166) -- -- --
Purchased for
cancellation (61,800) (206) -- -- -- (206)
Cash payments on share
purchase plan -- -- 201 -- -- 201
Cost of shares repurchased
in excess of stated
capital -- -- -- (539) -- (539)
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 12,919,055 53,654 (3,294) 6,168 2,492 59,020
- ----------------------------------------------------------------------------------------------------------------
Comprehensive earnings:
Net earnings -- -- -- 9,868 -- 9,868
Foreign currency
translation
adjustments (note 12) -- -- -- -- (323) (323)
--------
Comprehensive earnings 9,545
--------
Subordinate Voting Shares
Stock options exercised 132,475 465 -- -- -- 465
Purchased for
cancellation (62,000) (270) -- -- -- (270)
Cost of shares repurchased
in excess of stated
capital -- -- -- (422) -- (422)
- ----------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 12,989,530 $ 53,849 $(3,294) $ 15,614 $ 2,169 $ 68,338
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-29-
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars) - in accordance with United States generally
accepted accounting principles.
For the years ended March 31 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings $ 9,868 $ 7,222 $ 4,435
Items not affecting cash
Depreciation and amortization 10,107 8,145 5,277
Deferred income taxes 1,087 418 1,251
Minority interest share of earnings 2,164 1,409 1,704
Other 446 292 277
- --------------------------------------------------------------------------------------------------------
23,672 17,486 12,944
Changes in operating assets and liabilities
Accounts receivable (2,080) (7,015) (3,477)
Inventories (949) 2,084 (715)
Prepaids and other (1,360) (681) (713)
Account payable (1,395) (4,242) 422
Accrued liabilities 686 2,610 839
Income taxes payable 1,698 (634) 490
Unearned revenue (599) (1,500) 766
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,673 8,108 10,556
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (22,069) (38,831) (31,802)
Purchase of minority shareholders' interest -- (2,956) (30)
Purchases of fixed assets (8,824) (5,810) (5,547)
Proceeds from sale of business and other assets 105 2,648 --
Purchases of other assets (1,038) (569) (964)
(Increase) decrease in other receivables (980) (2,382) 449
- --------------------------------------------------------------------------------------------------------
Net cash used in investing (32,806) (47,900) (37,894)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increases in long-term debt 23,056 48,079 10,638
Repayments of long-term debt (10,706) (6,995) (3,530)
Financing fees paid (545) (746) (194)
Proceeds received on Subordinate Voting Shares 465 1,576 19,294
Subordinate Voting Shares repurchased (692) (745) (278)
Dividends paid to minority shareholders of subsidiaries (190) (226) (197)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing 11,388 40,943 25,733
- --------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 415 847 403
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
during the year (1,330) 1,998 (1,202)
Cash and cash equivalents, beginning of year 4,627 2,629 3,831
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,297 $ 4,627 $ 2,629
========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-30-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of U.S. Dollars, except per share amounts, in accordance with
United States generally accepted accounting principles)
1. DESCRIPTION OF THE BUSINESS
FirstService Corporation (the Company) is a provider of property and
business services to corporate, public sector and residential customers
in the United States and Canada. The Company's operations are conducted
through two principal operating divisions, Property Services and
Business Services. The Property Services division includes property
management, security, franchised services and lawn care, which
represents approximately 80% of the Company's revenues for the year
ended March 31, 2000. The Business Services division provides
outsourcing services such as transaction processing and literature
fulfillment for corporations and government agencies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. The most significant
estimates are related to fixed assets and goodwill. Actual results
could be materially different from these estimates. Significant
accounting policies are summarized as follows:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany transactions and accounts
are eliminated on consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments, which are
readily convertible into cash and have maturities of three months or
less.
INVENTORIES
Inventories are carried at the lower of cost and net realizable value.
Cost is determined by the weighted average or first-in, first-out
methods. The weighted average and the first-in, first-out methods
represent approximately 45% and 55% of total inventories, respectively.
Finished goods and work-in progress include the cost of materials,
direct labor and manufacturing overhead costs.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation and
amortization. The cost of additions and improvements are capitalized
while maintenance and repairs are expensed as incurred. Fixed assets
are depreciated and amortized over their estimated useful lives as
follows:
Buildings 40 years straight-line
Vehicles 3 to 10 years straight-line
Furniture and equipment 20% to 30% declining balance and 3 to 10 years straight-line
Computer equipment and software 20% declining balance and 3 to 5 years straight-line
Enterprise system software 10 years straight-line
Leasehold improvements term of the leases to a maximum of 10 years
The Company reviews the carrying value of fixed assets for impairment
whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows
expected to result from its use and eventual disposition. In cases
where undiscounted expected future cash flows are less than the
carrying value, an impairment loss is recognized equal to an amount by
which the carrying value exceeds the fair value of assets.
-31-
GOODWILL AND OTHER ASSETS
These assets are stated at cost less accumulated amortization.
Goodwill, which represents costs in excess of net assets acquired, and
other assets are amortized on a straight-line basis over periods
expected to be benefited at the following rates:
Goodwill 10 to 40 years
Management contracts over life of contract
Deferred costs 1 to 3 years
Goodwill in excess of associated expected operating cash flows
determined on an undiscounted cash flow basis is considered to be
impaired and is written down to fair value. Any difference would be
recorded as an impairment adjustment. Management is of the opinion that
there has been no decline in the value assigned to goodwill.
Financing fees are amortized on a straight-line basis over the term of
the associated debt.
REVENUE RECOGNITION AND UNEARNED REVENUE
(a) Business services and company owned property services
Revenue is recognized at the time the service is rendered or the
product is shipped. Revenue for contracts in process is recognized on
the percentage of completion method, generally in the ratio of actual
costs incurred to total estimated contract costs. Amounts received from
customers in advance of services being provided are recorded as
unearned revenue when received.
(b) Franchised property services
The Company's franchised property services are conducted principally
through subsidiaries California Closet Company, Inc. ("California
Closets"), Paul W. Davis Systems, Inc. ("Paul Davis"), Certa
ProPainters Ltd. in the United States and Canada (collectively - "Certa
ProPainters"), and College Pro Painters U.S. Ltd. and in Canada by
College Pro Painters Ltd. (collectively - "College Pro"). Initial
franchise fees are recognized by California Closets, Paul Davis and
Certa ProPainters when the required initial services have been
substantially performed. College Pro does not charge any such fees to
franchisees. Royalties are generally charged as a percentage of
revenue, as defined, where reported by the franchisees except for Certa
ProPainters, where the franchisees are charged a fixed monthly amount.
Revenue from administrative and other support services, as applicable,
is recognized as the services are provided.
ADVERTISING COSTS
Advertising costs are expensed as incurred except for direct response
advertising, which is recorded as a current asset and is amortized over
the period of expected sales revenue resulting from such advertising.
FOREIGN CURRENCY TRANSLATION
Effective April 1, 1999, the Company adopted the U.S. Dollar as its
reporting currency since a majority of the Company's revenues,
expenses, assets and liabilities are in the United States and the
increasing focus of the Company's operations are in that country.
Comparative financial statements were restated as if the U.S. Dollar
had been the reporting currency in prior years.
Assets and liabilities of the Company's Canadian operations where the
functional currency is other than U.S. dollars are translated into U.S.
dollars at the exchange rates prevailing at year-end and revenue and
expenses at the weighted average exchange rates for the year. All
exchange gains and losses on translation are shown as a separate
component of shareholders' equity.
INCOME TAXES
Income taxes have been provided using the liability method whereby
deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been recognized in the
financial
-32-
statements or tax returns. Deferred tax assets and liabilities are
measured using tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in earnings in the period in which the
change occurs.
Income taxes are not provided on the unremitted earnings of U.S.
subsidiaries since it has been the practice and is the intention of the
Company to reinvest these earnings in the U.S. businesses.
STOCK BASED COMPENSATION
The Company measures compensation costs for employee stock options
using the intrinsic value method as prescribed by APB opinion No. 25,
Accounting for Stock Issued to Employees.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts
receivable. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of entities comprising
the Company's customer base and their dispersion across many different
service industries in two countries.
FINANCIAL INSTRUMENTS
Financial instruments are initially recorded at historical cost. If
subsequent circumstances indicate that a decline in the fair value of a
financial asset is other than temporary, the financial asset is written
down to its fair value. The fair values of accounts receivable,
accounts payable, accrued liabilities, income taxes payable and
unearned revenue approximate recorded amounts because of the short
period to maturity of these instruments. The fair values of other
receivables and long-term debt are based on rates applicable to the
Company based on similar items and maturities of these instruments.
Off-balance sheet derivative financial instruments included interest
rate swap contracts to hedge against interest rate exposure on a
portion of the Company's long-term revolving debt facilities and are
fair valued based on current termination values or quoted market prices
of comparable contracts.
3. SIGNIFICANT BUSINESS ACQUISITIONS
2000 ACQUISITIONS:
Effective June 1, 1999, the Company acquired an 80% interest in
American Pool Enterprises, Inc. ("American Pool") headquartered in
Maryland. American Pool provides commercial swimming pool management
services.
Effective July 1, 1999, an 89% owned subsidiary of the Company (DDS
Distribution Services Ltd. or "DDS") acquired 100% of Southwest
Distribution Services Group ("DDS SW"), a Texas based textbook
fulfillment business.
1999 ACQUISITIONS:
Effective April 1, 1998, DDS acquired 100% of the Harris Fulfillment
and Harris Direct Mail divisions of Telespectrum Worldwide Inc. ("DDS
Harris") headquartered in Pennsylvania.
Effective October 1, 1998, an 80% owned subsidiary of the Company, The
Franchise Company, acquired 90% of California Closets, a California
based franchisor of installed closet and home storage systems.
1998 ACQUISITIONS:
Effective June 19, 1997, the Company acquired 80.1% of The Continental
Group, Inc. ("Continental Group"), a full service community association
management company headquartered in Florida.
Effective November 1, 1997, The Franchise Company acquired 100% of Paul
Davis, a Florida based franchisor of general contracting and cleaning
businesses.
-33-
Details of these acquisitions are as follows:
2000 1999 1998
------------------ ---------------------- ---------------------
American DDS SW DDS Harris California Continental Paul
Pool Closets Group Davis
Net assets acquired,
at fair market value:
Tangible assets, net
of liabilities $ (6,444) $ 673 $ 5,448 $ 577 $ 3,011 $ 306
Minority interest -- -- -- (57) (599) --
-------- -------- -------- -------- -------- --------
(6,444) 673 5,448 520 2,412 306
-------- -------- -------- -------- -------- --------
Consideration
Cash 4,755 8,711 23,000 12,488 13,100 11,005
-------- -------- -------- -------- -------- --------
Goodwill $ 11,199 $ 8,038 $ 17,552 $ 11,968 $ 10,688 $ 10,699
======== ======== ======== ======== ======== ========
In addition to the acquisitions disclosed above, the Company made
various other acquisitions for total consideration of $5,730 (1999 -
$9,403) (1998 - $10,515) comprised of cash of $5,730 (1999 - $6,580)
(1998 - $9,658) and capital stock of $nil (1999 - $2,823) (1998 - $857)
to acquire net assets of $1,040 (1999 - $1,505) (1998 - $53) resulting
in goodwill of $4,690 (1999 - $7,898) (1998 - $10,462).
In 2000 and 1999, the Company also disposed of business assets of
subsidiaries with a net book value of $209 (1999 - $1,481) for net
proceeds of $105 (1999 - $1,682).
In addition to the consideration disclosed above, certain vendors, at
the time of acquisition, were entitled to receive contingent payments
if the acquired business exceeded certain financial thresholds during
the two to three-year period following the date of acquisition as
follows:
Name of acquired business Amount of contingent consideration
at date of acquisition
American Pool $2,800
DDS SW 3,000
DDS Harris 4,000
California Closets 3,600
Continental Group 1,500
As at March 31, 2000 all vendors, including those above, are entitled
to receive contingent payments of up to $13,095 during the period
extending to March 2003. These amounts have been treated as contingent
consideration and any resulting payments will be recorded as goodwill
when the contingencies are resolved and the consideration is issuable.
Contingent consideration paid or accrued during the year ended March
31, 2000 was $6,570 (1999 - $nil) (1998 - $233).
The acquisitions referred to above were accounted for by the purchase
method of accounting for business combinations. Accordingly, the
accompanying consolidated statements of earnings and comprehensive
income do not include any revenues or expenses related to these
acquisitions prior to these respective closing dates. The cash portions
of the acquisitions were financed through available cash and borrowings
from the Company's revolving acquisition facility.
Following are the Company's unaudited pro forma results assuming the
acquisitions of American Pool, DDS SW, DDS Harris, California Closets,
Continental Group and Paul Davis occurred on April 1 on the respective
year of acquisition. The year immediately prior to the year of each
respective acquisition also includes the pro forma results of that
respective acquisition.
-34-
2000 1999 1998
----------- ----------- ----------
Pro forma revenue $ 347,072 $ 299,020 $ 240,116
Pro forma net earnings $ 10,498 $ 8,768 $ 5,260
Pro forma earning per share:
Basic $ 0.81 $ 0.70 $ 0.51
Diluted $ 0.76 $ 0.65 $ 0.48
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of results of
operations that would have actually resulted had the combinations been
in effect at the beginning of each year or of future results of
operations.
4. INVENTORIES
2000 1999
---------------- -------------
Supplies and other $ 3,637 $ 3,693
Finished goods 2,969 2,534
Work-in-progress 2,071 1,627
Small equipment 252 115
-------------- -------------
Total $ 8,929 $ 7,969
============== =============
5. OTHER RECEIVABLES
Included in other receivables are:
(a) $2,137 (1999 - $1,040) of secured non-interest bearing loans
due from minority shareholders of four (1999 - two)
subsidiaries;
(b) $885 (1999 - $2,385) of other long-term receivables primarily
relating to restoration and security installation projects
conducted by the Company's property services group; and
(c) $1,383 (1999 - $nil) of interest bearing franchise fees
receivable from franchisees in the Company's franchised
property services group.
6. FIXED ASSETS AND OTHER ASSETS
2000
Accumulated
depreciation/ Net
Cost amortization 2000
----------------- --------------- --------------
FIXED ASSETS
Land $ 937 $ - $ 937
Buildings 5,596 858 4,738
Vehicles 11,646 6,974 4,672
Furniture and equipment 18,823 10,880 7,943
Computer equipment and software 12,039 7,613 4,426
Enterprise system software 3,720 740 2,980
Leasehold improvements 7,839 3,842 3,997
----------------- --------------- --------------
Total $ 60,600 $ 30,907 $29,693
================= =============== ==============
==============
OTHER ASSETS
Investments $ 725 $ - $ 725
Financing fees 3,093 1,066 2,027
Management contracts 1,696 636 1,060
Deferred costs 1,107 845 262
----------------- --------------- --------------
Total $ 6,621 $ 2,547 $ 4,074
================= =============== ==============
-35-
1999
Accumulated
depreciation/ Net
Cost amortization 1999
----------------- --------------- --------------
FIXED ASSETS
Land $ 937 $ - $ 937
Buildings 5,564 685 4,879
Vehicles 7,552 4,139 3,413
Furniture and equipment 18,192 11,647 6,545
Computer equipment and software 9,564 5,493 4,071
Enterprise system software 2,811 330 2,481
Leasehold improvements 5,869 2,348 3,521
---------------- --------------- --------------
Total $ 50,489 $ 24,642 $ 25,847
================ =============== ==============
OTHER ASSETS
Investments $ 108 $ - $ 108
Financing fees 2,548 630 1,918
Management contracts 1,575 706 869
Deferred costs 1,069 535 534
---------------- --------------- --------------
Total $ 5,300 $ 1,871 $ 3,429
================ =============== ==============
Included in fixed assets are vehicles under capital lease at a cost of
$3,662 (1999 - $2,924) with a net book value of $2,103 (1999 - $1,615)
and computer equipment and software under capital lease at a cost of
$3,849 (1999 - $3,898) with a net book value of $1,714 (1999 - $2,282).
7. GOODWILL
2000 1999
--------------- -----------------
Cost $ 125,750 $ 94,264
Less: Accumulated amortization 8,255 5,500
--------------- -----------------
$ 117,495 $ 88,764
=============== =================
8. LONG-TERM DEBT
2000 1999
--------------- -----------------
Revolving debt facility of $130,000 U.S. and
$50,000 Cdn. due June 1, 2004 $ 99,400 $ 81,913
Obligations under capital leases bearing interest
ranging primarily from 6% to 9% and maturing at
various dates through the year 2005 2,891 3,175
Vendor-take-back notes bearing interest primarily at 8%,
and other long-term debt maturing at various dates
through the year 2002 2,619 1,154
--------------- -----------------
104,910 86,242
Less: Current portion 2,733 1,726
--------------- -----------------
$ 102,177 $ 84,516
=============== =================
The revolving debt facility at March 31, 2000 is comprised of
borrowings of $99,400 U.S. and at March 31, 1999, $103,970 Cdn.
($68,913 U.S.) and $13,000 U.S.
Included in capital leases at March 31, 2000 and 1999 are obligations
in Canadian dollars of $2,486 ($1,715 U.S.) and at March 31, 1999 of
$3,552 ($2,354 U.S.) respectively.
Included in the vendor-take-back notes at March 31, 2000 and 1999 are
obligations in Canadian dollars of $364 ($251 U.S.) and $801 ($531
U.S.) respectively.
-36-
At March 31, 2000, the estimated aggregate amount of principal
repayments on long-term debt required in each of the next five fiscal
years and thereafter to meet the retirement provisions are as follows:
2001 $ 2,733
2002 2,030
2003 307
2004 143
2005 99,697
On April 1, 1999 the Company amended and restated its lending
agreement. The amended facility split the senior debt facility into a
$50 million Cdn. ($34.5 million U.S.) and a $130 million U.S. tranche.
The new facility provided approximately $47 million Cdn. ($32.4 million
U.S.) of additional credit over the previous $200 million Cdn. ($138.0
million U.S.) facility. Other terms of the facility remain unchanged
from those arranged in June 1998.
The revolving facility provides that the Company may borrow using LIBOR
or Bankers Acceptances interest rate options that vary within a range
depending on certain leverage ratios. Borrowings currently bear
interest at the lenders' cost of funds rate plus 1.25%. The Company had
an interest rate swap contract to December 31, 2002 at a fixed rate of
5.3% in the amount of $20 million Cdn. ($13.8 million U.S.) to hedge
against interest rate exposure on a portion of its revolving facility.
On April 1, 2000, the company cancelled this interest rate swap
contract for a gain of $251.
As security for the debt facility, the Company has granted the lenders
various security including the following: an interest in all of the
assets of the Company including the Company's share of its
subsidiaries, an assignment of material contracts and an assignment of
the Company's "call rights" with respect to shares of the subsidiaries
held by minority interests. The lending agreement prohibits the Company
from paying dividends and without prior approval from undertaking
significant mergers, acquisitions and dispositions. The covenants also
require the Company to maintain certain ratios, including debt to
EBITDA, debt to capitalization, fixed charge coverage, working capital,
business value and debt to interest coverage.
9. CAPITAL STOCK
The authorized capital stock of the Company is as follows:
An unlimited number of preference shares, issuable in series;
An unlimited number of Subordinate Voting Shares having one vote per
share; and
An unlimited number of Multiple Voting Shares having 20 votes per
share, convertible at any time into Subordinate Voting Shares at
a rate of one Subordinate Voting Share for every Multiple Voting
Share outstanding.
The following table provides a continuity of total capital stock:
SUBORDINATE VOTING SHARES MULTIPLE VOTING SHARES Total Total
Number Amount Number Amount Number Amount
------------- ---------- --------- ----------- ------------ ----------
Balance, March 31, 1997 8,793,597 $26,660 662,847 $373 9,456,444 $27,033
Balance, March 31, 1998 11,622,691 48,123 662,847 373 12,285,538 48,496
Balance, March 31, 1999 12,256,208 53,281 662,847 373 12,919,055 53,654
Balance, March 31, 2000 12,326,683 53,476 662,847 373 12,989,530 53,849
During the year ended March 31, 1998, the Company completed an offering
of 2,500,000 Subordinate Voting Shares at $8.00 to a syndicate of
underwriters led by Credit Suisse First Boston Corporation and ABN AMRO
Chicago Corporation for proceeds of $19,206 net of expenses of $1,507
and a deferred tax asset of $713.
-37-
The Company has $3,294 (1999 - $3,294) of secured non-interest bearing
loans related to the purchase of 522,500 Subordinate Voting Shares
(1999 - 522,500 shares). The loans, which are secured by the shares
issued, have a five-year term from the grant date; however, they are
open for repayment at any time. The maturities of these loans are as
follows:
Year ending March 31
2002 $ 1,226
2003 902
2004 1,166
---------------
$ 3,294
===============
The Company has a Stock Option Plan for directors, officers and key
full-time employees of the Company and its subsidiaries. At March 31,
2000 a total of 2,850,000 Subordinate Voting Shares were reserved and
approved by the shareholders of the Company for issuance pursuant to
stock options. Each option usually vests over a four-year term and
expires five years from the date granted and allows for the purchase of
one Subordinate Voting Share. At March 31, 2000 there were 1,879,200
options outstanding to 80 employees and directors at prices ranging
from $5.00 to $21.00 Cdn. per share, which expire on various dates
through March 2005. There were 160,320 options available for future
grants as at March 31, 2000.
The number of Subordinate Voting Shares issuable under options and the
average option prices per share in $Cdn. are as follows:
SHARES ISSUABLE UNDER OPTIONS WEIGHTED AVERAGE PRICE PER SHARE
($CDN.)
------------------------------------------ ---------------------------------------
2000 1999 1998 2000 1999 1998
------------------------------------------ ---------------------------------------
Shares issuable under
options - Beginning
of year 1,342,675 1,558,180 1,250,305 $ 8.10 $ 7.17 $ 5.41
Granted 669,000 171,500 504,034 17.61 11.91 10.50
Exercised for cash (132,475) (358,380) (154,159) 5.17 5.78 5.87
Expired or cancelled - (28,625) (42,000) - 8.67 5.26
----------- ----------- ----------- --------- ---------- -----------
Shares issuable under
options - End of
year 1,879,200 1,342,675 1,558,180 $ 11.62 $ 8.10 $ 7.17
=========== =========== =========== ========= ========== ===========
Options exercisable -
End of year 896,803 726,459 836,909
=========== =========== ===========
The weighted average fair value of options granted in 2000, 1999 and
1998 was $4.54 ($6.68 Cdn.), $3.91 ($5.89 Cdn.) and $3.03 ($4.25 Cdn.)
per share, respectively.
The options outstanding as at March 31, 2000 to purchase Subordinate
Voting Shares are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------
Weighted-average Weighted-average Weighted-average
remaining exercise exercise
Number contractual price Number price
Range of exercise prices ($Cdn.) outstanding life (years) ($Cdn.) exercisable ($Cdn.)
---------------------------------- ------------ ------------- ------------- ------------- -------------
$5.00 to $5.69 606,950 1.22 $ 5.43 520,715 $ 5.43
$8.00 to $12.37 461,250 2.34 10.27 207,563 10.27
$13.50 to $21.00 811,000 3.84 17.02 168,525 16.27
------------ ------------- ------------- ------------- -------------
1,879,200 2.77 $ 11.62 896,803 $ 8.59
============ ============= ============= ============= =============
Statement of Financial Accounting Statements ("SFAS") No. 123 requires
pro forma disclosures of earnings and earnings per share as if the fair
value method of accounting for employee stock options had been applied.
The following table presents the results that would be obtained if the
Company had adopted SFAS No. 123, effective April 1, 1995. Compensation
cost is based on the fair value of the award using the Black-Scholes
option-pricing model. The disclosures in the table below show the
company's earnings and earnings per share after including the effect of
the compensation cost.
-38-
2000 1999 1998
-------------- ------------- ------------
Pro forma net earnings $9,164 $6,347 $3,964
Pro forma net earnings per share:
Basic $ 0.71 $ 0.51 $ 0.38
Diluted $ 0.67 $ 0.47 $ 0.36
Assumptions
Risk-free interest rate 5.5% 5.5% 5.5%
Expected life in years 4.50 4.00 4.00
Volatility 35.0% 40.0% 40.0%
Dividend yield 0.0% 0.0% 0.0%
10. INCOME TAXES
Income taxes differ from the amounts that would be obtained by applying
the statutory rate to the respective years' earnings before taxes.
These differences result from the following items:
2000 1999 1998
------------- -------------- -------------
Income tax expense using combined statutory rates of
approximately 45% $9,009 $6,764 $4,545
Non-deductible expenses
Amortization of goodwill 397 389 278
Other 185 165 100
Foreign tax rate reduction (1,602) (916) (307)
Change in valuation allowances - - (656)
------------- -------------- -------------
Provision for income taxes as reported $7,989 $6,402 $3,960
============= ============== =============
Earnings before income taxes and minority interest by tax jurisdiction
comprise the following:
2000 1999 1998
------------- -------------- -------------
Canada $ 9,132 $ 6,284 $ 4,704
United States 10,889 8,749 5,395
------------- -------------- -------------
Total $20,021 $ 15,033 $ 10,099
============= ============== =============
The provision for income taxes comprises the following:
2000 1999 1998
------------- -------------- -------------
Current
Canada $ 3,414 $ 2,732 $ 699
United States 3,488 3,252 2,010
------------- -------------- -------------
6,902 5,984 2,709
------------- -------------- -------------
Deferred
Canada 143 511 1,052
United States 944 (93) 199
------------- -------------- -------------
1,087 418 1,251
------------- -------------- -------------
Total $ 7,989 $ 6,402 $ 3,960
============= ============== =============
-39-
The significant components of deferred income taxes are as follows:
2000 1999
-------------- --------------
Deferred income tax assets
Expenses not currently deductible $ 508 $ 484
Provision for doubtful accounts 259 61
Inventory and other reserves 80 163
Loss carry-forwards 216 1,008
Capital stock underwriting expenses 270 410
-------------- --------------
1,333 2,126
-------------- --------------
Deferred income tax liabilities
Depreciation and amortization 1,660 60
Prepaid and other expenses deducted for tax purposes 459 543
Financing fees 176 259
-------------- --------------
2,295 862
-------------- --------------
Net deferred income tax asset (liability) $(962) $ 1,264
============== ==============
The valuation allowance as at March 31, 1997 of $656 was reversed in
1998 due to the increased earnings of the Canadian companies based on
management's assessment, that it is more likely than not, that all the
net deferred tax assets would be realized through future taxable
earnings.
Cumulative undistributed earnings of U.S. subsidiaries approximated
$12,840 as at March 31, 2000 (1999- $6,336).
11. EARNINGS PER SHARE
2000 1999 1998
-------------- ------------ ------------
Income available to Subordinate and Multiple Voting Shares $ 9,868 $ 7,222 $ 4,435
============ ============ ============
Shares issued and outstanding at beginning of year 12,919,055 12,285,538 9,456,444
Weighted average number of shares:
Issued in the year 33,617 294,852 958,798
Repurchased in the year (4,623) (16,107) (44,803)
------------ ------------ ------------
Weighted average number of shares used in computing
basic earnings per share 12,948,049 12,564,283 10,370,439
Assumed exercise of stock options, net of shares assumed
acquired under the Treasury Stock Method 759,689 910,361 565,903
------------ ------------ ------------
Number of shares used in computing diluted earnings per
share 13,707,738 13,474,644 10,936,342
============ ============ ============
-40-
12. OTHER SUPPLEMENTAL INFORMATION
2000 1999 1998
------------- -------------- -------------
Products and Services:
Revenue
Products $ 28,670 $17,985 $ 7,696
Services 311,365 245,376 188,792
------------- -------------- -------------
Total 340,035 263,361 196,488
------------- -------------- -------------
Cost of revenue
Products 22,545 13,664 5,287
Services 203,609 162,425 125,358
------------- -------------- -------------
Total 226,154 176,089 130,645
------------- -------------- -------------
Net $113,881 $87,272 $65,843
============= ============== =============
Cash payments made during the year on account of:
Income taxes $ 4,571 $ 4,452 $ 2,477
============= ============== =============
Interest $ 7,992 $ 5,806 $ 3,226
============= ============== =============
Depreciation and amortization comprise the following:
Capital assets $ 6,486 $ 5,395 $ 3,557
Goodwill 2,755 2,393 1,267
Other 866 357 453
------------- -------------- -------------
$10,107 $ 8,145 $ 5,277
============= ============== =============
Initial franchise fee revenue $ 3,224 $ 1,951 $ 1,754
============= ============== =============
Advertising expense $ 7,056 $ 5,921 $ 5,112
============= ============== =============
Components of accrued liabilities:
Accrued payroll and benefits $ 8,562 $ 8,477 $ 5,949
Customer advances 5,143 3,727 1,846
Contingent acquisition liability 3,512 - -
Other 5,796 5,653 3,105
------------- -------------- -------------
$23,013 $ 17,857 $10,900
============= ============== =============
The foreign currency translation adjustment for the year ended March
31, 2000 is net of current income taxes of $1,139 on realized exchange
gains for income tax purposes.
-41-
13. FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's significant
financial instruments as at March 31, 2000 and 1999 are as follows:
2000 1999
-------------------------- ---------------------------
Carrying Fair Carrying Fair
amount value amount Value
Cash and cash equivalents $ 3,297 $ 3,297 $4,627 $4,627
Other receivables 4,405 4,333 3,425 3,317
Long-term debt including current portion 104,910 104,910 86,242 86,242
Interest rate swap contract receivable (payable) - 251 - (148)
14. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
Minimum operating lease payments are as follows:
Year ending March 31
2001 $ 9,710
2002 7,825
2003 5,671
2004 4,444
2005 4,182
Thereafter 10,419
During the years ended March 31, 2000, 1999 and 1998 rent expense was
$9,359, $7,136 and $4,701, respectively.
(B) SHAREHOLDER AGREEMENTS
The Company has shareholder agreements with the minority owners of its
subsidiaries. These agreements allow the Company to "call" the minority
position for a predetermined formula price, which is usually equal to
the multiple of earnings before interest, taxes, depreciation, and
amortization paid by the Company for the original acquisition. The
minority owners may also "put" their interest to the Company at the
same price subject to certain limitations. The purchase price may, at
the option of the Company, be paid primarily in Subordinate Voting
Shares. Acquisitions of these minority interests would be accounted for
using the purchase method.
(C) CONTINGENCIES
The Company is involved in legal proceedings and claims primarily
arising in the normal course of its business. In the opinion of
management, the Company's liability, if any, would not materially
affect its financial condition or operations.
15. SEGMENTED INFORMATION
OPERATING SEGMENTS
The Company operates primarily through three operating groups -
property services (franchised), property services (Company owned) and
business services. The property services groups provide a variety of
services to both residential and commercial customers. Property
services (Company owned) provides security services, full-service
community association management and lawn care. Property services
(franchised) provides painting, decorating and disaster restoration
services. The business services group provides services to governments,
financial institutions and corporations wishing to outsource a variety
of
-42-
non-core, primarily labor intensive, "back office" functions. Operating
segmented information is as follows:
2000 Property Property Business Reconciling Consolidated
Services Services Services Items
(Franchised) (Company
Owned)
Revenues $ 51,541 $215,110 $ 73,198 $ 186 $340,035
======== ======== ======== ======== ========
Depreciation and
amortization $ 1,612 $ 5,633 $ 2,801 $ 61 $ 10,107
======== ======== ======== ======== ========
Segment operating profit $ 6,861 $ 13,118 $ 11,874 $ (3,983) 27,870
======== ======== ======== ======== ========
Interest expense (7,849)
Income taxes (7,989)
Minority interest (2,164)
========
Net earnings $ 9,868
========
Total assets $ 42,699 $107,054 $ 74,476 $ 6,658 $230,887
======== ======== ======== ======== ========
Total additions to fixed
assets and goodwill $ 2,837 $ 27,982 $ 10,923 $ 97 $ 41,839
======== ======== ======== ======== ========
1999 Property Property Business Reconciling Consolidated
Services Services Services Items
(Franchised) (Company
Owned)
Revenues $ 39,933 $165,161 $ 58,162 $ 105 $263,361
======== ======== ======== ======= ========
Depreciation and
amortization $ 989 $ 4,572 $ 2,503 $ 81 $ 8,145
======== ======== ======== ======= ========
Segment operating profit $ 5,618 $ 8,781 $ 9,447 $(3,224) $ 20,622
======== ======== ======== =======
Interest expense (5,589)
Income taxes (6,402)
Minority interest (1,409)
--------
Net earnings $ 7,222
========
Total assets $ 39,944 $ 85,855 $ 50,727 $ 7,780 $184,306
======== ======== ======== ======= ========
Total additions to fixed
assets and goodwill $ 14,875 $ 11,855 $ 23,397 $ 47 $ 50,174
======== ======== ======== ======= ========
1998 Property Property Business Reconciling Consolidated
Services Services Services Items
(Franchised) (Company
Owned)
Revenues $ 22,448 $137,408 $ 36,615 17 $196,488
======== ======== ======== ======== ========
Depreciation and
amortization $ 502 $ 3,461 $ 1,251 $ 63 $ 5,277
======== ======== ======== ======== ========
Segment operating profit $ 3,070 $ 6,823 $ 5,925 $ (2,487) $ 13,331
======== ======== ======== ======== ========
Interest expense (3,232)
Income taxes (3,960)
Minority interest (1,704)
--------
Net earnings $ 4,435
========
Total assets $ 20,347 $ 76,760 $ 23,924 $ 4,988 $126,019
======== ======== ======== ======== ========
Total additions to fixed
assets and goodwill $ 14,148 $ 24,087 $ 2,359 $ 18 $ 40,612
======== ======== ======== ======== ========
-43-
GEOGRAPHIC SEGMENTS
CANADA
2000 1999 1998
------------- ------------ ------------
Revenues $109,410 $ 96,456 $ 91,493
============= ============ ============
Total fixed
assets and goodwill $ 31,970 $ 30,968 $ 27,157
============= ============ ============
UNITED STATES
2000 1999 1998
------------- ------------ ------------
Revenues $230,625 $166,905 $104,995
============= ============ ============
Total fixed
assets and goodwill $115,218 $ 83,643 $ 48,234
============= ============ ============
CONSOLIDATED
2000 1999 1998
------------- ------------ ------------
Revenues $340,035 $263,361 $196,488
============= ============ ============
Total fixed
assets and goodwill $147,188 $114,611 $ 75,391
============= ============ ============
16. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities will become effective in
the first quarter of the Company's 2002 Fiscal year. The Company is
evaluating the impact that the requirements of this Statement will have
on the accounting for its hedging activities.
-44-
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-45-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Directors of the Company stand for re-election each year. The Directors as
at June 29, 2000 were as follows:
----------------------- ------ ------------------------------- ---------------------------------------
NAME AGE PRESENT POSITION AND TENURE BUSINESS EXPERIENCE DURING
LAST FIVE YEARS
----------------------- ------ ------------------------------- ---------------------------------------
Michael H. Appleton 60 Director since 1994 and Managing Partner, Fogler, Rubinoff
Secretary (Toronto law firm)
C. Robert Burgess 58 Director since 1988 President, Burgess & Co., Inc.
(Florida real estate sales and
financial services company)
Brendan Calder 54 Director since 1996 Former Chairman and Chief Executive
Officer, CIBC Mortgages Inc.
(subsidiary of a Canadian
chartered bank)
Peter F. Cohen 48 Director since 1990 Chairman and Chief Executive Officer,
Centrefund Realty Corporation
(publicly-traded Canadian real estate
company)
Jay S. Hennick 43 President, Chief Executive President, Chief Executive Officer
Officer and Director and Director of Company
Samuel Hennick 69 Director since 1993 Chairman and Chief Executive Officer,
Stargems Inc.
(Toronto jewellery manufacturer)
Steven Rogers 44 Director since 1989 President and Chief Executive
Officer,
The Franchise Company
(subsidiary of FirstService)
James R. Rollwagen 48 Director since 1996 Senior Attorney, Ecolab Inc.
(publicly-traded diversified services
company)
----------------------- ------ ------------------------------- ---------------------------------------
Mr. Samuel Hennick is the father of Mr. Jay S. Hennick, the President
and Chief Executive Officer of the Company. Mr. Jay S. Hennick and Mr. Cohen
each hold directorships of Centrefund Realty Corporation.
AUDIT COMMITTEE
The Audit Committee is composed of three non-management members. The
committee reviews the annual financial statements intended for circulation among
shareholders and reports upon these to the Board. In addition, the Board may
refer to the Audit Committee on other matters and questions relating to the
financial position of the Company. The Audit Committee members are Messrs.
Appleton, Burgess and Cohen.
COMPENSATION COMMITTEE
The Compensation Committee is composed of three non-management members
and makes recommendations to the Board on, among other things, the compensation
of the Chief Executive Officer including grants of options under the Company's
Stock Option Plan and rights under the Company's Share Purchase Plan to the
Chief Executive Officer. The Compensation Committee members are Messrs.
Appleton, Burgess and Cohen.
-46-
DIRECTORS' COMPENSATION
During Fiscal 2000, each Director who was not a full-time employee of
the Company or any of its subsidiaries received an annual retainer of $1,700
plus a fee equal to $510 for each meeting of the Board of Directors or Committee
thereof attended by such Director in person and $240 for each meeting held by
telephone. During Fiscal 2000, the Company paid the Directors aggregate fees
totaling $14,900. In addition, most Directors have received stock option grants
under the Company's Stock Option Plan. There were no such grants to Directors in
Fiscal 2000.
EXECUTIVE OFFICERS
The following shows the names and ages, as of June 29, 2000, of the
present executive officers of the Registrant, all positions presently held by
each officer, and the year each person became an officer. The executive officers
do not have a fixed term of office.
--------------------- ------ ------------------------------------------------ --------------
FIRST BECAME
NAME AGE PRESENT POSITION WITH THE COMPANY AN OFFICER
--------------------- ------ ------------------------------------------------ --------------
Jay S. Hennick 43 President, Chief Executive Officer and Director 1988
D. Scott Patterson 39 Senior Vice President and Chief Financial 1995
Officer
Timothy J. Greener 48 Senior Vice President, Integration 1996
John Friedrichsen 38 Senior Vice President, Acquisitions 1998
Douglas G. Cooke 40 Corporate Controller 1995
--------------------- ------ ------------------------------------------------ --------------
Mr. Hennick is the founder of the Company and has been President and
Chief Executive Officer since its inception. Mr. Hennick is a Director of the
Company.
Mr. Patterson has held his current position since February 1995. Mr.
Patterson is a Chartered Accountant.
Mr. Greener was president of a subsidiary of the Company until October
1996, at which time he assumed his present position.
Mr. Friedrichsen was Vice President, Corporate Finance with Ernst &
Young Corporate Finance Inc. prior to becoming Vice President, Acquisitions in
January 1998. Mr. Friedrichsen is a Chartered Accountant.
Mr. Cooke has held his current position since June 1995. Mr. Cooke is a
Chartered Accountant.
-47-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid to the Chief Executive Officer and the four next most highly compensated
executive officers in respect of Fiscal 2000. Each of the listed persons was
holding the office indicated on the table on March 31, 2000.
- ---------------------------------------------------------------------------------------------------------------------
SUMMARY
COMPENSATION TABLE LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ----------------------------------------------------------------------------------------------------------
OTHER ALL
ANNUAL RESTRICTED SECURITIES OTHER
COMP- STOCK UNDERLYING LTIP COMP-
NAME AND PRINCIPAL SALARY BONUS ENSATION AWARDS OPTIONS PAYOUTS ENSATION
POSITION YEAR ($ US) ($ US) ($ US) ($ US) (#) ($ US) ($ US)
- ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ----------
Jay S. Hennick, 2000 $442,000 $736,700 - - 150,000 - -
President and Chief 1999 $351,500 $448,400 - - 75,000 - -
Executive Officer 1998 $320,900 $320,900 - - 150,000 - -
- ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ----------
D. Scott Patterson, 2000 $136,000 $226,700 - - 75,000 - -
Senior Vice President 1999 $132,900 $230,800 - - 37,500 - -
and Chief Financial 1998 $107,000 $160,400 - - 75,000 - -
Officer
- ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ----------
Timothy J. Greener, 2000 $175,000 $145,800 - - 25,000 - -
Senior Vice 1999 $116,300 $195,500 - - 15,000 - -
President, Integration 1998 $114,100 $98,000 - - 25,000 - -
- ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ----------
John Friedrichsen, 2000 $91,800 $76,500 - - 50,000 - -
Senior Vice 1999 $89,700 $78,200 - - 15,000 - -
President, 1998 $14,800 $14,300 - - 30,000 - -
Acquisitions
- ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ----------
2000 $78,200 $32,600 - - 15,000 - -
Douglas G. Cooke, 1999 $66,400 $28,900 - - 5,000 - -
Corporate Controller 1998 $53,500 $26,700 - - 10,000 - -
- ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ----------
The following table summarizes the number and terms of the stock
options granted during Fiscal 2000 to the executive officers.
- -----------------------------------------------------------------------------------------------------------
OPTION GRANTS IN POTENTIAL REALIZED VALUE
FISCAL 2000 AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES PRICE
GRANTED IN FISCAL ($ US EXPIRATION 5% 10%
NAME (#) 2000 PER SHARE) DATE ($ US) ($ US)
- ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
Jay S. Hennick 150,000 22.4% $11.30 Dec. 2, 2004 $468,000 $1,035,000
- ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
D. Scott Patterson 75,000 11.2% $11.30 Dec. 2, 2004 $234,000 $517,500
- ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
Timothy J. Greener 25,000 3.7% $11.30 Dec. 2, 2004 $78,000 $172,500
- ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
John Friedrichsen 50,000 7.5% $11.30 Dec. 2, 2004 $156,000 $345,000
- ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
Douglas G. Cooke 15,000 2.2% $11.30 Dec. 2, 2004 $46,800 $103,500
- ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
NOTE:
One option entitles the holder to purchase one Subordinate Voting Share. All
options listed in the table above vest in the following manner: 10% on grant
date, 15% on the first anniversary, 20% on second anniversary, 25% on third
anniversary and 30% on the fourth anniversary of the grant date. The expiration
date is the fifth anniversary of the grant date.
-48-
The following table summarizes the exercises of stock options during
Fiscal 2000 by the executive officers and the number of, and the spread on,
unexercised options held by such officers on March 31, 2000.
------------------------------------------------------------------------------------------------
AGGREGATED OPTION NUMBER OF SECURITIES VALUE OF UNEXERCISED
EXERCISES IN FISCAL UNDERLYING IN-THE-MONEY
2000 AND YEAR-END UNEXERCISED OPTIONS OPTIONS AT
OPTION VALUES AT MARCH 31, 2000 MARCH 31, 2000
(#) ($ US)
------------------------------------------------------------------------------------------------
SHARES VALUE
ACQUIRED ON REALIZED EXERCISABLE / EXERCISABLE /
NAME EXERCISE (#) ($ US) UNEXERCISABLE UNEXERCISABLE
------------------------------------------------------------------------------------------------
Jay S. Hennick - - 301,250 / 273,750 $1,701,600 / $298,800
------------------------------------------------------------------------------------------------
D. Scott Patterson 90,000 $798,300 141,625 / 175,875 $795,200 / $437,800
------------------------------------------------------------------------------------------------
Timothy J. Greener - - 50,000 / 55,000 $282,100 / $104,400
------------------------------------------------------------------------------------------------
John Friedrichsen - - 22,500 / 72,500 $48,900 / $59,800
------------------------------------------------------------------------------------------------
Douglas G. Cooke - - 32,750 / 31,750 $206,800 / $86,900
------------------------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
The Company has an employment agreement with Jay S. Hennick, the
President and Chief Executive Officer of the Company, made as of April 1, 1998
having a term of five years, with one-year renewals at the option of Mr.
Hennick. In the event of a change of control of the Company, or in the event the
Company terminates Mr. Hennick's employment without cause after March 31, 2003,
Mr. Hennick will be entitled to:
(a) Payment of 300% of the aggregate of: (i) Mr.
Hennick's then current salary; (ii) the benefits and
other payments paid pursuant to the agreement in the
previous Fiscal year; and (iii) an amount equal to
the bonus paid to Mr. Hennick in the previous Fiscal
year;
(b) Certain job relocation expenses; and
(c) At Mr. Hennick's option, an amount equal to the
difference between the exercise price of any rights
or options to purchase shares of the Company that he
owned, or was entitled to receive, and the market
value of such shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Directors who served on the Compensation Committee during Fiscal
2000 were Michael H. Appleton, C. Robert Burgess and Peter F. Cohen.
None of the persons who served as members of the Compensation Committee
in Fiscal 2000 was an officer or employee of the Company or any of its
subsidiaries during Fiscal 2000 and none of such persons was formerly an officer
of the Company or any of its subsidiaries.
During Fiscal 2000, Jay S. Hennick, the President and Chief Executive
Officer of the Company, served on the board of directors of Centrefund Realty
Corporation. Centrefund Realty Corporation's President and Chief Executive
Officer, Peter F. Cohen, served on the Compensation Committee of the Company
during Fiscal 2000.
-49-
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICY
When determining the compensation of executive officers, the Committee
considers the objectives of: (i) retaining executives critical to the success of
the Company and the enhancement of shareholder value; (ii) providing fair and
competitive compensation; (iii) balancing the interests of management and
shareholders of the Company; (iv) rewarding performance, both on an individual
basis and with respect to the business in general; and (v) ensuring the
recognition of the fact that the Corporation carries on business with a small
number of executives relative to other public companies of similar size. In
order to achieve these objectives, the compensation paid to the executive
officers consists of three components:
(a) Base salary;
(b) Annual bonus incentive; and
(c) Long term incentive in the form of stock options and share
purchase rights granted in accordance with Stock Option and
Share Purchase Plans (the "Plans").
BASE SALARY
The base salary of each executive officer is determined by an
assessment by the committee of such executive's performance, a consideration of
competitive compensation levels in corporations similar to the Company and a
review of the performance of the Company as a whole and the role the executive
officer played in such performance.
ANNUAL BONUS INCENTIVE
Annual cash bonus incentive awards are based entirely on a formula that
relates to earnings per share growth of the Company. This establishes a direct
link between executive compensation and the Company's operating performance.
LONG-TERM INCENTIVE
The Company provides a long-term incentive by granting stock options
and share purchase rights to the executive officers through the Plans. The
options permit each executive officer to acquire Subordinate Voting Shares of
the Company at an exercise price equal to the market price of such shares under
option at the date the option was granted. The rights permit each executive
officer to purchase Subordinate Voting Shares at the current market price.
Shares purchased under the share purchase plan are paid for by way of a
five-year loan from the Company for which each executive officer is personally
liable. The objective of granting rights and options is to encourage each
executive officer to acquire an increased ownership interest in the Company over
a period of time, which acts as a financial incentive for each executive officer
to consider the long-term interests of the Company and its shareholders.
-50-
PERFORMANCE GRAPH
The following graph compares the five-year cumulative total return to
shareholders of the Company with the five-year cumulative total return of the
Russell 2000 Index and The ServiceMaster Company.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG FIRSTSERVICE CORPORATION,
THE RUSSELL 2000 INDEX, AND THE SERVICEMASTER COMPANY
[CHART]
* $100.00 invested on March 31, 1995 in stock or index, assuming
reinvestment of dividends.
- ----------------------------------------------------------------------------------------------------
AS AT MARCH 31 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
FirstService Corporation 100.00 86.37 143.07 302.68 317.76 268.37
Russell 2000 Index 100.00 126.84 131.36 184.33 152.48 206.73
The ServiceMaster Company 100.00 141.04 179.32 251.04 297.11 165.66
- ----------------------------------------------------------------------------------------------------
-51-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial shareholders of more than
5% of any class of shares known to the Registrant as of May 31, 2000.
----------------------- ---------------------------- --------------------- ----------------------
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF CLASS
NAME OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
----------------------- ---------------------------- --------------------- ----------------------
Multiple Voting Shares Jay S. Hennick 662,847 100.0%
1140 Bay Street
Suite 4000
Toronto, Ontario
M5S 2B4
----------------------- ---------------------------- --------------------- ----------------------
Subordinate Voting Jay S. Hennick 883,601 7.2%
Shares 1140 Bay Street
Suite 4000
Toronto, Ontario
M5S 2B4
---------------------------- --------------------- ----------------------
AXA Financial Inc. 811,400 6.6%
1290 Avenue of the Americas
New York, NY
10104
---------------------------- --------------------- ----------------------
Safeco Corporation 774,100 6.3%
4333 Brooklyn Ave. NE
Seattle, WA
98185
----------------------- ---------------------------- --------------------- ----------------------
The table below sets forth, as of May 31, 2000, the beneficial
ownership of the Company's Subordinate Voting Shares with respect to the
Company's Directors, executive officers and the Company's Directors and officers
as a group.
- -------------------------- -------------------------- -------------------- --------------- -------------------
NAME OF NUMBER OF SHARES EXERCISABLE PERCENTAGE OF
NAME OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED OPTIONS CLASS OWNED (1)
- -------------------------- -------------------------- -------------------- --------------- -------------------
Multiple Voting Shares Jay S. Hennick 662,847 - 100.0%
- -------------------------- -------------------------- -------------------- --------------- -------------------
Subordinate Voting Shares Michael H. Appleton 9,000 13,750 0.2%
-------------------------- -------------------- --------------- -------------------
C. Robert Burgess 20,000 25,000 0.4%
-------------------------- -------------------- --------------- -------------------
Brendan Calder - 25,000 0.2%
-------------------------- -------------------- --------------- -------------------
Peter F. Cohen 10,000 25,000 0.3%
-------------------------- -------------------- --------------- -------------------
Douglas G. Cooke 22,500 32,750 0.4%
-------------------------- -------------------- --------------- -------------------
John Friedrichsen 30,000 22,500 0.4%
-------------------------- -------------------- --------------- -------------------
Timothy J. Greener 102,460 50,000 1.2%
-------------------------- -------------------- --------------- -------------------
Jay S. Hennick 883,601 301,250 9.4%
-------------------------- -------------------- --------------- -------------------
Samuel Hennick 183,790 25,000 1.7%
-------------------------- -------------------- --------------- -------------------
D. Scott Patterson 280,700 141,625 3.4%
-------------------------- -------------------- --------------- -------------------
Steven Rogers 93,585 23,750 1.0%
-------------------------- -------------------- --------------- -------------------
All directors and
officers as a group (12 1,635,636 685,625 17.8%
persons)
- -------------------------- -------------------------- -------------------- --------------- -------------------
NOTE
(1) Percentage ownership is calculated using as a denominator the total number
of shares of the class outstanding plus the number of shares of the class to
which the beneficial owner indicated has a right to acquire pursuant to options
currently exercisable or exercisable within 60 days.
-52-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED MISCELLANEOUS TRANSACTIONS
The legal firm of Fogler, Rubinoff, of which Mr. Appleton is a partner,
received fees from the Company during the year for legal services performed.
Mr. Burgess' firm, Burgess and Co., Inc., received fees from the
Company totaling $100,000 during the year relating to business acquisition
brokerage services provided.
INDEBTEDNESS OF MANAGEMENT
Executive officers were indebted to the Company in connection with the
purchase of the Company's Subordinate Voting Shares. This indebtedness is
secured by the Subordinate Voting Shares acquired. The indebtedness has a
five-year term from the grant date, is non-interest bearing and is open for
repayment at any time. The following table lists the indebtedness of each
executive officer:
----------------------- ------------- ------------- -------------------- ----------------------
LARGEST NUMBER OF
AMOUNT AMOUNT FINANCIALLY SUBORDINATE VOTING
OUTSTANDING OUTSTANDING ASSISTED SHARES HELD IN TRUST
DURING AS AT JUNE SECURITIES BY COMPANY AS
FISCAL 2000 29, 2000 PURCHASES DURING SECURITY FOR
NAME ($ US) ($ US) FISCAL 2000 INDEBTEDNESS
----------------------- ------------- ------------- -------------------- ----------------------
Jay S. Hennick $2,143,200 $2,143,200 - 365,000
----------------------- ------------- ------------- -------------------- ----------------------
D. Scott Patterson $615,100 $615,100 - 95,000
----------------------- ------------- ------------- -------------------- ----------------------
Timothy J. Greener $127,200 $127,200 - 10,000
----------------------- ------------- ------------- -------------------- ----------------------
John Friedrichsen $282,600 $282,600 - 30,000
----------------------- ------------- ------------- -------------------- ----------------------
Douglas G. Cooke $126,100 $126,100 - 22,500
----------------------- ------------- ------------- -------------------- ----------------------
No executive officer had any other indebtedness to the Company in
excess of $60,000 at any time during the year.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. Financial statements
The documents listed below are included herein under Part II and are
also contained in the Financial Statements and Management Discussion
and Analysis sections of the FirstService Annual Report to Shareholders
for 2000:
- Auditors' Report;
- Consolidated Statements of Earnings for the three
years ended March 31, 2000, 1999 and 1998;
- Consolidated Balance Sheets as at March 31, 2000 and
1999;
- Consolidated Statements of Shareholders' Equity for
the three years ended March 31, 2000, 1999 and 1998;
- Consolidated Statements of Cash Flows for the three
years ended March 31, 2000, 1999, and 1998; and
- Notes to the Consolidated Financial Statements.
2. Financial Statement Schedules
- Schedule - Amounts receivable from related parties
and underwriters, promoters and employees other than
related parties: None.
- Included in Part IV of this Report: Schedule II -
Valuation and Qualifying Accounts
3. Exhibits
Included in Part IV of this report:
- List of Exhibits
- Exhibit 10 - Material contracts:
- Exhibit 10.2 - FirstService
Corporation Amended Stock Option
Plan #2
- Exhibit 10.3 - FirstService
Corporation Amended Share Purchase
Plan #2
- Exhibit 21 - Subsidiaries of the Registrant
- Exhibit 23 - Consent of Auditors
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF FISCAL 2000
None.
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FIRSTSERVICE CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands of U.S. dollars)
- --------------------------------------- ----------------- ----------------
BALANCE AT BALANCE AT
BEGINNING OF END OF
DESCRIPTION YEAR YEAR
- --------------------------------------- ----------------- ----------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
RECEIVABLE (CURRENT):
Year ended March 31, 2000 $2,620 $3,273
Year ended March 31, 1999 $1,988 $2,620
Year ended March 31, 1998 $1,578 $1,988
- --------------------------------------- ----------------- ----------------
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AUDITORS' REPORT
TO THE SHAREHOLDERS OF FIRSTSERVICE CORPORATION:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in FirstService Corporation's annual report to
shareholders incorporated in this Form 10-K, and have issued out report thereon
dated May 9, 2000. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule included in Part IV in the Form
10-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This supporting schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
May 9, 2000
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereto duly authorized.
FIRSTSERVICE CORPORATION
Registrant
D. SCOTT PATTERSON
------------------
Date: June 29, 2000 D. Scott Patterson
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in their capacities and on the date indicated.
NAME AND SIGNATURE TITLE DATE
JAY S. HENNICK President, Chief Executive June 29, 2000
- ------------------------------------ Officer and Director
Jay S. Hennick (PRINCIPAL EXECUTIVE OFFICER)
D. SCOTT PATTERSON Senior Vice President and June 29, 2000
- ------------------------------------ Chief Financial Officer
D. Scott Patterson (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
MICHAEL H. APPLETON Director June 29, 2000
- ------------------------------------
Michael H. Appleton
C. ROBERT BURGESS Director June 29, 2000
- ------------------------------------
C. Robert Burgess
-57-
NAME AND SIGNATURE TITLE DATE
BRENDAN CALDER Director June 29, 2000
- ------------------------------------
Brendan Calder
SAMUEL HENNICK Director June 29, 2000
- ------------------------------------
Samuel Hennick
STEVEN ROGERS Director June 29, 2000
- ------------------------------------
Steven Rogers
JAMES R. ROLLWAGEN Director June 29, 2000
- ------------------------------------
James R. Rollwagen
-58-
LIST OF EXHIBITS
EXHIBIT # DESCRIPTION
3.1 Articles of Incorporation and Amendment. Incorporated by
reference to Form 10-Q for the period ended June 30, 1999,
filed on August 12, 1999.
3.2 By-Laws and Amendments. Incorporated by reference to Form 10-Q for the
period ended June 30, 1999, filed on August 12, 1999.
10.1 Credit Facility dated April 1, 1999 among the Company and a
syndicate of bank lenders. Incorporated by reference to Form
10-Q for the period ended June 30, 1999, filed on August 12,
1999.
10.2 FirstService Corporation Amended Stock Option Plan #2. Included herein.
10.3 FirstService Corporation Amended Share Purchase Plan #2. Included herein.
21 Subsidiaries of FirstService Corporation. Included herein.
23 Consent of Auditors. Included herein.