UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-24762
FIRSTSERVICE CORPORATION
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
(State or other (I.R.S. employer
jurisdiction of incorporation identification number,
or organization) if applicable)
FIRSTSERVICE BUILDING
1140 BAY STREET, SUITE 4000
TORONTO, ONTARIO, CANADA
M5S 2B4
(416) 960-9500
(Address and telephone number of Registrant's principal executive office)
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 the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date:
Subordinate Voting Shares - 13,091,518 as of January 31, 2002
Multiple Voting Shares - 662,847 as of January 31, 2002
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FIRSTSERVICE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A) STATEMENTS OF EARNINGS FOR THE THREE MONTHS AND NINE MONTHS
ENDED DECEMBER 31, 2001 AND 2000 3
B) BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND MARCH 31, 2001 4
C) STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 AND 2000 5
D) NOTES TO THE FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands of U.S. dollars, except per share amounts) - in
accordance with U.S. generally accepted accounting principles.
Three month periods Nine month periods
ended December 31 ended December 31
2001 2000 2001 2000
---- ---- ---- ----
(NOTE 3) (NOTE 3)
Revenues $117,809 $ 96,957 $394,852 $320,514
Cost of revenues 81,189 66,879 260,894 211,545
Selling, general and administrative expenses 27,405 22,339 83,971 67,323
Depreciation 2,938 1,914 8,467 5,480
Amortization 102 1,046 429 3,119
Interest 3,000 2,489 8,951 7,200
-------- -------- -------- --------
Earnings before income taxes and minority interest 3,175 2,290 32,140 25,847
Income taxes 1,063 916 10,961 10,332
-------- -------- -------- --------
Earnings before minority interest 2,112 1,374 21,179 15,515
Minority interest share of earnings 375 319 3,514 2,852
-------- -------- -------- --------
Net earnings before extraordinary item 1,737 1,055 17,665 12,663
-------- -------- -------- --------
Extraordinary loss on early retirement of debt, net of
income tax benefit of $578 -- -- 797 --
-------- -------- -------- --------
Net earnings $ 1,737 $ 1,055 $ 16,868 $ 12,663
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS PER SHARE
Net earnings before extraordinary item: Basic $ 0.13 $ 0.08 $ 1.31 $ 0.97
Diluted $ 0.12 $ 0.08 $ 1.21 $ 0.92
Net earnings: Basic $ 0.13 $ 0.08 $ 1.25 $ 0.97
Diluted $ 0.12 $ 0.08 $ 1.16 $ 0.92
Weighted average shares outstanding: Basic 13,592 13,057 13,501 13,054
(in thousands) Diluted 14,644 13,908 14,555 13,772
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars) - in accordance with U.S. generally
accepted accounting principles.
DECEMBER 31, 2001 March 31, 2001
----------------- --------------
(UNAUDITED) (Audited)
(NOTE 3)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,407 $ 5,115
Accounts receivable, net 88,492 79,473
Inventories 9,398 9,627
Prepaids and other assets 11,323 10,757
Deferred income taxes 1,076 1,136
--------- ---------
117,696 106,108
Other receivables 5,362 5,092
Fixed assets 45,695 40,741
Other assets 5,431 4,025
Deferred income taxes 1,477 1,472
Intangible assets 29,614 29,547
Goodwill 141,804 126,675
--------- ---------
229,383 207,552
--------- ---------
$ 347,079 $ 313,660
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 25,114 $ 22,220
Accrued liabilities 30,093 34,001
Income taxes payable 5,318 2,436
Unearned revenues 4,829 9,505
Long-term debt - current 5,034 3,050
Deferred income taxes 43 558
--------- ---------
70,431 71,770
LONG-TERM LIABILITIES
Long-term debt less current portion 160,952 149,374
Deferred income taxes 4,387 4,236
--------- ---------
165,339 153,610
Minority interest 12,763 8,824
SHAREHOLDERS' EQUITY
Capital stock 57,013 54,863
Receivables pursuant to share purchase plan (2,692) (3,196)
Retained earnings 44,840 27,972
Cumulative other comprehensive loss (615) (183)
--------- ---------
98,546 79,456
--------- ---------
$ 347,079 $ 313,660
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of U.S. dollars) - in accordance with U.S. generally
accepted accounting principles.
Nine month periods
ended December 31
2001 2000
---- ----
(NOTE 3)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings $ 16,868 $ 12,663
Items not affecting cash:
Depreciation and amortization 8,896 8,599
Deferred income taxes (308) (16)
Minority interest share of earnings 3,514 2,852
Extraordinary loss on early retirement of debt 1,375 --
Other 335 335
-------- --------
30,680 24,433
Changes in operating assets and liabilities:
Accounts receivable (7,829) (7,119)
Inventories 447 (705)
Prepaids and other assets (508) 631
Accounts payable and other current liabilities 583 894
Unearned revenues (4,963) (5,764)
-------- --------
Net cash provided by operating activities 18,410 12,370
-------- --------
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (12,023) (21,616)
Purchases of minority shareholders' interests (3,322) (649)
Purchases of fixed assets, net (12,678) (7,046)
Increase (decrease) in intangibles and other assets (271) 8
Decrease (increase) in other receivables 195 (1,592)
-------- --------
Net cash used for investing (28,099) (30,895)
-------- --------
FINANCING ACTIVITIES
Increase in long-term debt, net 13,573 21,136
Financing fees paid (3,084) --
Issuance of Subordinate Voting Shares, net of repurchases 2,149 351
Dividends paid to minority shareholders of subsidiaries (108) (175)
-------- --------
Net cash provided by financing 12,530 21,312
-------- --------
Effect of exchange rate changes on cash (549) (866)
-------- --------
Increase in cash and cash equivalents during the period 2,292 1,921
Cash and cash equivalents, beginning of period 5,115 3,297
-------- --------
Cash and cash equivalents, end of period $ 7,407 $ 5,218
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTSERVICE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
(Unaudited)
(in thousands of U.S. dollars, except per share amounts)
1. DESCRIPTION OF THE BUSINESS - FirstService Corporation (the "Company")
is a provider of property and business services to residential,
corporate and public sector customers in the United States and Canada.
The Company's operations are conducted through two operating divisions,
Property Services and Business Services. The Property Services division
includes Residential Property Management, Integrated Security Services
and Consumer Services and represented approximately 80% of the
Company's revenues for the year ended March 31, 2001. The Business
Services division provides customer support & fulfillment and business
process outsourcing services to corporations and government agencies.
2. SUMMARY OF PRESENTATION - The condensed consolidated financial
statements included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial
information. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information not
misleading.
In the opinion of management, the condensed consolidated financial
statements contain all adjustments necessary to present fairly the
financial position of the Company as of December 31, 2001 and the
results of its operations for the three and nine month periods ended
December 31, 2001 and 2000 and its cash flows for the nine months ended
December 31, 2001 and 2000. All such adjustments are of a normal
recurring nature. The results of operations for the three and nine
months ended December 31, 2001 are not necessarily indicative of the
results to be expected for the year ending March 31, 2002. For further
information, refer to the consolidated financial statements and
footnotes thereto for the year ended March 31, 2001 contained in the
Company's Form 10-K filed on June 29, 2001.
3. ADOPTION OF NEW ACCOUNTING STANDARDS - In April 2001, the Company
elected early adoption of Statement of Financial Accounting Standards
("SFAS") No. 141, BUSINESS COMBINATIONS and No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. SFAS No. 141 addresses financial accounting and
reporting for business combinations and replaces APB Opinion No. 16,
BUSINESS COMBINATIONS. SFAS No. 141 requires the use of the purchase
method of accounting for acquisitions and provides new recognition
criteria for intangible assets. SFAS No. 142 addresses financial
accounting and reporting for acquired goodwill and other intangible
assets and replaces APB Opinion No. 17, INTANGIBLE ASSETS. SFAS No. 142
also addresses how intangible assets should be accounted for upon their
acquisition and after they have been initially recognized in the
financial statements. The new standards provide specific guidance on
measuring goodwill for impairment annually using a two-step process.
-7-
As of April 2001, the Company identified those intangible assets that
remain separable under the provisions of SFAS No. 141 and those that
are to be included in goodwill. The Comparative Consolidated Balance
Sheet has been restated to reclassify intangibles from goodwill. In
applying SFAS No. 142, the Company re-evaluated the useful lives of
these separable intangible assets.
In the year of adoption, SFAS No. 142 requires the first step of the
goodwill impairment test to be completed within the first six months
and the second step to be completed within twelve months of adoption.
The two steps of the test were completed during the quarter ended
September 30, 2001 and no indications of goodwill impairment were
found.
Had the provisions of SFAS Nos. 141 and 142 been applied for the three
and nine months ended December 31, 2000, the Company's comparative
earnings and earnings per share would be as follows:
Three months ended Nine months ended
December 31 December 31
2001 2000 2001 2000
---- ---- ---- ----
Reported net earnings before extraordinary item $1,737 $1,055 $17,665 $12,663
Goodwill amortization - 899 - 2,581
Minority interest - (85) - (236)
------ ------ ------- -------
Adjusted net earnings before extraordinary item $1,737 $1,869 $17,665 $15,008
------ ------ ------- -------
Reported net earnings $1,737 $1,055 $16,868 $12,663
Goodwill amortization - 899 - 2,581
Minority interest - (85) - (236)
------ ------ ------- -------
Adjusted net earnings $1,737 $1,869 $16,868 $15,008
------ ------ ------- -------
NET EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM:
BASIC
Reported $0.13 $0.08 $1.31 $0.97
Goodwill amortization - 0.07 - 0.20
Minority interest - (0.01) - (0.02)
------ ------ ------- -------
Adjusted $0.13 $0.14 $1.31 $1.15
------ ------ ------- -------
DILUTED
Reported $0.12 $0.08 $1.21 $0.92
Goodwill amortization - 0.06 - 0.19
Minority interest - (0.01) - (0.02)
------ ------ ------- -------
Adjusted $0.12 $0.13 $1.21 $1.09
------ ------ ------- -------
NET EARNINGS PER SHARE:
BASIC
Reported $0.13 $0.08 $1.25 $0.97
Goodwill amortization - 0.07 - 0.20
Minority interest - (0.01) - (0.02)
------ ------ ------- -------
Adjusted $0.13 $0.14 $1.25 $1.15
------ ------ ------- -------
DILUTED
Reported $0.12 $0.08 $1.16 $0.92
Goodwill amortization - 0.06 - 0.19
Minority interest - (0.01) - (0.02)
------ ------ ------- -------
Adjusted $0.12 $0.13 $1.16 $1.09
------ ------ ------- -------
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4. BUSINESS ACQUISITIONS - Business acquisitions for the nine-month period
totaled $12.0 million, comprised of four tuck-under acquisitions for
$3.8 million and several contingent consideration payments totaling
$8.2 million.
Certain vendors, at the time of acquisition, are entitled to receive
contingent consideration if the acquired businesses exceed certain
minimum financial thresholds during the two to four-year period
following the date of acquisition. As at December 31, 2001, there was
contingent consideration of up to $18.8 million payable during the
period extending to March 31, 2005. In addition, vendors are entitled
to receive interest on the principal amount of each contingent payment,
to the extent payable, which interest is calculated from the
acquisition date to the payment date at interest rates ranging from 7
to 9%. These amounts have been treated as contingent consideration and
any resulting payments will be recorded as goodwill to the extent the
contingencies are determined payable.
Also during the nine-month period, the Company purchased the 10% of its
subsidiary California Closet Company Inc. that it did not own
previously from the minority shareholder for consideration of $3.3
million.
5. LONG-TERM DEBT - On June 29, 2001, the Company amended and restated its
lending agreement to allow for the issuance of additional debt. The
amended and restated agreement provides a $140 million committed senior
revolving credit facility (the "Credit Facility") renewable and
extendible in 364-day increments, and if not renewed, a two-year final
maturity. The Credit Facility allows for borrowing in either U.S. or
Canadian currency and bears interest at 1.50% to 3.00% over floating
reference rates, depending on certain leverage ratios. At December 31,
2001, the Company had drawn $54.8 million on the Credit Facility, and
had $85.2 million of available un-drawn credit.
Also on June 29, 2001, the Company completed a private placement of
$100 million of 8.06% fixed-rate Senior Secured Notes (the "Notes").
The Notes have a final maturity of ten years, with equal annual
principal repayments beginning at the end of the fourth year, resulting
in a seven-year average life.
The Credit Facility and the Notes rank equally in terms of security.
The Company has granted the lenders and Note-holders 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 covenants and other limitations within the amended lending
agreement and the Note agreement are substantially the same. The
covenants require the Company to maintain certain ratios including
leverage, fixed charge coverage, interest coverage and net worth. Other
limitations include prohibition from paying dividends, and without
prior approval, from undertaking certain mergers, acquisitions and
dispositions.
6. FINANCIAL INSTRUMENTS - On December 7, 2001, the Company entered into
an interest rate swap agreement to exchange the fixed rate on $75
million of its 8.06% Notes for a variable rate of LIBOR + 2.50%. The
term of the swap matches the term of the Notes with a maturity of June
29, 2011. This swap is being accounted for as a hedge in accordance
with SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, whereby changes in the fair value of the swap are recorded
on the balance sheet and interest savings (expense) are recorded in the
statement of earnings. The fair value of the swap is determined based
on the present value of the estimated future net cash flows
-9-
using implied rates in the applicable yield curve as of the valuation
date. Due to changes in the yield curve, the fair value of the swap
fluctuates and at December 31, 2001, it had an unrealized loss of $1.16
million.
7. CAPITAL STOCK - During the nine months ended December 31, 2001 and
2000, the Company issued 450,725 and 124,610 Subordinate Voting Shares,
respectively, pursuant to provisions for the exercise of stock options
under its stock option plan. The Company did not repurchase any
Subordinate Voting Shares during the nine months ended December 31,
2001. During the nine months ended December 31, 2000, the Company
repurchased 49,500 Subordinate Voting Shares at a total cost of $564.
8. COMPREHENSIVE INCOME - Total comprehensive income was $1,678 and $1,179
for the three months ended December 31, 2001 and 2000, respectively and
$16,436 and $11,280 for the nine months ended December 31, 2001 and
2000, respectively. Total comprehensive income includes net earnings,
foreign currency exchange adjustments and current income taxes on
realized foreign exchange gains for income tax purposes.
9. 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.
10. IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS - In August 2001, the
Financial Accounting Standards Board issued SFAS No. 144, ACCOUNTING
FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, effective for the
Company's fiscal year ending March 31, 2003. The Company has not yet
determined the effect of SFAS No. 144 on the consolidated financial
statements.
11. SEGMENTED INFORMATION - Within the Property Services division, three
operating units (Residential Property Management, Integrated Security
Services and Consumer Services) provide a variety of services to
residential and commercial customers. The Business Services division
provides customer support & fulfillment and business process
outsourcing services to corporate and institutional clients.
OPERATING SEGMENTS
Property Property
Services - Services - Property
Residential Integrated Services -
Property Security Consumer Business
Management Services Services Services Corporate Consolidated
---------- -------- -------- -------- --------- ------------
THREE MONTH PERIOD ENDED
DECEMBER 31, 2001
Revenues $45,431 $24,168 $16,624 $31,519 $67 $117,809
------- ------ ------ ------- ----- -------
Operating profit 1,741 1,193 370 3,916 (1,045) 6,175
------- ------ ------ ------- ----- -------
Total assets 101,110 55,637 63,271 121,207 5,854 347,079
------- ------ ------ ------- ----- -------
THREE MONTH PERIOD ENDED
DECEMBER 31, 2000
Revenues $40,437 $20,974 $16,914 $18,570 $62 $96,957
------- ------ ------ ------- ----- -------
Operating profit 1,636 1,540 319 2,581 (1,297) 4,779
------- ------ ------ ------- ----- -------
Total assets 95,494 38,909 54,657 75,229 4,725 269,014
------- ------ ------ ------- ----- -------
-10-
Property Property
Services - Services - Property
Residential Integrated Services -
Property Security Consumer Business
Management Services Services Services Corporate Consolidated
---------- -------- -------- -------- --------- ------------
NINE MONTH PERIOD
ENDED DECEMBER 31, 2001
Revenues $160,751 $70,441 $69,475 $93,998 $187 $394,852
------- ------ ------ ------- ----- -------
Operating profit 13,661 4,282 12,945 13,680 (3,477) 41,091
------- ------ ------ ------- ----- -------
Additions to goodwill 3,889 3,311 4,743 3,186 - 15,129
------- ------ ------ ------- ----- -------
NINE MONTH PERIOD
ENDED DECEMBER 31, 2000
Revenues $137,819 $56,721 $65,989 $59,793 $192 $320,514
------- ------ ------ ------- ----- -------
Operating profit 11,287 3,631 11,333 10,446 (3,650) 33,047
------- ------ ------ ------- ----- -------
Additions to goodwill 6,104 9,865 4,799 1,820 - 22,588
------- ------ ------ ------- ----- -------
GEOGRAPHIC SEGMENTS
CANADA UNITED STATES CONSOLIDATED
------ ------------- ------------
THREE MONTH PERIOD
ENDED DECEMBER 31, 2001
Revenues $39,625 $78,184 $117,809
-------- -------- --------
Total assets 117,795 229,284 347,079
-------- -------- --------
THREE MONTH PERIOD
ENDED DECEMBER 31, 2000
Revenues $30,143 $66,814 $96,957
-------- -------- --------
Total assets 65,097 203,917 269,014
-------- -------- --------
NINE MONTH PERIOD
ENDED DECEMBER 31, 2001
Revenues $132,750 $262,102 $394,852
-------- -------- --------
NINE MONTH PERIOD
ENDED DECEMBER 31, 2000
Revenues $96,079 $224,435 $320,514
-------- -------- --------
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(in U.S. dollars)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q 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, changes in interest rates, changes in the
value of the Canadian dollar relative to the U.S. dollar, 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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
Revenues increased $20.8 million, or 22%, to $117.8 million in the third quarter
of fiscal 2002 from $97.0 million in the third quarter of fiscal 2001.
Approximately $18.0 million of the revenue increase is attributable to acquired
companies owned less than one year including Herbert A. Watts Ltd. ("Watts"),
and several smaller tuck-under acquisitions.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 19% to $9.2 million from $7.7 million in the prior year period. The
EBITDA margin for the three months ended December 31, 2001 was 7.8%, down 20
basis points versus the prior year due to margin reduction at certain of the
property service businesses offset somewhat by the impact of the recent Watts
acquisition which generates higher margins than FirstService as a whole and
alters the consolidated mix.
The Canadian dollar weakened 3.5% relative to the U.S. dollar from the prior
year period, which negatively impacted reported revenues and EBITDA on
translation by approximately $1.5 million and $200,000, respectively.
Approximately 34% of the Company's revenues for the quarter were denominated in
Canadian currency. Foreign currency risk is described in greater detail in Item
7A of the Company's Form 10-K for the year ended March 31, 2001.
-12-
Depreciation for the quarter ended December 31, 2001 was $2.9 million, up 54%
from the prior year quarter due largely to the acquisition of Watts. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective April 1, 2001, goodwill is no
longer being amortized in the Statement of Earnings.
Interest expense for the quarter increased 21% over prior year levels to $3.0
million as a result of increased borrowings related to acquisitions. The average
borrowing rate for the quarter was 7.4% versus 7.7% in the prior year quarter.
All acquisitions and related payments completed during the past year have been
financed through the Company's Credit Facility.
On December 7, 2001, the Company entered an interest rate swap agreement in
which the interest stream on $75 million of the fixed 8.06% Senior Secured Notes
(the "Notes") was exchanged for the variable rate interest of LIBOR + 2.50%. The
swap has a maturity matched to the underlying Notes due June 29, 2011. During
the month of December 2001, this swap resulted in interest savings of
approximately 3.0% on the $75 million of principal or $0.14 million. This swap
is being accounted for as a hedge in accordance with SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, whereby changes in the fair
value of the swap are recorded on the balance sheet and interest savings
(expense) are recorded in the statement of earnings.
The income tax provision for the third quarter was approximately 34% of earnings
before taxes, lower than the 40% recorded in the prior year. The decline in the
tax rate is primarily the result of the implementation of SFAS No. 142.
Minority interest remained unchanged at 18% of earnings before minority interest
in the current quarter relative to the prior year quarter (adjusted for SFAS No.
142). The Company repurchased certain minority shareholdings during the past
year, including the 14.9% minority interest in Intercon Security Ltd.
("Intercon") and the 10% minority interest in California Closet Company Inc.
("California Closets"). This was offset by earnings from Watts, which was
acquired in March 2001 and has a 17.85% minority interest, resulting in no net
change in the minority interest percentage.
Net earnings were $1.7 million, down $132,000 from the prior year period
(adjusted for SFAS No. 142), while diluted earnings per share decreased to $0.12
from $0.13. The decrease in earnings and diluted earnings per share resulted
from the 54% and 21% increases in depreciation and interest expense,
respectively, described above. In addition, earnings per share were tempered by
a 4% increase in the weighted average share count as a result of shares issued
upon the exercise of stock options and an increase in dilution caused by the 75%
increase in the average market price of the Company's shares relative to the
prior year.
Revenues for the Property Services division were $86.2 million, an increase of
$7.9 million or 10% over the prior year. Adjusting for the impact of foreign
exchange, revenue growth was 11% and internal growth 5%. Property Services
EBITDA declined to $5.0 million or 5.8% of revenues compared to $5.6 million or
7.2% of revenues in the prior year. The Property Services division is comprised
of three service lines - Residential Property Management, Integrated Security
Services and Consumer Services.
Residential Property Management revenues were $45.4 million for the quarter, up
12% over the prior year. EBITDA was $2.4 million, down from $2.9 million in last
year while margins decreased to 5.4% from 7.1% last year. The margin was
affected by poor results in painting and restoration, which posted break-even
performance during the quarter versus a 7% margin in the prior year quarter.
Painting and restoration, which has historically comprised 15% of the segment's
revenues, declined sharply during the quarter as clients (Boards of Directors of
condominium and
-13-
home-owner associations), deferred decisions regarding painting and restoration
projects in the wake of the events of September 11, 2001. These projects are
necessary for the upkeep of these properties and cannot be deferred
indefinitely. Management expects painting and restoration activities to pick up
in the fourth quarter or very early in fiscal 2003. Organic revenue growth was
7% (11% excluding the decline in painting and restoration), with the balance
coming from acquisitions completed in the past twelve months, including
Dickinson Management, a full-service residential property management company
operating in Palm Beach County, Florida, and Equity Management, a New York City
property management company.
Integrated Security Services revenues advanced to $24.2 million, up 15% over the
prior year. Internal growth was 12%. EBITDA was $1.6 million, down from $1.7
million in the prior year and EBITDA margins declined to 6.5% from 8.1% in the
prior year quarter. The margin decline resulted from strong security officer
revenues, which generated low margins and altered the sales mix relative to the
prior year quarter, which had very strong systems revenues. Looking forward, the
Company expects margins of 7.5%, subject to mix variations between the security
officer and systems businesses.
Consumer Services revenues were $16.6 million, a decline of 2% relative to last
year, while EBITDA was $1,025,000, down $49,000 from the prior year. Margins
were stable at approximately 6.2%. The acquisition of the California Closets
Seattle "branchise" in July 2001 added 6% to revenues, resulting in an organic
revenue decline of 8%. Excluding the impact of foreign exchange and the planned
transition of California Closets out of the laminated board supply business,
organic revenues declined 1%. California Closets has historically provided
laminated board and other supplies to franchisees, but has decided to transition
away from this practice and instead facilitate direct relationships between
franchisees and product suppliers. This has the impact of lowering revenues and
inventory but increasing margins. Board sales were $1.0 million less in the
current quarter than in the prior year quarter.
Business Services division revenues climbed to $31.5 million for the third
quarter, a 70% increase over the prior year due entirely to the acquisition of
Watts. Revenues declined 5% from operations other than Watts. The BDP Business
Data Services Ltd. ("BDP") business process outsourcing operations had strong
internal growth of 12%, while the DDS Distribution Services Ltd. ("DDS")
customer support & fulfillment operations were down 11% versus the prior year as
a result of reduced order volume from existing clients. The Company anticipates
customer support & fulfillment revenues will remain below prior year levels for
the balance of the year. Business Services EBITDA increased to $5.2 million or
16.5% of revenues, compared to $3.3 million and 17.6% of revenues in the prior
year. The margin decline is attributable to the change in service mix resulting
from the Watts acquisition.
Quarterly corporate expenses fell to $1.0 million versus $1.2 million in the
prior year period, due to lower executive bonus accruals resulting from
lower-than-forecast earnings growth and lower travel costs due to the
disruptions in air travel experienced in the wake of the events of September
11th, 2001.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2001 AND 2000
Revenues were $394.9 million in the first nine months of fiscal 2002, up from
$320.5 million in the first nine months of fiscal 2001, an increase of $74.3
million or 23%. Approximately $56.5 million of the increase is attributable to
acquired companies owned less than one year including Watts and several smaller
tuck-under acquisitions.
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EBITDA increased 20% to $50.0 million from $41.6 million in the prior year
period. The EBITDA margin for the nine months ended December 31, 2001 was 12.7%,
down 30 basis points versus the prior year.
The Canadian dollar was 3.8% weaker relative to the U.S. dollar during the
period than in the same period last year. If exchange rates were held constant,
revenues and EBITDA for the current nine months would have been approximately
$5.5 million and $0.7 million higher, respectively. Approximately 34% of the
Company's year-to-date revenues are denominated in Canadian currency.
Depreciation for the nine months ended December 31, 2001 was $8.5 million,
up 55% from the prior year due largely to the acquisition of Watts.
Interest expense for the period increased 24% over prior year levels to $9.0
million as a result of increased borrowings related to acquisitions. The average
interest rate year-to-date is 7.2%, which is similar to the rate experienced in
the prior year to date.
The year-to-date income tax provision was approximately 34% of earnings before
taxes, lower than the 40% recorded in the prior year, primarily as a result of
the implementation of SFAS No. 142.
Minority interest increased to $3.5 million or 17% of earnings before minority
interest from $3.1 million or 17% in the prior year (adjusted for SFAS No. 142).
Minority interest remained unchanged on a percentage basis, with the repurchase
of the California Closets and Intercon minority positions during the last twelve
months being offset by the 17.85% minority interest attached to Watts.
Net earnings before the extraordinary item were $17.7 million, up 18% over the
prior year period (adjusted for SFAS No. 142), while diluted earnings per share
increased 11% to $1.21 from $1.09. The increase in diluted earnings per share
reflects a 3% increase in the weighted average share count as a result of shares
issued upon the exercise of stock options and an increase in dilution caused by
the 84% increase in the average market price of the Company's shares relative to
the prior year.
At the time of the issuance of the Notes and the completion of the Credit
Facility on June 29, 2001, the Company wrote off the financing fees related to
its previous debt arrangements. This resulted in an extraordinary loss, net of
taxes, of $797,000.
Revenues for the Property Services division were $300.7 million, an increase of
$40.1 million or 15% over the prior year due to internal growth of approximately
7% as well as several acquisitions. Property Services EBITDA grew 11% to $36.1
million or 12.0% of revenues compared to $32.5 million or 12.5% of revenues in
the prior year.
Within Property Services, Residential Property Management revenues were $160.8
million for the nine months, up 17% over the prior year. Organic revenue growth
was 7%, with the balance of growth coming from acquisitions completed in the
last 21 months. EBITDA grew 11% to $16.4 million, while EBITDA margins decreased
slightly to 10.2% from 10.7% last year.
Integrated Security Services posted revenues of $70.4 million, up 24% over the
prior year, with 12% internal growth. EBITDA was $5.3 million, up 20% over the
prior year's figure, while EBITDA margins decreased to 7.5% from 7.8% in the
prior year nine-month period.
-15-
In Consumer Services, revenues advanced to $69.5 million, an increase of 5% over
last year, while EBITDA increased to $14.4 million, up 8%. The margin was 20.7%
compared to 20.2% in the prior year period. Revenue growth was attributable to
the Creative Closets Boston acquisition completed in October 2000 and the
acquisition of California Closets Seattle in July 2001. Both acquisitions are
franchises of the Company's California Closets franchise system, and were
acquired as part of the Company's "branchising" strategy.
Revenues for the Business Services division rose to $94.0 million for the nine
months, a 57% increase over the prior year primarily from the impact of the
acquisition of Watts. Internal growth approximated 2% for the nine months, with
the BDP business process outsourcing operation making gains with its student
loan and Canadian federal government contracts offset by volume declines in the
customer support & fulfillment operations. Business Services EBITDA increased to
$17.3 million or 18.4% of revenues, compared to $12.7 million and 21.2% of
revenues in the prior year. The margin decline is attributable to the change in
service mix resulting from the Watts acquisition.
Corporate expenses were down slightly at $3.4 million versus $3.5 million in the
prior year.
OUTLOOK FOR REMAINDER OF CURRENT FISCAL YEAR AND FISCAL 2003
On October 24, 2001, FirstService announced its outlook for the remainder of the
year. For fiscal 2002, annual revenues were expected to be in the range of
$510-$520 million, EBITDA in the range of $58-$59.5 million and diluted earnings
per share before the extraordinary item in the range of $1.30-$1.35.
On January 29, 2002, the Company revised its outlook for the remainder of the
current fiscal year, providing the following range of guidance for the fiscal
year: revenues $507-512 million; EBITDA $56.6-57.0 million; and diluted earnings
per share before the extraordinary item of $1.23 to $1.26. These lower figures
reflect the lower revenues being experienced in the Residential Property
Management painting and restoration business as well as declines in transaction
volumes in the Business Services customer support & fulfillment operations.
Fiscal 2001's diluted earnings per share, adjusted for SFAS 142, was $1.14.
The Company also provided the following initial guidance for fiscal 2003:
revenues $540-560 million; EBITDA $62-64 million and diluted earnings per share
of $1.46-1.54. This guidance assumes 8-10% growth in Residential Property
Management and Integrated Security Services, 3-4% growth in Consumer Services,
and 7-8% growth in Business Services. Any acquisitions completed during the year
would be additive to these figures.
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, exterior painting, and commercial swimming
pool services 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.
Residential Property Management (with the exception of swimming pool services),
Integrated Security Services, and Business Services generate revenues evenly
throughout the fiscal year.
-16-
The seasonality of swimming pool services and certain Consumer Services
operations (exterior painting and lawn care) results in variations in quarterly
EBITDA margins. Variations in quarterly EBITDA margins can also be caused by
acquisitions, which 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
On June 29, 2001, the Company amended and restated its lending agreement to
allow for the issuance of additional debt. The amended and restated agreement
provides a $140 million committed revolving credit facility (the "Credit
Facility") renewable and extendible in 364-day increments, and if not renewed, a
two-year final maturity. The Credit Facility allows for borrowing in U.S. and /
or Canadian currency and bears interest at 1.50% to 3.00% over floating
reference rates, depending on certain leverage ratios. Also on June 29, 2001,
the Company completed a private placement of $100 million of 8.06% fixed-rate
Senior Secured Notes (the "Notes"). The Notes have a final maturity of ten
years, with equal annual principal repayments beginning at the end of the fourth
year, resulting in a seven-year average life. Covenants and other limitations
within the amended lending agreement and the Notes are similar to those
contained in the prior lending agreement.
In connection with the Credit Facility and the Notes, the Company incurred
legal, agency and placement fees totaling $3.1 million, which will be amortized
over the life of the associated debt. The Company believes these new credit
arrangements will provide stability and flexibility to finance acquisitions and
working capital requirements for the foreseeable future. Un-drawn available
credit under the Credit Facility was $85.2 million at December 31, 2001.
During the quarter ended December 31, 2001, capital expenditures were $4.7
million. Significant purchases during the quarter included computer and
telecommunications equipment, warehouse management software and warehouse
fixtures and equipment, all within the Business Services division. In November
2001, the Dallas branch of DDS moved into a new 250,000 square foot fulfillment
facility. Capital expenditures for the nine months ended December 31, 2001 were
$12.7 million. The Company expects capital expenditures to be approximately $14
million for the full fiscal year.
Business acquisitions for the quarter totaled $1.7 million, comprised of several
contingent purchase price payments related to acquisitions made during the prior
three years. For the nine-month period, business acquisitions totaled $12.0
million, comprised of four tuck-under acquisitions totaling $3.8 million and
contingent consideration payments totaling $8.2 million. In connection with
certain acquisitions, the Company has agreed to pay additional consideration
contingent on post-acquisition operating results of the acquired entities. The
payment of any such amounts is made in cash and results in an increase in the
purchase prices for such acquisitions and, as a result, additional goodwill. As
at December 31, 2001, there was contingent consideration of up to $18.8 million
payable during the period extending to March 31, 2005.
Also during the nine-month period, the Company purchased the 10% its subsidiary
California Closet Company Inc. that it did not own previously from the minority
shareholder for consideration of $3.3 million.
-17-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. a) Exhibits
3.1* Articles of Incorporation and Amendment
3.2* By-Laws and Amendments
10.1* Credit Facility dated April 1, 1999 among the Company and
syndicate of bank lenders
10.2** FirstService Corporation Amended Stock Option Plan # 2
10.3** FirstService Corporation Amended Share Purchase Plan # 2
10.4*** Amended and Restated Credit Agreement Dated
June 21, 2001 among the Company and
syndicate of bank lenders
10.5*** Note and Guarantee Agreement - $US100 million 8.06%
Guaranteed Senior Secured Notes due 2011
b) Reports on Form 8-K
None.
-------------------
* Incorporated by reference to the Company's report on Form 10-Q for the
period ended June 30, 1999.
** Incorporated by reference to the Company's report on Form 10-K for the
year ended March 31, 2000.
*** Incorporated by reference to the Company's report on Form 10-Q for the
period ended June 30, 2001.
-18-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2002
FIRSTSERVICE CORPORATION
/s/ D. Scott Patterson
____________________________________________________
D. Scott Patterson
Senior Vice President and Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER & AUTHORIZED SIGNATORY)