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SECURITIES AND EXCHANGE COMMISION
WASHINGTON, DC 20549
FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15D-16 of
The Securities Exchange Act of 1934
For the month of: August, 1999 Commission File Number: 0-24762
FIRSTSERVICE CORPORATION
(Name of Registrant)
FIRSTSERVICE BUILDING
1140 BAY STREET
SUITE 4000
TORONTO, ONTARIO
CANADA, M5S 2B4
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F Form 40-F X
---- -----
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the SEC
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes No X
---- -----
If "Yes" is marked, indicate the file number assigned to the registrant in
connection with Rule 12g3-2(b):
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SIGNATURES
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: AUGUST 13, 1999
FIRSTSERVICE CORPORATION
BY: D. SCOTT PATTERSON
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SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
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EXHIBIT DESCRIPTION OF EXHIBIT PAGE
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1 Annual Information Form 4
2 Financial Statements for the Years Ended March 31, 1999 and 24
1998 - in accordance with Canadian generally accepted
accounting principles.
3 Management's Discussion and Analysis of Financial Conditions 41
and Results of Operations - in accordance with Canadian
generally accepted accounting principles.
4 Financial Statements For the Years Ended March 31, 1999, 1998 46
and 1997 - in accordance with United States generally accepted
accounting principles.
5 Management's Discussion and Analysis of Financial Conditions 67
and Results of Operations - in accordance with United States
generally accepted accounting principles.
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EXHIBIT 1
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FIRSTSERVICE CORPORATION
ANNUAL INFORMATION FORM
1999
AUGUST 13, 1999
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FIRSTSERVICE CORPORATION
1999 ANNUAL INFORMATION FORM
ORGANIZATION
FirstService Corporation (the "Company" or "FirstService") was formed by
Certificate of Incorporation dated February 25, 1988 under the laws of the
Province of Ontario. The Company amalgamated with Coloma Resources Limited
pursuant to a Certificate of Amalgamation dated July 31, 1988, and the
amalgamated corporation continued under the name "FirstService Corporation".
By Certificate of Amendment dated April 2, 1990, the Company: (i)
consolidated each of its Class A Subordinate Voting Shares on a 30 to 1 basis
and changed the designation of that class of shares to "Subordinate Voting
Shares", each such share carrying one vote per share; and, (ii) consolidated
each of its Class B Shares on a 30 to 1 basis and changed the designation of
that class of shares to "Multiple Voting Shares", each such share carrying 20
votes per share.
The Company's Subordinate Voting Shares are publicly traded on both The
Toronto Stock Exchange (symbol: FSV) and the Nasdaq National market system
(symbol: FSRV). The Company's principal office is located at FirstService
Building, 1140 Bay Street, Suite 4000, Toronto, Ontario M5S 2B4 and its
telephone number is (416) 960-9500.
OVERVIEW
The Company is a leading 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 which includes community association management, security,
franchising and lawn care represented approximately 78% of the Company's
revenues for the year ended March 31, 1999. The Company is the largest
full-service manager of community associations in North America and is the
largest lawn care company in Canada. The Business Services division provides
outsourcing services such as transaction processing and literature
fulfillment for corporations and government agencies and represented
approximately 22% of the Company's revenues for the year ended March 31,
1999. Between fiscal 1992 and fiscal 1999, the Company's consolidated
revenues increased from Cdn. $42 million to Cdn. $396 million, earnings
before interest, taxes, depreciation and amortization ("EBITDA") increased
from Cdn. $3.8 million to Cdn. $43.3 million and earnings per share increased
from Cdn. $0.12 per share to Cdn. $0.93 per share.
By implementing a systematic and focused acquisition strategy, the
Company has achieved significant growth in revenues and earnings, while
strengthening and diversifying its operations. The Company's operations are
diversified across five service lines with
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approximately 70% of annualized revenues generated in the United States and
the remainder in Canada. The Company believes this diversity provides access
to more growth opportunities and mitigates against downturns in any
particular service or geographic area.
All of the Company's businesses are labor-intensive, require limited
capital and provide predictable, recurring revenues. The Company has
developed an operating business paradigm capitalizing on these common
characteristics which enables the Company to effectively motivate, train and
support its employees and to efficiently manage its business. The Company's
senior operating managers have extensive service industry experience and have
retained a direct equity ownership in the businesses they manage. The Company
employs approximately 5,500 full-time staff which rises to approximately
12,500 with seasonal franchise employees.
The Company believes certain demographic, social and economic trends
will continue to provide significant growth opportunities. Such trends
include the increased outsourcing by business and government of certain
labor-intensive functions as well as the aging of the "baby boomer"
generation and the increase in two income families, with corresponding
increases in disposable income and demands for leisure time. These trends
have contributed to significant growth in the service sector during the past
decade, and growth is expected to continue into the foreseeable future.
HISTORY
The Company's origins date back to 1972 when Jay S. Hennick, President
and Chief Executive Officer of the Company, founded the predecessor to
Superior Pool, Spa & Leisure Ltd., a swimming pool and recreation facility
management company. In 1988, Mr. Hennick exchanged his interest in Superior
for shares of FirstService. While a private company, FirstService completed
the acquisitions of College Pro Painters Ltd. (1989) (TFC), a franchise
painting company and Greenspace Services Limited (Greenspace) (1991), a lawn
care business and several smaller related service companies. Both of these
companies operate in Canada and the U.S.
In June 1993, the Company completed its initial public offering raising
approximately Cdn. $10 million. A second Cdn. $10 million was raised through
an additional offering in the spring of 1994.
In December 1993, the Company acquired a controlling interest in
Intercon Security Limited (Intercon) a protective services company based in
Toronto with operations in Canada and the U.S.
During May 1995, FirstService established its Business Services Division
through the acquisition of B.D.P. Business Data Services Limited (BDP), which
is based in Toronto.
In March 1996, FirstService entered the community association management
business through the acquisition of Prime Management Group, Inc. (Prime)
which operates in the state of Florida.
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In July 1996, the Company expanded its business services division
through DDS Dyment Distribution Services (DDS) which acquired certain assets
of Dyment Limited, a fulfillment services company. DDS operates in both the
U.S. and Canada.
In April and June 1997, the Company expanded its community association
management division through the acquisitions of The Wentworth Group, Inc.
(Wentworth) and The Continental Group, Inc. (Continental) respectively.
Wentworth services the New Jersey, Pennsylvania, New York and Delaware
markets and Continental serves the South Florida market.
In October 1997, TFC, a subsidiary of the Company, acquired Paul W.
Davis Systems, Inc. (Paul Davis), a franchisor of general contracting and
cleaning businesses based in Jacksonville, Florida.
In November 1997, the Company completed an offering of 2,500,000
subordinate voting shares raising approximately $27.0 million net of expenses.
In February 1998, the Company further expanded its community association
management division into Arizona by acquiring Rossmar Management Company
("Rossmar") of Phoenix.
In April 1998, the Company expanded business services through the
acquisition of Harris Fulfillment and Harris Direct Mail of Philadelphia
through DDS.
In October 1998, the Company further expanded its subsidiary, The
Franchise Company through the acquisition of California Closet Company, Inc.
("California Closets"), a franchisor of installed closet and home storage
systems. California Closets is based in San Rafael, California.
In April 1999, the Company amended and restated its credit facilities
("Credit Facilities") provided by a syndicate of seven banks. The Credit
Facilities available to the Company to finance acquisitions and working
capital requirements total Cdn. $50.0 million and US $130.0 million.
In June 1999, the Company enhanced its community association management
operations through the acquisition of American Pool Enterprises Inc., which
is based in Beltsville, Maryland and has operations from New Jersey to
Atlanta.
In July 1999, the Company expanded its Business Services division by
acquiring Dallas based DDS Southwest Distribution Services Limited through
its fulfillment subsidiary, DDS Distribution Services Limited.
BUSINESS STRATEGY
The Company's objective is to continue building a diversified service
business which 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.
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OPERATING STRATEGY. The goal of the Company's operating strategy is to
increase the revenues, profitability and market position of each operating
company and subsequently acquired business, while maintaining the highest
level of service to its customers. Key elements of the Company's operating
strategy are:
SENIOR MANAGEMENT COMMITMENT. 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 requiring
management of newly acquired platform businesses to hold an 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 which are based on a percentage of the amount by which their
results exceed budgeted EBITDA. Lower level managers' incentives are
also linked to EBITDA targets, but may include other measures deemed
important for growing their business. The 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 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 of its
businesses in order to benefit from the most innovative and effective
management systems, techniques or practices. The implementation of
certain 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. 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 Property
Services businesses also provide 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
businesses that will enhance the market position of its current operations,
extend its geographic reach or expand its breadth of service offerings. The
service sector is 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 acquisition, meet the capital
and liquidity needs of such owners, as illustrated by the Company's
successful track record of acquiring and integrating over
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50 businesses. The Company believes that acquisition opportunities will
continue to be available to it across all of its businesses. Notwithstanding
such opportunities, the Company is committed to controlled growth and will
only make acquisitions that can be purchased at a fair price and effectively
assimilated into existing operations without overburdening existing managers
or systems. Key elements of the Company's acquisition strategy are:
EXPAND SERVICE OFFERINGS; EXTEND GEOGRAPHIC PRESENCE. The Company
intends to continue to acquire profitable "platform" businesses with
well-developed market positions that complement its existing services
or extend its geographic presence. When entering a new service area or
geographic market for the first time, the Company generally only
pursues platform acquisitions of larger companies with leading market
positions, a history of consistent and predictable profitability and
cash flow, experienced management teams and opportunities to enhance
performance through the support of the Company.
INCREASE MARKET PENETRATION. Once the Company has established a
presence 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 incorporated into existing
operations without a significant increase in selling, general and
administrative expenses. A "tuck-under" refers to an acquisition
that can be incorporated into an existing business to allow
increased market penetration.
EMPHASIZE INTEGRATION. While the Company is confident that there are
significant opportunities to grow rapidly through acquisitions,
management focuses on properly integrating newly acquired businesses in
order to maximize operating performance without impairing the quality
of service delivered. The Company believes its ability to balance
attractive growth opportunities against operating management's ability
to effectively assimilate new operations into the organization has been
a key component to its success.
MINORITY INTERESTS
FirstService 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 at FirstService while providing significant incentives to management at
the operating companies. In all cases, FirstService has the right to call
management's shares at a predetermined formula price, usually payable at
FirstService's option with any combination of FirstService shares or cash.
FirstService may also be obligated to acquire certain of these minority
interests in the event of the death, disability or cessation of employment of
the employee or if the shares are "put" by the employee. These arrangements
provide significant flexibility to FirstService in connection with management
succession planning and shareholder liquidity matters.
DIVIDEND POLICY
The Company has not paid, and does not anticipate paying in
the foreseeable future, dividends on its shares. Management believes that it is
in the best interest of shareholders to retain all available funds to invest in
its businesses with the objective of building long-term shareholder value. In
addition, the Company's ability to pay dividends is restricted by covenants in
its Credit Facilities. The payment of any future dividends will be determined by
the Board of Directors in light of conditions then existing, including the
Company's financial condition and
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requirements, future prospects, restrictions in financing agreements,
business conditions and other factors deemed relevant by the Board of
Directors.
FOREIGN EXCHANGE RISKS
Although the Company's financial results have historically been
reported in Canadian dollars, a significant portion of its sales and operating
costs are denominated in U.S. dollars. Significant long-term fluctuations in
relative currency values could adversely affect the Company's results of
operations. The Company currently does not hedge the risk of foreign exchange
exposures on a long-term basis, though may from time-to time hedge the risk of
foreign exchange exposures on a short-term basis.
In the future the Company's financial results will be reported in U.S.
dollars which will further mitigate foreign exchange translation risk.
ORGANIZATIONAL STRUCTURE
FirstService is divided into two principal operating groups:
Property Services and Business Services. Property Services is functionally
divided into four operating divisions: Community Association Management,
Security, Franchising and Lawn Care. The following diagram depicts
FirstService's organizational structure by group and division.
graphic,type="CHART"
BREAKDOWN OF REVENUE
(in thousands of Canadian dollars)
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Year Ended
March 31,
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1999 1998
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PROPERTY SERVICES
Community Assoc. Mgmt. ................ $136,450 $88,610
Security............................... 79,522 69,705
Franchising............................ 60,111 31,485
Lawn Care.............................. 32,644 34,413
BUSINESS SERVICES........................... 87,552 51,356
OTHER....................................... 176 186
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Total....................................... $396,455 $275,755
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PROPERTY SERVICES
COMMUNITY ASSOCIATION MANAGEMENT
PRINCIPAL OPERATING SUBSIDIARIES
Prime Management Group, Inc., a Florida corporation 100% owned by FirstService.
The Continental Group, Inc., a Florida corporation 80% owned by FirstService.
The Wentworth Group, Inc., a Pennsylvania corporation 80% owned by FirstService.
Rossmar Management Company, an Arizona corporation 100% owned by FirstService.
American Pool Enterprises, a Delaware corporation 80% owned by FirstService.
BUSINESS. The Company provides community association management services to more
than 1,800 community associations representing more than 300,000 residential
units, over half of which are in Florida and the remainder of which are in
Pennsylvania, New York, New Jersey, Delaware, Maryland, Virginia, District of
Columbia and Arizona. The Company believes it is the largest full service
manager of community associations in the United States. The Company entered the
community association management business in 1996.
There are two types of professional property management companies,
traditional and full-service. 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 property
management services as traditional property managers but also directly
provide a variety of other services such as grounds maintenance, pool
maintenance, pest control, irrigation, janitorial services and real estate
sales and leasing under one exclusive contract. Contracts are usually
obtained through a bidding process among several community association
management companies and typically are for one to five year terms.
INDUSTRY OVERVIEW. 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
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 the community has been delegated to a volunteer board of directors which was
elected by the owners. Increasingly, the responsibility for day to day
management of the community is being contracted-out by these boards of directors
to professional property management companies who are experts in the
administration of community affairs and the efficient operation of community
property.
The market is fragmented and is dominated primarily by numerous local
and regional management companies. Only a small number of such companies,
however, have the
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expertise and capital to provide both the traditional property management
services as well as the recurring services provided by full-service property
managers.
STRATEGY. The Company intends to continue to grow its community association
management business by (i) increasing the number of residential units under the
Company's management through (a) platform acquisitions of well-managed regional
market-leading residential property management companies and tuck-under
acquisitions of smaller, geographically complementary management companies, and
(b) leveraging the collective purchasing power of the community associations
under the Company's management to reduce operating costs, thereby giving the
Company a competitive advantage which will enable it to win more contracts, and
(ii) earning a greater percentage of maintenance fees by introducing to its
managed communities additional services and products.
SECURITY
PRINCIPAL OPERATING SUBSIDIARY
Intercon Security Limited ("Intercon"), an Ontario company 85% owned by
FirstService.
BUSINESS. The Company, through Intercon, is a leading provider of innovative
protective services in North America. Most security companies offer either guard
services or security systems. The Company believes that solutions to complex
security problems require both. Intercon provides a full range of integrated
security services, primarily to the high-end commercial market, that includes
both highly trained security officers, security system sales, installation and
monitoring and personal protection. The Company believes that Intercon is unique
in its ability to offer a complete range of security products and services that
can be integrated and customized for the specific protection services required
by a client, and that integration of products and services generally provides
clients with higher quality, more comprehensive service at a lower overall cost.
Intercon's security systems include security monitoring
systems, such as closed circuit television systems, and intrusion alarms, such
as alarm and access control systems. Intercon 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.
In the security officer business, which has low barriers to
entry and is cost competitive, Intercon 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. In general, revenues from security officer services are
generated from renewable annual contracts while revenues from the sale of
security systems are generated from up-front installation charges and then
on-going contractual service and monitoring fees. Customers who purchase
Intercon systems are less likely to switch to a competitor for servicing and
monitoring because of the high costs in removing one security system and
installing another. Service and monitoring contracts, therefore, are less
sensitive to cost competition than are security officer services.
Traditionally, Intercon has provided services for commercial
buildings, shopping malls and multi-use complexes that include business and
residential units. Recently, Intercon has
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expanded its customer base in the United States through the provision of
high-end security officer services to super-regional shopping malls and other
high traffic complexes. Intercon also provides residential security services
to the high-end residential market and to individuals associated with its
corporate clients. Intercon operates across Canada and in four U.S. states
from branch operations in Toronto, Vancouver, Calgary and Chicago.
INDUSTRY OVERVIEW. 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 North American
market for security services is estimated to grow at an annual rate of
approximately 8% from $19 billion in 1995 to $27 billion by the year 2000.
The security services industry is fragmented, but undergoing
consolidation. In the United States alone, there are approximately 10,000
security officer companies and 2,500 alarm monitoring centers. Consolidation has
primarily occurred in the alarm monitoring area while there has been little
consolidation in the security officer market. The Company's primary competitors
in the security guard market are Pinkertons Inc., Burns Security and Wackenhut
Corp., and in the systems market are ADT Security Systems Inc., Chubb Security
Systems Inc., Wells Fargo Guard Service and Honeywell Inc.
STRATEGY. The Company intends to grow Intercon through (i) further penetration
of the institutional and government market primarily in Canada; (ii) aggressive
penetration of the "super-regional" shopping malls and multi-use complex markets
in North America; and (iii) selected acquisitions of niche security companies in
Canada and the United States which would enable Intercon to introduce its
integrated security services to new markets.
FRANCHISING
PRINCIPAL OPERATING SUBSIDIARY
The Franchise Company ("TFC"), an Ontario company 80% owned by FirstService.
BUSINESS. The Company, through TFC, is the owner-operator of several service
franchise systems that offer painting, decorating, closet design and
installation, lawn care, cleaning and other services to residential and
commercial customers across the United States and Canada. Currently, TFC
operates through more than 1,700 franchisees employing approximately 7,300
seasonal and full-time staff. TFC performs centralized finance, marketing,
purchasing and training functions for its franchisees. Such centralization
permits franchisees to benefit from advantages available to TFC such as
economies of scale in purchasing and access to marketing materials and
information systems. TFC applies its expertise in recruiting, training and
operating franchise systems to expand its brands in existing and new markets,
and also seeks to acquire compatible franchise systems with strong brand names
and management teams.
The franchise systems operated by TFC are California Closet Company,
Paul W. Davis Systems, College Pro Painters, Certa ProPainters, Nutri-Lawn
International Inc., Action Window Cleaning and Stained Glass Overlay.
California Closet Company is a franchisor of installed closet and home
storage systems. Headquartered in San Rafael, California, the company operates
114 franchises in the United States and Canada as well as master franchises in
many other countries around the world.
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California Closets receives a royalty from franchisees based on a percentage
of revenues. The Company has been in business for 21 years.
Paul Davis Systems is a Florida based franchisor of general contracting
and cleaning services primarily serving the insurance restoration industry in
the U.S. The franchise system currently has approximately 230 franchisees across
the U.S. with system wide sales exceeding $240 million. Paul Davis Systems
receives a royalty based on a percentage of franchisors revenues. The Company
has been in business for 28 years.
College Pro Painters operates its seasonal exterior, residential
painting franchise system in 24 states across the United 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. TFC receives a
royalty from each College Pro Painters franchisee based on a percentage of
revenues. In addition, TFC sells business items such as signs, business kits
and mailing materials to each franchisee.
Certa ProPainters is a franchise system of full-time professional
painting contractors with 175 franchisees operating in major markets across
the United States and Canada. Certa ProPainters was started by TFC in 1990 in
response to customer needs for larger, more complex projects than typical
College Pro Painters projects. 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. Certa ProPainters franchisees pay TFC a fixed fee
royalty, plus administrative fees based on the various ancillary services
purchased by the franchisee.
Nutri-lawn, Action Window Cleaning and Stained Glass Overlay are
smaller franchise systems with an aggregate of approximately 350 franchises
primarily in the United States and Canada.
INDUSTRY OVERVIEW. The franchising industry is fragmented, consisting
principally of a large number of small, single-service or single-concept
franchising companies. Due to the large size of the overall market for
residential and commercial maintenance services, dominant market share is not
considered necessary for becoming a major factor in the industry. However,
because of the low barriers to entry in this segment, TFC believes that brand
name recognition among consumers is a critical factor in achieving long term
success in the businesses in which it operates. TFC also 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.
STRATEGY. The Company intends to grow TFC primarily through (i) the continued
geographic expansion and market penetration of its existing service franchise
systems, and (ii) selected acquisitions of profitable and complementary service
franchise systems.
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LAWN CARE
PRINCIPAL OPERATING SUBSIDIARY
Greenspace Services Limited ("Greenspace") an Ontario company, 90% owned by
FirstService.
BUSINESS. The Company, through Greenspace, provides lawn care and landscape
maintenance primarily under the ChemLawn, Sears Lawn Care, Green Lawn Care,
Evergreen and Greenspace Commercial brand names. The Company entered the lawn
care business in 1991 upon acquiring ChemLawn's Canadian operations which had
been providing lawn care services in Canada since 1978. The Company believes
Greenspace is the largest lawn care company in Canada as measured by total
revenues. Greenspace serves more than 120,000 customers from 14 branches in
markets across Ontario and Quebec and in Edmonton, Alberta, 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).
The Company provides lawn care services to both residential and
commercial customers. Services to residential customers include
fertilization, weed and pest control for lawns, trees and shrubs. The Company
offers residential lawn care services primarily in programs that offer
different levels of services which vary between four basic treatments per
season to comprehensive treatments monthly throughout the season. Residential
customers typically purchase lawn care services for the upcoming season in
early spring. Lawn care service companies market extensively in winter and
early spring in order to attract customers. Marketing techniques used by the
Company include mass mailings, distribution of pamphlets and leaflets and
telemarketing. The Company optimizes its marketing efforts through a
sophisticated information management system and an extensive database of
customer information. The Company believes it has more financial resources
than many of its competitors which allows it to market more aggressively and
comprehensively.
Services to commercial customers include all of the services
provided to residential customers and also include mowing, landscaping,
irrigation and other services comprising comprehensive grounds maintenance.
While services to residential customers are provided seasonally, services to
commercial customers are provided year round and during winter months include
clearing snow and ice. Greenspace primarily markets its commercial property
business through a sales force which participates in bids for new projects.
Major commercial customers include Ford Motor Company of Canada, the City of
Mississauga and the Catholic Cemeteries of Ontario.
INDUSTRY OVERVIEW. The professional lawn care industry is estimated to be an $8
billion market (including mowing) in North America, and despite some
consolidation, is still relatively fragmented. The Company estimates that the
market is growing at approximately 3% annually.
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The lawn care market is continuing a consolidation trend as
small operators who have built profitable local franchises are frequently
finding that they cannot compete against larger lawn care companies. The primary
advantages that larger companies have over the smaller operators are economies
of scale for purchasing vehicles and equipment, vehicle routing, direct mail and
telemarketing expenses and leveraging a central office across a large network.
Acquisition opportunities today consist primarily of tuck-unders of moderately
sized niche players servicing local or regional markets.
STRATEGY. The Company intends to grow its lawn care business through (i)
selected tuck-under acquisitions which increase market share or expand the
business geographically and (ii) aggressive direct mail and sales campaigns
aimed at maintaining its high customer retention and customer acquisition rates.
BUSINESS SERVICES
PRINCIPAL OPERATING SUBSIDIARIES
BDP Business Data Services Limited ("BDP"), an Ontario company 86% owned by
FirstService. DDS Distribution Services Ltd. ("DDS"), an Ontario company 89%
owned by FirstService.
BUSINESS. The Company provides a variety of business outsourcing services to
corporations and government agencies through BDP and DDS.
BDP's objective is to be recognized as the best strategic partner to
businesses and government for outsourcing of labor-intensive, back-office
functions. BDP provides administrative functions which typically are not
strategic to an organization and can be more efficiently and cost-effectively
performed by third parties that specialize in such activities. BDP has
developed significant expertise in performing services that require
significant labor in coordination with technology, such as processing of drug
and dental claims, credit card applications and student loans. BDP provides
its services from four branches: two in Toronto, one in Ottawa and one in
Orangeville, Ontario. Typical contracts vary in length from one to five years.
DDS is a leading North American literature fulfillment services company
whose services include warehousing, collating, packaging and direct mail. DDS
takes orders for materials from its clients, as well as directly from its
clients' customers, and assembles, packages and delivers such materials to
the appropriate party. DDS uses its information management system to track
the materials it delivers and to profile its clients' customers, and provides
such information to its clients who use it to track inventory and also as a
valuable marketing tool. DDS charges storage fees as well as processing fees
for orders fulfilled.
DDS is headquartered in Cleveland, Ohio, and provides its services from
facilities located in Cleveland, Los Angeles, Philadelphia, Dallas, Oklahoma
City, Albuquerque and Toronto. DDS primarily serves the following industries:
automotive, banking, building suppliers, beverages, pharmaceuticals, book
publishing, consumer goods, farm equipment and computer products. Its clients
include Chrysler Corporation, M&M Mars, British Airways plc, Merck, Bristol
Myers, Harris Semiconductor and New Holland North America Inc.
17
<PAGE>
A key objective of the Company's Business Services division is
to establish long term relationships with clients and leverage such
relationships through the provision of additional services. BDP and DDS have
similar customer bases and the Company believes there are significant
cross-selling opportunities between the two businesses.
INDUSTRY OVERVIEW. The outsourcing market has a number of distinct segments. The
two most closely associated with BDP's market are information technology and
personnel services. Information technology outsourcing includes companies such
as Electronic Data Systems Corp., IBM Corp. and SHL Systemhouse Inc. These
companies seek out technology and network contracts in large organizations. The
personnel service market includes companies such as Kelly Services Inc.,
Manpower, Inc. and Olsten Corporation. These companies seek out contracts within
large organizations to provide personnel, usually on an as-needed basis, which
are managed by the client. In contrast, BDP combines technology and people in a
process that targets the outsourcing of back-office and administrative
applications.
All major corporations and government agencies produce literature,
advertising, promotional displays, manuals, stationery or training materials
which require distribution. Historically, companies have distributed these
materials themselves, but 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 the United States. A number of DDS's
competitors are also in other businesses such as printing, creative
communications services, or logistics. However, DDS differentiates itself as
a specialist services company focused on the fulfillment of printed materials
as described above.
STRATEGY. The Company seeks to aggressively grow the Business Services division
through (i) expansion of existing outsourcing contracts through the introduction
of additional complementary services, (ii) continued development of new
contracts through the introduction of custom solutions to institutions,
primarily in Canada, where outsourcing is relatively new as compared to the
United States; (iii) selected acquisitions of business service companies in
North America that offer complementary services; and (iv) tuck-under
acquisitions of smaller companies that can be integrated into either BDP or DDS.
PROPERTIES
The only real estate owned by the Company or its subsidiaries are a
20,000 square foot building located in Toronto, Ontario, approximately
one-half of which is occupied by the Company as its head office and the other
one-half is rented to third party tenants, a 38,000 square foot office
building located in Boca Raton, most of which is occupied by Prime and a part
of which is leased to a third party and a 22,000 square foot office building
in Hollywood, Florida used by Continental. All of the Company's remaining
operations are carried out from leased premises located across the United
States and Canada, none of which is material to the Company. The Company
believes its existing premises are sufficient to meet its current operating
requirements.
SEASONALITY
Due to the seasonality inherent in some of the services provided by
FirstService, revenue and income are significantly higher in FirstService's
first and second quarters (ending
18
<PAGE>
June 30 and September 30, respectively) than in the third and fourth quarters
(ending December 31 and March 31, respectively). The continued acquisition of
non-seasonal businesses is expected to mitigate some of the seasonal
variances of FirstService's existing revenue base.
REGULATORY MATTERS
Certain of the Company's operations are subject to environmental
regulation by federal, provincial, state and local authorities. Management
believes that the Company is currently in compliance with all applicable
environmental laws in Canada and the United States in all material respects.
Certain of the Company's operations use pesticides, cleaning agents and other
materials that must be used, stored, handled and transported in accordance
with applicable environmental laws. Certain of the Company's operations also
produce various wastes, such as motor oils and solvents, which must be
handled, transported and disposed of in accordance with applicable
environmental laws. Management believes that environmental regulations
represent a barrier to entry to the industries in which the Company operates,
particularly in the case where regulations require licensing. Although the
likely future impact of compliance with environmental laws on the Company's
operations and financial condition cannot be precisely determined, the
Company does not anticipate that such impact, if any, will be material.
The Company's franchise business is subject to 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 Canadian provinces and in several other
countries around the world. In all jurisdictions, the Company endeavors to
have its franchisees meet or exceed regulation standards, and in some
instances, the Company works with regulators who help determine and set
regulatory standards.
The Company's community association management business is subject to
regulation by the States in which it operates. The Florida Department of
Professional Regulation requires that for each contract a designated employee
be licensed as a community association manager ("CAM License"), which
requires an examination and continuing education. 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. The Company believes
that it is in material compliance with all laws and regulations applicable to
the operations of these businesses.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of certain financial information of
the Company for each of the last five fiscal years (1)(2):
<TABLE>
<CAPTION>
Mar. 31 Mar. 31 Mar. 31 Mar. 31 Sept.30
1999 1998 1997 1996 (3) 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUE $ 396,455 $275,755 $178,363 $122,677 $88,376
TOTAL ASSETS 279,307 179,664 106,234 71,643 64,823
LONG-TERM DEBT (4) 127,513 54,186 39,785 15,387 8,885
EBITDA 43,311 26,111 16,497 10,244 7,658
NET EARNINGS 11,720 7,190 4,676 3,363 2,353
BASIC EARNINGS PER SHARE $0.93 $0.69 $0.52 $0.43 $0.35
</TABLE>
(1) All amounts are Canadian thousands except per share data.
(2) Effective March 31, 1995, the Company changed its year end to
March 31, 1995.
(3) In 1995, the Corporation changed its year-end to March 31. This
resulted in a short six-month fiscal year, covering the period October
1, 1994 to March 31, 1995, a period which captured all of the
Corporations seasonal losses but none of the seasonal profits and is
not considered comparative to other years.
(4) Excludes current portion
20
<PAGE>
The following is a summary of certain financial information
of the Company for each of the last eight fiscal quarters ended
March 31, 1999:(1)(2)
<TABLE>
<CAPTION>
----------------------------Year Ended March 31, 1999-----------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C> <C> <C> <C>
REVENUE $93,536 $105,124 $102,110 $95,686
EBITDA $13,179 $ 18,809 $ 7,249 $ 4,074
NET EARNINGS (LOSS) $ 5,512 $ 7,265 $ 418 $(1,476)
---------------------------Year Ended March 31, 1998------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
REVENUE $59,930 $ 78,396 $ 69,447 $67,982
EBITDA $ 9,458 $ 14,779 $ 2,452 $ (578)
NET EARNINGS (LOSS) $ 5,952 $ 7,134 $ (1,601) $(4,295)
</TABLE>
- ----------------
Notes:
(1) Due to the seasonal nature of the Company's businesses, disclosure of
quarterly earnings per share is not meaningful.
(2) All amounts are Canadian thousands
MANAGEMENT'S DISCUSSION AND ANALYSIS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 16 to 23 of the Company's 1999
annual report is hereby incorporated herein by reference.
MARKET FOR SECURITIES OF THE COMPANY
The Company's Subordinate Voting Shares trade on The Toronto Stock
Exchange and are quoted on the Nasdaq National Market. The Company's Multiple
Voting Shares do not trade on any public market or quotation system.
21
<PAGE>
DIRECTORS AND OFFICERS
The section entitled "Election of Directors" on pages 13 and 14 of the
Company's Management Information Circular dated July 30, 1999 filed in
connection with the Company's annual and special meeting of shareholders to
be held on September 15, 1999 is hereby incorporated herein by reference.
ADDITIONAL INFORMATION
Additional information, including directors' and officers' remuneration
and indebtedness, principal holders of securities, options to purchase
securities and interests of insiders in material transactions, where
applicable, is contained in the Company's Management Information Circular for
the annual and special meeting of shareholders to be held on September 15,
1999, which involves the election of directors. Additional financial
information is provided in the Company's comparative financial statements for
its most recently completed fiscal year which form part of the Company's 1999
annual report. Copies of the aforementioned documents may be obtained upon
written request from the Secretary of the Company.
In Quebec, a copy of such documents is available to the public under the
conditions provided for in section 87 of the Securities Act (Quebec). Such
documents are incorporated herein by reference.
The Company will provide to any person or company upon request to the Secretary
of the Company:
(a) when the securities of the Company are in the course of distribution
pursuant to a short form prospectus or a preliminary short form
prospectus has been filed in respect of a proposed distribution of its
securities:
(i) one copy of the Company's annual information form, together
with one copy of any document, or the pertinent pages of any
document, incorporated herein by reference;
(ii) the comparative consolidated financial statements of the
Company for the Company's most recently completed financial
year together with the accompanying report of the Company's
auditors hereon;
(iii) one copy of any interim financial statements of the Company
subsequent to the financial statements of the Company's most
recently completed financial year;
(iv) one copy of the information circular of the Company in respect
of the Company's most recent annual meeting of shareholders
that involved the election of directors; and (v) one copy of
any other documents that are incorporated by reference in the
preliminary short form prospectus or the short form prospectus
and are not required to be provided under (i) to (iv) above;
or
22
<PAGE>
(b) at any other time, one copy of any other documents referred to in (a)
(i), (ii), (iii) and (iv) above, provided the Company may require the
payment of a reasonable charge if the request is made by a person or
company who is not a security holder of the Company.
23
<PAGE> EXHIBIT 2
24
<PAGE>
FIRSTSERVICE CORPORATION
FINANCIAL STATEMENTS
(stated in Canadian Dollars and in accordance with
Canadian generally accepted accounting principles)
MARCH 31, 1999
25
<PAGE>
AUDITORS' REPORT
TO THE SHAREHOLDERS OF FIRSTSERVICE CORPORATION
We have audited the consolidated balance sheets of FirstService Corporation
as at March 31, 1999 and 1998 and the consolidated statements of earnings,
retained earnings and changes in financial position for the years then ended.
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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
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,
1999 and 1998 and the results of its operations and the changes in its
financial position for the years then ended in accordance with Canadian
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
May 14, 1999
26
<PAGE>
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of Canadian Dollars)
<TABLE>
<CAPTION>
For the years ended March 31 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $396,455 $275,755
Cost of services provided 265,079 183,394
Selling, general and administrative expenses 88,065 66,250
Depreciation and amortization 12,230 7,386
Interest (note 7) 8,414 4,540
- ----------------------------------------------------------------------------------------------
Earnings before the following 22,667 14,185
Income taxes (note 10) 8,726 4,358
- ----------------------------------------------------------------------------------------------
Earnings before minority interest 13,941 9,827
Minority interest share of earnings 2,221 2,637
- ----------------------------------------------------------------------------------------------
EARNINGS $11,720 $7,190
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE (NOTE 12) $0.93 $0.69
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE PERIOD 12,564,283 10,370,439
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
27
<PAGE>
FIRSTSERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian Dollars)
<TABLE>
<CAPTION>
As at March 31 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,980 $ 3,729
Accounts receivable 62,399 43,793
Inventories (note 3) 12,024 7,866
Prepaids and other 10,198 7,262
- ------------------------------------------------------------------------------------------------------------------------
91,601 62,650
- ------------------------------------------------------------------------------------------------------------------------
Other receivables (note 4) 9,831 4,786
Capital and other assets (note 5) 39,093 30,345
Intangible and other assets (note 5) 5,326 4,473
Deferred income taxes 1,907 892
Goodwill (note 6) 131,549 76,518
- ------------------------------------------------------------------------------------------------------------------------
187,706 117,014
- ------------------------------------------------------------------------------------------------------------------------
$279,307 $179,664
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $39,242 $27,889
Income taxes payable 1,796 2,716
Unearned revenue 9,202 10,790
Long-term debt - current (note 7) 2,604 10,215
- ------------------------------------------------------------------------------------------------------------------------
52,844 51,610
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt less current portion (note 7) 127,513 54,186
Minority interest 7,088 8,116
- ------------------------------------------------------------------------------------------------------------------------
134,601 62,302
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (note 8) 66,419 58,654
Retained earnings 17,911 7,002
Foreign currency translation adjustment 7,532 96
- ------------------------------------------------------------------------------------------------------------------------
91,862 65,752
- ------------------------------------------------------------------------------------------------------------------------
$279,307 $179,664
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
SIGNED ON BEHALF OF THE BOARD
Director Director
28
<PAGE>
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of Canadian Dollars)
<TABLE>
<CAPTION>
For the years ended March 31 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Retained earnings (Deficit) - Beginning of year $ 7,002 ($ 7,867)
Earnings for the year 11,720 7,190
Deficit conversion from capital stock ----- 7,867
Cost of shares repurchased in excess of stated capital (811) (188)
- ------------------------------------------------------------------------------------------------------------------------
Retained Earnings - End of year $17,911 $ 7,002
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
29
<PAGE>
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(in thousands of Canadian Dollars)
<TABLE>
<CAPTION>
For the years ended March 31 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Earnings for the year $11,720 $7,190
Items not affecting cash
Depreciation and amortization 12,230 7,386
Deferred income taxes (327) 558
Minority interest share of earnings 2,221 2,637
- -----------------------------------------------------------------------------------------------------------------
25,844 17,771
Net change in non-cash operating accounts (13,222) (4,192)
- -----------------------------------------------------------------------------------------------------------------
12,622 13,579
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of businesses (63,391) (48,334)
Increase in capital assets (9,838) (8,166)
Proceeds from sale of assets 1,234 -----
(Increase) decrease in intangible and other assets (1,217) 3
Increase in other receivables (5,046) (420)
- -----------------------------------------------------------------------------------------------------------------
(78,258) (56,917)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long-term debt 62,272 13,124
Issuance of capital stock (net of repurchases) 6,955 28,915
Dividends paid to minority shareholders of subsidiaries (340) (276)
- -----------------------------------------------------------------------------------------------------------------
68,887 41,763
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash during the year 3,251 (1,575)
Cash, beginning of year 3,729 5,304
- -----------------------------------------------------------------------------------------------------------------
Cash end of year $6,980 $3,729
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
30
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS ARE EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS)
1. ACCOUNTING POLICIES
The consolidated financial statements of FirstService Corporation
(the "Company") have been prepared by management in accordance with
accounting policies generally accepted in Canada. The principal
accounting policies followed by the Company, which have been
consistently applied, are summarized as follows:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Acquisitions are consolidated from the
effective date of acquisition using the purchase method.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's subsidiaries operating in
the United States representing self-sustaining operations are
translated at year-end rates and revenues and expenses at weighted
average exchange rates for the year during which they are earned or
incurred. Gains or losses on translation are shown as a separate
component of shareholders' equity.
Monetary items of the Company's subsidiaries operating in the United
States representing integrated operations are translated at year end
exchange rates, non-monetary items at historical exchange rates and
revenues and expenses at weighted average exchange rates for the year
during which they are earned or incurred with the exception of
depreciation and amortization which are translated at historical
exchange rates. Gains or losses on translation are included in
earnings.
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.
REVENUE RECOGNITION
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
estimated completion levels to the total contract price. Amounts
received from customers in advance of services being provided are
recorded as unearned revenue when received.
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. Unless otherwise indicated, the fair
values of financial instruments approximate their recorded amounts.
The fair value of accounts receivable, accounts payable and accrued
liabilities and income taxes payable approximate recorded amounts
because of the short period to receipt or payment of cash.
USE OF ESTIMATES
The preparation of 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 the disclosure of contingent assets and liabilities
at the date of the financial statements and the amounts of revenues
and expenses for the reported years. Actual results may differ from
those estimates.
31
<PAGE>
1. ACCOUNTING POLICIES (CONT'D)
CAPITAL ASSETS AND DEPRECIATION
Capital assets are carried at cost and are depreciated as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment and software 20% declining balance and 3 to 5 years straight line
Vehicles and tankers 3 to 10 years straight-line
Furniture and equipment 20% to 30% declining balance and 3 to 10 years straight line
Leasehold improvements Term of the leases to a maximum of 10 years
Buildings Generally 40 years straight-line
</TABLE>
GOODWILL, INTANGIBLES AND OTHER ASSETS AND AMORTIZATION
These assets are carried at cost and are amortized as follows:
<TABLE>
<CAPTION>
<S> <C>
Goodwill 10 to 40 years straight-line
Financing fees Term of the associated debt
Other deferred costs 3 to 15 years straight-line
</TABLE>
Management's policy is to review the ongoing value of the capital
assets and goodwill on a periodic basis by comparing undiscounted
future benefits to the carrying 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 the capital
assets or goodwill.
STOCK OPTIONS
Stock options are recorded using the intrinsic value method.
32
<PAGE>
2. SIGNIFICANT BUSINESS ACQUISITIONS
1999 ACQUISITIONS:
Effective April 1, 1998, a 89% subsidiary of the Company ("DDS Dyment
Distribution Services Ltd.") acquired 100% of the Harris Fulfillment
and Harris Direct Mail divisions of Telespectrum Worldwide Inc.
("DDS Harris") headquartered in Philadelphia, Pennsylvania.
Effective October 1, 1998, a 80% subsidiary of the Company ("The
Franchise Company") acquired 90% of California Closet Company, Inc.
("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 Miami,
Florida.
Effective November 1, 1997, "The Franchise Company" acquired 100% of
Paul Davis Systems, Inc. ("Paul Davis"), a Florida based franchisor
of general contracting and cleaning businesses.
Details of these acquisitions are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
DDS Harris California Continental Paul
Net Assets acquired, at fair Closets Group Davis
market value:
Tangible assets, net of liabilities $ 7,735 $ 883 $ 4,157 $ 431
Minority interest - 88 827 -
--------------- ---------------- ---------------- --------------
7,735 795 3,330 431
--------------- ---------------- ---------------- --------------
Cash consideration 32,655 19,121 18,084 15,500
--------------- ---------------- ---------------- --------------
Goodwill $24,920 $18,326 $14,754 $15,069
--------------- ---------------- ---------------- --------------
</TABLE>
In addition to the consideration disclosed above:
The vendors of DDS Harris are entitled to receive a
contingent payment of up to $4,000 U.S. (approximately
$6,000 Cdn.) if DDS Harris exceeds certain financial
thresholds during the two year period following the date of
acquisition. The vendors of California Closets are entitled
to receive a contingent payment of up to $3,600 U.S.
(approximately $5,400 Cdn.) if California Closets exceeds
certain financial thresholds during the two year period
following the date of acquisition.
With respect to other current year and prior year's
business acquisitions the vendors are entitled to receive
contingent payments of up to $2,150 Cdn. and $5,146 U.S.
(approximately $7,719 Cdn.) if the businesses acquired
exceed certain financial thresholds generally during a two
or three year period subsequent to acquisition which
extends to September 2001. In addition with respect to a
prior year acquisition the vendors are entitled to receive
as additional consideration contingent performance amounts,
either in cash or additional subordinate voting shares at
the Company's option, based on the operating results of the
acquired company up to March 31, 2000.
These amounts have been treated as contingent consideration
and any resulting payments will be recorded as goodwill when
paid.
In addition to the acquisitions disclosed above, the Company
made various other acquisitions for total consideration of
$14,155 (1998 - $14,749) comprised of cash of $9,905 (1998 -
$3,772); capital stock of $4,250 (1998 - $1,202) and in 1998
of long term debt of $9,775 to acquire net assets of $2,266
(1998 - $75) resulting in goodwill of $11,889 (1998 -
$14,674).
In 1999, the Company also disposed of business assets of a
subsidiary with a net book value of $2,229 for net proceeds
of approximately $2,541.
33
<PAGE>
3. INVENTORY
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
<S> <C> <C>
Supplies and other $5,571 $4,863
Finished goods 3,824 495
Work-in-progress 2,454 2,364
Small equipment 175 144
------------------- ------------------
Total $12,024 $7,866
------------------- ------------------
------------------- ------------------
</TABLE>
4. OTHER RECEIVABLES
Included in other receivables are:
a) $4,663 (1998 - $3,211) of secured non-interest bearing loans
relating to purchases made pursuant to the Company's Share
Purchase Plan. These loans when granted, have a term of five
years but are open for repayment at any time.
b) $1,563 (1998 - $1,103) of secured non-interest bearing loans due
from minority shareholders of two subsidiaries.
c) $3,599 (1998 - $274) of other long-term receivables primarily
relating to restoration and security installation projects
conducted by the Company's property services group.
5. CAPITAL ASSETS, INTANGIBLE AND OTHER ASSETS
<TABLE>
<CAPTION>
1999 Accumulated
depreciation/ Net
Cost amortization 1999
------- ---------------- --------------- --------------
<S> <C> <C> <C>
CAPITAL ASSETS
Land $ 1,415 $ - $ 1,415
Buildings 8,407 1,037 7,370
Vehicles and tankers 11,422 6,262 5,160
Furniture and equipment 27,530 17,637 9,893
Computer equipment and software 18,742 8,814 9,928
Leasehold improvements 8,886 3,559 5,327
---------------- --------------- --------------
Total $76,402 $37,309 $39,093
---------------- --------------- --------------
---------------- --------------- --------------
INTANGIBLE AND OTHER ASSETS
Investments $ 159 $ - $ 159
Financing fees 3,717 920 2,797
Other deferred costs 4,190 1,820 2,370
---------------- --------------- --------------
Total $ 8,066 $ 2,740 $ 5,326
---------------- --------------- --------------
---------------- --------------- --------------
</TABLE>
34
<PAGE>
5. CAPITAL ASSETS (CONT'D
<TABLE>
<CAPTION>
1998 ACCUMULATED
COST DEPRECIATION/ NET
AMORTIZATION 1998
---- ---------------- --------------- --------------
<S> <C> <C> <C>
CAPITAL ASSETS
Land $ 1,665 $ - $ 1,665
Buildings 8,486 398 8,088
Vehicles and tankers 8,264 3,974 4,290
Furniture and equipment 19,964 12,247 7,717
Computer equipment and software 12,542 5,317 7,225
Leasehold improvements 3,661 2,301 1,360
---------------- --------------- --------------
Total $ 54,582 $24,237 $30,345
---------------- --------------- --------------
---------------- --------------- --------------
INTANGIBLE AND OTHER ASSETS
Investments $ 159 $ - $ 159
Financing fees 2,594 480 2,114
Other deferred costs 3,808 1,608 2,200
---------------- --------------- --------------
Total $ 6,561 $ 2,088 $ 4,473
---------------- --------------- --------------
---------------- --------------- --------------
</TABLE>
Included in capital assets are assets under capital lease at a
cost of $10,293 (1998 - $7,274) with a net book value of
$5,879 (1998 - $4,220).
6. GOODWILL
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Cost $139,700 $81,080
Less: Accumulated amortization 8,151 4,562
--------------- ----------------
$131,549 $76,518
--------------- ----------------
--------------- ----------------
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Term loan bearing interest at 7.12% $ - $26,190
Revolving acquisition facility of $180,000 due
June 1, 2004 111,983 22,800
Revolving working capital facility of $20,000 due
June 1, 2004 11,600 6,000
Obligations under capital leases bearing interest
ranging primarily from 6% to 9% and maturing at
various dates through the year 2004 4,790 3,746
Vendor-take-back notes bearing interest primarily at 9%,
and other long-term debt maturing at various dates
through the year 2002 1,744 5,665
--------------- ----------------
130,117 64,401
Less: Current portion 2,604 10,215
--------------- ----------------
$127,513 $54,186
--------------- ----------------
--------------- ----------------
</TABLE>
The revolving acquisition facility at March 31, 1999 is composed of
borrowings of $92,370 Cdn. and $13,000 U.S.
Included in the vendor-take-back notes are $U.S. obligations in the
amount of $625 U.S. (1998 - $2,250)
Interest expense on long-term debt was approximately $8,026 for the
year ended March 31, 1999 (1998-$4,350)
35
<PAGE>
At March 31, 1999, the estimated aggregate amount of principal
repayments on long-term debt and capital leases required in each of the
next five fiscal years and thereafter to meet the retirement provisions
are as follows:
2000 $ 2,604
2001 1,937
2002 845
2003 801
2004 48
Thereafter 123,882
On June 1, 1998 the Company amended and restated it's lending
agreement. The credit availability was increased from $100 to $200
million. As part of the new facility the $59.5 million revolving
acquisition facility and $26.2 million term loan were replaced by a new
$180 million revolving acquisition facility. Repayment terms of both
facilities were extended until final maturity of the credit agreement
in June 2004. In addition, the interest rate on the revolving
acquisition line was reduced by 25 basis points compared to the prior
agreement.
The revolving facilities provide that the Company may borrow using
Prime, 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 has an interest rate swap contract to December 31, 2002 at
a fixed rate of 5.3% in the amount of $20 million to hedge against
interest rate exposure on a portion of its revolving facilities.
As security for the revolving working capital and acquisition
facilities, 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 Company is also required to comply with certain
operating and financial ratios.
36
<PAGE>
8. CAPITAL STOCK
The authorized share capital 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 have 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 share capital:
<TABLE>
<CAPTION>
SUBORDINATE VOTING SHARES SHARES AMOUNT
----------------- -------------------
<S> <C> <C>
Balance March 31, 1997 8,793,597 $35,917
Shares issued as consideration for acquisitions 110,235 1,202
Stock options exercised 154,159 905
Shares issued pursuant to share purchase plan 115,000 1,265
Shares purchased for cancellation (50,300) (205)
Shares issued under public offering 2,500,000 26,936
Deficit conversion from capital stock - (7,759)
----------------- --------------------
Balance, March 31, 1998 11,622,691 58,261
Shares issued as consideration for acquisition 239,437 4,250
Stock options exercised 358,380 2,070
Shares issued pursuant to share purchase plan 97,500 1,755
Shares purchased for cancellation (61,800) (310)
----------------- --------------------
Balance March 31, 1999 12,256,208 66,026
----------------- --------------------
MULTIPLE VOTING SHARES
Balance March 31, 1997 662,847 501
Deficit conversion from capital stock - (108)
----------------- --------------------
Balance, March 31, 1998 to March 31, 1999 662,847 393
----------------- --------------------
----------------- --------------------
Total 12,919,055 $66,419
----------------- --------------------
----------------- --------------------
</TABLE>
The Company has a Stock Option Plan for directors, officers and key
full-time employees of the Company and its subsidiaries. Each option
usually vests over a five year term and allows for the purchase of one
subordinate voting share. At March 31, 1999 there were 1,342,675
options outstanding to 65 employees and directors at prices ranging
from $5.00 to $17.00 per share which expire on various dates through
October 2003.
On September 15, 1997, the shareholders of the Company approved a
reduction of the stated capital attributable to the Company's share
capital of $7,867 which eliminated the Company's deficit at March 31,
1997.
37
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
Minimum operating lease payments are as follows:
<TABLE>
<S> <C>
Year ending March 31,
2000 $11,269
2001 8,971
2002 7,243
2003 5,043
2004 3,379
Thereafter 11,890
</TABLE>
(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 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.
10. INCOME TAXES
Income taxes differ from the amounts which would be obtained by
applying the statutory rate to the respective years' earnings before
taxes. These differences result from the following items:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Income tax expense using combined statutory rates of
approximately 45% $10,201 $6,366
Unrecognized benefit of loss carryforwards - 450
Non-deductible expenses
Amortization of goodwill 586 390
Other 190 57
Foreign tax rate reduction (1,379) (430)
Recovery of taxes due to utilization of prior year's losses (872) (2,475)
------- --------
$8,726 $4,358
------- --------
</TABLE>
38
<PAGE>
11. 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 primarily painting and decorating services. The
business services group provides services to governments, financial
institutions and corporations wishing to outsource a variety of
non-core, primarily labor intensive, "back office" functions. Operating
segmented information is as follows:
<TABLE>
<CAPTION>
1999 PROPERTY PROPERTY BUSINESS RECONCILING CONSOLIDATED
SERVICES SERVICES SERVICES ITEMS
(FRANCHISED) (COMPANY
OWNED)
------------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 60,111 $248,616 $ 87,552 $ 176 $396,455
------------ ----------- ---------- ----------- -------------
Depreciation and
amortization $ 1,489 $ 6,883 $ 3,768 $ 90 $ 12,230
------------ ----------- ---------- ----------- -------------
Segment operating profit $ 8,456 $ 13,218 $ 14,221 $(4,814) $ 31,081
------------ ----------- ---------- ----------- -------------
Interest expense (8,414)
Income taxes (8,726)
Minority interest (2,221)
--------------
Earnings $ 11,720
--------------
--------------
Total assets $ 58,337 $126,682 $74,372 $19,916 $279,307
------------ ----------- ---------- ----------- -------------
Total additions to capital
assets and goodwill $ 22,251 $ 12,064 $35,725 $ 5,486 $ 75,526
------------ ----------- ---------- ----------- -------------
------------ ----------- ---------- ----------- -------------
1998 PROPERTY PROPERTY BUSINESS RECONCILING CONSOLIDATED
SERVICES SERVICES SERVICES ITEMS
(FRANCHISED) (COMPANY
OWNED)
------------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $31,485 $192,728 $51,356 $ 186 $275,755
------------ ----------- ---------- ----------- -------------
Depreciation and
amortization $ 704 $ 4,854 $ 1,754 $ 74 7,386
------------ ----------- ---------- ----------- -------------
Segment operating profit $ 4,306 $ 9,570 $ 8,310 $(3,460) $ 18,726
------------ ----------- ---------- ----------- -------------
Interest expense (4,540)
Income taxes (4,358)
Minority interest (2,638)
-------------
Earnings $ 7,190
-------------
-------------
Total assets $28,888 $ 108,984 $33,967 $ 7,825 $179,664
------------ ----------- ---------- ----------- -------------
Total additions to capital
assets and goodwill $19,844 $ 30,446 $ 2,009 $ 4,664 $ 56,963
------------ ----------- ---------- ----------- -------------
------------ ----------- ---------- ----------- -------------
</TABLE>
39
<PAGE>
11. SEGMENTED INFORMATION (CONT'D)
GEOGRAPHIC SEGMENTS
<TABLE>
<CAPTION>
CANADA UNITED STATES CONSOLIDATED
-------------------------- ---------------------- -------------------------
1999 1998 1999 1998 1999 1998
--------- ---------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $145,194 $ 128,327 $251,261 $147,428 $ 396,455 $275,755
--------- ---------- -------- -------- --------- --------
Total assets $99,811 $ 70,980 $179,496 $108,684 $ 279,307 $179,664
--------- ---------- -------- -------- --------- --------
Total capital
assets and goodwil $46,616 $ 38,091 $124,026 $68,772 $ 170,642 $ 106,863
--------- ---------- -------- -------- --------- --------
--------- ---------- -------- -------- --------- --------
</TABLE>
12. FULLY-DILUTED EARNINGS PER SHARE
Fully diluted earnings per share are $0.87 for the year ended
March 31, 1999. (1998 - $0.63)
13. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with the
current year's presentation.
14. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 issue may be experienced before, on, or after January 1, 2000, and
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
15. SUBSEQUENT EVENT
REVISED CREDIT FACILITY
On April 1, 1999 the Company amended and restated its
lending agreement. The amended facilities split the senior debt
facilities into a $50 million Cdn. and a $130 million U.S.
tranche. The new facilities provide approximately $47 million
Cdn. of additional credit over the previous $200 million
Cdn. facility. Other terms of the facilities remain unchanged from
those arranged in June 1998.
40
<PAGE>
EXHIBIT 3
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999
Consolidated revenues for the year ended March 31, 1999 were $396.5 million,
a 44% increase from the $275.8 million reported for the year ended March 31,
1998. Approximately $63.0 million of the increase resulted from the
acquisitions of Harris Fulfillment, 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%
and the impact of a weaker Canadian dollar.
Earnings before interest, taxes, depreciation and amortization increased 66%,
to $43.3 million from $26.1 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 Davis
Systems, Harris Fulfillment and California Closets, which carry higher EBITDA
margins.
Depreciation for the year ended March 31, 1999 was $8.1 million up 63% 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. Generally, these investments are depreciated
over a short time frame relative to the Company's other pool of assets.
Amortization for the year was $4.1 million, up 71% 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 85% over prior year levels to $8.4 million as a
result of increased borrowings related to acquisitions completed during
fiscal 1999 and 1998. 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, 1999 was approximately
38.5% of earnings before taxes, compared with 31% for the year ended March
31, 1998. The 1999 rate is lower than statutory rates due to the use of the
remaining loss carryforwards which resulted from the change of year end at
March 31, 1995. The Company expects its effective tax rate to more closely
reflect the statutory rate in the current year and beyond. At March 31, 1999,
FirstService and its subsidiaries had no income tax loss carryforwards on an
accounting basis.
Minority interest expense decreased to $2.2 million from $2.6 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 Limited from 50.1% to 85%. In those operations where senior
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
shares of the Company.
Net income was $11.7 million, a 63% increase over the prior year, while basic
earnings per share increased 35% to $0.93. Basic earnings per share reflect a
21% increase in the weighted average number of shares outstanding as a result
of the full year impact of the November 26, 1997 public offering of 2.5
million shares. Earnings per share on a diluted basis in US dollars and under
US GAAP were $0.54, an increase of 32% over the prior year.
Revenues for the Property Services division were $308.7 million, an increase
of approximately $84.5 million or 38% over the prior year. Approximately $43
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 and the impact of a
weaker Canadian dollar.
42
<PAGE>
Property Services EBITDA grew 55% to 30.0 million or 9.7% of revenue compared
to an EBITDA margin of 8.5% 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 $87.6 million, an increase
of 70% over 1998, a consequence of internal growth of greater than 25% and
the full year 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.
EBITDA grew 80% to $18.0 million, while margins grew to 20.5% from 19.5%,
primarily as a result of productivity improvements.
Corporate expenses increased to $4.7 million in 1999 from $3.2 million as a
result of higher salary costs and increased travel and legal costs related,
in part, to investigation of prospective acquisitions which were not
completed.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998
Consolidated revenues for the year ended March 31, 1998 were $275.8 million,
a 55% increase from the $178.4 million reported for the year ended March 31,
1997. The increase results from the acquisitions of The Continental Group,
Inc. ($41 million) and The Wentworth Group, Inc. ($14 million), several
smaller tuck-under companies and strong internal growth in both our Property
Services and Business Services divisions.
Earnings before interest, taxes, depreciation and amortization increased 58%
to $26.1 million from $16.5 million in the prior year - while EBITDA margin
increased 24 basis points to 9.5% of revenue. The increased margins reflect
the combined effects of overhead leveraging throughout the Company, improved
pricing, and reduced costs.
Depreciation and amortization for the year ended March 31, 1998 was $7.4
million, up 44% from the previous year due largely to the inclusion of the
results from Continental and Paul Davis Systems, Inc. and the increase in
capital expenditures relative to the prior year.
Interest expense increased 26% over prior year levels, reflecting increased
borrowing primarily related to the acquisitions of Continental and Paul
Davis, partially offset by the proceeds of the November, 1997 equity
offering. The increase also reflects the lower average interest rate of the
Company's current bank facilities relative to the prior year.
The income tax provision for the year ended March 31, 1998 was approximately
31% of earnings before taxes, compared with 30% for the year ended March 31,
1997. The 1998 rate is lower than statutory rates due to the continued use of
loss carryforwards, a large portion of which resulted from the change of year
end at March 31, 1995. The Company expects its effective tax rate to move
closer to the statutory rate over the next two years as the remaining losses
are utilized. At March 31, 1998, FirstService and its subsidiaries had
remaining income tax loss carryforwards on an accounting basis of
approximately $2.0 million.
Minority interest expense increased significantly to $2.6 million from $0.8
million, reflecting strong growth in operations with higher minority
interests - and the addition of Continental and Wentworth which have 20% and
40% minority interests, respectively.
Net income was $7.2 million, a 54% increase over the prior year, while basic
earnings per share increased 33% to $0.69. Basic earnings per share reflect a
14% increase in the weighted average number of shares outstanding resulting
from the November 26, 1997 public offering of 2.5 million shares. Earnings
per share on a diluted basis in US dollars and under US GAAP were $0.41, an
increase of 32% over the prior year.
Revenues for the Property Services division were $224.4 million, up $83.6
million or 59% over the prior year. Approximately $65 million of the revenue
increase results from the acquisitions of Continental, Wentworth, Paul Davis
and several smaller tuck-under companies, with the balance resulting from
internal growth. Our security and community association management operations
achieved double-digit internal growth rates while the lawn care and franchise
operations generated high single-digit internal growth.
43
<PAGE>
Property Services EBITDA grew 60% to $19.4 million or 8.7% of revenue
compared to an EBITDA margin of 8.4% in the prior year. The margin
improvement reflects productivity enhancements and some price increases,
offset in part by the strong growth of the lower margin security operations.
Revenues for the Business Services division were $51.4 million, an increase
of 37% over 1997, reflecting strong double-digit internal growth and the full
year impact of DDS Dyment Distribution Services, Ltd., acquired in August,
1996.
EBITDA grew 50% to $10.0 million, while margins grew to 19.5% from 17.1%,
primarily as a result of productivity improvements.
Corporate expenses increased from $1.9 million in 1997 to $3.2 million as a
result of higher salary and travel costs.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Certain segments of the Company's operations are subject to seasonal
variations. Specifically, the demand for residential lawn care services and
exterior painting services in the northern United States and in Canada is
highest during late spring, summer and early fall and very low during winter.
As a result, the franchising and some parts of the lawn care business are
highly seasonal in nature and 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.
Seasonality of the lawn care and a portion of the franchise business 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
Bank borrowings, proceeds from capital stock issues, and cashflow from
operations have historically been the funding sources for working capital
requirements, capital expenditures and acquisitions. Management believes that
funds from these sources will remain available and are adequate to support
ongoing operational requirements and near-team acquisition growth.
In December 1996, FirstService entered into a lending agreement with a
syndicate of chartered 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 for
acquisitions of Cdn $50 million and US $130 million. 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, 1999, the Company had drawn Cdn
$104.0 million and US $13.0 under the credit facilities. After giving effect
to the April 1, 1999 credit amendment and restatement, the amount drawn was
Cdn $4.7 million and US $80.3 million.
FirstService is exposed to foreign currency exchange risk through its U.S.
operations. At March 31, 1999, the Company's U.S. operations consisted of
it's community association management operations and certain divisions or
subsidiaries of its security, franchise and business services operations. The
Company's exposure to foreign exchange losses may be mitigated as the lending
agreement provides that it may borrow in Canadian or U.S. funds.
On November 19, 1997, the Company completed a public offering of 2.500,000
common shares at US $8.00 per share through a syndicate of underwriters led
by Credit Suisse First Boston and ABN AMRO Chicago Corporation. The net
proceeds of US $18.8 million or Cdn. $25.9 million were used to pay down
long-term bank debt.
During fiscal 1999, capital expenditures were approximately $9.8 million
split approximately equally between management information systems, leasehold
improvements and building expansion, and vehicles and equipment. For the
upcoming year, capital expenditures are expected to approximate 1999 levels.
44
<PAGE>
In connection with certain acquisitions, the Company has agreed to pay
additional consideration based on 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.
FirstService does not anticipate paying dividends on its outstanding shares
in the foreseeable future. Management believes that it is in the best
interest of shareholders to retain all available funds to invest in its
businesses with the objective of building long-term shareholder value.
YEAR 2000
The Company is currently in the process of addressing 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 recognize an input of two zeros (00) as the
year 1900. This incorrect date recognition could cause systems and software
malfunctions that may have a material adverse effect on business operations.
This potential problem could affect not only the Company's internal
information systems 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.
Company's Readiness. Beginning in late fiscal 1997 the Company undertook a
comprehensive review of its software applications and computer infrastructure
that are likely to be affected by the Year 2000 issue. The review was
completed 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 and fiscal 1999 and several
upgrades will be completed in the first half of fiscal 2000. The Company's
objective is to complete all its Y2K readiness programs by the fall of
calendar 1999.
The Company presently believes that it is largely Y2K compliant and that the
Year 2000 issue will not pose significant operational problems for its
computer systems.
The Company has identified its significant customers and suppliers that it
believes, at this time, to be critical to its various operations. Steps are
underway to ascertain their respective stages of readiness through the use of
questionnaires, interviews, and other available means to determine the
progress that those customers and suppliers are making in remediating their
own Year 2000 issues. The Company is requiring that significant customers and
suppliers certify those products and services to be Year 2000 compliant.
However, there can be no assurance that the information systems provided by
or utilized by other companies which affect the Company's operations will be
timely revised in such a way as to allow them to continue normal business
operations or furnish products, services or data to the Company without
disruption.
Cost of Compliance. Many of the systems upgrades which are dealing with Y2K
issue would have occurred in the normal course of business. In other cases,
the Company is accelerating normal course systems replacements or upgrades in
view of the Y2K issue. The costs incurred to date to replace non-compliant
systems that would not otherwise have been replaced are not material and the
Company does not expect its future Year 2000 costs to be material. All Year
2000 costs have been funded with cash from operations.
Company Risk and Contingency Plans. The Company's systems identified as
non-compliant or in need of replacement are being upgraded or replaced. The
Company expects this remediation to be substantially completed by year-end
1999. If needed conversions to the Company's information systems are not made
on a timely basis or the Company's significant customers or suppliers fail to
make such remediations and conversions on a timely basis, it could have a
material adverse effect on the Company's results of operation or financial
condition.
45
<PAGE>
EXHIBIT 4
46
<PAGE>
FIRSTSERVICE CORPORATION
FINANCIAL STATEMENTS
(stated in U.S. Dollars and in accordance with
United States generally accepted accounting principles)
MARCH 31, 1999
47
<PAGE>
AUDITORS' REPORT
TO THE SHAREHOLDERS OF FIRSTSERVICE CORPORATION
We have audited the consolidated balance sheets of FirstService Corporation
as at March 31, 1999 and 1998 and the consolidated statements of earnings and
comprehensive earnings, shareholders' equity and cash flows for each year in
the three-year period ended March 31, 1999. 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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
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,
1999 and 1998 and the results of its operations and cash flows for each year
in the three-year period ended March 31, 1999 in accordance with United
States generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Ontario
May 14, 1999
48
<PAGE>
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
(in thousands of U.S. Dollars, except per share amounts) - in accordance with
United States generally accepted accounting principles.
<TABLE>
<CAPTION>
For the years ended March 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $263,361 $196,488 $ 131,084
Cost of revenues 176,089 130,645 84,177
Selling, general and administrative expenses 58,505 47,235 34,790
Depreciation and amortization 8,145 5,277 3,765
Interest 5,589 3,232 2,059
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority 15,033 10,099 6,293
interest
Income taxes (note 10) 6,402 3,960 2,518
- --------------------------------------------------------------------------------------------------------------------
Earnings before minority interest 8,631 6,139 3,775
Minority interest share of earnings 1,409 1,704 566
- --------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 7,222 4,435 3,209
Extraordinary loss on early retirement of debt, net
of income tax benefit of $403 (note 8) - - 501
- --------------------------------------------------------------------------------------------------------------------
Net earnings 7,222 4,435 2,708
Foreign currency translation adjustment 3,337 (302) (6)
- --------------------------------------------------------------------------------------------------------------------
Comprehensive earnings $ 10,559 $ 4,133 $ 2,702
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE (note 11)
Earnings before extraordinary item:
Basic $0.57 $0.43 $0.35
Diluted $0.54 $0.41 $0.35
Net earnings:
Basic $0.57 $0.43 $0.30
Diluted $0.54 $0.41 $0.30
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
49
<PAGE>
FIRSTSERVICE CORPORATION CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars) - in accordance with United States generally
accepted accounting principles.
<TABLE>
<CAPTION>
AS AT MARCH 31 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,627 $ 2,629
Accounts receivable, net of an allowance of $2,620 (1998 - $1,988) 41,360 30,846
Inventories (note 4) 7,969 5,540
Prepaids and other 6,759 5,115
Deferred income taxes (note 10) 1,716 563
- ------------------------------------------------------------------------------------------------------------------
62,431 44,693
- ------------------------------------------------------------------------------------------------------------------
Other receivables (note 5) 3,425 1,108
Fixed assets (note 6) 25,847 21,351
Other assets (note 6) 3,429 3,154
Deferred income taxes (note 10) 410 1,673
Goodwill (note 7) 88,764 54,040
- ------------------------------------------------------------------------------------------------------------------
121,875 81,326
- ------------------------------------------------------------------------------------------------------------------
$184,306 $126,019
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable $8,156 $8,742
Accrued liabilities 17,857 10,900
Income taxes payable 1,181 1,918
Unearned revenue 6,099 7,599
Long-term debt - current (note 8) 1,726 7,195
Deferred income taxes (note 10) 543 649
- ------------------------------------------------------------------------------------------------------------------
35,562 37,003
- ------------------------------------------------------------------------------------------------------------------
Long-term debt less current portion (note 8) 84,516 38,163
Deferred income taxes (note 10) 319 355
Minority interest 4,889 5,691
- ------------------------------------------------------------------------------------------------------------------
89,724 44,209
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (note 14)
SHAREHOLDERS' EQUITY
Capital stock (note 9) 53,654 48,496
Issued and outstanding 12,256,208 (1998 - 11,622,691)
subordinate voting shares and 662,847 convertible multiple
voting
shares (1998 - 662,847)
Receivables pursuant to company's share purchase plan (note 9) ( 3,294) ( 2,329)
Retained earnings (deficit) 6,168 (515)
Cumulative other comprehensive income (expense) 2,492 (845)
- ------------------------------------------------------------------------------------------------------------------
59,020 44,807
- ------------------------------------------------------------------------------------------------------------------
$184,306 $126,019
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
SIGNED ON BEHALF OF THE BOARD
Director Director
50
<PAGE>
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars) - in accordance with United States generally
accepted accounting principles.
<TABLE>
<CAPTION>
ISSUED AND RECEIVABLES CUMULATIVE OTHER
OUTSTANDING CAPITAL PURSUANT TO RETAINED COMPREHENSIVE TOTAL
SHARES STOCK SHARE EARNINGS EARNINGS SHAREHOLDERS'
(NOTE 9) (NOTE 9) PURCHASE PLAN (DEFICIT) (DEFICIT) EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 8,806,615 $ 24,964 $ (256) $ (7,467) $ (537) $ 16,704
Subordinate voting shares
issued for purchase of
minority interest 126,800 466 - - - 466
Stock options exercised 229,500 414 - - - 414
Issued under share
purchase plan 340,000 1,328 (1,328) - - -
Purchased for
cancellation (46,471) (139) - - - (139)
Net earnings - - - 2,708 - 2,708
Cost of shares repurchased
in excess of stated
capital - - - (59) - (59)
Foreign currency
translation adjustments - - - - (6) (6)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 9,456,444 27,033 (1,584) (4,818) (543) 20,088
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
Net earnings - - - 4,435 - 4,435
Cost of shares repurchased
in excess of stated
capital - - - (132) - (132)
Foreign currency
translation adjustments - - - - (302) (302)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 12,285,538 48,496 (2,329) (515) (845) 44,807
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
Net earnings - - - 7,222 - 7,222
Cost of shares repurchased
in excess of stated
capital - - - (539) - (539)
Foreign currency
translation adjustments - - - - 3,337 3,337
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 12,919,055 $ 53,654 $ (3,294) $ 6,168 $ 2,492 $ 59,020
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
51
<PAGE>
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars) - in accordance with United States generally
accepted accounting principles.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings for the year $7,222 $4,435 $ 2,708
Items not affecting cash
Extraordinary loss on early retirement of debt - - 501
Depreciation and amortization 8,145 5,277 3,765
Deferred income taxes 418 1,251 646
Minority interest share of earnings 1,409 1,704 566
Other 292 277 242
- -----------------------------------------------------------------------------------------------------------------------
17,486 12,944 8,428
- -----------------------------------------------------------------------------------------------------------------------
Changes in operating assets and liabilities
Accounts receivable (7,015) (3,477) (4,900)
Inventories 2,084 (715) (800)
Prepaids and other (681) (713) (1,314)
Account payable (4,242) 422 (143)
Accrued liabilities 2,610 839 1,376
Income taxes payable (634) 490 1,116
Unearned revenue (1,500) 766 1,054
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,108 10,556 4,817
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of businesses (38,831) (31,802) (12,278)
Purchase of minority shareholders' interest (2,956) (30) (111)
Increase in fixed assets (5,810) (5,547) (2,838)
Proceeds from sale of business and other assets 2,648 - 3,230
Increase in other assets (569) (964) (462)
(Increase) decrease in other receivables (2,382) 449 42
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing (47,900) (37,894) (12,417)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increases in long-term debt 48,079 10,638 26,359
Repayments of long-term debt (6,995) (3,530) (10,666)
Decrease in bank indebtedness - - (6,374)
Financing fees paid (746) (194) (1,705)
Proceeds received on subordinate voting shares 1,576 19,294 414
Subordinate voting shares repurchased (745) (278) (198)
Penalties paid on early retirement of debt - - (606)
Dividends paid to minority shareholders of subsidiaries (226) (197) (294)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing 40,943 25,733 6,930
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 847 403 401
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
during the year 1,998 (1,202) (269)
Cash and cash equivalents, beginning of year 2,629 3,831 4,100
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $4,627 $2,629 $ 3,831
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
52
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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 corporate, public sector and residential customers
in the United States and Canada, principally in Ontario. The Company's
operations are conducted through two principal operating divisions,
Property Services and Business Services. The Property Services division
includes community association management, security, franchising and
lawncare and represented approximately 80% of the Company's revenues
for the year ended March 31, 1999. 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 in 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 labour 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:
<TABLE>
<S> <C>
Computer equipment and software 20% declining balance and 3 to 5 years straight-line
Vehicles and tankers 3 to 10 years straight-line
Furniture and equipment 20% to 30% declining balance and 3 to 10 years straight-line
Leasehold improvements term of the leases to a maximum of 10 years
Buildings 40 years straight-line
</TABLE>
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 3 years
53
<PAGE>
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
cost 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, College Pro Painters U.S. Ltd. and in Canada by
College Pro Painters Ltd. (collectively - "College Pro"); Certa Pro
Painters Ltd. in the United States and Canada (collectively - "Certa
Pro"); Paul Davis Systems, Inc. ("Paul Davis") and California Closet
Company, Inc. ("California Closets"). Initial franchise fees are earned
by California Closets, Certa Pro and Paul Davis 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 Pro, 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 periods.
Assets and liabilities of the Company's self-sustaining Canadian
operations 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.
Monetary items of the Company's subsidiaries operating in the United
States representing integrated operations are translated at year-end
exchange rates, non-monetary items at historical exchange rates and
revenues and expenses at weighted average exchange rates for the year
during which they are earned or incurred with the exception of
depreciation and amortization which are translated at historical
exchange rates. Gains or losses on translation are included in
earnings.
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 statements or tax returns. Deferred tax assets and
liabilities are measured using tax rates expected to apply to taxable
income 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.
54
<PAGE>
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 cash investments
and accounts receivable. The Company maintains its cash investments
with various major financial institutions and believes that no
significant concentration of credit risk exists. 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 and 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 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 expense on a portion of the
Company's long-term debt revolving facilities and are fair valued based
on current termination values or quoted market prices of comparable
contracts.
3. SIGNIFICANT BUSINESS ACQUISITIONS
1999 ACQUISITIONS:
Effective April 1, 1998, an 89% subsidiary of the Company (DDS Dyment
Distribution Services Ltd. or "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% 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.
1997 ACQUISITION:
Effective August 1, 1996, an 80% subsidiary of the Company, DDS,
acquired the United States and Canadian fulfillment services division
of Dyment Limited headquartered in Ohio.
55
<PAGE>
Details of these acquisitions are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ------------------------ -----------
DDS HARRIS CALIFORNIA CONTINENTAL PAUL DDS
CLOSETS GROUP DAVIS
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net assets acquired, at fair
market value:
Tangible assets, net of
liabilities $ 5,448 $ 577 $ 3,011 $ 306 $ 4,714
Minority interest - (57) (599) - -
------------ ------------ ----------- ----------- ------------
5,448 520 2,412 306 4,714
------------ ------------ ----------- ----------- ------------
Consideration
Cash 23,000 12,488 13,100 11,005 9,390
Long-term debt - - - - 3,000
------------ ------------ ----------- ----------- ------------
23,000 12,488 13,100 11,005 12,390
------------ ------------ ----------- ----------- ------------
Goodwill $17,552 $11,968 $10,688 $10,699 $ 7,676
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
</TABLE>
In addition to the consideration disclosed above, certain vendors are
entitled to receive contingent payments if the acquired business
exceeds certain financial thresholds during the two-year period
following the date of acquisition as follows:
<TABLE>
<CAPTION>
NAME OF ACQUIRED BUSINESS AMOUNT OF CONTINGENT CONSIDERATION
------------------------- ----------------------------------
<S> <C>
DDS Harris $ 4,000
California Closets 3,600
Continental Group 1,500
DDS 500
</TABLE>
As at March 31, 1999, vendors are entitled to receive contingent
payments of up to $14,171 if the businesses acquired exceed certain
financial thresholds, generally during a two or three-year period
subsequent to acquisition which extends to September 2001. In addition,
with respect to a prior year acquisition, the vendors are entitled to
receive as additional consideration contingent performance amounts,
either in cash or additional subordinate voting shares at the Company's
option, based on the operating results of the acquired company up to
March 31, 2000.
These amounts have been treated as contingent consideration and any
resulting payments will be recorded as goodwill when paid.
In addition to the acquisitions disclosed above, the Company made
various other acquisitions for total consideration of $9,403 (1998 -
$10,515) (1997 - $3,737) comprised of cash of $6,580 (1998 - $9,658)
(1997 - $3,271); capital stock of $2,823 (1998 - $857) (1997 - $466) to
acquire net assets of $1,505 (1998 - $53) (1997 - $2,894) resulting in
goodwill of $7,898 (1998 - $10,462) (1997 - $843).
In 1999 and 1997, the Company also disposed of business assets of
subsidiaries with a net book value of $1,481 (1997 - $3,230) for net
proceeds of approximately $1,682 (1997 - $3,230).
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 DDS
Harris, California Closets, Continental Group, Paul Davis and DDS
occurred on April 1 of each respective year, including comparative
prior year results.
56
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue $273,732 $240,116 $179,982
Earnings before extraordinary loss $ 7,941 $ 5,260 $ 4,245
Earning per share
Basic $ 0.63 $ 0.51 $ 0.47
Diluted $ 0.59 $ 0.48 $ 0.46
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of results of
operations which would have actually resulted had the combinations been
in effect at the beginning of each year or of future results of
operations.
4. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Supplies and other $ 3,693 $ 3,425
Finished goods 2,534 348
Work-in-progress 1,627 1,665
Small equipment 115 102
-------------- -------------
Total $ 7,969 $ 5,540
-------------- -------------
-------------- -------------
</TABLE>
5. OTHER RECEIVABLES
Included in other receivables are:
a) $1,040 (1998 - $777) of secured non-interest bearing loans due
from minority shareholders of two subsidiaries; and
b) $2,385 (1998 - $193) of other long-term receivables primarily
relating to restoration and security installation projects
conducted by the Company's property services group.
6. FIXED ASSETS AND OTHER ASSETS
<TABLE>
<CAPTION>
1999 Accumulated
Depreciation/ Net
Cost Amortization 1999
-------------- --------------- --------------
<S> <C> <C> <C>
FIXED ASSETS
Land $ 937 $ - $ 937
Buildings 5,564 685 4,879
Vehicles and tankers 7,552 4,139 3,413
Furniture and equipment 18,192 11,647 6,545
Computer equipment and software 12,375 5,823 6,552
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
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
1998 Accumulated
Depreciation/ Net
Cost Amortization 1998
-------------- --------------- --------------
<S> <C> <C> <C>
FIXED ASSETS
Land $ 1,172 $ - $ 1,172
Buildings 5,971 280 5,691
Vehicles and tankers 5,814 2,796 3,018
Furniture and equipment 14,047 8,617 5,430
Computer equipment and software 8,825 3,741 5,084
Leasehold improvements 2,575 1,619 956
-------------- --------------- --------------
Total $ 38,404 $ 17,053 $ 21,351
-------------- --------------- --------------
-------------- --------------- --------------
OTHER ASSETS
Investments $ 112 $ - $ 112
Financing fees 1,829 338 1,491
Management contracts 1,577 565 1,012
Deferred costs 1,108 569 539
-------------- --------------- --------------
Total $ 4,626 $ 1,472 $ 3,154
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
Included in fixed assets are vehicles and tankers under capital lease
at a cost of $2,924 (1998 - $1,908) with a net book value of $1,615
(1998 - $872) and computer equipment and software under capital lease
at a cost of $3,898 (1998 - $3,215) with a net book value of $2,282
(1998 - $2,101).
7. GOODWILL
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Cost $ 94,264 $ 57,262
Less: Accumulated amortization 5,500 3,222
--------------- -----------------
$ 88,764 $ 54,040
--------------- -----------------
--------------- -----------------
</TABLE>
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Term loan bearing interest at 7.12% $ - $ 18,446
Revolving acquisition facility of $180,000 Cdn. due
June 1, 2004 74,224 16,059
Revolving working capital facility of $20,000 Cdn. due
June 1, 2004 7,689 4,225
Obligations under capital leases bearing interest
ranging primarily from 6% to 9% and maturing at
various dates through the year 2004 3,175 2,638
Vendor-take-back notes bearing interest primarily at 9% ,
and other long-term debt maturing at various dates
through the year 2002 1,154 3,990
--------------- -----------------
86,242 45,358
Less: Current portion 1,726 7,195
--------------- -----------------
$ 84,516 $ 38,163
--------------- -----------------
--------------- -----------------
</TABLE>
The revolving acquisition facility at March 31, 1999 is comprised of
borrowings of $92,370 Cdn. ($61,225 U.S.) and $13,000.
Included in capital leases are obligations in Canadian dollars of
$3,552 ($2,354 U.S.) and at March 31, 1998 of $2,976 ($2,096 U.S.)
58
<PAGE>
Included in the vendor-take-back notes are obligations in Canadian
dollars of $801 ($531 U.S.) and at March 31, 1998 of $2,470 ($1,740
U.S.).
In 1997, the Company repaid a convertible debenture and the prepayment
penalties prior to maturity resulted in an extraordinary loss before
taxes of $904.
At March 31, 1999, the estimated aggregate amount of principal
repayments on long-term debt and capital leases required in each of the
next five fiscal years and thereafter to meet the retirement provisions
are as follows:
2000 $ 1,726
2001 1,284
2002 560
2003 531
2004 32
Thereafter 82,109
On June 1, 1998, the Company amended and restated its lending
agreement. The credit availability was increased from $100 to $200
million Cdn. ($66.3 to $132.6 million U.S.). As part of the new
facility the $59.5 million Cdn. ($39.4 million U.S.) revolving
acquisition facility and $26.2 million Cdn ($17.4 million U.S.) term
loan were replaced by a new $180 million Cdn. ($119.3 million U.S.)
revolving acquisition facility. Repayment terms of both facilities were
extended until final maturity of the credit agreement in June 2004. In
addition, the interest rate on the revolving acquisition line was
reduced by 25 basis points compared to the prior agreement.
The revolving facilities provide that the Company may borrow using
Prime, 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 has an interest rate swap contract to December 31, 2002 at
a fixed rate of 5.3% in the amount of $20 million Cdn. ($13.3 million
U.S.) to hedge against interest rate exposure on a portion of its
revolving facilities.
As security for the revolving working capital and acquisition
facilities, 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 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:
<TABLE>
<CAPTION>
SUBORDINATE VOTING SHARES MULTIPLE VOTING SHARES
------------------------- ---------------------- TOTAL TOTAL
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------------- ---------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 8,143,768 $24,591 662,847 $373 8,806,615 $24,964
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
</TABLE>
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
59
<PAGE>
AMRO Chicago Corporation for proceeds of $19,206, net of expenses of
$1,507 and a deferred tax asset of $713.
The Company has $3,294 (1998 - $2,329) of secured non-interest bearing
loans related to the purchase of 522,500 shares (1998 - 485,000
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 maturity of these loans are as follows:
Year ending March 31
2002 $ 1,226
2003 902
2004 1,166
---------------
$ 3,294
---------------
---------------
On September 15, 1997, the shareholders of the Company approved a
reduction of the stated capital attributable to the Company's share
capital of $7,867 Cdn. ($5,683 U.S.) which eliminated the Company's
Canadian dollar deficit at March 31, 1997. United States generally
accepted accounting principles do not allow such a reduction in capital
stock.
The Company has a Stock Option Plan for directors, officers and key
full-time employees of the Company and its subsidiaries. At March 31,
1999, a total of 2,350,000 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 five-year term and
expires five years from the date granted and allows for the purchase of
one subordinate voting share. At March 31, 1999 there were 1,342,675
options outstanding to 65 employees and directors at prices ranging
from $5.00 to $18.35 Cdn. per share which expire on various dates
through October 2003. There were 329,320 options available for future
grants as at March 31, 1999.
The number of subordinate voting shares issuable under options and the
average option prices per share in $Cdn. are as follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE UNDER OPTIONS WEIGHTED AVERAGE PRICE PER SHARE
($CDN.)
--------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares issuable under
options - Beginning
of year 1,558,180 1,250,305 840,055 $ 7.17 $ 5.41 $ 4.51
Granted 171,500 504,034 663,250 11.91 10.50 5.32
Exercised for cash (358,380) (154,159) (229,500) 5.78 5.87 2.45
Expired or cancelled (28,625) (42,000) (23,500) 8.67 5.26 5.02
----------- ----------- ----------- --------- ---------- -----------
Shares issuable under
options - End of
year 1,342,675 1,558,180 1,250,305 $ 8.10 $ 7.17 $ 5.41
----------- ----------- ----------- --------- ---------- -----------
----------- ----------- ----------- --------- ---------- -----------
Options exercisable -
End of year 726,459 836,909 727,058
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and
1997 was $5.89 Cdn., $4.25 Cdn. and $3.81 Cdn. per share,
respectively.
The options outstanding as at March 31, 1999 to purchase subordinate
voting shares are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
WEIGHTED- WEIGHTED WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISABLE EXERCISABLE
CONTRACTUAL PRICE NUMBER PRICE
NUMBER LIFE ($CDN.) EXERCISABLE ($CDN.)
RANGE OF EXERCISE PRICES ($CDN.) OUTSTANDING (YEARS)
---------------------------------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$5.00 to $5.69 736,075 2.02 $ 5.41 562,059 $ 5.38
$8.00 to $13.20 464,600 3.35 10.49 116,150 10.49
$13.50 to $18.35 142,000 4.04 14.26 48,250 13.78
------------ ------------ ------------- ------------ -------------
1,342,675 2.96 $ 8.10 726,459 $ 6.76
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
</TABLE>
60
<PAGE>
10. INCOME TAXES
Income taxes differ from the amounts which would be obtained by
applying the statutory rate to the respective years' earnings before
taxes. These differences result from the following items:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
<S> <C> <C> <C>
Income tax expense using combined statutory rates of
approximately 45% $6,764 $4,545 $ 2,832
Non-deductible expenses
Amortization of goodwill 389 278 255
Other 165 100 48
Foreign tax rate reduction (916) (307) (196)
Change in valuation allowances - (656) (421)
------------- -------------- -------------
Provision for income taxes as reported $6,402 $3,960 $ 2,518
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
Earnings before income taxes and minority interest by tax jurisdiction
comprise the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Canada $ 6,284 $ 4,704 $ 3,630
United States 8,749 5,395 2,663
------------- -------------- -------------
Total $ 15,033 $ 10,099 $ 6,293
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
<S> <C> <C> <C>
Current
Canada $ 2,732 $ 699 $ 1,292
United States 3,252 2,010 580
------------- -------------- ------------
5,984 2,709 1,872
------------- -------------- ------------
Deferred
Canada 511 1,052 521
United States (93) 199 125
------------- -------------- ------------
418 1,251 646
------------- -------------- ------------
Total $ 6,402 $ 3,960 $ 2,518
------------- -------------- ------------
------------- -------------- ------------
</TABLE>
61
<PAGE>
The significant components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Deferred income tax assets
Expenses not currently deductible $ 484 $ -
Provision for doubtful accounts 61 -
Inventory and other reserves 163 -
Loss carry-forwards 1,008 1,571
Capital stock underwriting expenses 410 578
Depreciation and amortization - 87
-------------- --------------
2,126 2,236
-------------- --------------
Deferred income tax liabilities
Depreciation and amortization 60 -
Prepaid and other expenses deducted for tax purposes 543 649
Financing fees 259 355
-------------- --------------
862 1,004
-------------- --------------
Net deferred income tax asset $1,264 $1,232
-------------- --------------
-------------- --------------
</TABLE>
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
$6,336 as at March 31, 1999.
11. EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- -------------
<S> <C> <C> <C>
Income available to subordinate and multiple voting shares $ 7,222 $ 4,435 $ 2,708
-------------- --------------- -------------
Weighted average number of shares:
Issued and outstanding at beginning of year 12,285,538 9,456,444 8,806,615
Weighted average shares:
Issued in the year 294,852 958,798 293,943
Repurchased in the year (16,107) (44,803) (31,049)
-------------- --------------- -------------
Weighted average used in computing basic earnings per
share 12,564,283 10,370,439 9,069,509
Assumed exercise of stock options, net of shares assumed
acquired under the Treasury Stock Method 910,361 565,903 97,205
-------------- --------------- -------------
Weighted average used in computing diluted earnings per
share 13,474,644 10,936,342 9,166,714
-------------- --------------- -------------
-------------- --------------- -------------
</TABLE>
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 show the company's
earnings and earnings per share after including the effect of the
compensation cost.
62
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Net earnings $6,394 $3,964 $ 2,070
Net earnings per share
Basic $ 0.51 $ 0.38 $ 0.23
Diluted $ 0.48 $ 0.36 $ 0.23
Assumptions
Risk-free interest rate 5.5% 5.5% 6.0%
Expected life in years 4.00 4.00 4.00
Volatility 40.0% 40.0% 45.0%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
12. OTHER SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Revenue
Products $17,985 $ 7,696 $ 5,623
Services 245,376 188,792 125,461
------------- -------------- -------------
Total 263,361 196,488 131,084
------------- -------------- -------------
Cost of revenue
Products 13,664 5,287 4,445
Services 162,425 125,358 79,732
------------- -------------- -------------
Net $ 87,272 $ 65,843 $ 46,907
------------- -------------- -------------
------------- -------------- -------------
1999 1998 1997
------------- -------------- -------------
Cash payments made during the year
on account of:
Income taxes $ 4,452 $ 2,477 $ 239
------------- -------------- -------------
------------- -------------- -------------
Interest $ 1,460 $ 3,226 $ 1,905
------------- -------------- -------------
------------- -------------- -------------
Depreciation and amortization comprise the
following:
Capital assets 5,395 3,557 2,902
Goodwill 2,393 1,267 706
Other 357 453 157
------------- -------------- -------------
$ 8,145 $ 5,277 $ 3,765
------------- -------------- -------------
------------- -------------- -------------
Advertising costs $ 5,921 $ 5,112 $ 4,942
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
COMPONENTS OF ACCRUED LIABILITIES: 1999 1998
------------- --------------
<S> <C> <C>
Accrued payroll and benefits $ 8,477 $ 5,949
Customer advances 3,727 1,846
Other 5,653 3,105
------------- --------------
$17,857 $10,900
------------- --------------
------------- --------------
</TABLE>
63
<PAGE>
13. FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's significant
financial instruments as at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents $4,627 $4,627 $2,629 $2,629
Other receivables 3,425 3,317 1,108 1,108
Long-term debt including current portion 86,242 86,242 45,358 45,358
Interest rate swap contract receivable (payable) - (148) - 37
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
(D) LEASE COMMITMENTS
Minimum operating lease payments are as follows:
Year ending March 31
2000 $7,469
2001 5,946
2002 4,801
2003 3,342
2004 2,240
Thereafter 7,880
During the years ended March 31, 1999, 1998 and 1997,
rent expense was $7,136, $4,701 and $3,794, respectively.
(E) 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 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.
(F) 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 AND FRANCHISED OPERATIONS INFORMATION
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 primarily painting and decorating services. The
business services group provides services to
64
<PAGE>
governments, financial institutions and corporations wishing to
outsource a variety of non-core, primarily labor intensive,
"back office" functions. Operating segmented information is
as follows:
<TABLE>
<CAPTION>
1999 PROPERTY PROPERTY BUSINESS RECONCILING CONSOLIDATED
SERVICES SERVICES SERVICES ITEMS
(FRANCHISED) (COMPANY
OWNED)
------------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
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 $ 38,667 $ 83,968 $ 49,295 $12,376 $184,306
------------- ----------- ----------- ------------ --------------
Total additions to fixed
assets and goodwill $ 14,782 $ 8,015 $ 23,733 $ 3,644 $ 50,174
------------- ----------- ----------- ------------ --------------
------------- ----------- ----------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
1998 PROPERTY PROPERTY BUSINESS RECONCILING CONSOLIDATED
SERVICES SERVICES SERVICES ITEMS
(FRANCHISED) (COMPANY
OWNED)
------------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
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 $ 21,707 $ 1,432 $ 3,325 $ 40,612
------------- ----------- ----------- ------------ --------------
------------- ----------- ----------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
1997 PROPERTY PROPERTY BUSINESS RECONCILING CONSOLIDATED
SERVICES SERVICES SERVICES ITEMS
(FRANCHISED) (COMPANY
OWNED)
------------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues $16,610 $ 86,297 $28,155 $ 22 $131,084
------------- ----------- ----------- ------------ --------------
Depreciation and
amortization $ 174 $ 2,664 $ 920 $ 7 $ 3,765
------------- ----------- ----------- ------------ --------------
Segment operating profit $ 1,910 $ 3,937 $ 3,866 $(1,361) $ 8,352
------------- ----------- ----------- ------------ --------------
Interest expense (2,059)
Income taxes (2,518)
Minority interest (566)
Extraordinary loss (501)
--------------
Net earnings $ 2,708
--------------
Total assets $ 6,023 $48,572 $22,029 - $ 76,624
------------- ----------- ----------- ------------ --------------
Total additions to fixed
assets and goodwill $ 433 $ 3,937 $ 9,050 - $ 13,420
------------- ----------- ----------- ------------ --------------
------------- ----------- ----------- ------------ --------------
</TABLE>
65
<PAGE>
GEOGRAPHIC SEGMENTS
CANADA
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Revenues $ 96,456 $ 91,493 $ 84,876
------------- ------------ ------------
Total assets $ 66,157 $ 49,994 $ 47,273
------------- ------------ ------------
Total fixed
assets and goodwill $ 30,968 $ 27,157 $ 21,598
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
UNITED STATES
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Revenues $166,905 $104,995 $46,208
------------- ------------ ------------
Total assets $118,149 $ 76,025 $29,351
------------- ------------ ------------
Total fixed
assets and goodwill $ 83,643 $ 48,234 $16,347
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
CONSOLIDATED
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Revenues $ 263,361 $196,488 $131,084
------------- ------------ ------------
Total assets $ 184,306 $126,019 $ 76,624
------------- ------------ ------------
Total fixed
assets and goodwill $ 114,611 $ 75,391 $ 37,945
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
FRANCHISED OPERATIONS INFORMATION
Initial franchises fees for 1999, 1998 and 1997 were $1,951, $1,754,
and $1,255, respectively.
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 2001 fiscal year. The Company is
evaluating the impact that the requirements of this Statement will have
on the accounting for its hedging activities.
17. SUBSEQUENT EVENT
REVISED CREDIT FACILITY
On April 1, 1999 the Company amended and restated its lending
agreement. The amended facilities split the senior debt facilities into
a $50 million Cdn. ($33.1 million U.S.) and a $130 million U.S.
tranche. The new facilities provide approximately $47 million Cdn.
($31.2 million U.S.) of additional credit over the previous $200
million Cdn. ($132.6 million U.S.) facility. Other terms of the
facilities remain unchanged from those arranged in June 1998.
66
<PAGE>
EXHIBIT 5
67
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
Harris Fulfillment, 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 Davis Systems, Harris
Fulfillment 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. Generally, these investments are depreciated over a short time
frame relative to the Company's other pool of assets. 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. 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, 1999 was approximately
42.6% of earnings before taxes, compared with 39.2% for the year ended March 31,
1998. The 1999 rate closely reflects the Company's blended statutory rate. The
Company expects its effective tax rate to closely reflect the statutory rate in
the current year and beyond. At March 31, 1999, FirstService and its
subsidiaries had no income tax loss carryforwards on an accounting basis.
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 Limited from 50.1% to 85%. In those operations where senior
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 shares of
the Company.
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 as a
result of the full year impact of the November 26, 1997 public offering of 2.5
million shares.
Revenues for the Property Services division were $205.1 million, an increase of
approximately $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 $19.9 million or 9.7% of revenue compared
to an EBITDA margin of 8.5% 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.
68
<PAGE>
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.
EBITDA grew 68% to $12.0 million, while margins grew to 20.5% from 19.5%,
primarily as a result of productivity improvements.
Corporate expenses increased to $3.2 million in 1999 from $2.3 million as a
result of higher salary costs and increased travel and legal costs related, in
part, to the investigation of prospective acquisitions which were not completed.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998
Consolidated revenues for the year ended March 31, 1998 were $196.5 million, a
50% increase from the $131.1 million reported for the year ended March 31, 1997.
The increase results from the acquisitions of The Continental Group, Inc. ($29
million) and The Wentworth Group, Inc. ($10 million), several smaller tuck-under
companies and strong internal growth in both our Property Services and Business
Services divisions.
Earnings before interest, taxes, depreciation and amortization increased 54% to
$18.6 million from $12.1 million in the prior year - while EBITDA margin
increased 24 basis points to 9.5% of revenue. The increased margins reflect the
combined effects of overhead leveraging throughout the Company, improved
pricing, and reduced costs.
Depreciation and amortization for the year ended March 31, 1998 was $5.3
million, up 40% from the previous year due largely to the inclusion of the
results from Continental and Paul Davis Systems, Inc. and the increase in
capital expenditures relative to the prior year.
Interest expense increased 57% over prior year levels, reflecting increased
borrowing primarily related to the acquisitions of Continental and Paul Davis,
partially offset by the proceeds of the November, 1997 equity offering. The
increase also reflects the lower average interest rate of the Company's current
bank facilities relative to the prior year.
The income tax provision for the year ended March 31, 1998 was approximately
39.2% of earnings before taxes, compared with 40.0% for the year ended March 31,
1997. The 1998 rate is lower than statutory rates due to the use of certain loss
carryforwards. The Company expects its effective tax rate to approximate the
statutory rate in the current year. At March 31, 1998, FirstService and its
subsidiaries had no income tax loss carryforwards on an accounting basis.
Minority interest expense increased significantly to $1.7 million from $0.6
million, reflecting strong growth in operations with higher minority interests -
and the addition of Continental and Wentworth which have 20% and 40% minority
interests, respectively.
Net earnings were $4.4 million, a 64% increase over the prior year, while
diluted earnings per share increased 37% to $0.41. Diluted earnings per share
reflect an 19% increase in the weighted average number of shares outstanding
resulting from the November 26, 1997 public offering of 2.5 million shares.
Revenues for the Property Services division were $160.0 million, up $56.9
million or 55% over the prior year. Approximately $46 million of the revenue
increase results from the acquisitions of Continental, Wentworth, Paul Davis and
several smaller tuck-under companies, with the balance resulting from internal
growth. Our security and community association management operations achieved
double-digit internal growth rates while the lawn care and franchise operations
generated high single-digit internal growth.
Property Services EBITDA grew 60% to $13.8 million or 8.7% of revenue compared
to an EBITDA margin of 8.4% in the prior year. The margin improvement reflects
productivity enhancements and some price increases, offset in part by the strong
growth of the lower margin security operations.
69
<PAGE>
Revenues for the Business Services division were $36.6 million, an increase of
30% over 1997, reflecting strong double-digit internal growth and the full year
impact of DDS Dyment Distribution Services, Ltd., acquired in August, 1996.
EBITDA grew 50% to $7.2 million, while margins grew to 19.5% from 17%, primarily
as a result of productivity improvements.
Corporate expenses increased from $1.4 million in 1997 to $2.3 million as a
result of higher salary and travel costs.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Certain segments of the Company's operations are subject to seasonal variations.
Specifically, the demand for residential lawn care services and exterior
painting services in the northern United States and in Canada is highest during
late spring, summer and early fall and very low during winter. As a result, the
franchising and some parts of the lawn care business are highly seasonal in
nature and 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.
Seasonality of the lawn care and a portion of the franchise business 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
Bank borrowings, proceeds from capital stock issues, and cashflow from
operations have historically been the funding sources for working capital
requirements, capital expenditures and acquisitions. Management believes that
funds from these sources 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 chartered 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 for acquisitions of Cdn. $50
million and U.S. $130 million. 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, 1999, the Company had drawn Cdn. $104.0 million and
U.S. $13.0 million under the credit facilities. After giving effect to the April
1, 1999 credit amendment and restatement, the amount drawn was Cdn. $4.7 million
and U.S. $80.3 million.
FirstService is exposed to foreign currency exchange risk through its U.S.
operations. At March 31, 1999, the Company's U.S. operations consisted of its
community association management operations and certain divisions or
subsidiaries of its security, franchise and business services operations. The
Company's exposure to foreign exchange losses may be mitigated as the lending
agreement provides that it may borrow in Canadian or U.S. funds.
On November 19, 1997, the Company completed a public offering of 2,500,000
common shares at U.S. $8.00 per share through a syndicate of underwriters led by
Credit Suisse First Boston and ABN AMRO Chicago Corporation. The net proceeds of
US $18.8 million or Cdn. $25.9 million were used to pay down long-term bank
debt.
During fiscal 1999, capital expenditures were approximately $5.8 million split
approximately equally between management information systems, leasehold
improvements and building expansion, and vehicles and equipment. For the
upcoming year, capital expenditures are expected to approximate 1999 levels.
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In connection with certain acquisitions, the Company has agreed to pay
additional consideration based on 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.
FirstService does not anticipate paying dividends on its outstanding shares in
the foreseeable future. Management believes that it is in the best interest of
shareholders to retain all available funds to invest in its businesses with the
objective of building long-term shareholder value.
YEAR 2000
The Company is currently in the process of addressing 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 recognize an input of two zeros (00) as the year 1900. This
incorrect date recognition could cause systems and software malfunctions that
may have a material adverse effect on business operations. This potential
problem could affect not only the Company's internal information systems 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.
COMPANY'S READINESS. Beginning in late fiscal 1997 the Company undertook a
comprehensive review of its software applications and computer infrastructure
that are likely to be affected by the Year 2000 issue. The review was completed
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 and fiscal 1999 and several upgrades will
be completed in the first half of fiscal 2000. The Company's objective is to
complete all its Y2K readiness programs by the fall of calendar 1999.
The Company presently believes that it is largely Y2K compliant and that the
Year 2000 issue will not pose significant operational problems for its computer
systems. The Company has identified its significant customers and suppliers that
it believes, at this time, to be critical to its various operations. Steps are
underway to ascertain their respective stages of readiness through the use of
questionnaires, interviews, and other available means to determine the progress
that those customers and suppliers are making in remediating their own Year 2000
issues. The Company is requiring that significant customers and suppliers
certify those products and services to be Year 2000 compliant. However, there
can be no assurance that the information systems provided by or utilized by
other companies which affect the Company's operations will be timely revised in
such a way as to allow them to continue normal business operations or furnish
products, services or data to the Company without disruption.
COST OF COMPLIANCE. Many of the systems upgrades which are dealing with Y2K
issue would have occurred in the normal course of business. In other cases, the
Company is accelerating normal course systems replacements or upgrades in view
of the Y2K issue. The costs incurred to date to replace non-compliant systems
that would not otherwise have been replaced are not material and the Company
does not expect its future Year 2000 costs to be material. All Year 2000 costs
have been funded with cash from operations.
COMPANY RISK AND CONTINGENCY PLANS. The Company's systems identified as
non-compliant or in need of replacement are being upgraded or replaced. The
Company expects this remediation to be substantially completed by year-end 1999.
If needed conversions to the Company's information systems are not made on a
timely basis or the Company's significant customers or suppliers fail to make
such remediations and conversions on a timely basis, it could have a material
adverse effect on the Company's results of operation or financial condition.
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