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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to _______
Commission File Number 0-24762
FIRSTSERVICE CORPORATION
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
(Province or other (I.R.S. employer
jurisdiction of incorporation identification number,
or organization) if applicable)
1140 BAY STREET
SUITE 4000
TORONTO, ONTARIO
CANADA M5S 2B4
(416) 960-9500
(Address and telephone number of Registrant's principal executive office)
FIRSTSERVICE CORPORATION
6300 PARK OF COMMERCE BLVD.
BOCA RATON, FLORIDA
U.S.A. 33487
(561) 989-5100
(Name, address and telephone number of agent for service in the United States)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of the Registrant's common stock as of
the latest practicable date:
Subordinate Voting Shares: 12,421,743 as of June 30, 2000
Multiple Voting Shares: 662,847 as of June 30, 2000
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FIRSTSERVICE CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2000
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
a) Statements of Earnings
For the Three Months Ended June 30, 2000 and 1999. 3
b) Balance Sheets
As of June 30, 2000 and March 31, 2000 4
c) Statements of Cash Flows
For the Three Months Ended June 30, 2000 and 1999 5
d) Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of U.S. dollars)
(Unaudited)
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Three Month Periods
Ended June 30
2000 1999
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Revenues $105,391 $84,907
Cost of revenues 69,380 56,070
Selling, general and administrative expenses 21,554 17,593
Depreciation 1,741 1,470
Amortization 977 814
Interest 2,234 1,763
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Earnings before income taxes and minority interest 9,505 7,197
Income taxes 3,800 2,859
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Earnings before minority interest 5,705 4,338
Minority interest share of earnings 1,026 754
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Net earnings $4,679 $3,584
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Earnings per share: Basic $0.36 $0.28
Diluted $0.34 $0.26
Weighted average shares outstanding (thousands): Basic 13,042 12,924
Diluted 13,648 13,788
</TABLE>
The Condensed Consolidated Statements of Earnings have been prepared in
accordance with U.S. GAAP.
3
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
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June 30 March 31
2000 2000
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(Unaudited) (Audited)
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,489 $3,297
Accounts receivable, net 60,106 53,170
Inventories 10,065 8,929
Prepaids and other assets 7,637 8,491
Deferred income taxes 1,271 1,063
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82,568 74,950
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Other receivables 5,573 4,405
Fixed assets 30,780 29,693
Other assets 4,101 4,074
Deferred income taxes 268 270
Goodwill 124,995 117,495
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165,717 155,937
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$248,285 $230,887
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $12,668 $11,752
Other current liabilities 21,126 23,013
Income taxes payable 4,106 2,879
Unearned revenue 14,627 10,725
Long-term debt - current 2,813 2,733
Deferred income taxes 387 459
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55,727 51,561
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LONG-TERM LIABILITIES
Long-term debt less current portion 109,653 102,177
Deferred income taxes 1,746 1,836
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111,399 104,013
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Minority interest 7,906 6,975
SHAREHOLDERS' EQUITY
Capital stock 54,532 53,849
Receivables pursuant to company's share purchase plan (3,294) (3,294)
Retained earnings 20,294 15,614
Cumulative other comprehensive income 1,721 2,169
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73,253 68,338
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$248,285 $230,887
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</TABLE>
The Condensed Consolidated Balance Sheets have been prepared in accordance with
U.S. GAAP.
4
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
(Unaudited)
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Three month periods
Ended June 30
2000 1999
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CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings for the period $4,679 $3,584
Items not affecting cash
Depreciation and amortization 2,718 2,284
Deferred income taxes (368) 544
Minority interest share of earnings 1,026 754
Other 113 110
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8,168 7,276
Changes in working capital, net of acquisitions
Accounts receivable (6,761) (5,885)
Inventories (1,136) (1,413)
Prepaids and other assets 893 736
Accounts payable 810 3,151
Other current liabilities (1,908) (3,739)
Income taxes payable 1,227 1,972
Unearned revenue 3,736 1,963
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Net cash provided by operating activities 5,029 4,061
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INVESTING ACTIVITIES
Acquisition of businesses (6,936) (5,822)
Purchase of minority shareholder's interest (648) --
Increase in fixed assets (2,679) (2,245)
Decrease (increase) in other assets 54 (160)
Increase in other receivables (1,168) (967)
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Net cash used for investing (11,377) (9,194)
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FINANCING ACTIVITIES
Net increase in long-term debt 6,538 11,833
Financing fees paid -- (531)
Issuance of subordinate voting shares 770 50
Repurchase of subordinate voting shares (86) --
Dividends paid to minority shareholders of subsidiaries (95) (83)
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Net cash provided by financing 7,127 11,269
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Effect of exchange rate changes on cash (587) (473)
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Increase in cash and cash equivalents during the period 192 5,663
Cash and cash equivalents, beginning of period 3,297 4,627
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Cash and cash equivalents, end of period $3,489 $10,290
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</TABLE>
The Condensed Consolidated Statements of Cash Flows have been prepared in
accordance with U.S. GAAP.
5
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FIRSTSERVICE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(in thousands of U.S. dollars)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS - FirstService Corporation (the "Company")
is a provider of property and business services to corporate, public
sector and residential customers in the United States and Canada. The
Company's operations are conducted through two principal operating
divisions, Property Services and Business Services. The Property
Services division includes residential property management, security
and consumer services and represented approximately 80% of the
Company's revenues for the year ended March 31, 2000. The Business
Services division provides outsourcing services such as transaction
processing and literature fulfillment for corporations and government
agencies.
2. SUMMARY OF PRESENTATION - The condensed consolidated financial
statements included herein have been prepared by FirstService
Corporation, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission for the presentation of interim
financial information. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information not
misleading. In the opinion of management, the condensed consolidated
financial statements contain all adjustments necessary to present
fairly the financial position of the Company as of June 30, 2000 and
the results of its operations for the three months ended June 30, 2000
and 1999 and its cash flows for the three months ended June 30, 2000
and 1999. All such adjustments are of a normal recurring nature. The
results of operations for the three months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ended
March 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended March 31,
2000 contained in the Company's Form 10-K filed on June 29, 2000.
3. ANNOUNCED ACQUISITIONS SUBSEQUENT TO JUNE 30, 2000 - On July 20, 2000,
the Company announced that it had completed five acquisitions in its
Property Services division. Four of these were in Management
Services, including: Argold Management which serves 200 properties
and 25,000 residential units in the New York City market; two
acquisitions in painting, concrete restoration and plumbing to
expand the Company's ability to cross-sell maintenance services to
managed communities in South Florida; and Poolman, Inc., the leading
swimming pool management company in Phoenix, Arizona which increases
the cross-selling potential to more than 120 communities managed by
the Company in that region. The fifth acquisition was in Security
Services, where the Company acquired BLW, Inc. (operating as
Security Services and Technologies ("SST")). SST is a leading
provider of electronic security systems and integration services to
large corporations and governments in the Pennsylvania and New
Jersey regions. These five acquisitions generated revenues of
approximately $20,000 during the calendar year ended December 31,
1999.
4. LONG-TERM DEBT - On April 1, 1999, the Company amended and restated its
lending agreement increasing credit availability by approximately U.S.
$30,000 and splitting the facilities into tranches of Cdn. $50,000 and
U.S. $130,000. The amended facilities, which will be used for
acquisitions, capital expenditures and working capital, provide a more
tax efficient structure and more effectively match long-term U.S.
dollar denominated assets with U.S. dollar denominated debt.
6
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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%.
As security for the revolving credit 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.
5. COMPREHENSIVE INCOME - Total comprehensive income was approximately
$4,230 and $3,150 for the three months ended June 30, 2000 and 1999,
respectively. Total comprehensive income includes net earnings and
foreign currency exchange adjustments.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains or incorporates by reference certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company intends that such forward-looking
statements be subject to the safe harbors created by such legislation. Such
forward-looking statements involve risks and uncertainties and include, but are
not limited to, statements regarding future events and the Company's plans,
goals and objectives. Such statements are generally accompanied by words such as
"intend", "anticipate", "believe", "estimate", "expect" or similar statements.
The Company's actual results may differ materially from such statements. Among
the factors that could result in such differences are the impact of weather
conditions, increased competition, labor shortages, the condition of the United
States and Canadian economies and the ability of the Company to make
acquisitions at reasonable prices. Although the Company believes that the
assumptions underlying its forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in such forward-looking statements will be
realized. The inclusion of such forward-looking statements should not be
regarded as a representation by the Company or any other person that the future
events, plans or expectations contemplated by the Company will be achieved. The
Company notes that past performance in operations and share price are not
necessarily predictive of future performance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues increased $20.5 million, or 24%, to $105.4 million in the first quarter
of fiscal 2000 from $84.9 million in the first quarter of fiscal 1999.
Approximately $10 million of the increase is attributable to acquired companies
owned less than one year including American Pool Enterprises ("APE"), DDS
Southwest Distribution ("DDS SW") and several smaller tuck-under companies.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 29% to $14.5 million from $11.2 million in the prior year period.
EBITDA margins for the three months ended June 30, 2000, increased 50 basis
points to 13.7% compared to 13.2% in the prior year. The margin improvement is
primarily the result of the inclusion for the full quarter of APE and DDS SW,
which are seasonal businesses that generate very high margins in the June and
September quarters. The consolidated margin was also positively impacted by
improved margins in the Business Services division driven by productivity
improvements.
Depreciation for the quarter ended June 30, 2000 was $1.7 million, up 18% from
the prior year quarter due largely to acquisitions. The increase also reflects
continued capital investment in management information systems over the past
year in our Management Services operations. Generally, these investments are
depreciated over a short time frame
8
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relative to the Company's other pool of assets. Amortization was $1.0 million,
up 20% due to the increase in goodwill resulting from acquisitions completed
during the past year.
Interest expense increased 27% over prior year levels to $2.2 million as a
result of increased borrowings related to acquisitions and higher interest
rates. All acquisitions completed during the past year have been financed
through the Company's credit facilities.
The income tax provision for the second quarter was approximately 40% of
earnings before taxes, consistent with the prior year.
Minority interest expense increased to $1.0 million or 18.0% of earnings before
minority interest from $0.8 million or 17.4% in the prior year quarter. The 36%
increase reflects the 31% increase in earnings and a change in the mix of
earnings relative to the prior year as certain operations having higher minority
shareholdings contributed more to consolidated earnings.
Net earnings were $4.7 million, up 31% over the prior year, while diluted
earnings per share increased 31% to $0.34. Adding back amortization would result
in cash earnings per share of $0.41 for the quarter compared to $0.32 in the
prior year.
Revenues for the Property Services division were $86.4 million, an increase of
approximately $17.3 million or 25% over the prior year. Approximately $8.0
million of the revenue increase resulted from acquisitions including APE, which
closed effective June 1, 1999 and several tuck-under companies. The balance of
the increase resulted from internal growth. Property Services EBITDA grew 26% to
$11.6 million or 13.5% of revenue compared to $9.2 million or 13.3% of revenue
in the prior year.
Revenues for the Business Services division rose to $19.0 million for the first
quarter, a 20% increase over the prior year, reflecting 8% internal growth and
the acquisition of DDS SW which was completed effective July 1, 1999. Business
Services EBITDA was $4.0 million or 21% of revenue, compared to $3.1 million and
19.6% of revenue in the prior year. The margin improvement was driven by
productivity improvements and mix change as discussed above.
Corporate expenses increased to $1.2 million in the first quarter from $1.1
million in the prior year period.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Certain segments of the Company's operations, which in the aggregate comprise
approximately 15% of revenues, are subject to seasonal variations. Specifically,
the demand for residential lawn care services, exterior painting services, and
commercial pool maintenance in the northern United States and in Canada is
highest during late spring, summer and early fall and very low during winter. As
a result, these operations generate a large percentage of their annual revenues
between April and September. The Company has historically generated lower
profits or net losses during its third and fourth fiscal quarters, from October
to March. The management services, security, business services and many of the
franchise systems generate revenues approximately evenly throughout the fiscal
year.
9
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The seasonality of the lawn care, painting and pool maintenance operations
results in variations in quarterly EBITDA margins. Variations in quarterly
EBITDA margins can also be caused by acquisitions 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 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 June 30, 2000, the Company had drawn Cdn
$5.5 million and US $104.4 million.
The Company is exposed to foreign currency exchange risk however the exposure
may be mitigated as the lending agreement provides that it may borrow in
Canadian or U.S. funds.
During the first quarter, capital expenditures were approximately $2.7 million
split approximately equally between management information systems, leasehold
improvements and vehicles and equipment.
In connection with certain acquisitions, the Company has agreed to pay
additional consideration based on operating results of the acquired entities.
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.
10
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PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 17, 2000, the Registrant purchased 351 Class D shares of its subsidiary,
The Franchise Company Inc., from a minority shareholder. As consideration,
69,360 of the Registrant's Subordinate Voting Shares with a value of Cdn.
$971,000 (U.S. $648,000) were issued.
The Subordinate Voting Shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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a) Exhibits
3.1* Articles of Incorporation and Amendment
3.2* By-Laws and Amendments
10.1* Credit Facility dated April 1, 1999 among the company and a
syndicate of bank lenders
10.2** FirstService Corporation Amended Stock Option Plan #2
10.3** FirstService Corporation Amended Share Purchase Plan #2
b) Reports on Form 8-K
None.
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* Incorporated by reference to the Company's report on Form 10-Q for the
period ended June 30, 1999.
** Incorporated by reference to the Company's report on Form 10-K for the year
ended March 31, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2000
FIRSTSERVICE CORPORATION
By: D. SCOTT PATTERSON
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D. SCOTT PATTERSON
Senior Vice President and Chief Financial Officer
(Principal Financial Officer & Authorized Signatory)
13
