UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-24762
FIRSTSERVICE CORPORATION
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA NOT APPLICABLE
(State or other (I.R.S. employer
jurisdiction of incorporation identification number,
or organization) if applicable)
FIRSTSERVICE BUILDING
1140 BAY STREET, SUITE 4000
TORONTO, ONTARIO, CANADA
M5S 2B4
(416) 960-9500
(Address and telephone number of Registrant's principal executive office)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] or No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date:
Subordinate Voting Shares - 12,928,643 as of October 31, 2001
Multiple Voting Shares - 662,847 as of October 31, 2001
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FIRSTSERVICE CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A) STATEMENTS OF EARNINGS FOR THE THREE MONTHS
AND SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 3
B) BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND MARCH 31, 2001 4
C) STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 5
D) NOTES TO THE FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands of U.S. dollars, except per share amounts) - in accordance with
U.S. generally accepted accounting principles.
Three month periods Six month periods
ended September 30 ended September 30
2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------------
(NOTE 3) (NOTE 3)
Revenues $140,468 $118,166 $277,043 $223,557
Cost of revenues 90,347 75,286 179,705 144,666
Selling, general and administrative expenses 28,109 23,430 56,566 44,984
Depreciation 2,777 1,825 5,529 3,566
Amortization 123 1,096 327 2,073
Interest 3,283 2,477 5,951 4,711
-------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interest 15,829 14,052 28,965 23,557
Income taxes 5,303 5,616 9,898 9,416
-------------------------------------------------------------------------------------------------------------------------
Earnings before minority interest 10,526 8,436 19,067 14,141
Minority interest share of earnings 1,688 1,507 3,139 2,533
-------------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary item 8,838 6,929 15,928 11,608
-------------------------------------------------------------------------------------------------------------------------
Extraordinary loss on early retirement of debt, net of
income tax benefit of $578 - - 797 -
-------------------------------------------------------------------------------------------------------------------------
Net earnings $ 8,838 $ 6,929 $ 15,131 $ 11,608
=========================================================================================================================
EARNINGS PER SHARE
Net earnings before extraordinary item: Basic $ 0.65 $ 0.53 $ 1.18 $ 0.89
Diluted $ 0.61 $ 0.50 $ 1.10 $ 0.85
Net earnings: Basic $ 0.65 $ 0.53 $ 1.12 $ 0.89
Diluted $ 0.61 $ 0.50 $ 1.04 $ 0.85
Weighted average shares outstanding: Basic 13,515 13,061 13,456 13,052
(in thousands) Diluted 14,571 13,728 14,488 13,684
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars) - in accordance with U.S. generally accepted
accounting principles.
SEPTEMBER 30, 2001 March 31, 2001
-------------------------------------------------------------------------------------------------------------
(UNAUDITED)
(NOTE 3) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,982 $ 5,115
Accounts receivable, net 88,089 79,473
Inventories 9,505 9,627
Prepaids and other assets 10,672 10,757
Deferred income taxes 1,070 1,136
-------------------------------------------------------------------------------------------------------------
113,318 106,108
-------------------------------------------------------------------------------------------------------------
Other receivables 5,946 5,092
Fixed assets 43,624 40,741
Other assets 5,470 4,025
Deferred income taxes 1,488 1,472
Intangible assets 29,506 29,547
Goodwill 140,929 126,675
-------------------------------------------------------------------------------------------------------------
226,963 207,552
-------------------------------------------------------------------------------------------------------------
$340,281 $313,660
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,120 $ 22,220
Accrued liabilities 28,042 34,001
Income taxes payable 8,036 2,436
Unearned revenue 3,733 9,505
Long-term debt - current (note 4) 5,103 3,050
Deferred income taxes 43 558
-------------------------------------------------------------------------------------------------------------
71,077 71,770
-------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt less current portion (note 4) 156,369 149,374
Deferred income taxes 4,370 4,236
-------------------------------------------------------------------------------------------------------------
160,739 153,610
-------------------------------------------------------------------------------------------------------------
Minority interest 12,391 8,824
-------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 56,582 54,863
Receivables pursuant to share purchase plan (3,055) (3,196)
Retained earnings 43,103 27,972
Cumulative other comprehensive loss (556) (183)
-------------------------------------------------------------------------------------------------------------
96,074 79,456
-------------------------------------------------------------------------------------------------------------
$340,281 $313,660
=============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of U.S. dollars) - in accordance with U.S. generally accepted
accounting principles.
Six month periods
ended September 30
2001 2000
---------------------------------------------------------------------------------------------------------
(NOTE 3)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings $ 15,131 $ 11,608
Items not affecting cash:
Depreciation and amortization 5,856 5,639
Deferred income taxes (330) (282)
Minority interest share of earnings 3,139 2,533
Extraordinary loss on early retirement of debt 1,375 -
Other 220 226
---------------------------------------------------------------------------------------------------------
25,391 19,724
Changes in operating assets and liabilities:
Accounts receivable (5,644) (7,194)
Inventories 366 (2,379)
Prepaids and other assets 179 2,784
Accounts payable and other current liabilities 432 539
Unearned revenue (6,109) (7,323)
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,615 6,151
---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (10,292) (17,908)
Purchase of minority shareholders' interest (3,322) (649)
Purchases of fixed assets, net (7,999) (4,954)
Increase (decrease) in intangibles and other assets (257) 126
Increase in other receivables (718) (1,484)
---------------------------------------------------------------------------------------------------------
Net cash used for investing (22,588) (24,869)
---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long-term debt, net 8,791 17,665
Financing fees paid (2,994) -
Issuance of Subordinate Voting Shares, net of repurchases 1,719 253
Dividends paid to minority shareholders of subsidiaries (96) (145)
---------------------------------------------------------------------------------------------------------
Net cash provided by financing 7,420 17,773
---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (580) (892)
---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents during the period (1,133) (1,837)
Cash and cash equivalents, beginning of period 5,115 3,297
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,982 $ 1,460
=========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTSERVICE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
(in thousands of U.S. dollars, except per share amounts)
1. DESCRIPTION OF THE BUSINESS - FirstService Corporation (the "Company")
is a provider of property and business services to residential,
corporate and public sector customers in the United States and Canada.
The Company's operations are conducted through two operating divisions,
Property Services and Business Services. The Property Services division
includes Residential Property Management, Integrated Security Services
and Consumer Services and represented approximately 80% of the
Company's revenues for the year ended March 31, 2001. The Business
Services division provides customer support & fulfillment and business
process outsourcing services to corporations and government agencies.
2. SUMMARY OF PRESENTATION - The condensed consolidated financial
statements included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial
information. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information not
misleading.
In the opinion of management, the condensed consolidated financial
statements contain all adjustments necessary to present fairly the
financial position of the Company as of September 30, 2001 and the
results of its operations for the three and six month periods ended
September 30, 2001 and 2000 and its cash flows for the six months ended
September 30, 2001 and 2000. All such adjustments are of a normal
recurring nature. The results of operations for the three and six
months ended September 30, 2001 are not necessarily indicative of the
results to be expected for the year ending March 31, 2002. For further
information, refer to the consolidated financial statements and
footnotes thereto for the year ended March 31, 2001 contained in the
Company's Form 10-K filed on June 29, 2001.
3. ADOPTION OF NEW ACCOUNTING STANDARDS - Effective April 1, 2001, the
Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142 - GOODWILL AND OTHER INTANGIBLE ASSETS. These standards require
the Company to no longer amortize goodwill. This results in a material
increase in net earnings and earnings per share. The comparative
Condensed Consolidated Balance Sheet has been restated to reclassify
intangibles from goodwill.
The prior period Condensed Consolidated Statements of Earnings have
not been restated for the impact of SFAS No. 142. The tables below
provide a reconciliation of previously reported earnings to the
earnings adjusted for SFAS No. 142.
-7-
Three months ended Six months ended
September 30 September 30
2001 2000 2001 2000
-------------- ------------ ------------ ------------
Reported net earnings before extraordinary item $8,838 $6,929 $15,928 $11,608
Goodwill amortization - 870 - 1,682
Minority interest - (78) - (152)
-------------- ------------ ------------ ------------
Adjusted net earnings before extraordinary item $8,838 $7,721 $15,928 $13,138
-------------- ------------ ------------ ------------
Reported net earnings $8,838 $6,929 $15,131 $11,608
Goodwill amortization - 870 - 1,682
Minority interest - (78) - (152)
-------------- ------------ ------------ ------------
Adjusted net earnings $8,838 $7,721 $15,131 $13,138
-------------- ------------ ------------ ------------
NET EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM:
BASIC
Reported $ 0.65 $ 0.53 $ 1.18 $ 0.89
Goodwill amortization - 0.06 - 0.13
Minority interest - - - (0.01)
-------------- ------------ ------------ ------------
Adjusted $ 0.65 $ 0.59 $ 1.18 $ 1.01
-------------- ------------ ------------ ------------
DILUTED
Reported $ 0.61 $ 0.50 $ 1.10 $ 0.85
Goodwill amortization - 0.06 - 0.12
Minority interest - - - (0.01)
-------------- ------------ ------------ ------------
Adjusted $ 0.61 $ 0.56 $ 1.10 $ 0.96
-------------- ------------ ------------ ------------
NET EARNINGS PER SHARE:
BASIC
Reported $ 0.65 $ 0.53 $ 1.12 $ 0.89
Goodwill amortization - 0.06 - 0.13
Minority interest - - - (0.01)
-------------- ------------ ------------ ------------
Adjusted $ 0.65 $ 0.59 $ 1.12 $ 1.01
-------------- ------------ ------------ ------------
DILUTED
Reported $ 0.61 $ 0.50 $ 1.04 $ 0.85
Goodwill amortization - 0.06 - 0.12
Minority interest - - - (0.01)
-------------- ------------ ------------ ------------
Adjusted $ 0.61 $ 0.56 $ 1.04 $ 0.96
-------------- ------------ ------------ ------------
4. LONG-TERM DEBT - On June 29, 2001, the Company amended and restated its
lending agreement to allow for the issuance of additional debt. The
amended and restated agreement provides a $140 million committed senior
revolving credit facility (the "Credit Facility") renewable and
extendible in 364-day increments, and if not renewed, a two-year final
maturity. The Credit Facility allows for borrowing in either U.S. or
Canadian currency and bears interest at 1.50% to 3.00% over floating
reference rates, depending on certain leverage ratios. At September 30,
2001, the Company had drawn $50.2 million on the Credit Facility, and
had $89.8 million of available un-drawn credit.
Also on June 29, 2001, the Company completed a private placement of
$100 million of 8.06% fixed-rate Senior Secured Notes (the "Notes").
The Notes have a final maturity of ten years, with equal annual
principal repayments beginning at the end of the fourth year, resulting
in a seven-year average life.
-8-
The Credit Facility and the Notes rank equally in terms of security.
The Company has granted the lenders and Note-holders various security
including the following: an interest in all of the assets of the
Company including the Company's share of its subsidiaries, an
assignment of material contracts and an assignment of the Company's
"call rights" with respect to shares of the subsidiaries held by
minority interests.
The covenants and other limitations within the amended lending
agreement and the Note agreement are substantially the same. The
covenants require the Company to maintain certain ratios including
leverage, fixed charge coverage, interest coverage and net worth. Other
limitations include prohibition from paying dividends, and without
prior approval, from undertaking certain mergers, acquisitions and
dispositions.
5. COMPREHENSIVE INCOME - Total comprehensive income was $8,592 and $5,870
for the three months ended September 30, 2001 and 2000, respectively
and $14,758 and $10,101 for the six months ended September 30, 2001 and
2000, respectively. Total comprehensive income includes net earnings,
foreign currency exchange adjustments and current income taxes on
realized foreign exchange gains for income tax purposes.
6. SEGMENTED INFORMATION - Within the Property Services division, three
operating units (Residential Property Management, Integrated Security
Services and Consumer Services) provide a variety of services to
residential and commercial customers. The Business Services division
provides customer support & fulfillment and business process
outsourcing services to corporate and institutional clients.
OPERATING SEGMENTS
Property Property
Services - Services - Property
Residential Integrated Services
Property Security Consumer Business
Management Services Services Services Corporate Consolidated
------------- ------------- ----------- ----------- ----------- -------------
THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2001
Revenues $ 58,325 $23,399 $27,238 $ 31,448 $ 58 $140,468
------------- ------------- ----------- ----------- ----------- -------------
Operating profit 5,959 1,494 7,443 5,467 (1,251) 19,112
------------- ------------- ----------- ----------- ----------- -------------
Total assets 91,564 51,960 69,141 122,205 5,411 340,281
------------- ------------- ----------- ----------- ----------- -------------
THREE MONTH PERIOD ENDED
SEPTEMBER 30, 2000
Revenues $ 50,771 $20,516 $24,548 $ 22,246 $ 85 $118,166
------------- ------------- ----------- ----------- ----------- -------------
Operating profit 5,013 1,482 6,584 4,583 (1,133) 16,529
------------- ------------- ----------- ----------- ----------- -------------
Total assets 93,351 36,237 52,749 72,955 4,825 260,117
------------- ------------- ----------- ----------- ----------- -------------
SIX MONTH PERIOD
ENDED SEPTEMBER 30, 2001
Revenues $115,320 $46,273 $52,851 $ 62,479 $ 120 $277,043
------------- ------------- ----------- ----------- ----------- -------------
Operating profit 11,920 3,089 12,575 9,764 (2,432) 34,916
------------- ------------- ----------- ----------- ----------- -------------
SIX MONTH PERIOD
ENDED SEPTEMBER 30, 2000
Revenues $ 97,382 $35,747 $49,075 $ 41,223 $ 130 $223,557
------------- ------------- ----------- ----------- ----------- -------------
Operating profit 9,651 2,091 11,014 7,865 (2,353) 28,268
------------- ------------- ----------- ----------- ----------- -------------
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GEOGRAPHIC SEGMENTS
CANADA UNITED STATES CONSOLIDATED
------------- --------------- -------------
THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2001
Revenues $ 45,251 $ 95,217 $140,468
------------- --------------- -------------
Total assets 107,296 232,985 340,281
------------- --------------- -------------
THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2000
Revenues $ 33,742 $ 84,424 $118,166
------------- --------------- -------------
Total assets 60,466 199,651 260,117
------------- --------------- -------------
SIX MONTH PERIOD
ENDED SEPTEMBER 30, 2001
Revenues $ 93,125 $183,918 $277,043
------------- --------------- -------------
SIX MONTH PERIOD
ENDED SEPTEMBER 30, 2000
Revenues $ 65,936 $157,621 $223,557
------------- --------------- -------------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in U.S. dollars)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains or incorporates by reference certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company intends that such forward-looking
statements be subject to the safe harbors created by such legislation. Such
forward-looking statements involve risks and uncertainties and include, but are
not limited to, statements regarding future events and the Company's plans,
goals and objectives. Such statements are generally accompanied by words such as
"intend", "anticipate", "believe", "estimate", "expect" or similar statements.
The Company's actual results may differ materially from such statements.
Among the factors that could result in such differences are the impact of
weather conditions, increased competition, labor shortages, the condition of the
United States and Canadian economies, changes in interest rates, changes in the
value of the Canadian dollar relative to the U.S. dollar, and the ability of the
Company to make acquisitions at reasonable prices.
Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in such forward-looking statements will be realized. The inclusion
of such forward-looking statements should not be regarded as a representation by
the Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company notes that past
performance in operations and share price are not necessarily predictive of
future performance.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues increased $22.3 million, or 19%, to $140.5 million in the second
quarter of fiscal 2002 from $118.2 million in the second quarter of fiscal 2001.
Approximately $16.5 million of the revenue increase is attributable to acquired
companies owned less than one year including Herbert A. Watts Ltd. ("Watts"),
and several smaller tuck-under acquisitions.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased 13% to $22.0 million from $19.5 million in the prior year period. The
EBITDA margin for the three months ended September 30, 2001 was 15.7%, down 80
basis points versus the prior year. The decrease in margin was a result of a
change in business mix reflecting the impact of recent acquisitions of
non-seasonal businesses including Watts and several residential property
management companies. These acquisitions have consistent year-round margins that
were lower during the second quarter than the Company's seasonal businesses,
which carry high margins in the second quarter. Seasonal fluctuations are
discussed in more detail later in this discussion.
The Canadian dollar weakened 4.3% relative to the U.S. dollar from the prior
year period, which negatively impacted reported revenues and EBITDA on
translation by approximately $2 million and $250,000, respectively.
Approximately 32% of the Company's revenues for the quarter were denominated in
Canadian currency. Foreign currency risk is described in greater detail in Item
7A of the Company's Form 10-K for the year ended March 31, 2001.
-11-
Depreciation for the quarter ended September 30, 2001 was $2.8 million, up 52%
from the prior year quarter due largely to acquisitions. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142 GOODWILL AND OTHER
INTANGIBLE ASSETS, effective April 1, 2001, goodwill is no longer being
amortized in the Statement of Earnings.
Interest expense for the quarter increased 33% over prior year levels to $3.3
million as a result of increased borrowings related to acquisitions and a higher
average borrowing rate due to the 8.06% Senior Secured Notes (the "Notes")
issued at the end of the first quarter. All acquisitions and related payments
completed during the past year have been financed through the Company's Credit
Facility.
The income tax provision for the second quarter was approximately 34% of
earnings before taxes, lower than the 40% recorded in the prior year. The
decline in the tax rate is primarily the result of the implementation of SFAS
No. 142.
Minority interest increased to $1.7 million or 16.0% of earnings before minority
interest from $1.6 million or 17.0% in the prior year quarter (adjusted for SFAS
No. 142). The 6% increase in minority interest versus the 13% increase in
earnings before minority interest (adjusted for SFAS No. 142) reflects the
acquisition by the Company of certain minority shareholdings during the past
year, including the 14.9% minority interest in Intercon Security Ltd. and the
10% minority interest in California Closet Company Inc. ("California Closets").
Net earnings were $8.8 million, up 14% over the prior year period (adjusted for
SFAS No. 142), while diluted earnings per share increased 9% to $0.61 from
$0.56. The increase in diluted earnings per share was tempered by a 3% increase
in the weighted average share count as a result of shares issued upon the
exercise of options and an increase in dilution caused by the 95% increase in
the average market price of the Company's shares relative to the prior year.
Revenues for the Property Services division were $109.0 million, an increase of
$13.1 million or 14% over the prior year. Adjusting for the impact of foreign
exchange, revenue growth was 15% and internal growth 8%. Property Services
EBITDA grew 9% to $16.6 million or 15.2% of revenue compared to $15.2 million or
15.8% of revenues in the prior year. The Property Services division is comprised
of three service lines - Residential Property Management, Integrated Security
Services and Consumer Services.
Residential Property Management revenues were $58.3 million for the quarter, up
15% over the prior year. EBITDA grew 10% to $6.8 million, while EBITDA margins
decreased to 11.7% from 12.3% last year as a result of more non-seasonal
business in the service mix in the current year. Organic revenue growth was 9%,
with the balance coming from acquisitions completed in the past twelve months,
including Dickinson Management, a full-service residential property management
company operating in Palm Beach County, FL, and Equity Management, a New York
City property management company.
Integrated Security Services revenues advanced to $23.4 million, up 14% over the
prior year. Adjusting for the impact of foreign exchange, revenue growth was 17%
and internal growth 13%. EBITDA was $1.8 million, up 3% over the prior year's
figure, while EBITDA margins declined to 7.8% from 8.6% in the prior year
quarter. The margin decline resulted from strong security officer revenues,
which generated low margins and altered the sales mix relative to the prior
year.
Consumer Services revenues were $27.2 million, an increase of 11% over last
year, while EBITDA increased to $7.9 million, up 10%. Revenue growth was
attributable to the Creative Closets Boston
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"branchise" acquisition completed in October 2000 and the acquisition of the
California Closets Seattle "branchise" in July 2001. Adjusting for the impact of
foreign exchange, revenue growth was 13% and internal growth 2%. Revenues were
also impacted by the continuing decline in product sales at California Closets.
California Closets has historically provided laminated board and other supplies
to franchisees, but has decided to transition away from this practice and
instead facilitate direct relationships between franchisees and product
suppliers. This has the impact of lowering revenue and inventory but increasing
margins. Board sales were $1 million less in the current quarter than in the
prior year quarter. Adjusting for this, internal revenue growth was 5%. The
Consumer Services EBITDA margin was 29.0% compared to 29.2% in the prior year
period.
Business Services division revenues climbed to $31.4 million for the second
quarter, a 41% increase over the prior year entirely from the impact of the
acquisition of Watts. Year-over-year organic growth was negligible. The BDP
business process outsourcing unit had strong internal growth of 22%, while the
DDS customer support & fulfillment operations were down 8% versus the prior year
as a result of reduced order volume from existing clients. The Company
anticipates customer support & fulfillment revenues will remain below prior year
levels for the balance of the year. Business Services EBITDA increased to $6.7
million or 21.2% of revenue, compared to $5.4 million and 24.1% of revenue in
the prior year. The margin decline is attributable to the change in service mix
resulting from the Watts acquisition.
Quarterly corporate expenses rose slightly to $1.2 million versus $1.1 million
in the prior year period.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues were $277.0 million in the first half of fiscal 2002, up from $223.6
million in the first half of fiscal 2001, an increase of $53.5 million or 24%.
Approximately $38.5 million of the increase is attributable to acquired
companies owned less than one year including Watts and several smaller
tuck-under acquisitions.
EBITDA increased 20% to $40.8 million from $33.9 million in the prior year
period. The EBITDA margin for the six months ended September 30, 2001 was 14.7%,
down 50 basis points versus the prior year.
The Canadian dollar was 4.2% weaker relative to the U.S. dollar during the
period than in the same period last year. If exchange rates were held constant,
revenues and EBITDA for the current six months would have been approximately $4
million and $500,000 higher, respectively. Approximately 34% of the Company's
year-to-date revenues were denominated in Canadian currency.
Depreciation for the six months ended September 30, 2001 was $5.5 million, up
55% from the prior year due largely to acquisitions. In accordance with SFAS No.
142, effective April 1, 2001, goodwill is no longer being amortized in the
Statement of Earnings.
Interest expense for the period increased 26% over prior year levels to $6.0
million as a result of increased borrowings related to acquisitions and a higher
average borrowing rate from the private placement of 8.06% Notes completed June
29, 2001.
The year-to-date income tax provision was approximately 34% of earnings before
taxes, lower than the 40% recorded in the prior year, primarily as a result of
the implementation of SFAS No. 142.
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Minority interest increased to $3.1 million or 16.5% of earnings before minority
interest from $2.7 million or 17.0% in the prior year (adjusted for SFAS No.
142). The 17% increase in minority interest reflects the 21% increase in
earnings before minority interest together with the acquisitions of certain
minority shareholdings during the past year.
Net earnings before the extraordinary item were $15.9 million, up 21% over the
prior year period (adjusted for SFAS No. 142), while diluted earnings per share
increased 15% to $1.10 from $0.96. The increase in diluted earnings per share
reflects a 3% increase in the weighted average share count as a result of shares
issued upon the exercise of options and an increase in dilution caused by the
85% increase in the average market price of the Company's shares relative to the
prior year.
At the time of the issuance of the Notes and the completion of the Credit
Facility on June 29, 2001, the Company wrote off the financing fees related to
its previous debt arrangements. This resulted in an extraordinary loss, net of
taxes, of $797,000.
Revenues for the Property Services division were $214.4 million, an increase of
$32.2 million or 18% over the prior year due to internal growth of approximately
8% as well as several acquisitions. Property Services EBITDA grew 16% to $31.0
million or 14.5% of revenues compared to $26.8 million or 14.7% of revenues in
the prior year. The Property Services division is comprised of three service
lines - Residential Property Management, Integrated Security Services and
Consumer Services.
Residential Property Management revenues were $115.3 million for the six months,
up 18% over the prior year. EBITDA grew 17% to $13.9 million, while EBITDA
margins decreased slightly to 12.1% from 12.2% last year. Organic revenue growth
was 9%, with the balance of growth coming from acquisitions completed in the
past eighteen months.
Integrated Security Services posted revenues of $46.3 million, up 29% over the
prior year, of which 13% came from internal growth. EBITDA was $3.7 million, up
37% over the prior year's figure, while EBITDA margins increased to 8.0% from
7.6% in the prior year six month period.
In Consumer Services, revenues advanced to $52.9 million, an increase of 8% over
last year, while EBITDA increased to $13.4 million, up 9%. The margin was 25.3%
compared to 24.9% in the prior year period. Revenue growth was attributable to
the Creative Closets Boston acquisition completed in October 2000 and the
acquisition of California Closets Seattle in July 2001. Both acquisitions are
franchises of the Company's California Closets franchise system, and were
acquired as part of the Company's "branchising" strategy.
Revenues for the Business Services division rose to $62.5 million for the six
months, a 52% increase over the prior year primarily from the impact of the
acquisition of Watts. Internal growth approximated 5% for the six months, with
the BDP business process outsourcing unit making gains with its student loan and
Canadian federal government contracts offset by volume declines in customer
support & fulfillment operations. Business Services EBITDA increased to $12.1
million or 19.4% of revenue, compared to $9.4 million and 22.8% of revenue in
the prior year. The margin decline is attributable to the change in service mix
resulting from the Watts acquisition.
Corporate expenses increased slightly to $2.4 million versus $2.3 million in the
prior year.
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OUTLOOK FOR REMAINDER OF FISCAL YEAR
On October 24, 2001, FirstService announced its outlook for the remainder of the
year. For fiscal 2002, annual revenues are expected to be in the range of
$510-$520 million, EBITDA in the range of $58-$59.5 million and diluted earnings
per share before the extraordinary item in the range of $1.30-$1.35. Revenues
and earnings from any acquisitions completed before year-end would be
incremental to these amounts.
These amounts, with the exception of diluted earnings per share, are in line
with management's stated objective of achieving a minimum of 20% annual growth
in these areas. The outlook represents revenue growth of 20-23% and EBITDA
growth of 21-24%. SFAS No. 142 has an impact on the calculation of earnings per
share growth in the current year. Starting with last year's reported (pre-SFAS
No. 142) diluted earnings per share of $0.92, 20% growth in the current year
would result in diluted earnings per share of $1.10 for fiscal 2002. The annual
impact of the implementation of SFAS No. 142 is estimated to be an earnings
increase of $0.24, which would result in diluted earnings per share of $1.34,
which is within the range.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Certain segments of the Company's operations, which in the aggregate comprise
approximately 15% of revenues, are subject to seasonal variations. Specifically,
the demand for residential lawn care, exterior painting, and commercial swimming
pool services in the northern United States and Canada is highest during late
spring, summer and early fall and very low during winter. As a result, these
operations generate a large percentage of their annual revenues between April
and September. The Company has historically generated lower profits or net
losses during its third and fourth fiscal quarters, from October to March.
Residential Property Management (with the exception of swimming pool services),
Integrated Security Services, and Business Services generate revenues evenly
throughout the fiscal year.
The seasonality of swimming pool services and certain Consumer Services
operations (exterior painting and lawn care) results in variations in quarterly
EBITDA margins. Variations in quarterly EBITDA margins can also be caused by
acquisitions, which alter the consolidated service mix. The Company's
non-seasonal businesses typically generate a consistent EBITDA margin over all
four quarters, while the Company's seasonal businesses experience high EBITDA
margins in the first two quarters, offset by negative EBITDA in the last two
quarters. As non-seasonal revenues increase as a percentage of total revenues,
the Company's quarterly EBITDA margin fluctuations should be reduced.
LIQUIDITY AND CAPITAL RESOURCES
On June 29, 2001, the Company amended and restated its lending agreement to
allow for the issuance of additional debt. The amended and restated agreement
provides a $140 million committed revolving credit facility (the "Credit
Facility") renewable and extendible in 364-day increments, and if not renewed, a
two-year final maturity. The Credit Facility allows for borrowing in U.S. and /
or Canadian currency and bears interest at 1.50% to 3.00% over floating
reference rates, depending on certain leverage ratios. Also on June 29, 2001,
the Company completed a private placement of $100 million of 8.06% fixed-rate
Senior Secured Notes (the "Notes"). The Notes have a final maturity of ten
years, with equal annual principal repayments beginning at the end of the fourth
year, resulting in a seven-year average life. Covenants and other limitations
-15-
within the amended lending agreement and the Notes are similar to those
contained in the prior lending agreement.
In connection with the Credit Facility and the Notes, the Company incurred
legal, agency and placement fees totaling $3.0 million, which will be amortized
over the life of the associated debt.
The Company believes these new credit arrangements will provide stability and
flexibility to finance acquisitions and working capital requirements for the
foreseeable future. Un-drawn available credit under the Credit Facility was
$89.8 million at September 30, 2001. The higher interest rates with the new
credit arrangements, relative to the prior lending agreement, offset by recent
declines in floating reference rates, will result in a slightly higher average
interest rate in fiscal 2002 than experienced in fiscal 2001.
During the quarter ended September 30, 2001, capital expenditures were $3.0
million. Significant items included computer equipment and software in the
Business Services division for both replacement and expansion purposes. Capital
expenditures for the six months ended September 30, 2001 were $8.0 million.
Business acquisitions for the quarter totaled $12.4 million. Acquisitions were
VASEC / Virginia Security and Automation Inc., an integrated security services
provider serving the Washington, DC area and California Closets Seattle, LLC,
the Seattle, WA franchisee of the Company's California Closets franchise system.
During the quarter, the Company also acquired from a minority shareholder the
10% of California Closet Company Inc. that it did not own.
In connection with certain acquisitions, the Company has agreed to pay
additional consideration contingent on post-acquisition operating results of the
acquired entities. The payment of any such amounts is made in cash and results
in an increase in the purchase prices for such acquisitions and, as a result,
additional goodwill. Included in the total for business acquisitions for the
quarter is $6.2 million paid with respect to contingent acquisition liabilities.
-16-
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual and Special Meeting of Shareholders was held on September
10, 2001. The matters voted upon and the results of voting were as follows:
To ratify the appointment of PricewaterhouseCoopers LLP, Chartered Accountants,
as the auditors of the Corporation and the authorization of the Directors to fix
their renumeration.
For 21,212,242
Against 1,269
To re-elect the current Board of Directors of the Corporation to serve until the
next meeting called for the purpose of electing Directors or until their
respective successors are duly appointed.
For 21,210,041
Against 3,470
To approve an amendment to the Company's Stock Option Plan No. 2 to reserve an
additional 300,000 Subordinate Voting Shares. The amendment increases the
maximum number of shares issuable from the option plan pool from 3.55 million to
3.85 million Subordinate Voting Shares.
For 3,754,488
Against 2,853,264
Ineligible 14,604,690
Abstained 1,069
-17-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. a) Exhibits
3.1* Articles of Incorporation and Amendment
3.2* By-Laws and Amendments
10.1* Credit Facility dated April 1, 1999 among the Company and
syndicate of bank lenders
10.2** FirstService Corporation Amended Stock Option Plan # 2
10.3** FirstService Corporation Amended Share Purchase Plan # 2
10.4*** Amended and Restated Credit Agreement Dated
June 21, 2001 among the Company and
syndicate of bank lenders
10.5*** Note and Guarantee Agreement - $US100 million 8.06%
Guaranteed Senior Secured Notes due 2011
b) Reports on Form 8-K
None.
-------------------
* Incorporated by reference to the Company's report on Form 10-Q for the
period ended June 30, 1999.
** Incorporated by reference to the Company's report on Form 10-K for the
year ended March 31, 2000.
*** Incorporated by reference to the Company's report on Form 10-Q for the
period ended June 30, 2001.
-18-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001
FIRSTSERVICE CORPORATION
/s/ D. Scott Patterson
----------------------------------------------------
D. Scott Patterson
Senior Vice President and Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER & AUTHORIZED SIGNATORY)