UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 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: 12,401,793 as of December 31, 2000 Multiple Voting Shares: 662,847 as of December 31, 2000
FIRSTSERVICE CORPORATION FORM 10-Q For the Quarter Ended December 31, 2000 INDEX <TABLE> <CAPTION> Page ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements a) Statements of Earnings For the Three Months and Nine Months Ended December 31, 2000 and 1999 3 b) Balance Sheets As of December 31, 2000 and March 31, 2000 4 c) Statements of Cash Flows For the Nine Months Ended December 31, 2000 and 1999 5 d) Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURE 15 </TABLE> 2
FIRSTSERVICE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands of U.S. dollars, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Month Periods Nine Month Periods Ended December 31 Ended December 31 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues $ 96,957 $ 79,793 $ 320,514 $ 261,247 Cost of revenues 66,879 54,954 211,545 170,789 Selling, general and administrative expenses 22,339 18,994 67,323 56,370 Depreciation 1,914 1,641 5,480 4,726 Amortization 1,046 957 3,119 2,821 Interest 2,489 2,047 7,200 5,769 - --------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes and minority interest 2,290 1,200 25,847 20,772 Income taxes 916 479 10,332 8,285 - --------------------------------------------------------------------------------------------------------------------------- Earnings before minority interest 1,374 721 15,515 12,487 Minority interest share of earnings 319 170 2,852 2,166 - --------------------------------------------------------------------------------------------------------------------------- Net earnings $ 1,055 $ 551 $ 12,663 $10,321 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $0.08 $0.04 $0.97 $0.80 Diluted $0.08 $0.04 $0.92 $0.75 Weighted average shares outstanding: Basic 13,057 12,936 13,054 12,931 (in thousands) Diluted 13,908 13,666 13,772 13,742 </TABLE> The Condensed Consolidated Statements of Earnings have been prepared in accordance with U.S. GAAP. 3
FIRSTSERVICE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars) <TABLE> <CAPTION> DECEMBER 31 March 31 2000 2000 - --------------------------------------------------------------------------------------- (UNAUDITED) (Audited) <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $5,218 $ 3,297 Accounts receivable, net 63,673 53,170 Inventories 10,163 8,929 Prepaids and other assets 8,612 8,491 Deferred income taxes 916 1,063 - --------------------------------------------------------------------------------------- 88,582 74,950 - --------------------------------------------------------------------------------------- Other receivables 5,997 4,405 Fixed assets 32,259 29,693 Other assets 3,470 4,074 Deferred income taxes 1,405 270 Goodwill 137,301 117,495 - --------------------------------------------------------------------------------------- 180,432 155,937 - --------------------------------------------------------------------------------------- $ 269,014 $ 230,887 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 16,633 $ 11,752 Accrued liabilities 19,204 23,013 Income taxes payable 6,696 2,879 Unearned revenue 5,878 10,725 Long-term debt - current 4,054 2,733 Deferred income taxes - 459 - --------------------------------------------------------------------------------------- 52,465 51,561 - --------------------------------------------------------------------------------------- LONG-TERM LIABILITIES Long-term debt less current portion 123,056 102,177 Deferred income taxes 3,712 1,836 - --------------------------------------------------------------------------------------- 126,768 104,013 - --------------------------------------------------------------------------------------- Minority interest 9,811 6,975 - --------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Capital stock 54,199 53,849 Receivables pursuant to company's share purchase plan (3,294) (3,294) Retained earnings 28,279 15,614 Cumulative other comprehensive income 786 2,169 - --------------------------------------------------------------------------------------- 79,970 68,338 - --------------------------------------------------------------------------------------- $ 269,014 $ 230,887 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- </TABLE> The Condensed Consolidated Balance Sheets have been prepared in accordance with U.S. GAAP. 4
FIRSTSERVICE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) (Unaudited) <TABLE> <CAPTION> Nine Month Periods Ended December 31 2000 1999 - --------------------------------------------------------------------------------------------------- <S> <C> <C> CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net earnings for the period $ 12,663 $ 10,321 Items not affecting cash Depreciation and amortization 8,599 7,547 Deferred income taxes (16) 354 Minority interest share of earnings 2,852 2,166 Other 335 331 - --------------------------------------------------------------------------------------------------- 24,433 20,719 Changes in operating assets and liabilities, net of acquisitions Accounts receivable (7,119) 1,896 Inventories (705) (701) Prepaids and other assets 631 23 Accounts payable and other current liabilities 894 4,625 Unearned revenue (5,764) (5,603) - --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 12,370 20,959 - --------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired (21,616) (19,041) Purchase of minority shareholders' interest (649) - Purchases of fixed assets, net (7,046) (6,525) Decrease (increase) in other assets 8 (1,134) Increase in other receivables (1,592) (675) - --------------------------------------------------------------------------------------------------- Net cash used for investing (30,895) (27,375) - --------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in long-term debt 21,136 15,825 Financing fees paid - (543) Issuance of subordinate voting shares, net of repurchases 351 43 Dividends paid to minority shareholders of subsidiaries (175) (196) - --------------------------------------------------------------------------------------------------- Net cash provided by financing 21,312 15,129 - --------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (866) (970) - --------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents during the period 1,921 7,743 Cash and cash equivalents, beginning of period 3,297 4,627 Cash and cash equivalents, end of period $ 5,218 $ 12,370 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- </TABLE> The Condensed Consolidated Statements of Cash Flows have been prepared in accordance with U.S. GAAP. 5
FIRSTSERVICE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 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 ("Management Services"), Security Services 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 the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information not misleading. In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of December 31, 2000 and the results of its operations for the three and nine months ended December 31, 2000 and 1999 and its cash flows for the nine months ended December 31, 2000 and 1999. All such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended December 31, 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. ACQUISITIONS - 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 the more than 120 communities managed by the Company in that region. The fifth acquisition was in 6
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. The results of operations of these five acquisitions have been included in the Condensed Consolidated Financial Statements included herein since the applicable date of acquisition. These acquisitions were accounted for using the purchase method. As a result, the purchase prices have been allocated to the assets acquired, including intangibles, based on their respective fair values. The purchase price allocations are preliminary and subject to adjustments. On January 22, 2001 the Company announced that it had completed three acquisitions in its Property Services division. In Management Services, the Company acquired Dickinson Management, Inc., a full-service residential property management operation located in Jupiter, Florida serving 54 communities and over 8,000 residential units. In Consumer Services, the Company acquired the Boston, Massachusetts franchise of its California Closets franchise system. In Security Services, the Company acquired Century Security, a Toronto based provider of security services to the health care industry. These acquisitions generated approximately $10,000 in annual revenues in their last respective fiscal years prior to acquisition. 4. LONG-TERM DEBT - The Company's amended and restated lending agreement provides a facility of approximately U.S. $163,000 comprised of tranches of Cdn. $50,000 and U.S. $130,000. The amended facilities, which are used for acquisitions, capital expenditures and working capital, provide a tax efficient structure and effectively match long-term U.S. dollar denominated assets with U.S. dollar denominated debt. The revolving facilities provide that the Company may borrow using Prime, LIBOR or Bankers Acceptance interest rate options that vary within a range depending on certain leverage ratios. Borrowings currently bear interest at the lender's 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. 7
5. COMPREHENSIVE INCOME - Total comprehensive income was $1,179 and $691 for the three months ended December 31, 2000 and 1999, respectively and $11,280 and $10,700 for the nine months ended December 31, 2000 and 1999, 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 - 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 residential property management and lawn care. Property Services (franchised) provides painting, decorating and disaster restoration services. The Business Services group provides services to governments, financial institutions and corporations wishing to outsource a variety of non-core, primarily labor intensive, "back office" functions. The Company derives substantially all of its revenues from customers in the United States and Canada. OPERATING SEGMENTS <TABLE> <CAPTION> PROPERTY PROPERTY FOR THE THREE MONTH PERIOD SERVICES SERVICES BUSINESS ENDING DECEMBER 31,2000 (FRANCHISED) (COMPANY-OWNED) SERVICES CORPORATE CONSOLIDATED ----------------- ------------------ ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Revenue 15,543 62,782 18,570 62 96,957 ----------------- ------------------ ------------- ------------- -------------- Operating profit 689 2,806 2,581 (1,297) 4,779 ----------------- ------------------ ------------- ------------- -------------- PROPERTY PROPERTY FOR THE THREE MONTH PERIOD SERVICES SERVICES BUSINESS ENDING DECEMBER 31,1999 (FRANCHISED) (COMPANY-OWNED) SERVICES CORPORATE CONSOLIDATED ----------------- ------------------ ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Revenue 11,286 50,943 17,474 90 79,793 ----------------- ------------------ ------------- ------------- -------------- Operating profit (117) 1,901 2,522 (1,059) 3,247 ----------------- ------------------ ------------- ------------- -------------- PROPERTY PROPERTY FOR THE NINE MONTH PERIOD SERVICES SERVICES BUSINESS ENDING DECEMBER 31,2000 (FRANCHISED) (COMPANY-OWNED) SERVICES CORPORATE CONSOLIDATED ----------------- ------------------ ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Revenue 46,442 214,080 59,800 192 320,514 ----------------- ------------------ ------------- ------------- -------------- Operating profit 8,271 17,956 10,452 (3,632) 33,047 ----------------- ------------------ ------------- ------------- -------------- Total assets 47,279 141,781 75,229 4,725 269,014 ----------------- ------------------ ------------- ------------- -------------- PROPERTY PROPERTY FOR THE NINE MONTH PERIOD SERVICES SERVICES BUSINESS ENDING DECEMBER 31,1999 (FRANCHISED) (COMPANY-OWNED) SERVICES CORPORATE CONSOLIDATED ----------------- ------------------ ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Revenue 40,976 165,830 54,186 255 261,247 ----------------- ------------------ ------------- ------------- -------------- Operating profit 7,154 13,542 9,290 (3,445) 26,541 ----------------- ------------------ ------------- ------------- -------------- Total assets 41,402 109,056 69,905 6,702 227,065 ----------------- ------------------ ------------- ------------- -------------- </TABLE> 8
<TABLE> <CAPTION> GEOGRAPHIC SEGMENTS FOR THE THREE MONTH PERIOD ENDING DECEMBER 31,2000 CANADA UNITED STATES CONSOLIDATED ----------------- ------------------ ------------- <S> <C> <C> <C> Revenue 30,143 66,814 96,957 ----------------- ------------------ ------------- FOR THE THREE MONTH PERIOD ENDING DECEMBER 31,1999 CANADA UNITED STATES CONSOLIDATED ----------------- ------------------ ------------- <S> <C> <C> <C> Revenue 29,282 50,511 79,793 ----------------- ------------------ ------------- FOR THE NINE MONTH PERIOD ENDING DECEMBER 31,2000 CANADA UNITED STATES CONSOLIDATED ----------------- ------------------ ------------- <S> <C> <C> <C> Revenue 97,202 223,312 320,514 ----------------- ------------------ ------------- Total assets 65,097 203,917 269,014 ----------------- ------------------ ------------- FOR THE NINE MONTH PERIOD ENDING DECEMBER 31,1999 CANADA UNITED STATES CONSOLIDATED ----------------- ------------------ ------------- <S> <C> <C> <C> Revenue 91,870 169,377 261,247 ----------------- ------------------ ------------- Total assets 67,361 159,704 227,065 ----------------- ------------------ ------------- </TABLE> 7. COMPARATIVE FIGURES - Certain of the prior period's figures in the Condensed Consolidated Statement of Cash Flows have been reclassified to conform with the current period's presentation. 8. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS - In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101 "Revenue Recognition in Financial Statements", which was amended by SAB 101B in June 2000. SAB 101B delayed the implementation date of SAB 101 to the fourth quarter of the Company's fiscal 2001. The SAB provides guidance on the recognition, presentation and disclosure of revenue in the financial statements. The Company intends to adopt the SAB in the fourth quarter of fiscal 2001. The impact of its adoption on the consolidated financial statements is not expected to be material. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement was subsequently amended as SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". The Company intends to adopt this Statement on April 1, 2001. Adoption of this Statement is not expected to have a material impact on the Company's financial statements. 9
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 and the ability of the Company to make acquisitions at reasonable prices. Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking statements should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. The Company notes that past performance in operations and share price are not necessarily predictive of future performance. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999 Revenues increased $17.2 million, or 21.5%, to $97.0 million in the third quarter of fiscal 2001 from $79.8 million in the third quarter of fiscal 2000. Approximately $9.0 million of the increase is attributable to acquired companies owned less than one year including SST and several smaller tuck-under acquisitions. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 32.4% to $7.7 million from $5.8 million in the prior year period. EBITDA margins for the three months ended December 31, 2000, increased 70 basis points to 8.0% from 7.3% in the prior year. The margin improvement primarily reflects a change in the seasonal mix of business driven by the rapid growth of the residential property management operations, which carry consistent quarterly margins of 10-12% relative to the Company's slower growth seasonal businesses that historically have generated losses in the December and March quarters. 10
Depreciation for the quarter ended December 31, 2000 was $1.9 million, up 16.6% from the prior year quarter due largely to acquisitions. Amortization was $1.0 million, up 9.3% due to the increase in goodwill resulting from acquisitions completed during the past year. Interest expense increased 21.6% over prior year levels to $2.5 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 increased to $319 or 23.2% of earnings before minority interest from $170 or 23.6% in the prior year quarter. The 87.6% increase reflects the 90.6% increase in earnings before minority interest and also a change in the mix of earnings relative to the prior year as certain operations having lower minority shareholdings contributed more to consolidated earnings. Net earnings were $1.1 million, up 91.5% over the prior year period, while diluted earnings per share doubled to $0.08. Adding back amortization would result in cash earnings per share of $0.15 for the quarter compared to $0.11 in the prior year quarter. Revenues for the Property Services division were $78.3 million, an increase of approximately $16.0 million or 25.7 % over the prior year. Approximately $9.0 million of the revenue increase resulted from acquisitions including SST, which closed on July 1, 2000 and several tuck-under companies. The balance of the increase resulted from internal growth of approximately 11.0%. Property Services EBITDA grew 55.0% to $5.6 million or 7.1% of revenue compared to $3.6 million or 5.8% of revenue in the prior year. The margin increase reflects the change in seasonal mix discussed above. Revenues for the Business Services division rose to $18.6 million for the third quarter, a 6.3% increase over the prior year, all attributable to internal growth. Business Services EBITDA was $3.4 million or 18.3% of revenue, compared to $3.3 million and 19.0% of revenue in the prior year. The margin decline is primarily attributable to start-up costs associated with three significant contracts secured during the quarter by the Company's BDP Business Data Services unit. Two of the contracts commenced during the quarter and the third will start in the fourth quarter. Corporate expenses increased to $1.2 million in the third quarter from $1.1 million in the prior year period. RESULTS OF OPERATIONS NINE MONTHS ENDED DECEMBER 31, 2000 AND 1999 Revenues for the first nine months of fiscal 2001 increased 22.7% to $320.5 million from $261.2 million in the first nine months of fiscal 2000. Approximately $30 million of the increase was attributable to acquired companies owned less than one year. The remaining increase resulted from internal growth of approximately 11%. 11
EBITDA increased 22.2% to $41.6 million from $34.1 million in the prior year period. EBITDA margins for the nine months ended December 31, 2000, were 13.0% approximately the same as the 13.1% for the nine months ended December 31, 1999. Depreciation for the nine month period was $5.5 million up 16.0% from the prior year period due largely to acquisitions. Amortization was $3.1 million, up 10.6% due to the increase in goodwill that has resulted from acquisitions completed during the past year. Interest expense increased 24.8% over prior year levels to $7.2 million as a result of increased borrowings related to acquisitions and higher interest rates. The income tax provision for the nine months ended December 31, 2000 was approximately 40.0% of earnings before taxes, consistent with the prior year period. Minority interest increased 31.7% to $2.9 million or 18.4% of earnings before minority interest compared to $2.2 million or 17.3% in the prior year period. The increase reflects the increase in earnings and the larger contribution to earnings by non-wholly owned operations relative to the prior year period. Net income for the first nine months of fiscal 2001 was $12.7 million, up 22.7% over the first nine months of fiscal 2000, while diluted earnings per share increased 22.7% to $0.92. Nine months' revenues for the Property Services division were $260.7 million, an increase of approximately $53.6 million or 26.0% over the prior year. Approximately $30 million of the revenue increase resulted from acquisitions including American Pool Enterprises, which closed on June 1, 1999, SST, which closed July 1, 2000 and several smaller tuckunder acquisitions. The balance of the increase resulted from internal growth. The Property Services EBITDA margin for the nine months was 12.4% compared to 12.6% in the prior year. Nine months' revenues for the Business Services division were $59.8 million, up 10.3% over the prior year, reflecting the impact of the acquisition of DDS Southwest and internal growth of approximately 6.0%. The Business Services EBITDA margin for the first nine months of fiscal 2001 was 21.4% of revenue, up from 21.0% in the prior year. Corporate expenses increased to $3.5 million in the first nine months of fiscal 2001 from $3.3 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. Residential property management, Security Services, Business 12
Services and many of the franchise systems generate revenues evenly throughout the fiscal year. The seasonality of the lawn care, painting and pool maintenance operations results in variations in quarterly EBITDA margins. Variations in quarterly EBITDA margins can also be caused by acquisitions 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 cash flow 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 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 December 31, 2000, the Company had drawn Cdn $6.1 million and US $117.3 million under this lending agreement. 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 quarter ended December 31, 2000, capital expenditures were $2.0 million primarily for leasehold improvements and equipment in the Business Services division, as well as vehicles and equipment in Management Services. Capital expenditures for the nine months ended December 31, 2000 were $7.0 million. 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. 13
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 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. 14
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 14, 2001 FIRSTSERVICE CORPORATION By: --------------------------------------------------- D. SCOTT PATTERSON Senior Vice President and Chief Financial Officer (PRINCIPAL FINANCIAL OFFICER & AUTHORIZED SIGNATORY) 15