-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JCRUHbS0OEeu8YFkXCQ9rcON72rU8pyOTTdHuTPhlAA+rgcvQs/+BNiRqYuHRqtd liOyHH2bsRZp0FE13rNV9w== /in/edgar/work/20000629/0000912057-00-030417/0000912057-00-030417.txt : 20000920 0000912057-00-030417.hdr.sgml : 20000920 ACCESSION NUMBER: 0000912057-00-030417 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTSERVICE CORP CENTRAL INDEX KEY: 0000913353 STANDARD INDUSTRIAL CLASSIFICATION: [7381 ] IRS NUMBER: 000000000 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24762 FILM NUMBER: 664504 BUSINESS ADDRESS: STREET 1: 1140 BAY ST STREET 2: SUITE 4000 CITY: TORONTO ONTARIO CANA STATE: A6 MAIL ADDRESS: STREET 1: FIRSTSERVICE BUILDING 1140 BAY STREET STREET 2: SUITE 4000 CITY: TORONTO ONTARIO CANA STATE: A6 10-K 1 a10-k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20509 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 0-24762 FIRSTSERVICE CORPORATION (Exact name of registrant as specified in its charter) ONTARIO, CANADA NOT APPLICABLE (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) FIRSTSERVICE BUILDING 1140 BAY STREET, SUITE 4000 M5S 2B4 TORONTO, ONTARIO, CANADA (Postal Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (416) 960-9500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: SUBORDINATE VOTING SHARES 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 be check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Subordinate Voting Shares held by non-affiliates of the Registrant as of May 31, 2000 was $130,890,700 U.S. The number of shares outstanding of the Registrant's Subordinate Voting Shares as of May 31, 2000 was 12,420,743, and the closing market price of such shares on that date was $12.125 U.S. The number of Multiple Voting Shares outstanding on May 31, 2000 was 662,847. -2- FIRSTSERVICE CORPORATION ANNUAL REPORT ON FORM 10-K MARCH 31, 2000 INDEX
PAGE ---- PART I ITEM 1. BUSINESS 3 ITEM 2. PROPERTIES 13 ITEM 3. LEGAL PROCEEDINGS 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14 PART II ITEM 5. MARKET FOR REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS 15 ITEM 6. SELECTED FINANCIAL DATA 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45 ITEM 11. EXECUTIVE COMPENSATION 47 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 51 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 53 SIGNATURES 56
-3- PART I ITEM 1. BUSINESS UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS IN THIS FORM 10-K ARE EXPRESSED IN UNITED STATES DOLLARS. This annual report is prepared on Form 10-K and is filed by FirstService Corporation, an Ontario company (hereinafter sometimes referred to as the "Registrant"). The Registrant and its subsidiaries are referred to as "FirstService" or the "Company". The Registrant is a "foreign private issuer" as defined under Rule 405 of Regulation C under the Securities Act of 1933, as amended. However, effective for the year ended March 31, 2000 ("Fiscal 2000"), the Registrant elected to file its annual, quarterly and current reports on forms designated for U.S. domestic issuers and consequently, this Form is its initial 10-K filing. FORWARD-LOOKING STATEMENTS This annual report on Form 10-K 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. OVERVIEW FirstService is a leader in the rapidly growing service sector, providing a variety of Property and Business Services to consumers and corporations throughout North America. Each service line operated by the Company generates a high level of recurring revenues, has strong cash flows, and generates high returns on invested capital and each has the ability to be leveraged through margin enhancement, cross-selling or consolidation. Throughout the FirstService organization, managers and employees are financially motivated to identify and realize synergies and growth opportunities through share ownership and performance-based compensation. -4- Over the last five years, FirstService has grown its earnings and earnings per share by more than 25% annually on the strength of strong internal growth and by completing and successfully integrating strategic acquisitions in Canada and, predominantly, the United States. HISTORY The roots of the Company date back to 1972, when Jay S. Hennick, the President and Chief Executive Officer, founded a pool and recreational facility management company that became known as Superior Pool, Spa and Leisure, Ltd. ("Superior"). FirstService Corporation was formed in July 1988 under the laws of the Province of Ontario, Canada, with Mr. Hennick exchanging his interest in Superior for FirstService shares. The Company completed its initial public offering on the Toronto Stock Exchange in June 1993 and currently its Subordinate Voting Shares trade on the NASDAQ National Market (symbol: FSRV) and the Toronto Stock Exchange (symbol: FSV). For a detailed history of the Company, please refer to the exhibit entitled "Annual Information Form" contained in Form 6-K for the month of August 1999, filed on August 12, 1999. BUSINESS STRATEGY The Company's objective is to continue building a diversified property and business services company that can generate consistent growth in annual cash flow and earnings per share. Management believes that the Company's operating strategy and entrepreneurial culture support and encourage the effective management of its businesses, thereby increasing profitability and contributing to successful acquisitions. OPERATING STRATEGY The goal of the Company's operating strategy is to increase the revenues, profitability and market position of each operating company, while maintaining the highest level of service to its customers. Key elements of the Company's operating strategy are: SENIOR MANAGEMENT OWNERSHIP. The Company strongly believes that management ownership at each of its primary operating units has contributed significantly to its ability to grow its businesses. As a result, the Company expects to continue its practice of allowing management to hold a minority equity interest in the business they operate, generally in the form of a non-transferable direct equity ownership position. In all cases, the Company retains the right to purchase the minority interest at a pre-determined formula price. Management believes that its strategy of aligning the interests of operating management with those of the Company and its shareholders provides a powerful incentive to deliver superior financial performance. PERFORMANCE-BASED COMPENSATION. The Company uses performance-based compensation programs throughout each of its businesses to attract, retain and motivate its employees. In general, senior managers receive bonuses that are based on a percentage of the amount by which their results exceed budgeted earnings before interest, taxes, depreciation and amortization ("EBITDA"). Lower level managers' incentives are also linked to EBITDA targets, but may include other measures deemed important for growing their business. The -5- Company believes these programs are effective incentives to operating management and employees to deliver consistent, high-quality service in a cost effective manner. OPERATING EFFICIENCIES. The Company has been able to obtain significant operating efficiencies, increase margins and improve on its competitive advantage through the implementation of a variety of best practices. The Company attempts to identify and refine its best practices across all business units to benefit from the most innovative and effective management systems and techniques. The implementation of these best practices has resulted in improved labor management, customer service and management information systems. The Company also achieves significant savings through the volume purchasing of vehicles, insurance, group benefits, advertising and professional and financial services. MARKET PENETRATION AND CROSS-SELLING INITIATIVES. The Company capitalizes on the complementary nature of its businesses by introducing new or additional services to customers with which it already has long-term contractual relationships. The complementary nature of the Company's businesses also provides certain advantages when introducing a new service in a market where the Company has existing operations. These advantages include significant market knowledge, demographic information and the ability to share the established overhead of another Company operation. ACQUISITION STRATEGY The goal of the Company's acquisition strategy is to systematically acquire companies in existing or complementary service areas that will enhance its market position, extend its geographic reach or expand the breadth of its service offerings. The service sector is highly fragmented, consisting primarily of small business owners that often have limited access to capital and few options for liquidity. The Company has demonstrated that it can, through a targeted acquisition plan, meet the capital and liquidity needs of such owners, as illustrated by the Company's successful track record of acquiring and integrating over 60 businesses. The Company believes that acquisition opportunities will continue to be available to it across all of its service lines. Despite these opportunities, the Company is committed to a controlled growth acquisition strategy, limiting acquisitions to those that can be purchased at a fair price and can easily be integrated into existing operations without overburdening managers or systems. Key elements of the Company's acquisition strategy are: EXPANSION OF SERVICE OFFERINGS OR GEOGRAPHIC REACH. The Company intends to continue to acquire "platform" service businesses that have well-developed market positions that complement existing services or extend the Company's geographic reach. When entering a new service area or geographic market, the Company generally pursues larger operations with leading market positions, a history of consistent profitability and cash flow, experienced management and whose performance can be leveraged through margin enhancement, cross-selling or consolidation. INCREASE MARKET PENETRATION. Once the Company has established a leading market position in a new geographic market, it will also pursue "tuck-under" acquisitions of smaller companies whose customer bases, operating assets and service personnel can be easily incorporated into existing operations without a significant increase in selling, general and administrative expenses. -6- EMPHASIZE INTEGRATION. While the Company is confident that there are significant opportunities to grow rapidly through strategic acquisitions, management places a large focus on properly integrating new acquisitions. The Company has a dedicated integration and margin enhancement team consisting of experienced business process professionals. Their role is to assist operating management to effectively assimilate newly acquired operations into the organization. DESCRIPTION OF SERVICE LINES The Company's operations are conducted through two principal operating divisions, Property Services and Business Services. The following diagram depicts FirstService's organizational structure: [CHART] * Includes both franchised and company-owned services.
- ------------------------------------------ ----------------- ---------------- ---------------- REVENUE BY SERVICE LINE YEAR ENDED YEAR ENDED YEAR ENDED (In thousands of U.S. dollars) MARCH 31 MARCH 31 MARCH 31 2000 1999 1998 - ------------------------------------------ ----------------- ---------------- ---------------- Property Services Management Services $ 133,782 $ 90,649 $ 62,958 Consumer Services 71,330 61,618 46,984 Security Services 61,539 52,827 49,914 Business Services 73,198 58,162 36,615 Other 186 105 17 -------- --------- -------- TOTAL $340,035 $ 263,361 $196,488 ======== ========= ======== - ------------------------------------------ ----------------- ---------------- ----------------
Please note that: (i) Management Services was previously disclosed as Community Association Management and (ii) Consumer Services was formed to aggregate the operations previously disclosed as Franchised Services and Lawn Care. Note 15 to the Consolidated Financial Statements included herein under Part II contains further details regarding the operating profit and total assets of the operating segments of the Company. PROPERTY SERVICES DIVISION MANAGEMENT SERVICES FirstService is the largest manager of private residential communities in North America. Private residential communities include condominiums, cooperatives, gated communities and a variety of other residential developments governed by multiple unit residential community associations. In total, the Company manages more than 325,000 residential units in 1,600 -7- communities in the States of Florida, Pennsylvania, New York, New Jersey, Delaware, Maryland, Virginia, District of Columbia and Arizona. The Management Services operations are carried out through the following subsidiaries: The Continental Group, Ltd., Prime Management Group, Inc., The Wentworth Group, Inc., and Rossmar & Graham Community Association Management Company. In addition, through its subsidiary American Pool Enterprises, Inc. ("American Pool"), FirstService is the largest manager of commercial swimming pools and recreation facilities in North America. American Pool currently serves more than 1,400 commercial swimming pools and recreation facilities and more than 5,500 residential swimming pools in ten U.S. States and in Canada, providing recreational facility management, staffing, maintenance, and restoration services. The operations of American Pool, outside of the Florida and Arizona markets, are seasonal in nature with the majority of revenues being earned in the Company's first and second quarters. There are two types of professional property management companies: traditional property managers and full-service property managers. Traditional property managers primarily handle administrative property management functions, such as collecting maintenance fees, paying suppliers, preparing financial statements and contracting out support services. Full-service property managers provide the same services as traditional property managers but also provide a variety of other services under one exclusive contract. FirstService is a full-service property manager providing a full range of services including landscaping, pest control, irrigation, real estate sales and leasing, painting and restoration, heating, air conditioning and plumbing services and swimming pool maintenance. CONSUMER SERVICES In Consumer Services, FirstService provides a variety of brand leading residential and commercial services through its network of over 1,700 company-owned and franchised locations across North America and internationally and generates customer level revenues of approximately $450 million per annum. The principal subsidiaries in its Consumer Services group include The Franchise Company, Inc. ("The Franchise Company") and Greenspace Services Ltd. ("Greenspace"). The Franchise Company is the owner-operator of several property service franchise systems. Its franchise systems offer closet design and installation services through the "California Closets" brand; residential and commercial insurance restoration services through the "Paul Davis Restoration" brand; commercial and residential painting services through the "Certa ProPainters" and "College Pro Painters" brands; home decorating services through the "Stained Glass Overlay" or "SGO" brand; and residential and commercial lawn care services through the "Nutri-Lawn" brand. Currently, The Franchise Company operates through approximately 1,700 franchisees employing approximately 7,300 seasonal and full-time staff. California Closets is the largest provider of installed closet and home storage systems in the world. Headquartered in San Rafael, California, California Closets has approximately 125 franchises in the United States and Canada as well as master franchises in other countries around the world. California Closets receives a royalty from franchisees based on a percentage of revenues. Paul Davis Restoration is a Florida-based franchisor of residential and commercial restoration services primarily serving the insurance restoration industry in the United States. The franchise system currently has approximately 230 franchisees across the U.S. with system wide -8- sales exceeding $220 million. Paul Davis Restoration receives a royalty based on a percentage of franchisee revenues. Certa ProPainters is a residential and commercial painting franchise system with approximately 210 franchisees operating in major markets across the United States and Canada as well as master franchises in other countries around the world. Certa ProPainters focuses on high-end residential, commercial and industrial exterior painting and decorating work and other programs for property managers who have portfolios of condominium and commercial properties. Franchisees pay Certa ProPainters a fixed fee royalty, plus administrative fees for various ancillary services. College Pro Painters operates a seasonal exterior residential painting franchise system in 24 US States and across Canada through approximately 750 franchisees. It recruits students and trains them to operate the business, including price estimating, marketing, operating procedures, hiring, customer service and safety. College Pro Painters receives a royalty from each franchisee based on a percentage of revenues. In addition, College Pro Painters sells business items such as signs, business kits and mailing materials to each franchisee. Franchise agreements are generally for a term of ten years, with the exception of College Pro Painters, where the agreements are for a term of 1 year. In addition, the Company through its Greenspace subsidiary provides residential and commercial lawn care and landscape services, primarily in Canada, under the "ChemLawn", "Sears Lawn Care" and "Green Lawn Care" brands. Greenspace serves more than 120,000 customers from 14 branches and has the largest share of the Ontario and Quebec markets with an estimated 40% market share among households who purchase lawn care services, excluding mowing. Services to residential customers include fertilization, weed and pest control for lawns, trees and shrubs, and lawn aeration. Services to commercial customers include all of the services provided to residential customers plus mowing, landscaping, irrigation and other services comprising comprehensive grounds maintenance. Greenspace's operations are seasonal in nature, with the majority of its revenues earned during the Company's first and second quarters. SECURITY SERVICES FirstService operates one of the largest integrated security operations in North America through its subsidiary, Intercon Security Limited ("Intercon Security"). Intercon Security is a leading provider of integrated electronic systems and security personnel to office buildings, shopping malls and residential communities across Canada and in six U.S. states from branch operations in Toronto, Chicago, New Jersey, Milwaukee, Jacksonville, Vancouver, and Calgary. Intercon Security's electronic security systems include access control systems, closed circuit television systems and intrusion alarms. Intercon Security designs and manages security systems using security officers, monitoring devices, access card readers and elevator controllers interfaced with closed circuit television systems, in combination or individually, as a client's situation demands. BUSINESS SERVICES DIVISION FirstService's Business Services division provides a variety of customer support and fulfillment services to Fortune 1000 companies through 11 branches occupying more than 1.8 -9- million square feet throughout the United States and Canada. The principal Business Services operating subsidiaries are BDP Business Data Services Limited ("BDP") and DDS Distribution Services Ltd. ("DDS"). BDP has developed expertise in performing services that require significant labor in coordination with technology, such as the administration and processing of consumer and student loans, insurance claims and credit and loyalty cards. Through the use of efficient labor management practices and by leveraging technology, BDP offers these services to its clients as an integrated, cost-effective and high-quality solution. DDS provides integrated business-to-business fulfillment and distribution services to blue chip clients in the consumer goods, retail, automotive and pharmaceutical sectors. Services offered include, warehousing, order processing, order assembly and shipping, customer support, inventory management and client profiling. DDS works with its clients to create fulfillment channels that meet their needs, which can include the integration of DDS' proprietary order processing software, the development of customized e-commerce sites, the use of DDS' call center, and the coordination of activities across DDS' eight North American fulfillment centers. DDS takes orders from its clients, as well as directly from its clients' customers, and assembles, packages and delivers materials to the appropriate parties. Orders are received through each client's customized fulfillment channels. With its information management systems, DDS tracks the materials it warehouses and delivers and compiles data to profile its clients' customers. DDS provides its clients an array of data reporting options, and this information is used to track inventory and as a valuable marketing tool. DDS charges storage fees as well as processing fees for orders fulfilled. INDUSTRY POSITION, COMPETITION AND CUSTOMERS The following information is based solely on estimates made by management of the Company and cannot be verified. In considering the Company's industry and competitive position, it should be recognized that FirstService competes with many other companies in the sale of its services, franchises and products and that some of these competitors are larger and may have greater financial and marketing strength than FirstService. PROPERTY SERVICES DIVISION MANAGEMENT SERVICES Based on the most recent available industry data, the Company estimates that: (i) more than 42 million Americans, representing approximately 16 million households, live in condominiums, cooperatives, planned communities and other residential developments governed by multiple unit residential community associations; (ii) more than 50% of new homes being built in and around major metropolitan areas in the United States are within these categories; (iii) there are approximately 205,000 community associations in the United States; and (iv) the total annual fees for operating expenses for all community associations in the U.S. approaches $25 billion. Typically, owners of privately owned residential units are required to pay quarterly or monthly fees to cover the expenses of managing the condominium or homeowner association's business activities and maintaining community properties. Historically, decision making for communities was delegated to volunteer boards of directors elected by the owners. Increasingly, -10- these volunteer boards have outsourced the responsibility to manage the day-to-day operation and maintenance of community property to professional property management companies. The residential property management industry is fragmented and dominated primarily by numerous local and regional management companies. Only a small number of such companies, however, have the expertise and capital to provide both traditional property management services as well as the other support services provided by full-service property managers. The Company is the largest full-service manager of private residential communities in the United States. The Company's Management Services business is subject to regulation by the States in which it operates. For example, the Florida Department of Professional Regulation requires that property managers must be licensed which involves certain examinations and continuing education. In addition, the division's real estate sales and leasing operations are subject to regulation as a real estate brokerage by the various States in which it operates. SECURITY SERVICES Growth in the security industry has been significant over the last several years and is expected to continue due to a number of factors, including heightened public anxiety over crime and violence. The security industry is highly fragmented, but undergoing consolidation. In the United States alone, there are approximately 10,000 security manpower companies and 2,500 alarm-monitoring companies. The security manpower business has low barriers to entry and is cost competitive. Intercon Security differentiates itself by providing highly trained security officers to commercial enterprises willing to pay more for quality services and by integrating its security officer services with its security systems. Service and monitoring contracts are less sensitive to price competition than are security officer services. Intercon Security has a large market share in the Canadian cities in which it operates, but a small market share in the United States. The Company believes that Intercon Security is unique in its ability to offer a complete range of security systems and personnel that can be integrated and customized for the specific protection services required by its clients. CONSUMER SERVICES The residential and commercial service industry is highly fragmented, consisting principally of a large number of smaller, single-service or single-concept companies. Due to the large size of the overall market for these services, dominant market share is not considered necessary for becoming a major player in the industry. However, because of the low barriers to entry in this segment, the Company believes that brand name recognition among consumers is a critical factor in achieving long term success in the businesses in which it operates. In terms of franchising, the Company believes that the largest franchise companies in North America have been successful because of their ability to realize economies of scale through the centralization and successful application of certain administrative functions such as finance, marketing, purchasing, training and support staffing. The Company's franchise businesses are subject to United States Federal Trade Commission regulation and State and provincial laws that regulate the offering and sale of franchises. To date, these provisions have not had an adverse effect on the performance of the Company. Presently, the Company is authorized to sell franchises in 49 U.S. states, in all -11- Canadian provinces and in several other countries around the world. In all jurisdictions, the Company endeavors to have its franchisees meet or exceed regulatory standards. In terms of lawn care, the professional lawn care industry is estimated to be an $8 billion market (including mowing) in North America, and despite some consolidation, is still highly fragmented. Local and regional competitors, as well as do-it-yourself homeowners, provide strong competition in the Canadian lawn care industry, the primary market for the Company's lawn care operations carried out through Greenspace. Federal and Provincial environmental laws are applicable in the jurisdictions in which Greenspace operates. These regulations dictate which products and methods may be used and require employees to be properly trained and licensed in the use of pesticides and herbicides. These laws, together with municipal bylaws, may limit or restrict the use of certain lawn care practices and if such laws change, Greenspace's business may be adversely affected. BUSINESS SERVICES DIVISION The business outsourcing market has a number of distinct segments. The two most closely associated with BDP's market are information technology and personnel services. These companies seek out contracts within large organizations to provide either information systems or personnel, which are managed by clients. In contrast, BDP combines technology and people in a process that targets the outsourcing of back-office and administrative applications. BDP's customers are comprised of leading Canadian banks, health insurance companies, and consumer products companies. The in-house data processing departments of these customers are BDP's major competitors, and BDP differentiates itself through quality of service and price. DDS focuses on the fulfillment of printed materials and specialty products including promotional displays, marketing materials, medical information, educational materials and pharmaceutical samples. Many companies now are outsourcing this function to third-party fulfillment companies such as DDS. DDS is one of the largest providers of such services in North America. A number of DDS's competitors also engage in other businesses such as printing, creative communications services, or logistics. However, DDS positions itself as a specialist services company focused on the fulfillment of specialty materials and products as described above. RECURRING REVENUE A common theme and key focus across the FirstService companies is recurring, contractual revenue. This is driven by the essential nature of the services provided by the Property Services and Business Services divisions. In the Property Services Division, property management contracts are generally for terms of one to three years, and Security Services contracts are generally one year in duration. Contracts with franchisees in Consumer Services are primarily for ten-year periods. In the Business Services Division, contracts have terms of one to five years, with larger contracts having longer terms. -12- CURRENT YEAR DEVELOPMENTS In April 1999, the Company amended and restated its lending agreement to increase credit availability and to split its senior debt facility into a $50.0 million Cdn. ($34.5 million U.S.) and a $130.0 million U.S. tranche. This revolving facility is available to finance acquisitions and working capital. In June 1999, the Company expanded its Management Services operations through the acquisition of American Pool, which is based in Beltsville, Maryland and operates in ten US States and in Canada. In July 1999, the Company expanded its Business Services division by acquiring Dallas based Southwest Distribution Services Group (now named DDS Southwest Distribution Services, Ltd.), a educational materials and textbook fulfillment business, through its subsidiary, DDS Distribution Services, Limited. The Company also made six smaller "tuck-under" acquisitions during the year. No material dispositions of business assets occurred during the year ended March 31, 2000. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS Notes 10 and 15 to the Consolidated Financial Statements included herein under Part II contain information regarding revenues, net income before taxes and minority interest, and total assets, by geographic region. MINORITY SHAREHOLDERS OF SUBSIDIARIES The Company owns a majority interest (on average, 85% of the equity) in all of its subsidiaries, while the operating management of each subsidiary owns the remaining shares. This structure was designed to maintain control by FirstService while providing significant incentives to management at the operating companies. In all cases, the Company has the right to repurchase the management's shares at a predetermined formula price, usually payable at the Company's option with any combination of Subordinate Voting Shares or cash. The Company may also be obligated to acquire certain of these minority interests in the event of the death, disability or cessation of employment of an operating manager or if shares are required to be purchased pursuant to the right of the minority shareholders to require the Company to repurchase their shares. These arrangements provide significant flexibility to the Company in connection with management succession planning and shareholder liquidity matters. MAJOR CUSTOMERS FirstService has no single customer which accounts for more than 2% of its total revenues. No part of the Company's business is dependent on a single customer or a few customers, the loss of which would have a material adverse effect on the Company as a whole. Revenues from governmental sources are not material. -13- EMPLOYEES The Company has approximately 7,000 full-time employees, rising to a total of 13,000 in the spring and summer months with seasonal employees. TRADEMARKS FirstService's trademarks are important for the advertising and brand awareness of all of its businesses and franchises. Trademarks are renewed at each registration expiry date. ITEM 2. PROPERTIES The head office of the Registrant is a 20,000 square foot owned building located at 1140 Bay Street, Toronto, Ontario, Canada, M5S 2B4, approximately three-quarters of which is leased to third party tenants. BUSINESS SERVICES DIVISION DDS leases approximately 1.7 million square feet of warehouse and office space in connection with its fulfillment and warehousing operations. Principal warehouse locations include 380,000 square feet in Norristown, Pennsylvania; 360,000 square feet in Elyria, Ohio; 250,000 square feet in Strongsville, Ohio; 175,000 square feet in Toronto, Ontario; 150,000 square feet in Dallas, Texas; 115,000 square feet in Whittier, California; and 88,000 square feet in Chicago, Illinois. BDP leases approximately 100,000 square feet of office space, consisting of 65,000 square feet in Toronto, Ontario; 25,000 square feet in Orangeville, Ontario; and 10,000 square feet in Ottawa, Ontario. PROPERTY SERVICES DIVISION FirstService owns a 38,000 square foot office and warehouse building located in Boca Raton, Florida, most of which is occupied by Prime Management Group, Inc., part of which is occupied by the U.S. corporate offices of the Company and part of which is leased to a third party. The Company also owns a 22,000 square foot office and warehouse building in Hollywood, Florida, which is occupied by The Continental Group, Ltd. To house the operations of The Franchise Company, the Company leases approximately 40,000 square feet of office and warehouse space, comprised principally of the offices of Paul Davis Restoration in Jacksonville, Florida (12,000 square feet); the offices of Certa ProPainters in Valley Forge, Pennsylvania (9,000 square feet); the head office of The Franchise Company in Mississauga, Ontario (6,000 square feet); and the offices of California Closets in San Rafael, California (5,000 square feet). Intercon Security leases approximately 75,000 square feet of office space, consisting of primarily the following locations: Toronto, Ontario - 46,000 square feet (includes 12,000 square feet of warehouse and manufacturing space); Vancouver, British Columbia - 13,000 square feet; Oakbrook, Illinois - 7,000 square feet; and Forked River, New Jersey - 6,000 square feet. -14- All of the Company's remaining operations are carried out from leased premises located across United States and Canada, none of which is material to the Company. The Company believes its existing premises, as described above, are sufficient to meet its current operating requirements. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, FirstService may become involved in legal proceedings with private parties and/or governments. As at June 16, 2000, these proceedings included a number of general liability actions, none of which are material to the company, and no environmental actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the Fourth Quarter of the year ended March 31, 2000, no matters were submitted to a vote of security holders. -15- PART II ITEM 5. MARKET FOR REGISTRANT'S SHARES AND RELATED SHAREHOLDER MATTERS The Registrant's Subordinate Voting Shares are traded on the NASDAQ National Market ("NASDAQ") (symbol: FSRV) and the Toronto Stock Exchange ("TSE") (symbol: FSV). The Registrant's Multiple Voting Shares are not traded on any established public trading market. The following table sets forth the highest and lowest closing prices of the Registrant's Subordinate Voting Shares in each quarter of the two years ending March 31, 2000 and 1999:
---------------------- ------------- -------------- ------------- -------------- NASDAQ NASDAQ TSE TSE QUARTERLY QUARTERLY QUARTERLY QUARTERLY HIGH PRICE LOW PRICE HIGH PRICE LOW PRICE QUARTER ($ US) ($ US) ($ CDN) ($ CDN) ---------------------- ------------- -------------- ------------- -------------- FISCAL 1999 Q1 $13.88 $11.88 $20.25 $17.05 Q2 13.13 10.38 18.75 16.00 Q3 12.25 11.00 18.30 16.75 Q4 13.75 11.88 20.70 18.00 ---------------------- ------------- -------------- ------------- -------------- FISCAL 2000 Q1 17.00 13.06 25.85 19.65 Q2 15.31 12.00 23.00 17.75 Q3 13.69 11.00 19.90 16.25 Q4 13.13 11.03 20.50 16.05 ---------------------- ------------- -------------- ------------- --------------
As of May 31, 2000, in relation to the Subordinate Voting Shares, there were approximately 300 shareholders of record and approximately 4,000 persons who held shares in the names of nominees. One shareholder, the President and Chief Executive Officer of the Company, held all of the Multiple Voting Shares. No dividends were declared by the Registrant during the two Fiscal years ending March 31, 2000 and 1999. The Company's lending agreement with its lenders prohibits the Company from declaring dividends without the prior approval of the lenders. TAXATION The following discussion summarizes certain tax considerations relevant to an investment by individuals and corporations who, for income tax purposes, are resident in the United States and not in Canada, hold shares as capital property, and do not use or hold the shares in carrying on business through a permanent establishment or in connection with a fixed base in Canada (collectively, "Unconnected U.S. Shareholders"). The Canadian tax consequences of investment in the shares by investors who are not Unconnected U.S. Shareholders may be expected to differ substantially from the tax consequences discussed herein. This discussion is based on upon the provisions of the Income Tax Act (Canada) (the "Tax Act"), the Convention between Canada and the United States of America with respect to taxes on Income and Capital (the "Convention") and the published administrative practices of the Canada Customs and Revenue Agency and judicial decisions, all of which are subject to change. This discussion does not take into account the tax laws of the various provinces or territories of Canada. -16- This discussion is intended to be a general description of the Canadian tax considerations and does not take into account the individual circumstances of any particular shareholder. Any cash and stock dividends on the shares payable to Unconnected U.S. Shareholders generally will be subject to Canadian withholding tax. Under the Convention, the rate of withholding tax generally applicable to Unconnected U.S. Shareholders is 15%. In the case of a United States corporate shareholder owning 10% or more of the voting shares of the Company, the applicable withholding tax under the Convention is 5%. Capital gains realized on the disposition of shares by Unconnected U.S. Shareholders will not be subject to tax under the Tax Act unless such shares are taxable Canadian property within the meaning of the Tax Act. Shares will not be taxable Canadian property to a holder unless, at any time during the five-year period immediately preceding the disposition, the holder, or persons with whom the holder did not deal at arm's length, or any combination thereof, owned 25% or more of the issued shares of any class or series of the Company. If the shares are considered taxable Canadian property to a holder, the Convention will generally exempt Unconnected U.S. Shareholders from tax under the Tax Act in respect of a disposition of shares provided the value of the shares of the Company is not derived principally from real property situated in Canada. -17- ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR FINANCIAL SUMMARY (in thousands of U.S. Dollars, except per share amounts) - in accordance with United States generally accepted accounting principles.
- -------------------------------------------- ------------ ------------ ------------ ------------ ------------ YEAR ENDED MARCH 31 2000 1999 1998 1997 1996 - -------------------------------------------- ------------ ------------ ------------ ------------ ------------ OPERATIONS Revenue $340,035 $263,361 $196,488 $131,084 $90,008 EBITDA (1) $37,977 $28,767 $18,608 $12,117 $7,515 Net earnings $9,868 $7,222 $4,435 $2,708 $1,699 FINANCIAL POSITION Total assets $230,887 $184,306 $126,019 $76,624 $45,183 Long-term debt (2) $102,177 $84,516 $38,163 $28,737 $11,149 Shareholders' equity $68,338 $59,020 $44,807 $20,088 $16,704 Book value per share $5.26 $4.57 $3.65 $2.12 $1.90 SHARE DATA Net earnings per share Basic $0.76 $0.57 $0.43 $0.30 $0.21 Diluted $0.72 $0.54 $0.41 $0.30 $0.21 Weighted average shares (thousands) Basic 12,948 12,564 10.370 9,070 7,911 Diluted 13,708 13,475 10,936 9,167 8,040 Cash dividends per share - - - - - - -------------------------------------------- ------------- ------------- ------------- ------------- -------------
NOTES (1) Earnings before interest, taxes, depreciation and amortization. (2) Excluding current portion of long-term debt. ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS YEAR ENDED MARCH 31, 2000 Consolidated revenues for the year ended March 31, 2000 were $340.0 million; a 29.1% increase from the $263.4 million reported for the year ended March 31, 1999. Approximately $45.0 million of the increase resulted from the acquisitions of American Pool Enterprises Inc. ("American Pool"), Southwest Distribution Services Group ("DDS SW"), several smaller tuck-under companies and the full-year impact of acquisitions completed in Fiscal 1999. The balance resulted from internal growth of approximately 13%. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 32.0%, to $38.0 million from $28.8 million in the prior year, while EBITDA margins increased 25 basis points to 11.2% of revenue. The increased margins reflect productivity improvements, overhead leveraging and the impact of certain acquisitions including California Closet Company, Inc. ("California Closets"), which carry higher EBITDA margins. Depreciation for the year ended March 31, 2000 was $6.5 million, up 20.2% from the previous year due largely to acquisitions. However, the increase also reflects a sharp step-up in capital investment in management information systems over the past three years. Generally, these investments are depreciated over a short time frame relative to the Company's other pool of assets. Amortization for the year was $3.6 million, up 31.7% over Fiscal 1999 due to the -18- significant amount of goodwill that has resulted from the acquisitions completed during the years ended March 31, 2000 and 1999. Interest expense increased 40.4% over prior year levels to $7.8 million as a result of increased borrowings related to acquisitions completed during Fiscal 2000 and 1999 and higher interest rates. All acquisitions completed during the last two Fiscal years have been financed through the Company's credit facilities. The income tax provision for the year ended March 31, 2000 was approximately 39.9% of earnings before taxes, compared with 42.6% for the year ended March 31, 1999. The lower tax provision reflects a more efficient cross-border tax structure resulting from amendments to the Company's credit facilities on April 1, 1999, which split the facilities into separate Canadian and US tranches. The Company expects its effective tax rate for Fiscal 2001 to closely reflect the rate experienced in Fiscal 2000. Minority interest expense increased to $2.2 million or 18.0% of earnings before minority interest from $1.4 million, or 16.3% in the prior year. The increase reflects a change in the mix of earnings relative to the prior year as certain operations having higher minority shareholdings contributed more to consolidated earnings. In the future, the Company expects minority interest as a percentage of earnings before minority interest to approximate the rate experienced in Fiscal 2000. In those operations where operating management are also minority owners, the Company is party to a shareholders' agreement. These agreements allow the Company to "call" the minority position for a predetermined formula price, which is usually equal to the multiple of earnings paid by the Company for the original acquisition. While it is not management's intention to acquire outstanding minority interests, this step would materially increase earnings per share. Minority owners may also "put" their interest to the Company at the same price, with certain limitations. The purchase price may, at the option of the Company, be paid primarily in Subordinate Voting Shares of the Company. Net earnings were $9.9 million, a 36.6% increase over the prior year, while diluted earnings per share increased 33.3% to $0.72. Diluted earnings per share reflect a 1.7% increase in the weighted average number of shares outstanding primarily as a result of the shares issued for the acquisition of an additional 34.9% interest in Intercon Security Ltd. ("Intercon Security") in December 1998. Revenues for the Property Services division were $266.7 million, an increase of $61.6 million or 30% over the prior year. Approximately $35.0 million of the revenue increase resulted from the acquisitions of American Pool and several tuck-under companies in Fiscal 2000 in addition to the full year impact of acquisitions completed during Fiscal 1999. The balance of the increase resulted from internal growth. Property Services EBITDA grew 36.3% to $27.2 million or 10.2% of revenue compared to an EBITDA margin of 9.7% in the prior year. The margin increase reflects productivity improvements, some price increases and the impact of the higher margin American Pool operations offset in part by strong growth in the lower margin security and community association management operations. Revenues for the Business Services division were $73.2 million, an increase of 25.8% or $15.0 million over 1999, a consequence of strong double-digit internal growth and the impact of the acquisition of DDS SW. Strong internal growth primarily reflected increases in the scope of services provided to several clients at both BDP and DDS. -19- Business Services EBITDA grew 22.5% to $14.7 million, while margins fell slightly to 20.1% from 20.5%, primarily reflecting higher expenses at DDS relating to capacity expansion. Corporate expenses increased to $4.0 million in Fiscal 2000 from $3.2 million as a result of higher staffing levels and increased travel and legal costs related, in part, to the investigation of prospective acquisitions that were not completed. RESULTS OF OPERATIONS YEAR ENDED MARCH 31, 1999 Consolidated revenues for the year ended March 31, 1999 were $263.4 million; a 34% increase from the $196.5 million reported for the year ended March 31, 1998. Approximately $41.8 million of the increase resulted from the acquisitions of the Harris Fulfillment and Harris Direct Mail divisions of Telespectrum Worldwide Inc. ("DDS Harris"), California Closets, several smaller tuck-under companies and the full-year impact of acquisitions completed in Fiscal 1998. The balance resulted from internal growth of approximately 13%. Earnings before interest, taxes, depreciation and amortization increased 55%, to $28.8 million from $18.6 million in the prior year, while EBITDA margins increased 140 basis points to 10.9% of revenue. The increased margins reflect approximately 25 basis points of enhancement primarily from overhead leveraging and productivity improvements. The balance of the increase in consolidated margins reflects the impact of acquisitions including Paul W. Davis Systems, Inc. ("Paul Davis"), DDS Harris and California Closets, which carry higher EBITDA margins. Depreciation for the year ended March 31, 1999 was $5.4 million, up 52% from the previous year due largely to acquisitions. However, the increase also reflected a sharp step-up in capital investment in management information systems over the past two years. Amortization for the year was $2.7 million, up 60% over Fiscal 1998 due to the significant amount of goodwill that has resulted from the acquisitions completed during the years ended March 31, 1999 and 1998. Interest expense increased 73% over prior year levels to $5.6 million as a result of increased borrowings related to acquisitions completed during Fiscal 1999 and 1998. The income tax provision for the year ended March 31, 1999 was approximately 42.6% of earnings before taxes, compared with 39.2% for the year ended March 31, 1998. The higher tax provision resulted from the non-deductibility of goodwill related to several acquisitions in 1999 and 1998. Minority interest expense decreased to $1.4 million from $1.7 million, reflecting the following increases in the Company's ownership positions in subsidiary companies: The Franchise Company from 76% to 80%; DDS Distribution Services Ltd. from 80% to 89%; The Wentworth Group, Inc. from 60% to 80%; and Intercon Security from 50.1% to 85%. Net earnings were $7.2 million, a 63% increase over the prior year, while diluted earnings per share increased 32% to $0.54. Diluted earnings per share reflect a 23% increase in the weighted average number of shares outstanding primarily as a result of the full year impact of the November 26, 1997 public offering of 2.5 million shares. -20- Revenues for the Property Services division were $205.1 million, an increase of $45.2 million or 28% over the prior year. Approximately $28.6 million of the revenue increase results from the acquisitions of California Closets and several smaller community association management companies, and the full year impact of acquisitions completed during Fiscal 1998. The balance of the increase resulted from internal growth. Property Services EBITDA grew 44% to $20.0 million or 9.7% of revenue compared to an EBITDA margin of 8.7% in the prior year. The margin increase reflects productivity improvements, some price increases and the impact of the higher margin Paul Davis and California Closets operations offset in part by strong growth in the lower margin security and community association management operations. Revenues for the Business Services division were $58.2 million, an increase of 59% over 1998, a consequence of internal growth of greater than 25% and the impact of the Harris Fulfillment acquisition. Strong internal growth reflected the impact of a large student loan processing contract secured early in the Fiscal year by BDP and significant increases in the scope of services provided to several clients at both BDP and DDS. Business Services EBITDA grew 67% to $12.0 million, while margins grew to 20.5% from 19.6%, primarily as a result of productivity improvements. Corporate expenses increased to $3.2 million in 1999 from $2.5 million primarily as a result of higher salary costs. 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 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 community association management, security, business services and many of the franchise systems generate revenues approximately 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 that 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 Net cash provided by operating activities for the year ended March 31, 2000 was $19.7 million, up approximately 140% over the prior year. The significant increase in cash flow is the result of a concerted effort by operating management to more effectively manage working -21- capital. Working capital investment increased by only $4.0 million during Fiscal 2000 compared to a $9.4 million increase during Fiscal 1999. Bank borrowings and cash flow from operations have historically been the primary funding sources for working capital requirements, capital expenditures and acquisitions. Management believes that funds from these sources and proceeds from capital stock issues 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 of $50 million Cdn. and $130 million U.S. to fund acquisitions. Outstanding indebtedness under the facilities bears interest at a rate based on competitive floating reference rates, as selected by the Company, such as LIBOR, plus a margin of 1.00% to 1.50% per annum, depending on certain leverage ratios. The agreement requires the Company to meet specific financial ratios and places certain limitations on additional borrowing and the ability to pay dividends or sell assets. As of March 31, 2000, the Company had drawn $99.4 million U.S. and was in compliance with all financial covenants. Net borrowings increased by approximately $19.0 million from March 31, 1999 to March 31, 2000, however all key financial coverage ratios showed significant improvement. At March 31, 2000, the Company had an interest rate swap contract to December 31, 2002 at a fixed rate of 5.3% in the amount of approximately $14 million to hedge against interest rate exposure on a portion of its revolving facilities. On April 1, 2000 the Company cancelled the swap contract for a gain of $251,000. The Company is exposed to certain foreign currency exchange risks. The Company's exposure to losses may be mitigated as the lending agreement provides that it may borrow in Canadian or U.S. funds. During Fiscal 2000, capital expenditures totaled $8.8 million comprising approximately $4.0 million in expenditures on management information systems with the balance split between vehicles and production equipment. For the upcoming year, capital expenditures are expected to approximate Fiscal 2000 levels with reduced spending anticipated for information systems offset by increased expenditures for facilities and leasehold improvements to support expansion requirements in the Business Services division. Acquisition expenditures during the year totaled $22.0 million. All of the acquisition consideration was in the form of cash. In connection with certain acquisitions, the Company has agreed to pay additional consideration contingent on the future operating results of the acquired entity. The payment of any such amounts would be in cash and would result in an increase in the purchase prices for such acquisitions and, as a result, additional goodwill. YEAR 2000 The Company has addressed the Year 2000 issue, which is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, computer applications and software may have recognized an input of two zeros (00) as the -22- year 1900. This incorrect date recognition could have caused systems and software malfunctions that may have had a material adverse effect on business operations. This potential problem could have affected not only the Company's internal information systems and other infrastructure containing embedded technology, but also those of third parties, such as customers and suppliers using systems that may interact with or affect the Company's operations or, in the case of the Company's security operation, systems supplied by the Company. Beginning in late Fiscal 1997 the Company undertook a comprehensive review of its software applications and computer infrastructure and other infrastructure containing embedded technology that were likely to be affected by the Year 2000 issue. The review was completed in Fiscal 1999 using the Company's employees and various computer consultants. As a result of this review, new systems or upgrades were implemented at several of the operations during Fiscal 1998, Fiscal 1999 and the first half of Fiscal 2000. The Company experienced no material difficulties with its internal systems in the transition from the year 1999 to the year 2000. The Company also did not experience any material Y2K-related difficulties with its providers of goods and services and it did not experience any material difficulties in facilities in which the Company was providing systems or services. Many of the systems upgrades that dealt with the Y2K issue would have occurred in the normal course of business. In other cases, the Company accelerated normal course systems replacements or upgrades in view of the Y2K issue. The costs incurred to replace non-compliant systems that would not otherwise have been replaced were not material. All Year 2000 costs were funded with cash from operations. FORWARD-LOOKING STATEMENTS This Management Discussion and Analysis of Financial Condition and Results of Operations contains 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. -23- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Set forth below is the report of PricewaterhouseCoopers LLP dated May 9, 2000, the consolidated balance sheets of FirstService Corporation as at March 31, 2000 and 1999, the consolidated statements of earnings, shareholders' equity and cash flows for the three-year period ended March 31, 2000 and the notes to the financial statements. -24- FIRSTSERVICE CORPORATION FINANCIAL STATEMENTS (STATED IN U.S. DOLLARS AND IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES) MARCH 31, 2000 -25- AUDITORS' REPORT TO THE SHAREHOLDERS OF FIRSTSERVICE CORPORATION We have audited the consolidated balance sheets of FirstService Corporation as at March 31, 2000 and 1999 and the consolidated statements of earnings, shareholders' equity and cash flows for each year in the three-year period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2000 and 1999 and the results of its operations and cash flows for each year in the three-year period ended March 31, 2000 in accordance with United States generally accepted accounting principles. PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario May 9, 2000 -26- FIRSTSERVICE CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (in thousands of U.S. Dollars, except per share amounts) - in accordance with United States generally accepted accounting principles.
For the years ended March 31 2000 1999 1998 - ------------------------------------------------------------------------------------------------------- Revenues $340,035 $263,361 $196,488 Cost of revenues 226,154 176,089 130,645 Selling, general and administrative expenses 75,904 58,505 47,235 Depreciation and amortization 10,107 8,145 5,277 Interest 7,849 5,589 3,232 - ------------------------------------------------------------------------------------------------------- Earnings before income taxes and minority interest 20,021 15,033 10,099 Income taxes (note 10) 7,989 6,402 3,960 - ------------------------------------------------------------------------------------------------------- Earnings before minority interest 12,032 8,631 6,139 Minority interest share of earnings 2,164 1,409 1,704 - ------------------------------------------------------------------------------------------------------- NET EARNINGS $ 9,868 $ 7,222 $ 4,435 ======================================================================================================= Earnings per share (note 11) NET EARNINGS: BASIC $ 0.76 $ 0.57 $ 0.43 DILUTED $ 0.72 $ 0.54 $ 0.41 =======================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -27- FIRSTSERVICE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of U.S. Dollars) - in accordance with United States generally accepted accounting principles.
As at March 31 2000 1999 - -------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,297 $ 4,627 Accounts receivable, net of an allowance of $3,273 (1999 - $2,620) 53,170 41,360 Inventories (note 4) 8,929 7,969 Prepaids and other 8,491 6,759 Deferred income taxes (note 10) 1,063 1,716 - -------------------------------------------------------------------------------------------------------- 74,950 62,431 - -------------------------------------------------------------------------------------------------------- Other receivables (note 5) 4,405 3,425 Fixed assets (note 6) 29,693 25,847 Other assets (note 6) 4,074 3,429 Deferred income taxes (note 10) 270 410 Goodwill (note 7) 117,495 88,764 - -------------------------------------------------------------------------------------------------------- 155,937 121,875 - -------------------------------------------------------------------------------------------------------- $ 230,887 $ 184,306 ======================================================================================================== LIABILITIES CURRENT LIABILITIES Accounts payable $ 11,752 $ 8,156 Accrued liabilities 23,013 17,857 Income taxes payable 2,879 1,181 Unearned revenue 10,725 6,099 Long-term debt - current (note 8) 2,733 1,726 Deferred income taxes (note 10) 459 543 - -------------------------------------------------------------------------------------------------------- 51,561 35,562 - -------------------------------------------------------------------------------------------------------- Long-term debt less current portion (note 8) 102,177 84,516 Deferred income taxes (note 10) 1,836 319 Minority interest 6,975 4,889 - -------------------------------------------------------------------------------------------------------- 110,988 89,724 - -------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Capital stock (note 9) 53,849 53,654 Issued and outstanding 12,326,683 (1999 - 12,256,208) Subordinate Voting Shares and 662,847 convertible Multiple Voting Shares (1999 - 662,847) Receivables pursuant to company's share purchase plan (note 9) (3,294) (3,294) Retained earnings 15,614 6,168 Cumulative other comprehensive earnings 2,169 2,492 - -------------------------------------------------------------------------------------------------------- 68,338 59,020 - -------------------------------------------------------------------------------------------------------- $ 230,887 $ 184,306 ========================================================================================================
Commitments and contingencies (note 14) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. Signed on behalf of the Board Director Director -28- FIRSTSERVICE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands of U.S. Dollars) - in accordance with United States generally accepted accounting principles.
Receivables Cumulative Issued and pursuant to other outstanding Capital share Retain comprehensive Total shares stock purchase earnings earnings shareholders' (note 9) (note 9) plan (deficit) (deficit) equity - ---------------------------------------------------------------------------------------------------------------- Balance, March 31, 1997 9,456,444 $ 27,033 $(1,584) $ (4,818) $ (543) $ 20,088 - ---------------------------------------------------------------------------------------------------------------- Comprehensive earnings: Net earnings -- -- -- 4,435 -- 4,435 Foreign currency translation adjustments -- -- -- -- (302) (302) -------- Comprehensive earnings 4,133 -------- Subordinate Voting Shares Issued for purchase of Minority interest 110,235 857 -- -- -- 857 Stock options exercised 154,159 644 -- -- -- 644 Issued under share purchase plan 115,000 902 (902) -- -- -- Purchased for cancellation (50,300) (146) -- -- -- (146) Issued under public offering 2,500,000 19,206 -- -- -- 19,206 Cash payments on share purchase plan -- -- 157 -- -- 157 Cost of shares repurchased in excess of stated capital -- -- -- (132) -- (132) - ---------------------------------------------------------------------------------------------------------------- Balance, March 31, 1998 12,285,538 48,496 (2,329) (515) (845) 44,807 - ---------------------------------------------------------------------------------------------------------------- Comprehensive earnings: Net earnings -- -- -- 7,222 -- 7,222 Foreign currency translation adjustments -- -- -- -- 3,337 3,337 -------- Comprehensive earnings 10,559 -------- Subordinate Voting Shares Issued for purchase of Minority interest 239,437 2,823 -- -- -- 2,823 Stock options exercised 358,380 1,375 -- -- -- 1,375 Issued under share purchase plan 97,500 1,166 (1,166) -- -- -- Purchased for cancellation (61,800) (206) -- -- -- (206) Cash payments on share purchase plan -- -- 201 -- -- 201 Cost of shares repurchased in excess of stated capital -- -- -- (539) -- (539) - ---------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 12,919,055 53,654 (3,294) 6,168 2,492 59,020 - ---------------------------------------------------------------------------------------------------------------- Comprehensive earnings: Net earnings -- -- -- 9,868 -- 9,868 Foreign currency translation adjustments (note 12) -- -- -- -- (323) (323) -------- Comprehensive earnings 9,545 -------- Subordinate Voting Shares Stock options exercised 132,475 465 -- -- -- 465 Purchased for cancellation (62,000) (270) -- -- -- (270) Cost of shares repurchased in excess of stated capital -- -- -- (422) -- (422) - ---------------------------------------------------------------------------------------------------------------- Balance, March 31, 2000 12,989,530 $ 53,849 $(3,294) $ 15,614 $ 2,169 $ 68,338 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -29- FIRSTSERVICE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. Dollars) - in accordance with United States generally accepted accounting principles.
For the years ended March 31 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net earnings $ 9,868 $ 7,222 $ 4,435 Items not affecting cash Depreciation and amortization 10,107 8,145 5,277 Deferred income taxes 1,087 418 1,251 Minority interest share of earnings 2,164 1,409 1,704 Other 446 292 277 - -------------------------------------------------------------------------------------------------------- 23,672 17,486 12,944 Changes in operating assets and liabilities Accounts receivable (2,080) (7,015) (3,477) Inventories (949) 2,084 (715) Prepaids and other (1,360) (681) (713) Account payable (1,395) (4,242) 422 Accrued liabilities 686 2,610 839 Income taxes payable 1,698 (634) 490 Unearned revenue (599) (1,500) 766 - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 19,673 8,108 10,556 - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired (22,069) (38,831) (31,802) Purchase of minority shareholders' interest -- (2,956) (30) Purchases of fixed assets (8,824) (5,810) (5,547) Proceeds from sale of business and other assets 105 2,648 -- Purchases of other assets (1,038) (569) (964) (Increase) decrease in other receivables (980) (2,382) 449 - -------------------------------------------------------------------------------------------------------- Net cash used in investing (32,806) (47,900) (37,894) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increases in long-term debt 23,056 48,079 10,638 Repayments of long-term debt (10,706) (6,995) (3,530) Financing fees paid (545) (746) (194) Proceeds received on Subordinate Voting Shares 465 1,576 19,294 Subordinate Voting Shares repurchased (692) (745) (278) Dividends paid to minority shareholders of subsidiaries (190) (226) (197) - -------------------------------------------------------------------------------------------------------- Net cash provided by financing 11,388 40,943 25,733 - -------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 415 847 403 - -------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents during the year (1,330) 1,998 (1,202) Cash and cash equivalents, beginning of year 4,627 2,629 3,831 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 3,297 $ 4,627 $ 2,629 ========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -30- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands of U.S. Dollars, except per share amounts, in accordance with United States generally accepted accounting principles) 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 property management, security, franchised services and lawn care, which represents 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 SIGNIFICANT ACCOUNTING POLICIES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates are related to fixed assets and goodwill. Actual results could be materially different from these estimates. Significant accounting policies are summarized as follows: BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and accounts are eliminated on consolidation. CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid investments, which are readily convertible into cash and have maturities of three months or less. INVENTORIES Inventories are carried at the lower of cost and net realizable value. Cost is determined by the weighted average or first-in, first-out methods. The weighted average and the first-in, first-out methods represent approximately 45% and 55% of total inventories, respectively. Finished goods and work-in progress include the cost of materials, direct labor and manufacturing overhead costs. FIXED ASSETS Fixed assets are stated at cost less accumulated depreciation and amortization. The cost of additions and improvements are capitalized while maintenance and repairs are expensed as incurred. Fixed assets are depreciated and amortized over their estimated useful lives as follows: Buildings 40 years straight-line Vehicles 3 to 10 years straight-line Furniture and equipment 20% to 30% declining balance and 3 to 10 years straight-line Computer equipment and software 20% declining balance and 3 to 5 years straight-line Enterprise system software 10 years straight-line Leasehold improvements term of the leases to a maximum of 10 years
The Company reviews the carrying value of fixed assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. -31- GOODWILL AND OTHER ASSETS These assets are stated at cost less accumulated amortization. Goodwill, which represents costs in excess of net assets acquired, and other assets are amortized on a straight-line basis over periods expected to be benefited at the following rates: Goodwill 10 to 40 years Management contracts over life of contract Deferred costs 1 to 3 years
Goodwill in excess of associated expected operating cash flows determined on an undiscounted cash flow basis is considered to be impaired and is written down to fair value. Any difference would be recorded as an impairment adjustment. Management is of the opinion that there has been no decline in the value assigned to goodwill. Financing fees are amortized on a straight-line basis over the term of the associated debt. REVENUE RECOGNITION AND UNEARNED REVENUE (a) Business services and company owned property services Revenue is recognized at the time the service is rendered or the product is shipped. Revenue for contracts in process is recognized on the percentage of completion method, generally in the ratio of actual costs incurred to total estimated contract costs. Amounts received from customers in advance of services being provided are recorded as unearned revenue when received. (b) Franchised property services The Company's franchised property services are conducted principally through subsidiaries California Closet Company, Inc. ("California Closets"), Paul W. Davis Systems, Inc. ("Paul Davis"), Certa ProPainters Ltd. in the United States and Canada (collectively - "Certa ProPainters"), and College Pro Painters U.S. Ltd. and in Canada by College Pro Painters Ltd. (collectively - "College Pro"). Initial franchise fees are recognized by California Closets, Paul Davis and Certa ProPainters when the required initial services have been substantially performed. College Pro does not charge any such fees to franchisees. Royalties are generally charged as a percentage of revenue, as defined, where reported by the franchisees except for Certa ProPainters, where the franchisees are charged a fixed monthly amount. Revenue from administrative and other support services, as applicable, is recognized as the services are provided. ADVERTISING COSTS Advertising costs are expensed as incurred except for direct response advertising, which is recorded as a current asset and is amortized over the period of expected sales revenue resulting from such advertising. FOREIGN CURRENCY TRANSLATION Effective April 1, 1999, the Company adopted the U.S. Dollar as its reporting currency since a majority of the Company's revenues, expenses, assets and liabilities are in the United States and the increasing focus of the Company's operations are in that country. Comparative financial statements were restated as if the U.S. Dollar had been the reporting currency in prior years. Assets and liabilities of the Company's Canadian operations where the functional currency is other than U.S. dollars are translated into U.S. dollars at the exchange rates prevailing at year-end and revenue and expenses at the weighted average exchange rates for the year. All exchange gains and losses on translation are shown as a separate component of shareholders' equity. INCOME TAXES Income taxes have been provided using the liability method whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial -32- statements or tax returns. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period in which the change occurs. Income taxes are not provided on the unremitted earnings of U.S. subsidiaries since it has been the practice and is the intention of the Company to reinvest these earnings in the U.S. businesses. STOCK BASED COMPENSATION The Company measures compensation costs for employee stock options using the intrinsic value method as prescribed by APB opinion No. 25, Accounting for Stock Issued to Employees. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of entities comprising the Company's customer base and their dispersion across many different service industries in two countries. FINANCIAL INSTRUMENTS Financial instruments are initially recorded at historical cost. If subsequent circumstances indicate that a decline in the fair value of a financial asset is other than temporary, the financial asset is written down to its fair value. The fair values of accounts receivable, accounts payable, accrued liabilities, income taxes payable and unearned revenue approximate recorded amounts because of the short period to maturity of these instruments. The fair values of other receivables and long-term debt are based on rates applicable to the Company based on similar items and maturities of these instruments. Off-balance sheet derivative financial instruments included interest rate swap contracts to hedge against interest rate exposure on a portion of the Company's long-term revolving debt facilities and are fair valued based on current termination values or quoted market prices of comparable contracts. 3. SIGNIFICANT BUSINESS ACQUISITIONS 2000 ACQUISITIONS: Effective June 1, 1999, the Company acquired an 80% interest in American Pool Enterprises, Inc. ("American Pool") headquartered in Maryland. American Pool provides commercial swimming pool management services. Effective July 1, 1999, an 89% owned subsidiary of the Company (DDS Distribution Services Ltd. or "DDS") acquired 100% of Southwest Distribution Services Group ("DDS SW"), a Texas based textbook fulfillment business. 1999 ACQUISITIONS: Effective April 1, 1998, DDS acquired 100% of the Harris Fulfillment and Harris Direct Mail divisions of Telespectrum Worldwide Inc. ("DDS Harris") headquartered in Pennsylvania. Effective October 1, 1998, an 80% owned subsidiary of the Company, The Franchise Company, acquired 90% of California Closets, a California based franchisor of installed closet and home storage systems. 1998 ACQUISITIONS: Effective June 19, 1997, the Company acquired 80.1% of The Continental Group, Inc. ("Continental Group"), a full service community association management company headquartered in Florida. Effective November 1, 1997, The Franchise Company acquired 100% of Paul Davis, a Florida based franchisor of general contracting and cleaning businesses. -33- Details of these acquisitions are as follows:
2000 1999 1998 ------------------ ---------------------- --------------------- American DDS SW DDS Harris California Continental Paul Pool Closets Group Davis Net assets acquired, at fair market value: Tangible assets, net of liabilities $ (6,444) $ 673 $ 5,448 $ 577 $ 3,011 $ 306 Minority interest -- -- -- (57) (599) -- -------- -------- -------- -------- -------- -------- (6,444) 673 5,448 520 2,412 306 -------- -------- -------- -------- -------- -------- Consideration Cash 4,755 8,711 23,000 12,488 13,100 11,005 -------- -------- -------- -------- -------- -------- Goodwill $ 11,199 $ 8,038 $ 17,552 $ 11,968 $ 10,688 $ 10,699 ======== ======== ======== ======== ======== ========
In addition to the acquisitions disclosed above, the Company made various other acquisitions for total consideration of $5,730 (1999 - $9,403) (1998 - $10,515) comprised of cash of $5,730 (1999 - $6,580) (1998 - $9,658) and capital stock of $nil (1999 - $2,823) (1998 - $857) to acquire net assets of $1,040 (1999 - $1,505) (1998 - $53) resulting in goodwill of $4,690 (1999 - $7,898) (1998 - $10,462). In 2000 and 1999, the Company also disposed of business assets of subsidiaries with a net book value of $209 (1999 - $1,481) for net proceeds of $105 (1999 - $1,682). In addition to the consideration disclosed above, certain vendors, at the time of acquisition, were entitled to receive contingent payments if the acquired business exceeded certain financial thresholds during the two to three-year period following the date of acquisition as follows:
Name of acquired business Amount of contingent consideration at date of acquisition American Pool $2,800 DDS SW 3,000 DDS Harris 4,000 California Closets 3,600 Continental Group 1,500
As at March 31, 2000 all vendors, including those above, are entitled to receive contingent payments of up to $13,095 during the period extending to March 2003. These amounts have been treated as contingent consideration and any resulting payments will be recorded as goodwill when the contingencies are resolved and the consideration is issuable. Contingent consideration paid or accrued during the year ended March 31, 2000 was $6,570 (1999 - $nil) (1998 - $233). The acquisitions referred to above were accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of earnings and comprehensive income do not include any revenues or expenses related to these acquisitions prior to these respective closing dates. The cash portions of the acquisitions were financed through available cash and borrowings from the Company's revolving acquisition facility. Following are the Company's unaudited pro forma results assuming the acquisitions of American Pool, DDS SW, DDS Harris, California Closets, Continental Group and Paul Davis occurred on April 1 on the respective year of acquisition. The year immediately prior to the year of each respective acquisition also includes the pro forma results of that respective acquisition. -34-
2000 1999 1998 ----------- ----------- ---------- Pro forma revenue $ 347,072 $ 299,020 $ 240,116 Pro forma net earnings $ 10,498 $ 8,768 $ 5,260 Pro forma earning per share: Basic $ 0.81 $ 0.70 $ 0.51 Diluted $ 0.76 $ 0.65 $ 0.48
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of results of operations that would have actually resulted had the combinations been in effect at the beginning of each year or of future results of operations. 4. INVENTORIES
2000 1999 ---------------- ------------- Supplies and other $ 3,637 $ 3,693 Finished goods 2,969 2,534 Work-in-progress 2,071 1,627 Small equipment 252 115 -------------- ------------- Total $ 8,929 $ 7,969 ============== =============
5. OTHER RECEIVABLES Included in other receivables are: (a) $2,137 (1999 - $1,040) of secured non-interest bearing loans due from minority shareholders of four (1999 - two) subsidiaries; (b) $885 (1999 - $2,385) of other long-term receivables primarily relating to restoration and security installation projects conducted by the Company's property services group; and (c) $1,383 (1999 - $nil) of interest bearing franchise fees receivable from franchisees in the Company's franchised property services group. 6. FIXED ASSETS AND OTHER ASSETS 2000
Accumulated depreciation/ Net Cost amortization 2000 ----------------- --------------- -------------- FIXED ASSETS Land $ 937 $ - $ 937 Buildings 5,596 858 4,738 Vehicles 11,646 6,974 4,672 Furniture and equipment 18,823 10,880 7,943 Computer equipment and software 12,039 7,613 4,426 Enterprise system software 3,720 740 2,980 Leasehold improvements 7,839 3,842 3,997 ----------------- --------------- -------------- Total $ 60,600 $ 30,907 $29,693 ================= =============== ============== ============== OTHER ASSETS Investments $ 725 $ - $ 725 Financing fees 3,093 1,066 2,027 Management contracts 1,696 636 1,060 Deferred costs 1,107 845 262 ----------------- --------------- -------------- Total $ 6,621 $ 2,547 $ 4,074 ================= =============== ==============
-35- 1999
Accumulated depreciation/ Net Cost amortization 1999 ----------------- --------------- -------------- FIXED ASSETS Land $ 937 $ - $ 937 Buildings 5,564 685 4,879 Vehicles 7,552 4,139 3,413 Furniture and equipment 18,192 11,647 6,545 Computer equipment and software 9,564 5,493 4,071 Enterprise system software 2,811 330 2,481 Leasehold improvements 5,869 2,348 3,521 ---------------- --------------- -------------- Total $ 50,489 $ 24,642 $ 25,847 ================ =============== ============== OTHER ASSETS Investments $ 108 $ - $ 108 Financing fees 2,548 630 1,918 Management contracts 1,575 706 869 Deferred costs 1,069 535 534 ---------------- --------------- -------------- Total $ 5,300 $ 1,871 $ 3,429 ================ =============== ==============
Included in fixed assets are vehicles under capital lease at a cost of $3,662 (1999 - $2,924) with a net book value of $2,103 (1999 - $1,615) and computer equipment and software under capital lease at a cost of $3,849 (1999 - $3,898) with a net book value of $1,714 (1999 - $2,282). 7. GOODWILL
2000 1999 --------------- ----------------- Cost $ 125,750 $ 94,264 Less: Accumulated amortization 8,255 5,500 --------------- ----------------- $ 117,495 $ 88,764 =============== =================
8. LONG-TERM DEBT
2000 1999 --------------- ----------------- Revolving debt facility of $130,000 U.S. and $50,000 Cdn. due June 1, 2004 $ 99,400 $ 81,913 Obligations under capital leases bearing interest ranging primarily from 6% to 9% and maturing at various dates through the year 2005 2,891 3,175 Vendor-take-back notes bearing interest primarily at 8%, and other long-term debt maturing at various dates through the year 2002 2,619 1,154 --------------- ----------------- 104,910 86,242 Less: Current portion 2,733 1,726 --------------- ----------------- $ 102,177 $ 84,516 =============== =================
The revolving debt facility at March 31, 2000 is comprised of borrowings of $99,400 U.S. and at March 31, 1999, $103,970 Cdn. ($68,913 U.S.) and $13,000 U.S. Included in capital leases at March 31, 2000 and 1999 are obligations in Canadian dollars of $2,486 ($1,715 U.S.) and at March 31, 1999 of $3,552 ($2,354 U.S.) respectively. Included in the vendor-take-back notes at March 31, 2000 and 1999 are obligations in Canadian dollars of $364 ($251 U.S.) and $801 ($531 U.S.) respectively. -36- At March 31, 2000, the estimated aggregate amount of principal repayments on long-term debt required in each of the next five fiscal years and thereafter to meet the retirement provisions are as follows: 2001 $ 2,733 2002 2,030 2003 307 2004 143 2005 99,697
On April 1, 1999 the Company amended and restated its lending agreement. The amended facility split the senior debt facility into a $50 million Cdn. ($34.5 million U.S.) and a $130 million U.S. tranche. The new facility provided approximately $47 million Cdn. ($32.4 million U.S.) of additional credit over the previous $200 million Cdn. ($138.0 million U.S.) facility. Other terms of the facility remain unchanged from those arranged in June 1998. The revolving facility provides that the Company may borrow using LIBOR or Bankers Acceptances interest rate options that vary within a range depending on certain leverage ratios. Borrowings currently bear interest at the lenders' cost of funds rate plus 1.25%. The Company had an interest rate swap contract to December 31, 2002 at a fixed rate of 5.3% in the amount of $20 million Cdn. ($13.8 million U.S.) to hedge against interest rate exposure on a portion of its revolving facility. On April 1, 2000, the company cancelled this interest rate swap contract for a gain of $251. As security for the debt facility, the Company has granted the lenders various security including the following: an interest in all of the assets of the Company including the Company's share of its subsidiaries, an assignment of material contracts and an assignment of the Company's "call rights" with respect to shares of the subsidiaries held by minority interests. The lending agreement prohibits the Company from paying dividends and without prior approval from undertaking significant mergers, acquisitions and dispositions. The covenants also require the Company to maintain certain ratios, including debt to EBITDA, debt to capitalization, fixed charge coverage, working capital, business value and debt to interest coverage. 9. CAPITAL STOCK The authorized capital stock of the Company is as follows: An unlimited number of preference shares, issuable in series; An unlimited number of Subordinate Voting Shares having one vote per share; and An unlimited number of Multiple Voting Shares having 20 votes per share, convertible at any time into Subordinate Voting Shares at a rate of one Subordinate Voting Share for every Multiple Voting Share outstanding. The following table provides a continuity of total capital stock:
SUBORDINATE VOTING SHARES MULTIPLE VOTING SHARES Total Total Number Amount Number Amount Number Amount ------------- ---------- --------- ----------- ------------ ---------- Balance, March 31, 1997 8,793,597 $26,660 662,847 $373 9,456,444 $27,033 Balance, March 31, 1998 11,622,691 48,123 662,847 373 12,285,538 48,496 Balance, March 31, 1999 12,256,208 53,281 662,847 373 12,919,055 53,654 Balance, March 31, 2000 12,326,683 53,476 662,847 373 12,989,530 53,849
During the year ended March 31, 1998, the Company completed an offering of 2,500,000 Subordinate Voting Shares at $8.00 to a syndicate of underwriters led by Credit Suisse First Boston Corporation and ABN AMRO Chicago Corporation for proceeds of $19,206 net of expenses of $1,507 and a deferred tax asset of $713. -37- The Company has $3,294 (1999 - $3,294) of secured non-interest bearing loans related to the purchase of 522,500 Subordinate Voting Shares (1999 - 522,500 shares). The loans, which are secured by the shares issued, have a five-year term from the grant date; however, they are open for repayment at any time. The maturities of these loans are as follows:
Year ending March 31 2002 $ 1,226 2003 902 2004 1,166 --------------- $ 3,294 ===============
The Company has a Stock Option Plan for directors, officers and key full-time employees of the Company and its subsidiaries. At March 31, 2000 a total of 2,850,000 Subordinate Voting Shares were reserved and approved by the shareholders of the Company for issuance pursuant to stock options. Each option usually vests over a four-year term and expires five years from the date granted and allows for the purchase of one Subordinate Voting Share. At March 31, 2000 there were 1,879,200 options outstanding to 80 employees and directors at prices ranging from $5.00 to $21.00 Cdn. per share, which expire on various dates through March 2005. There were 160,320 options available for future grants as at March 31, 2000. The number of Subordinate Voting Shares issuable under options and the average option prices per share in $Cdn. are as follows:
SHARES ISSUABLE UNDER OPTIONS WEIGHTED AVERAGE PRICE PER SHARE ($CDN.) ------------------------------------------ --------------------------------------- 2000 1999 1998 2000 1999 1998 ------------------------------------------ --------------------------------------- Shares issuable under options - Beginning of year 1,342,675 1,558,180 1,250,305 $ 8.10 $ 7.17 $ 5.41 Granted 669,000 171,500 504,034 17.61 11.91 10.50 Exercised for cash (132,475) (358,380) (154,159) 5.17 5.78 5.87 Expired or cancelled - (28,625) (42,000) - 8.67 5.26 ----------- ----------- ----------- --------- ---------- ----------- Shares issuable under options - End of year 1,879,200 1,342,675 1,558,180 $ 11.62 $ 8.10 $ 7.17 =========== =========== =========== ========= ========== =========== Options exercisable - End of year 896,803 726,459 836,909 =========== =========== ===========
The weighted average fair value of options granted in 2000, 1999 and 1998 was $4.54 ($6.68 Cdn.), $3.91 ($5.89 Cdn.) and $3.03 ($4.25 Cdn.) per share, respectively. The options outstanding as at March 31, 2000 to purchase Subordinate Voting Shares are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ---------------------------- Weighted-average Weighted-average Weighted-average remaining exercise exercise Number contractual price Number price Range of exercise prices ($Cdn.) outstanding life (years) ($Cdn.) exercisable ($Cdn.) ---------------------------------- ------------ ------------- ------------- ------------- ------------- $5.00 to $5.69 606,950 1.22 $ 5.43 520,715 $ 5.43 $8.00 to $12.37 461,250 2.34 10.27 207,563 10.27 $13.50 to $21.00 811,000 3.84 17.02 168,525 16.27 ------------ ------------- ------------- ------------- ------------- 1,879,200 2.77 $ 11.62 896,803 $ 8.59 ============ ============= ============= ============= =============
Statement of Financial Accounting Statements ("SFAS") No. 123 requires pro forma disclosures of earnings and earnings per share as if the fair value method of accounting for employee stock options had been applied. The following table presents the results that would be obtained if the Company had adopted SFAS No. 123, effective April 1, 1995. Compensation cost is based on the fair value of the award using the Black-Scholes option-pricing model. The disclosures in the table below show the company's earnings and earnings per share after including the effect of the compensation cost. -38-
2000 1999 1998 -------------- ------------- ------------ Pro forma net earnings $9,164 $6,347 $3,964 Pro forma net earnings per share: Basic $ 0.71 $ 0.51 $ 0.38 Diluted $ 0.67 $ 0.47 $ 0.36 Assumptions Risk-free interest rate 5.5% 5.5% 5.5% Expected life in years 4.50 4.00 4.00 Volatility 35.0% 40.0% 40.0% Dividend yield 0.0% 0.0% 0.0%
10. INCOME TAXES Income taxes differ from the amounts that would be obtained by applying the statutory rate to the respective years' earnings before taxes. These differences result from the following items:
2000 1999 1998 ------------- -------------- ------------- Income tax expense using combined statutory rates of approximately 45% $9,009 $6,764 $4,545 Non-deductible expenses Amortization of goodwill 397 389 278 Other 185 165 100 Foreign tax rate reduction (1,602) (916) (307) Change in valuation allowances - - (656) ------------- -------------- ------------- Provision for income taxes as reported $7,989 $6,402 $3,960 ============= ============== =============
Earnings before income taxes and minority interest by tax jurisdiction comprise the following:
2000 1999 1998 ------------- -------------- ------------- Canada $ 9,132 $ 6,284 $ 4,704 United States 10,889 8,749 5,395 ------------- -------------- ------------- Total $20,021 $ 15,033 $ 10,099 ============= ============== =============
The provision for income taxes comprises the following:
2000 1999 1998 ------------- -------------- ------------- Current Canada $ 3,414 $ 2,732 $ 699 United States 3,488 3,252 2,010 ------------- -------------- ------------- 6,902 5,984 2,709 ------------- -------------- ------------- Deferred Canada 143 511 1,052 United States 944 (93) 199 ------------- -------------- ------------- 1,087 418 1,251 ------------- -------------- ------------- Total $ 7,989 $ 6,402 $ 3,960 ============= ============== =============
-39- The significant components of deferred income taxes are as follows:
2000 1999 -------------- -------------- Deferred income tax assets Expenses not currently deductible $ 508 $ 484 Provision for doubtful accounts 259 61 Inventory and other reserves 80 163 Loss carry-forwards 216 1,008 Capital stock underwriting expenses 270 410 -------------- -------------- 1,333 2,126 -------------- -------------- Deferred income tax liabilities Depreciation and amortization 1,660 60 Prepaid and other expenses deducted for tax purposes 459 543 Financing fees 176 259 -------------- -------------- 2,295 862 -------------- -------------- Net deferred income tax asset (liability) $(962) $ 1,264 ============== ==============
The valuation allowance as at March 31, 1997 of $656 was reversed in 1998 due to the increased earnings of the Canadian companies based on management's assessment, that it is more likely than not, that all the net deferred tax assets would be realized through future taxable earnings. Cumulative undistributed earnings of U.S. subsidiaries approximated $12,840 as at March 31, 2000 (1999- $6,336). 11. EARNINGS PER SHARE
2000 1999 1998 -------------- ------------ ------------ Income available to Subordinate and Multiple Voting Shares $ 9,868 $ 7,222 $ 4,435 ============ ============ ============ Shares issued and outstanding at beginning of year 12,919,055 12,285,538 9,456,444 Weighted average number of shares: Issued in the year 33,617 294,852 958,798 Repurchased in the year (4,623) (16,107) (44,803) ------------ ------------ ------------ Weighted average number of shares used in computing basic earnings per share 12,948,049 12,564,283 10,370,439 Assumed exercise of stock options, net of shares assumed acquired under the Treasury Stock Method 759,689 910,361 565,903 ------------ ------------ ------------ Number of shares used in computing diluted earnings per share 13,707,738 13,474,644 10,936,342 ============ ============ ============
-40- 12. OTHER SUPPLEMENTAL INFORMATION
2000 1999 1998 ------------- -------------- ------------- Products and Services: Revenue Products $ 28,670 $17,985 $ 7,696 Services 311,365 245,376 188,792 ------------- -------------- ------------- Total 340,035 263,361 196,488 ------------- -------------- ------------- Cost of revenue Products 22,545 13,664 5,287 Services 203,609 162,425 125,358 ------------- -------------- ------------- Total 226,154 176,089 130,645 ------------- -------------- ------------- Net $113,881 $87,272 $65,843 ============= ============== ============= Cash payments made during the year on account of: Income taxes $ 4,571 $ 4,452 $ 2,477 ============= ============== ============= Interest $ 7,992 $ 5,806 $ 3,226 ============= ============== ============= Depreciation and amortization comprise the following: Capital assets $ 6,486 $ 5,395 $ 3,557 Goodwill 2,755 2,393 1,267 Other 866 357 453 ------------- -------------- ------------- $10,107 $ 8,145 $ 5,277 ============= ============== ============= Initial franchise fee revenue $ 3,224 $ 1,951 $ 1,754 ============= ============== ============= Advertising expense $ 7,056 $ 5,921 $ 5,112 ============= ============== ============= Components of accrued liabilities: Accrued payroll and benefits $ 8,562 $ 8,477 $ 5,949 Customer advances 5,143 3,727 1,846 Contingent acquisition liability 3,512 - - Other 5,796 5,653 3,105 ------------- -------------- ------------- $23,013 $ 17,857 $10,900 ============= ============== =============
The foreign currency translation adjustment for the year ended March 31, 2000 is net of current income taxes of $1,139 on realized exchange gains for income tax purposes. -41- 13. FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's significant financial instruments as at March 31, 2000 and 1999 are as follows:
2000 1999 -------------------------- --------------------------- Carrying Fair Carrying Fair amount value amount Value Cash and cash equivalents $ 3,297 $ 3,297 $4,627 $4,627 Other receivables 4,405 4,333 3,425 3,317 Long-term debt including current portion 104,910 104,910 86,242 86,242 Interest rate swap contract receivable (payable) - 251 - (148)
14. COMMITMENTS AND CONTINGENCIES (A) LEASE COMMITMENTS Minimum operating lease payments are as follows:
Year ending March 31 2001 $ 9,710 2002 7,825 2003 5,671 2004 4,444 2005 4,182 Thereafter 10,419
During the years ended March 31, 2000, 1999 and 1998 rent expense was $9,359, $7,136 and $4,701, respectively. (B) SHAREHOLDER AGREEMENTS The Company has shareholder agreements with the minority owners of its subsidiaries. These agreements allow the Company to "call" the minority position for a predetermined formula price, which is usually equal to the multiple of earnings before interest, taxes, depreciation, and amortization paid by the Company for the original acquisition. The minority owners may also "put" their interest to the Company at the same price subject to certain limitations. The purchase price may, at the option of the Company, be paid primarily in Subordinate Voting Shares. Acquisitions of these minority interests would be accounted for using the purchase method. (C) CONTINGENCIES The Company is involved in legal proceedings and claims primarily arising in the normal course of its business. In the opinion of management, the Company's liability, if any, would not materially affect its financial condition or operations. 15. SEGMENTED INFORMATION OPERATING SEGMENTS The Company operates primarily through three operating groups - property services (franchised), property services (Company owned) and business services. The property services groups provide a variety of services to both residential and commercial customers. Property services (Company owned) provides security services, full-service community association management and lawn care. Property services (franchised) provides painting, decorating and disaster restoration services. The business services group provides services to governments, financial institutions and corporations wishing to outsource a variety of -42- non-core, primarily labor intensive, "back office" functions. Operating segmented information is as follows:
2000 Property Property Business Reconciling Consolidated Services Services Services Items (Franchised) (Company Owned) Revenues $ 51,541 $215,110 $ 73,198 $ 186 $340,035 ======== ======== ======== ======== ======== Depreciation and amortization $ 1,612 $ 5,633 $ 2,801 $ 61 $ 10,107 ======== ======== ======== ======== ======== Segment operating profit $ 6,861 $ 13,118 $ 11,874 $ (3,983) 27,870 ======== ======== ======== ======== ======== Interest expense (7,849) Income taxes (7,989) Minority interest (2,164) ======== Net earnings $ 9,868 ======== Total assets $ 42,699 $107,054 $ 74,476 $ 6,658 $230,887 ======== ======== ======== ======== ======== Total additions to fixed assets and goodwill $ 2,837 $ 27,982 $ 10,923 $ 97 $ 41,839 ======== ======== ======== ======== ========
1999 Property Property Business Reconciling Consolidated Services Services Services Items (Franchised) (Company Owned) Revenues $ 39,933 $165,161 $ 58,162 $ 105 $263,361 ======== ======== ======== ======= ======== Depreciation and amortization $ 989 $ 4,572 $ 2,503 $ 81 $ 8,145 ======== ======== ======== ======= ======== Segment operating profit $ 5,618 $ 8,781 $ 9,447 $(3,224) $ 20,622 ======== ======== ======== ======= Interest expense (5,589) Income taxes (6,402) Minority interest (1,409) -------- Net earnings $ 7,222 ======== Total assets $ 39,944 $ 85,855 $ 50,727 $ 7,780 $184,306 ======== ======== ======== ======= ======== Total additions to fixed assets and goodwill $ 14,875 $ 11,855 $ 23,397 $ 47 $ 50,174 ======== ======== ======== ======= ========
1998 Property Property Business Reconciling Consolidated Services Services Services Items (Franchised) (Company Owned) Revenues $ 22,448 $137,408 $ 36,615 17 $196,488 ======== ======== ======== ======== ======== Depreciation and amortization $ 502 $ 3,461 $ 1,251 $ 63 $ 5,277 ======== ======== ======== ======== ======== Segment operating profit $ 3,070 $ 6,823 $ 5,925 $ (2,487) $ 13,331 ======== ======== ======== ======== ======== Interest expense (3,232) Income taxes (3,960) Minority interest (1,704) -------- Net earnings $ 4,435 ======== Total assets $ 20,347 $ 76,760 $ 23,924 $ 4,988 $126,019 ======== ======== ======== ======== ======== Total additions to fixed assets and goodwill $ 14,148 $ 24,087 $ 2,359 $ 18 $ 40,612 ======== ======== ======== ======== ========
-43- GEOGRAPHIC SEGMENTS CANADA
2000 1999 1998 ------------- ------------ ------------ Revenues $109,410 $ 96,456 $ 91,493 ============= ============ ============ Total fixed assets and goodwill $ 31,970 $ 30,968 $ 27,157 ============= ============ ============
UNITED STATES
2000 1999 1998 ------------- ------------ ------------ Revenues $230,625 $166,905 $104,995 ============= ============ ============ Total fixed assets and goodwill $115,218 $ 83,643 $ 48,234 ============= ============ ============
CONSOLIDATED
2000 1999 1998 ------------- ------------ ------------ Revenues $340,035 $263,361 $196,488 ============= ============ ============ Total fixed assets and goodwill $147,188 $114,611 $ 75,391 ============= ============ ============
16. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities will become effective in the first quarter of the Company's 2002 Fiscal year. The Company is evaluating the impact that the requirements of this Statement will have on the accounting for its hedging activities. -44- ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -45- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The Directors of the Company stand for re-election each year. The Directors as at June 29, 2000 were as follows:
----------------------- ------ ------------------------------- --------------------------------------- NAME AGE PRESENT POSITION AND TENURE BUSINESS EXPERIENCE DURING LAST FIVE YEARS ----------------------- ------ ------------------------------- --------------------------------------- Michael H. Appleton 60 Director since 1994 and Managing Partner, Fogler, Rubinoff Secretary (Toronto law firm) C. Robert Burgess 58 Director since 1988 President, Burgess & Co., Inc. (Florida real estate sales and financial services company) Brendan Calder 54 Director since 1996 Former Chairman and Chief Executive Officer, CIBC Mortgages Inc. (subsidiary of a Canadian chartered bank) Peter F. Cohen 48 Director since 1990 Chairman and Chief Executive Officer, Centrefund Realty Corporation (publicly-traded Canadian real estate company) Jay S. Hennick 43 President, Chief Executive President, Chief Executive Officer Officer and Director and Director of Company Samuel Hennick 69 Director since 1993 Chairman and Chief Executive Officer, Stargems Inc. (Toronto jewellery manufacturer) Steven Rogers 44 Director since 1989 President and Chief Executive Officer, The Franchise Company (subsidiary of FirstService) James R. Rollwagen 48 Director since 1996 Senior Attorney, Ecolab Inc. (publicly-traded diversified services company) ----------------------- ------ ------------------------------- ---------------------------------------
Mr. Samuel Hennick is the father of Mr. Jay S. Hennick, the President and Chief Executive Officer of the Company. Mr. Jay S. Hennick and Mr. Cohen each hold directorships of Centrefund Realty Corporation. AUDIT COMMITTEE The Audit Committee is composed of three non-management members. The committee reviews the annual financial statements intended for circulation among shareholders and reports upon these to the Board. In addition, the Board may refer to the Audit Committee on other matters and questions relating to the financial position of the Company. The Audit Committee members are Messrs. Appleton, Burgess and Cohen. COMPENSATION COMMITTEE The Compensation Committee is composed of three non-management members and makes recommendations to the Board on, among other things, the compensation of the Chief Executive Officer including grants of options under the Company's Stock Option Plan and rights under the Company's Share Purchase Plan to the Chief Executive Officer. The Compensation Committee members are Messrs. Appleton, Burgess and Cohen. -46- DIRECTORS' COMPENSATION During Fiscal 2000, each Director who was not a full-time employee of the Company or any of its subsidiaries received an annual retainer of $1,700 plus a fee equal to $510 for each meeting of the Board of Directors or Committee thereof attended by such Director in person and $240 for each meeting held by telephone. During Fiscal 2000, the Company paid the Directors aggregate fees totaling $14,900. In addition, most Directors have received stock option grants under the Company's Stock Option Plan. There were no such grants to Directors in Fiscal 2000. EXECUTIVE OFFICERS The following shows the names and ages, as of June 29, 2000, of the present executive officers of the Registrant, all positions presently held by each officer, and the year each person became an officer. The executive officers do not have a fixed term of office.
--------------------- ------ ------------------------------------------------ -------------- FIRST BECAME NAME AGE PRESENT POSITION WITH THE COMPANY AN OFFICER --------------------- ------ ------------------------------------------------ -------------- Jay S. Hennick 43 President, Chief Executive Officer and Director 1988 D. Scott Patterson 39 Senior Vice President and Chief Financial 1995 Officer Timothy J. Greener 48 Senior Vice President, Integration 1996 John Friedrichsen 38 Senior Vice President, Acquisitions 1998 Douglas G. Cooke 40 Corporate Controller 1995 --------------------- ------ ------------------------------------------------ --------------
Mr. Hennick is the founder of the Company and has been President and Chief Executive Officer since its inception. Mr. Hennick is a Director of the Company. Mr. Patterson has held his current position since February 1995. Mr. Patterson is a Chartered Accountant. Mr. Greener was president of a subsidiary of the Company until October 1996, at which time he assumed his present position. Mr. Friedrichsen was Vice President, Corporate Finance with Ernst & Young Corporate Finance Inc. prior to becoming Vice President, Acquisitions in January 1998. Mr. Friedrichsen is a Chartered Accountant. Mr. Cooke has held his current position since June 1995. Mr. Cooke is a Chartered Accountant. -47- ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by, or paid to the Chief Executive Officer and the four next most highly compensated executive officers in respect of Fiscal 2000. Each of the listed persons was holding the office indicated on the table on March 31, 2000.
- --------------------------------------------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION ------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS - ---------------------------------------------------------------------------------------------------------- OTHER ALL ANNUAL RESTRICTED SECURITIES OTHER COMP- STOCK UNDERLYING LTIP COMP- NAME AND PRINCIPAL SALARY BONUS ENSATION AWARDS OPTIONS PAYOUTS ENSATION POSITION YEAR ($ US) ($ US) ($ US) ($ US) (#) ($ US) ($ US) - ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ---------- Jay S. Hennick, 2000 $442,000 $736,700 - - 150,000 - - President and Chief 1999 $351,500 $448,400 - - 75,000 - - Executive Officer 1998 $320,900 $320,900 - - 150,000 - - - ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ---------- D. Scott Patterson, 2000 $136,000 $226,700 - - 75,000 - - Senior Vice President 1999 $132,900 $230,800 - - 37,500 - - and Chief Financial 1998 $107,000 $160,400 - - 75,000 - - Officer - ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ---------- Timothy J. Greener, 2000 $175,000 $145,800 - - 25,000 - - Senior Vice 1999 $116,300 $195,500 - - 15,000 - - President, Integration 1998 $114,100 $98,000 - - 25,000 - - - ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ---------- John Friedrichsen, 2000 $91,800 $76,500 - - 50,000 - - Senior Vice 1999 $89,700 $78,200 - - 15,000 - - President, 1998 $14,800 $14,300 - - 30,000 - - Acquisitions - ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ---------- 2000 $78,200 $32,600 - - 15,000 - - Douglas G. Cooke, 1999 $66,400 $28,900 - - 5,000 - - Corporate Controller 1998 $53,500 $26,700 - - 10,000 - - - ----------------------- ------- ----------- ------------ ----------- ------------- ------------ ---------- ----------
The following table summarizes the number and terms of the stock options granted during Fiscal 2000 to the executive officers.
- ----------------------------------------------------------------------------------------------------------- OPTION GRANTS IN POTENTIAL REALIZED VALUE FISCAL 2000 AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM - ----------------------- -------------- ------------ ----------- -------------- -------------- ------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS EXERCISE UNDERLYING GRANTED TO OR BASE OPTIONS EMPLOYEES PRICE GRANTED IN FISCAL ($ US EXPIRATION 5% 10% NAME (#) 2000 PER SHARE) DATE ($ US) ($ US) - ----------------------- -------------- ------------ ----------- -------------- -------------- ------------- Jay S. Hennick 150,000 22.4% $11.30 Dec. 2, 2004 $468,000 $1,035,000 - ----------------------- -------------- ------------ ----------- -------------- -------------- ------------- D. Scott Patterson 75,000 11.2% $11.30 Dec. 2, 2004 $234,000 $517,500 - ----------------------- -------------- ------------ ----------- -------------- -------------- ------------- Timothy J. Greener 25,000 3.7% $11.30 Dec. 2, 2004 $78,000 $172,500 - ----------------------- -------------- ------------ ----------- -------------- -------------- ------------- John Friedrichsen 50,000 7.5% $11.30 Dec. 2, 2004 $156,000 $345,000 - ----------------------- -------------- ------------ ----------- -------------- -------------- ------------- Douglas G. Cooke 15,000 2.2% $11.30 Dec. 2, 2004 $46,800 $103,500 - ----------------------- -------------- ------------ ----------- -------------- -------------- -------------
NOTE: One option entitles the holder to purchase one Subordinate Voting Share. All options listed in the table above vest in the following manner: 10% on grant date, 15% on the first anniversary, 20% on second anniversary, 25% on third anniversary and 30% on the fourth anniversary of the grant date. The expiration date is the fifth anniversary of the grant date. -48- The following table summarizes the exercises of stock options during Fiscal 2000 by the executive officers and the number of, and the spread on, unexercised options held by such officers on March 31, 2000.
------------------------------------------------------------------------------------------------ AGGREGATED OPTION NUMBER OF SECURITIES VALUE OF UNEXERCISED EXERCISES IN FISCAL UNDERLYING IN-THE-MONEY 2000 AND YEAR-END UNEXERCISED OPTIONS OPTIONS AT OPTION VALUES AT MARCH 31, 2000 MARCH 31, 2000 (#) ($ US) ------------------------------------------------------------------------------------------------ SHARES VALUE ACQUIRED ON REALIZED EXERCISABLE / EXERCISABLE / NAME EXERCISE (#) ($ US) UNEXERCISABLE UNEXERCISABLE ------------------------------------------------------------------------------------------------ Jay S. Hennick - - 301,250 / 273,750 $1,701,600 / $298,800 ------------------------------------------------------------------------------------------------ D. Scott Patterson 90,000 $798,300 141,625 / 175,875 $795,200 / $437,800 ------------------------------------------------------------------------------------------------ Timothy J. Greener - - 50,000 / 55,000 $282,100 / $104,400 ------------------------------------------------------------------------------------------------ John Friedrichsen - - 22,500 / 72,500 $48,900 / $59,800 ------------------------------------------------------------------------------------------------ Douglas G. Cooke - - 32,750 / 31,750 $206,800 / $86,900 ------------------------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT The Company has an employment agreement with Jay S. Hennick, the President and Chief Executive Officer of the Company, made as of April 1, 1998 having a term of five years, with one-year renewals at the option of Mr. Hennick. In the event of a change of control of the Company, or in the event the Company terminates Mr. Hennick's employment without cause after March 31, 2003, Mr. Hennick will be entitled to: (a) Payment of 300% of the aggregate of: (i) Mr. Hennick's then current salary; (ii) the benefits and other payments paid pursuant to the agreement in the previous Fiscal year; and (iii) an amount equal to the bonus paid to Mr. Hennick in the previous Fiscal year; (b) Certain job relocation expenses; and (c) At Mr. Hennick's option, an amount equal to the difference between the exercise price of any rights or options to purchase shares of the Company that he owned, or was entitled to receive, and the market value of such shares. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Directors who served on the Compensation Committee during Fiscal 2000 were Michael H. Appleton, C. Robert Burgess and Peter F. Cohen. None of the persons who served as members of the Compensation Committee in Fiscal 2000 was an officer or employee of the Company or any of its subsidiaries during Fiscal 2000 and none of such persons was formerly an officer of the Company or any of its subsidiaries. During Fiscal 2000, Jay S. Hennick, the President and Chief Executive Officer of the Company, served on the board of directors of Centrefund Realty Corporation. Centrefund Realty Corporation's President and Chief Executive Officer, Peter F. Cohen, served on the Compensation Committee of the Company during Fiscal 2000. -49- COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION COMPENSATION POLICY When determining the compensation of executive officers, the Committee considers the objectives of: (i) retaining executives critical to the success of the Company and the enhancement of shareholder value; (ii) providing fair and competitive compensation; (iii) balancing the interests of management and shareholders of the Company; (iv) rewarding performance, both on an individual basis and with respect to the business in general; and (v) ensuring the recognition of the fact that the Corporation carries on business with a small number of executives relative to other public companies of similar size. In order to achieve these objectives, the compensation paid to the executive officers consists of three components: (a) Base salary; (b) Annual bonus incentive; and (c) Long term incentive in the form of stock options and share purchase rights granted in accordance with Stock Option and Share Purchase Plans (the "Plans"). BASE SALARY The base salary of each executive officer is determined by an assessment by the committee of such executive's performance, a consideration of competitive compensation levels in corporations similar to the Company and a review of the performance of the Company as a whole and the role the executive officer played in such performance. ANNUAL BONUS INCENTIVE Annual cash bonus incentive awards are based entirely on a formula that relates to earnings per share growth of the Company. This establishes a direct link between executive compensation and the Company's operating performance. LONG-TERM INCENTIVE The Company provides a long-term incentive by granting stock options and share purchase rights to the executive officers through the Plans. The options permit each executive officer to acquire Subordinate Voting Shares of the Company at an exercise price equal to the market price of such shares under option at the date the option was granted. The rights permit each executive officer to purchase Subordinate Voting Shares at the current market price. Shares purchased under the share purchase plan are paid for by way of a five-year loan from the Company for which each executive officer is personally liable. The objective of granting rights and options is to encourage each executive officer to acquire an increased ownership interest in the Company over a period of time, which acts as a financial incentive for each executive officer to consider the long-term interests of the Company and its shareholders. -50- PERFORMANCE GRAPH The following graph compares the five-year cumulative total return to shareholders of the Company with the five-year cumulative total return of the Russell 2000 Index and The ServiceMaster Company. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG FIRSTSERVICE CORPORATION, THE RUSSELL 2000 INDEX, AND THE SERVICEMASTER COMPANY [CHART] * $100.00 invested on March 31, 1995 in stock or index, assuming reinvestment of dividends.
- ---------------------------------------------------------------------------------------------------- AS AT MARCH 31 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- FirstService Corporation 100.00 86.37 143.07 302.68 317.76 268.37 Russell 2000 Index 100.00 126.84 131.36 184.33 152.48 206.73 The ServiceMaster Company 100.00 141.04 179.32 251.04 297.11 165.66 - ----------------------------------------------------------------------------------------------------
-51- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial shareholders of more than 5% of any class of shares known to the Registrant as of May 31, 2000.
----------------------- ---------------------------- --------------------- ---------------------- NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF CLASS NAME OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED OWNED ----------------------- ---------------------------- --------------------- ---------------------- Multiple Voting Shares Jay S. Hennick 662,847 100.0% 1140 Bay Street Suite 4000 Toronto, Ontario M5S 2B4 ----------------------- ---------------------------- --------------------- ---------------------- Subordinate Voting Jay S. Hennick 883,601 7.2% Shares 1140 Bay Street Suite 4000 Toronto, Ontario M5S 2B4 ---------------------------- --------------------- ---------------------- AXA Financial Inc. 811,400 6.6% 1290 Avenue of the Americas New York, NY 10104 ---------------------------- --------------------- ---------------------- Safeco Corporation 774,100 6.3% 4333 Brooklyn Ave. NE Seattle, WA 98185 ----------------------- ---------------------------- --------------------- ----------------------
The table below sets forth, as of May 31, 2000, the beneficial ownership of the Company's Subordinate Voting Shares with respect to the Company's Directors, executive officers and the Company's Directors and officers as a group.
- -------------------------- -------------------------- -------------------- --------------- ------------------- NAME OF NUMBER OF SHARES EXERCISABLE PERCENTAGE OF NAME OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED OPTIONS CLASS OWNED (1) - -------------------------- -------------------------- -------------------- --------------- ------------------- Multiple Voting Shares Jay S. Hennick 662,847 - 100.0% - -------------------------- -------------------------- -------------------- --------------- ------------------- Subordinate Voting Shares Michael H. Appleton 9,000 13,750 0.2% -------------------------- -------------------- --------------- ------------------- C. Robert Burgess 20,000 25,000 0.4% -------------------------- -------------------- --------------- ------------------- Brendan Calder - 25,000 0.2% -------------------------- -------------------- --------------- ------------------- Peter F. Cohen 10,000 25,000 0.3% -------------------------- -------------------- --------------- ------------------- Douglas G. Cooke 22,500 32,750 0.4% -------------------------- -------------------- --------------- ------------------- John Friedrichsen 30,000 22,500 0.4% -------------------------- -------------------- --------------- ------------------- Timothy J. Greener 102,460 50,000 1.2% -------------------------- -------------------- --------------- ------------------- Jay S. Hennick 883,601 301,250 9.4% -------------------------- -------------------- --------------- ------------------- Samuel Hennick 183,790 25,000 1.7% -------------------------- -------------------- --------------- ------------------- D. Scott Patterson 280,700 141,625 3.4% -------------------------- -------------------- --------------- ------------------- Steven Rogers 93,585 23,750 1.0% -------------------------- -------------------- --------------- ------------------- All directors and officers as a group (12 1,635,636 685,625 17.8% persons) - -------------------------- -------------------------- -------------------- --------------- -------------------
NOTE (1) Percentage ownership is calculated using as a denominator the total number of shares of the class outstanding plus the number of shares of the class to which the beneficial owner indicated has a right to acquire pursuant to options currently exercisable or exercisable within 60 days. -52- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED MISCELLANEOUS TRANSACTIONS The legal firm of Fogler, Rubinoff, of which Mr. Appleton is a partner, received fees from the Company during the year for legal services performed. Mr. Burgess' firm, Burgess and Co., Inc., received fees from the Company totaling $100,000 during the year relating to business acquisition brokerage services provided. INDEBTEDNESS OF MANAGEMENT Executive officers were indebted to the Company in connection with the purchase of the Company's Subordinate Voting Shares. This indebtedness is secured by the Subordinate Voting Shares acquired. The indebtedness has a five-year term from the grant date, is non-interest bearing and is open for repayment at any time. The following table lists the indebtedness of each executive officer:
----------------------- ------------- ------------- -------------------- ---------------------- LARGEST NUMBER OF AMOUNT AMOUNT FINANCIALLY SUBORDINATE VOTING OUTSTANDING OUTSTANDING ASSISTED SHARES HELD IN TRUST DURING AS AT JUNE SECURITIES BY COMPANY AS FISCAL 2000 29, 2000 PURCHASES DURING SECURITY FOR NAME ($ US) ($ US) FISCAL 2000 INDEBTEDNESS ----------------------- ------------- ------------- -------------------- ---------------------- Jay S. Hennick $2,143,200 $2,143,200 - 365,000 ----------------------- ------------- ------------- -------------------- ---------------------- D. Scott Patterson $615,100 $615,100 - 95,000 ----------------------- ------------- ------------- -------------------- ---------------------- Timothy J. Greener $127,200 $127,200 - 10,000 ----------------------- ------------- ------------- -------------------- ---------------------- John Friedrichsen $282,600 $282,600 - 30,000 ----------------------- ------------- ------------- -------------------- ---------------------- Douglas G. Cooke $126,100 $126,100 - 22,500 ----------------------- ------------- ------------- -------------------- ----------------------
No executive officer had any other indebtedness to the Company in excess of $60,000 at any time during the year. -53- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS 1. Financial statements The documents listed below are included herein under Part II and are also contained in the Financial Statements and Management Discussion and Analysis sections of the FirstService Annual Report to Shareholders for 2000: - Auditors' Report; - Consolidated Statements of Earnings for the three years ended March 31, 2000, 1999 and 1998; - Consolidated Balance Sheets as at March 31, 2000 and 1999; - Consolidated Statements of Shareholders' Equity for the three years ended March 31, 2000, 1999 and 1998; - Consolidated Statements of Cash Flows for the three years ended March 31, 2000, 1999, and 1998; and - Notes to the Consolidated Financial Statements. 2. Financial Statement Schedules - Schedule - Amounts receivable from related parties and underwriters, promoters and employees other than related parties: None. - Included in Part IV of this Report: Schedule II - Valuation and Qualifying Accounts 3. Exhibits Included in Part IV of this report: - List of Exhibits - Exhibit 10 - Material contracts: - Exhibit 10.2 - FirstService Corporation Amended Stock Option Plan #2 - Exhibit 10.3 - FirstService Corporation Amended Share Purchase Plan #2 - Exhibit 21 - Subsidiaries of the Registrant - Exhibit 23 - Consent of Auditors (B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF FISCAL 2000 None. -54- FIRSTSERVICE CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands of U.S. dollars)
- --------------------------------------- ----------------- ---------------- BALANCE AT BALANCE AT BEGINNING OF END OF DESCRIPTION YEAR YEAR - --------------------------------------- ----------------- ---------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE (CURRENT): Year ended March 31, 2000 $2,620 $3,273 Year ended March 31, 1999 $1,988 $2,620 Year ended March 31, 1998 $1,578 $1,988 - --------------------------------------- ----------------- ----------------
-55- AUDITORS' REPORT TO THE SHAREHOLDERS OF FIRSTSERVICE CORPORATION: We have audited in accordance with generally accepted auditing standards, the financial statements included in FirstService Corporation's annual report to shareholders incorporated in this Form 10-K, and have issued out report thereon dated May 9, 2000. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule included in Part IV in the Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This supporting schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario May 9, 2000 -56- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. FIRSTSERVICE CORPORATION Registrant D. SCOTT PATTERSON ------------------ Date: June 29, 2000 D. Scott Patterson Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their capacities and on the date indicated.
NAME AND SIGNATURE TITLE DATE JAY S. HENNICK President, Chief Executive June 29, 2000 - ------------------------------------ Officer and Director Jay S. Hennick (PRINCIPAL EXECUTIVE OFFICER) D. SCOTT PATTERSON Senior Vice President and June 29, 2000 - ------------------------------------ Chief Financial Officer D. Scott Patterson (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) MICHAEL H. APPLETON Director June 29, 2000 - ------------------------------------ Michael H. Appleton C. ROBERT BURGESS Director June 29, 2000 - ------------------------------------ C. Robert Burgess -57- NAME AND SIGNATURE TITLE DATE BRENDAN CALDER Director June 29, 2000 - ------------------------------------ Brendan Calder SAMUEL HENNICK Director June 29, 2000 - ------------------------------------ Samuel Hennick STEVEN ROGERS Director June 29, 2000 - ------------------------------------ Steven Rogers JAMES R. ROLLWAGEN Director June 29, 2000 - ------------------------------------ James R. Rollwagen
-58- LIST OF EXHIBITS
EXHIBIT # DESCRIPTION 3.1 Articles of Incorporation and Amendment. Incorporated by reference to Form 10-Q for the period ended June 30, 1999, filed on August 12, 1999. 3.2 By-Laws and Amendments. Incorporated by reference to Form 10-Q for the period ended June 30, 1999, filed on August 12, 1999. 10.1 Credit Facility dated April 1, 1999 among the Company and a syndicate of bank lenders. Incorporated by reference to Form 10-Q for the period ended June 30, 1999, filed on August 12, 1999. 10.2 FirstService Corporation Amended Stock Option Plan #2. Included herein. 10.3 FirstService Corporation Amended Share Purchase Plan #2. Included herein. 21 Subsidiaries of FirstService Corporation. Included herein. 23 Consent of Auditors. Included herein.
EX-10.2 2 ex-10_2.txt EXHIBIT 10.2 EXHIBIT 10.2 FIRSTSERVICE CORPORATION AMENDED STOCK OPTION PLAN NO. 2 FirstService Corporation (the "Company") hereby establishes a stock option plan (the "Plan") for the benefit of the respective directors, officers and full-time employees of the Company and its subsidiaries. 1. DEFINITIONS As used herein, the following terms shall have the following meanings: (a) "Associate" shall have the meaning ascribed to that term in the Securities Act (Ontario); (b) "Business Day" means a day other than a Saturday, Sunday or any other day which is a statutory holiday in the Province of Ontario; (c) "Insider" means: (i) an insider (as defined in the Securities Act (Ontario)) of the Company, other than a person who falls within that definition solely by virtue of being a director or senior officer of a subsidiary of the Company; and (ii) an Associate of any person who is an insider by virtue of (i); (d) "Multiple Voting Shares" means the multiple voting shares in the capital of the Company; (e) "Outstanding Issue" means the aggregate number of Shares that are outstanding immediately prior to the share issuance in question, excluding Subordinate Voting Shares issued pursuant to Share Compensation Arrangements over the preceding one-year period; (f) "Securities Act (Ontario)" means the Securities Act, R.S.O. c. S.5, as amended; and (g) "Share Compensation Arrangements" means a stock option, stock option plan, employee stock purchase plan or any other compensation or incentive mechanism involving the issuance or potential issuance of Subordinate Voting Shares to one or more persons, including a share purchase from treasury which is financially assisted by the Company by way of a loan, guarantee or otherwise; (h) "Shares" means Subordinate Voting Shares and Multiple Voting Shares; (i) "Subordinate Voting Shares" means the subordinate voting shares in the capital of the Company; and (j) "Subsidiary" shall have the meaning ascribed to that term in the Securities Act (Ontario). 2 2. PURPOSE OF THE PLAN The purpose of the Plan is to provide the Company and its subsidiaries with a share-related mechanism designed to develop and increase the interest in the growth and development of the Company and its subsidiaries of those of the respective directors, officers and full-time employees of the Company and its subsidiaries as may from time to time be granted options under the Plan by providing to them the opportunity to acquire a proprietary interest in the Company through the purchase of Subordinate Voting Shares. 3. IMPLEMENTATION The Plan is subject to and is conditional upon: (a) the approval of the Plan by The Toronto Stock Exchange and any other stock exchange on which the Subordinate Voting Shares of the Company may be posted and listed for trading; and (b) the approval of the Plan by the shareholders of the Company given by the affirmative vote of a majority of the votes cast at a meeting of shareholders. 4. ADMINISTRATION The Plan will be administered by the board of directors of the Company (the "Board") or a committee appointed by the Board to be composed of members of management of the Company (the "Committee"). References herein to the "Board" are deemed to be references to the "Board" or the "Committee", as the case may be. Subject to the provisions of the Plan, the Board is authorized in its sole discretion to make such determinations under, and such interpretations of, and to take such steps and actions in connection with the proper administration of the Plan and to impose, amend or revoke such rules and regulations concerning the granting of options pursuant to the Plan as it, in its sole discretion, may deem necessary or advisable. No member of the Board will be liable for any action or determination taken or made in good faith with respect to the Plan or any options granted thereunder and each such member shall be entitled to indemnification by the Company with respect to any such action or determination in the manner provided for by the Board. Any determination approved by a majority of the members of the Board will be deemed to be a determination of that matter by the Board. Members of the Board may be granted options under the Plan. 5. NUMBER OF SHARES DEDICATED TO THE PLAN Options shall not be granted under the Plan with respect to any class of shares in the capital of the Company other than Subordinate Voting Shares. The aggregate number of Subordinate Voting Shares subject to options under the Plan and under the Company's stock option plan adopted by the shareholders of the Company on March 22, 1994 shall not exceed, in the aggregate, 2,850,000 Subordinate Voting Shares or such greater number as may be approved from time to time by the shareholders of the Company. 3 All options granted under the Plan will conform to all applicable provisions prescribed by the Plan and to such specific terms and conditions as may be determined by the Board at the time of making each such grant. The granting of any option must, in order to become effective and binding on the Company, be authorized or approved by the Board. Subordinate Voting Shares in respect of which an option is granted under the Plan, but not exercised prior to the termination of such option, whether through lapse of time or otherwise, shall be available for options thereafter granted by the Board under the Plan. All Subordinate Voting Shares issued pursuant to the due exercise of options granted under the Plan will be so issued as fully paid and non-assessable shares. 6. ELIGIBILITY FOR OPTIONS The persons who will be eligible to be granted options pursuant to the Plan ("Eligible Participants") will be such directors, officers and full-time employees of the Company or its subsidiaries as the Board shall from time to time determine in its sole discretion. In determining the options to be granted to Eligible Participants under the Plan, the Board will give due consideration to the value of each such person's present potential contribution to the Company's (or any subsidiary of the Company's) success and to the recommendation if any in that regard of the compensation committee, if any, of the Board. Upon the approval by the shareholders of the Company given by the affirmative vote of a majority of the votes cast at a meeting of the shareholders of the Company, excluding the Shares beneficially owned by: (a) Insiders; and (b) Associates of Insiders, and on the basis that each Multiple Voting Share carries the right to one vote per share only for the purposes of such vote: (i) the number of Subordinate Voting Shares reserved for issuance pursuant to options granted to Insiders under the Plan and under all other Share Compensation Arrangements may exceed 10% of the aggregate number of Shares outstanding; (ii) the issuance of Subordinate Voting Shares to Insiders under the Plan and under all other Share Compensation Arrangements, within a one-year period, may exceed 10% of the Outstanding Issue; and (iii) the issuance of Subordinate Voting Shares to any one Insider and such Insider's Associates under the Plan and under all other Share Compensation Arrangements, within a one-year period, may exceed 10% of the Outstanding Issue. 7. GRANTING OF OPTIONS Subject to the provisions herein set forth and after reviewing any recommendations from time to time made by the compensation committee, if any, of the Board, the Board shall, in its sole discretion, select the Eligible Participants to whom options under the Plan may be granted (herein sometimes referred to as the "Optionees"), the number of Subordinate Voting Shares to be optioned to each of them, the date or dates on which such options should be granted and the terms and conditions within the limits prescribed in Section 8 hereof attaching to each such option. 4 The aggregate number of Subordinate Voting Shares reserved for issuance pursuant to all options granted to any one Optionee shall not exceed 5% of the number of Subordinate Voting Shares outstanding on a non-diluted basis at the time of such grant. The granting of an option under the Plan to an Eligible Participant shall neither entitle nor preclude such Eligible Participant from being subsequently granted one or more additional options to purchase Subordinate Voting Shares under the Plan. 8. TERMS AND CONDITIONS OF THE OPTIONS The terms and conditions of each option granted under the Plan shall be set forth in an option agreement (an "Option Agreement") to be entered into between the Company and each Optionee, such agreement to be in such form as may from time to time be approved by the Board. The Option Agreement shall include the following terms and conditions as well as such other terms and conditions not inconsistent with the Plan as may be deemed advisable by the Board: (a) Number of Shares - The Board shall, in its sole discretion, fix the aggregate number of Subordinate Voting Shares which are the subject of the option so granted. (b) Option Price - The Board shall fix the option price per Subordinate Voting Share which shall not be less than the market price in Canadian dollars on The Toronto Stock Exchange of the Subordinate Voting Shares at the time of the granting of such option. For the purposes of this subparagraph 8(b), "market price" of the Subordinate Voting Shares shall mean the simple average of the bid and ask prices of the Subordinate Voting Shares on The Toronto Stock Exchange for the five trading day period terminating one trading day prior to the effective date on which the option is granted by the Board, where "trading day" means a day on which bid and ask prices are available for the Subordinate Voting Shares on The Toronto Stock Exchange. If the Subordinate Voting Shares are not then traded on The Toronto Stock Exchange, "market price" of the Subordinate Voting Shares shall mean the simple average of the bid and ask prices of the Subordinate Voting Shares on such public market on which the Subordinate Voting Shares are then traded, as selected by the Board, in its sole discretion, for the five trading day period terminating one trading day prior to the effective date on which the option is granted by the Board, where "trading day" means a day on which bid and ask prices are available for the Subordinate Voting Shares on such public market. If the Subordinate Voting Shares are not then traded on any public market, the Board in its sole discretion shall determine the "market price" at the time of grant. (c) Payment - The full purchase price of the Subordinate Voting Shares purchased upon the exercise of the option shall be paid for in cash or by certified cheque or bank draft upon the exercise thereof. An Optionee who is not already a shareholder of the Company shall have none of the rights of a shareholder of the Company until Subordinate Voting Shares issuable pursuant to the exercise of an option granted to an Optionee are issued to such Optionee. (d) Vesting - Subject to subsection 8(i) of this Section 8, the Board shall determine, at the time of granting an option to an Optionee pursuant to the Plan, the maximum number of Subordinate Voting Shares that may be exercised by such Optionee in each year during the term of the option. (e) Term of Option - The term of the option shall not be for less than one year and not more than 10 years from the date the option is granted, subject always to subsections (f), (g), (h) and (i) of this Section 8. 5 (f) Death of Optionee - In the event of the death of an Optionee while in the employment, or as a director or officer, of the Company or a subsidiary of the Company prior to 5:00 p.m. (Toronto time) on the expiry date of the option (the "Expiry Date"), the option may be exercised, as to all or any of the Subordinate Voting Shares forming the subject matter of such option in respect of which such Optionee would have been entitled to exercise the option hereunder at the time of the death of such Optionee if such Optionee had survived, by the legal representatives of such Optionee at any time up to and including, but not after, 5:00 p.m. (Toronto time) on the date which is the first anniversary of the date of death of such Optionee or the Expiry Date, whichever is the earlier, after which the option shall in all respects cease and terminate and be of no further force or effect whatsoever as to such of the Subordinate Voting Shares in respect of which such option had not been previously exercised. (g) Resignation or Discharge of Optionee - In the event of: (i) the resignation of an Optionee as an employee of the Company or a subsidiary of the Company such that the Optionee is no longer an Eligible Participant; (ii) the resignation or removal of an Optionee as a director or officer of the Company or a subsidiary of the Company other than in the circumstances referred to in subsection (f), above, such that the Optionee is no longer an Eligible Participant; or (iii) the discharge of an Optionee as an employee of the Company or a subsidiary of the Company by reason of a wilful and substantial breach of such Optionee's employment duties, in each such case prior to 5:00 p.m. (Toronto time) on the Expiry Date, all options granted to such Optionee under the Plan shall in all respects forthwith cease and terminate and be of no further force or effect whatsoever as to such of the Subordinate Voting Shares in respect of which such option had not previously been exercised, upon notice of such resignation being received by the Company or subsidiary of the Company, or upon notice of such removal or discharge being given by the Company or subsidiary of the Company to such Optionee, as the case may be. For the purposes of the Plan, the determination by the Company that such Optionee was discharged as an employee of the Company or a subsidiary of the Company by reason of a wilful and substantial breach of such Optionee's employment duties shall be binding upon such Optionee. (h) Other Termination of Employment of Optionee - In the event of the termination of employment of an Optionee by the Company or a subsidiary of the Company other than in the circumstances referred to in subsections (f) and (g), above, such that the Optionee is no longer an Eligible Participant, such Optionee may exercise each option then held by such Optionee under the Plan to the extent that such Optionee was entitled to do so at the time of such termination of employment, at any time up to and including, but not after, 5:00 p.m. (Toronto time) on the 30th day (or such later day as the Board in its sole discretion may determine) following the effective date of termination of employment, or the Expiry Date, whichever is earlier, after which the option shall in all respects cease and terminate and be of no further force or effect whatsoever as to such of the Subordinate Voting Shares in respect of which such option had not been previously exercised. (i) As used in this subsection 8(i): (a) "Offeror" has the meaning ascribed to that term in the Securities Act (Ontario); (b) "Take-over Bid" means a take-over bid, as defined in the Securities Act (Ontario), which is a "formal bid" as defined in such Act, and which is made: (i) for all of the issued and outstanding shares of any one or more classes of shares in the capital of the Company; or 6 (ii) for all of the issued and outstanding shares of any one or more classes of shares in the capital of the Company other than: (A) those shares in the capital of the Company which are then owned by the offeror under such Take-over Bid; and/or (B) those shares in the capital of the Company which the offeror under such Take-over Bid then otherwise has, directly or indirectly, the right to acquire; and (c) "Sale" means the sale of all or substantially all of the assets of the Company as an entirety or substantially as an entirety to any person or entity (other than a wholly-owned subsidiary of the Company) under circumstances such that, following the completion of such sale, the Company will cease to carry on an active business, either directly or indirectly through one or more subsidiaries. If: (1) The Company shall enter into an agreement providing for a Sale; or (2) a Take-over Bid shall be made, the Board may, at any time thereafter, authorize the Company to give a notice in writing to each Optionee advising such Optionee that, notwithstanding any other provision of the Plan, all options granted to such Optionee under the Plan will expire on the date determined by the Board as specified in such notice (provided that the date determined by the Board as specified in such notice shall not increase the term of any option granted under the Plan), which date shall in no event be the earlier of: (A) 60 days following the date of such notice; and (B) in the case of the Company having entered into an agreement providing for a Sale, one business day prior to the date on which the Sale provided for in such agreement is completed, or, in the case of a Take-over Bid having been made, one business day prior to the date on which there shall have been taken up by the offeror thereunder at least 90% of the total number of the issued and outstanding shares of each class of shares in the capital of the Company in respect of which such Take-over Bid is being made and, for this purpose, all shares of each class of shares in the capital of the Company in respect of which such Take-over Bid is made which are owned by the offeror at the expiry of such Take-over Bid shall be deemed to have been taken up pursuant to such Take-over Bid. In the event that such a notice is given by the Company, each Optionee shall have the right, on such terms and conditions as may be prescribed in such notice, to exercise up to the time that such Optionee's option expires, after giving effect to such notice, all options then held by such 7 Optionee under the Plan in respect of up to all of the Subordinate Voting Shares which could have been purchased by such Optionee on a full exercise of all such options. (j) Non-Assignability of Option - Each option granted under the Plan shall be non-assignable by the Optionee. (k) Exercise of Option - Subject to the provisions of the Plan, an option granted under the Plan shall be exercised from time to time by the Optionee, or in the event of death by his legal representatives, by giving notice in writing addressed to the Company at its registered and principal office in the City of Toronto, to the attention of the Secretary of the Company, specifying the number of Subordinate Voting Shares forming the subject matter of such option in respect of which such notice is being given, together with payment (by cash, certified cheque or bank draft) in full of the purchase price of the Subordinate Voting Shares being purchased. 9. ADJUSTMENTS IN EVENT OF CHANGE IN STRUCTURE OF CAPITAL Appropriate adjustments in the number of Subordinate Voting Shares and in the option price per Subordinate Voting Share, relating to options granted or to be granted, shall be made by the Board in its sole discretion to give effect to adjustments in the number of Subordinate Voting Shares resulting, subsequent to the approval of the Plan, from any subdivisions, consolidations or reclassifications of the Subordinate Voting Shares, the payment of stock dividends by the Company or other relevant changes in the capital structure of the Company. Any such adjustments shall be subject to the approval thereof by such stock exchanges on which the Subordinate Voting Shares are then listed for trading. 10. AMENDMENT OR DISCONTINUANCE OF PLAN The Board may amend, vary or discontinue the Plan at any time either prospectively or retrospectively; provided, however, that no such amendment may increase the maximum number of Subordinate Voting Shares that may be optioned under the Plan, change the manner of determining the option price, extend the term of any option beyond 10 years from the date of the granting of such option, extend the period during which options may be granted or, without the prior written consent of the Optionee, alter or impair any option previously granted to an Optionee under the Plan. Any such amendment, variance or discontinuance of the Plan shall be subject to the approval thereof by such stock exchanges on which the Subordinate Voting Shares are then listed for trading. 11. MISCELLANEOUS Nothing contained in the Plan nor in any option granted thereunder shall be deemed to give any Optionee any interest or title in or to any shares of the Company or any rights as a shareholder of the Company or any other legal or equitable right against the Company whatsoever other than as set forth in the Plan and pursuant to the exercise of any option. The Plan does not give any optionee or any employee of the Company or any of its subsidiaries the right or obligation to or to continue to serve as a director, officer or full-time employee, as the case may be, of the Company or any of its subsidiaries. The awarding of options to any Eligible Participant is a matter to be determined solely in the discretion of the Board. The Plan 8 shall not in any way fetter, limit, obligate, restrict or constrain the Board with regard to the allotment or issue of any shares or any other securities in the capital of the Company or any of its subsidiaries other than as specifically provided for in the Plan. No fractional Subordinate Voting Shares shall be issued upon the exercise of options granted under the Plan and, accordingly, if an Optionee would otherwise become entitled to a fractional Subordinate Voting Share upon the exercise of an option, such Optionee shall only have the right to purchase the next lowest whole number of Subordinate Voting Shares and no payment or other adjustment shall be made with respect to the fractional interest so disregarded. 12. BINDING EFFECT The Company and every Optionee shall be bound by the terms and conditions of the Plan. 13. COMPLIANCE WITH APPLICABLE LAW If any provision of the Plan or any agreement entered into pursuant to the Plan contravenes any law or any order, policy, by-law or regulation of any regulatory body or stock exchange having authority over the Company or the Plan, then such provision shall be deemed to be amended to the extent required to bring such provision into compliance therewith. EX-10.3 3 ex-10_3.txt EXHIBIT 10.3 EXHIBIT 10.3 FIRSTSERVICE CORPORATION AMENDED SHARE PURCHASE PLAN NO. 2 FirstService Corporation (the "Company") hereby establishes a share purchase plan (the "Plan") for the benefit of the employees of the Company and its subsidiaries. 1. DEFINITIONS As used herein, the following terms shall have the following meanings: (a) "Associate" shall have the meaning ascribed to that term in the Securities Act (Ontario); (b) "Business Day" means a day other than a Saturday, Sunday or any other day which is a statutory holiday in the Province of Ontario; (c) "Insider" means: (i) an insider (as defined in the Securities Act (Ontario)) of the Company, other than a person who falls within that definition solely by virtue of being a director or senior officer of a subsidiary of the Company; and (ii) an Associate of any person who is an insider by virtue of (i); (d) "Multiple Voting Shares" means the multiple voting shares in the capital of the Company; (e) "Outstanding Issue" means the aggregate number of Shares that are outstanding immediately prior to the share issuance in question, excluding Subordinate Voting Shares issued pursuant to Share Compensation Arrangements over the preceding one-year period; (f) "Securities Act (Ontario)" means the Securities Act, R.S.O. c. S.5, as amended; and (g) "Share Compensation Arrangements" means a stock option, stock option plan, employee stock purchase plan or any other compensation or incentive mechanism involving the issuance or potential issuance of Subordinate Voting Shares to one or more persons, including a share purchase from treasury which is financially assisted by the Company by way of a loan, guarantee or otherwise; (h) "Shares" means Subordinate Voting Shares and Multiple Voting Shares; (i) "Subordinate Voting Shares" means the subordinate voting shares in the capital of the Company; and (j) "Subsidiary" shall have the meaning ascribed to that term in the Securities Act (Ontario). 2 2. PURPOSE OF THE PLAN The purpose of the Plan is to provide the respective employees of the Company and its subsidiaries with an opportunity to purchase Subordinate Voting Shares and to obtain financial assistance from the Company in respect of such purchases. 3. IMPLEMENTATION The Plan is subject to and is conditional upon: (a) the approval of the Plan by The Toronto Stock Exchange and any other stock exchange on which the Subordinate Voting Shares may be posted and listed for trading; and (b) the approval of the Plan by the shareholders of the Company given by the affirmative vote of a majority of the votes cast at a meeting of shareholders. 4. ADMINISTRATION The Plan shall be administered by the board of directors of the Company (the "Board") or a committee appointed by the Board to be composed of members of management of the Company (the "Committee"). References herein to the "Board" are deemed to be references to the "Board" or the "Committee", as the case may be. Subject to the provisions of the Plan and to the extent permitted by law, the Board is authorized in its sole discretion to make such determinations under, and such interpretations of, and to take such steps and actions in connection with the proper administration of the Plan and to impose, amend or revoke such rules and regulations concerning the granting of rights to purchase Subordinate Voting Shares pursuant to the Plan (such rights being hereinafter individually referred to as a "Right" and, collectively, as the "Rights") and the provision of financial assistance by way of loans ("Loans") to assist in the purchase of Subordinate Voting Shares as it, in its sole discretion, may deem necessary or advisable. No member of the Board will be liable for any action or determination taken or made in good faith with respect to the Plan or any Rights granted thereunder. Any determination approved by a majority of the Board will be deemed to be a determination of that matter by the Board. The Board may delegate to any officer, director or employee of the Company such administrative duties and powers as it may see fit. 5. NUMBER OF SHARES DEDICATED TO THE PLAN Rights shall not be granted under the Plan with respect to any class of shares in the capital of the Company other than Subordinate Voting Shares and the aggregate number of Subordinate Voting Shares subject to Rights under the Plan shall not exceed 800,000 Subordinate Voting Shares. In addition, the aggregate number of Subordinate Voting Shares subject to such Rights in respect of which Loans are then outstanding under the Plan granted to any one person shall not at any time exceed 5% of the aggregate number of Shares then outstanding on a non- diluted basis at the time of such grant. All Rights and Loans granted under the Plan will conform to all applicable provisions prescribed by the Plan and to such specific terms and conditions as may be determined by the Board at the time of making each such grant. Subordinate Voting Shares in respect of which a Right is granted under the Plan but not exercised prior to the termination of such Right, whether through lapse of time or otherwise, shall be available for Rights thereafter 3 granted by the Board under the Plan. All Subordinate Voting Shares issued pursuant to the exercise of Rights granted under the Plan will be so issued from treasury as fully paid and non-assessable shares. 6. ELIGIBILITY FOR RIGHTS After reviewing recommendations from time to time made by management of the Company for the granting of Rights and Loans under the Plan, the Board shall, in its sole discretion, but subject to the provisions herein set forth, designate those classes of employees of the Company and its subsidiaries which will be eligible to participate in the Plan and the persons who will be eligible to be granted Rights and Loans pursuant to the Plan (such persons being herein called the "Eligible Participants"), which persons shall fall within the classes of employees of the Company and its subsidiaries as so designated by the Board from time to time. Upon the approval by the shareholders of the Company given by the affirmative vote of a majority of the votes cast at a meeting of the shareholders of the Company, excluding the Shares beneficially owned by: (a) Insiders; and (b) Associates of Insiders, and on the basis that each Multiple Voting Share carries the right to one vote per share only for the purposes of such vote: (i) the number of Subordinate Voting Shares reserved for issuance pursuant to options granted to Insiders under the Company's stock option plan and under all other Share Compensation Arrangements may exceed 10% of the aggregate number of Shares outstanding; (ii) the issuance of Subordinate Voting Shares to Insiders under the Plan and under all other Share Compensation Arrangements, within a one-year period, may exceed 10% of the Outstanding Issue; and (iii) the issuance of Subordinate Voting Shares to any one Insider and such Insider's Associates under the Plan and under all other Share Compensation Arrangements, within a one-year period, may exceed 10% of the Outstanding Issue. 7. GRANTING OF RIGHTS In determining the Rights and Loans to be granted to each Eligible Participant under the Plan, the Board will give due consideration to such factors as it, in its sole discretion, may deem relevant. Rights shall not be granted otherwise than by the Board and then only on the terms and conditions authorized by the Board. Subject to the provisions of the Plan, the granting of a Right under the Plan to an Eligible Participant shall neither entitle nor preclude such Eligible Participant from being subsequently granted one or more additional Rights under the Plan. The holder of a Right who is not already a shareholder of the Company shall have none of the rights of a shareholder of the Company until Subordinate Voting Shares issuable pursuant to a Right granted to him are issued to him. To the extent permitted by law, the Board shall, in its sole discretion (but subject to the provisions of the Plan), determine the terms and conditions of each Right and, if applicable, Loan granted to an Eligible Participant under the Plan and, following the approval by the Board of the granting of a Right to an Eligible Participant and, the Board shall cause to be sent to such 4 Eligible Participant a notice in writing (a "Participation Notice") advising such Eligible Participant that a Right has been so granted to him and, if applicable, that a Loan is available to him, and such Participation Notice shall specify: (a) the maximum and, if applicable, the minimum number of Subordinate Voting Shares purchaseable upon the exercise of such Right; (b) the price per share of the Subordinate Voting Shares purchaseable upon the exercise of such Right, which price shall not be less than the market price in Canadian dollars on The Toronto Stock Exchange of the Subordinate Voting Shares at the time of the granting of such Right. For the purposes of this subparagraph 7(b), "market price" of the Subordinate Voting Shares shall mean the simple average of the bid and ask prices of the Subordinate Voting Shares on The Toronto Stock Exchange for the five trading day period terminating one trading day prior to the effective date on which the Right is granted by the Board, where "trading day" means a day on which bid and ask prices are available for the Subordinate Voting Shares on The Toronto Stock Exchange. If the Subordinate Voting Shares are not then traded on The Toronto Stock Exchange, "market price" of the Subordinate Voting Shares shall mean the simple average of the bid and ask prices of the Subordinate Voting Shares on such public market on which the Subordinate Voting Shares are then traded, as selected by the Board, in its sole discretion, for the five trading day period terminating one trading day prior to the effective date on which the Right is granted by the Board, where "trading day" means a day on which bid and ask prices are available for the Subordinate Voting Shares on such public market. If the Subordinate Voting Shares are not then traded on any public market, the Board in its sole discretion shall determine the "market price" at the time of grant; (c) the date upon which such Right will expire (the "Expiry Date") which date shall in no event be more than 30 days following the date on which such Right was granted; (d) if applicable, the amount of the Loan which such Eligible Participant may avail himself of in connection with the purchase of Subordinate Voting Shares upon the exercise of such Right; and (e) such other information as the Board may prescribe. If an Eligible Participant to whom a Participation Notice has been sent wishes to exercise the Right which has been awarded to him, as therein specified, he shall, within 30 days following his receipt of such Participation Notice (such period of 30 days being herein called the "Acceptance Period"), send a notice in writing (the "Exercise Notice") to the Company advising the Company of the number of Subordinate Voting Shares which he wishes to purchase pursuant to such Right and, if applicable, the amount of the Loan which he wishes to avail himself of and, in such event, such Eligible Participant shall, within 7 days of his receipt of the same from the Company, execute and deliver all such subscription documentation and, if applicable, loan documentation (including, without limitation, a promissory note and share hypothecation) as the Board shall require. If prior to the expiration of the Acceptance Period: 5 (f) an Eligible Participant has not sent an Exercise Notice to the Company, the Right granted to such Eligible Participant shall be deemed to have expired and to be of no further force and effect whatsoever; or (g) an Eligible Participant has sent an Exercise Notice to the Company with respect to less than all of the Subordinate Voting Shares purchaseable upon the exercise of his Right, the Right, insofar as it pertains to the Subordinate Voting Shares not agreed to be purchased by such Eligible Participant, shall be deemed to have expired and to be of no further force and effect whatsoever. 8. TERMS AND CONDITIONS OF RIGHTS Each Right granted under the Plan shall be subject to such terms and conditions not inconsistent with the Plan as may be deemed advisable by the Board including, without limitation, the following: (i) the total purchase price of the Subordinate Voting Shares purchased upon the exercise of a Right, to the extent that the same is then exercised, shall be paid for in cash or by certified cheque or bank draft upon such exercise; (ii) if, prior to 5:00 p.m. (Toronto time) on the Expiry Date, the holder of a Right should cease to be an employee of the Company or a subsidiary of the Company for any reason whatsoever (including, without limitation, by reason of death or voluntary resignation, discharge by reason of a wilful and substantial breach of his employment duties, illness, disability or otherwise) such Right, to the extent that it has not previously been exercised by the holder thereof, shall thereupon immediately become null and void and of no further force and effect whatsoever; and (iii) if the holder of a Right, at any time prior to 5:00 p.m. (Toronto time) on the Expiry Date of such Right, shall assign, encumber or otherwise dispose of such Right or his interest therein, such Right shall thereupon immediately terminate, without any further act or formality, as to any Subordinate Voting Shares not theretofore taken up. 9. LOANS In order to assist an Eligible Participant who is then the holder of a Right to purchase the Subordinate Voting Shares purchaseable upon the exercise of such Right, the Company shall, if so requested by such Eligible Participant, make a Loan to such Eligible Participant concurrently with his exercise of such Right with the principal amount of such Loan to be such amount as may be approved by the Board. In addition, if an Eligible Participant should wish to purchase Subordinate Voting Shares and, in connection therewith, obtain a Loan from the Company in order to assist him to pay the purchase price therefor, he may so advise the Company by a request in writing and, in such event, the Board may consider his request and, if thought fit, cause the Company to make a Loan to him concurrently with his completion of his proposed purchase of such Subordinate Voting Shares, the principal amount of which Loan shall be the amount approved by the Board. The Board shall 6 determine, in its sole discretion, at the time of making a Loan, whether the principal amount thereof will bear interest and if so, the rate of interest which such principal amount shall bear. Each Loan made to an Eligible Participant shall be evidenced by a promissory note and shall have a term of not more than 10 years from the making thereof. In addition, if such Eligible Participant should cease to be an employee of the Company or a subsidiary of the Company for any reason whatsoever (including, without limitation, by reason of death or voluntary resignation, discharge by reason of a wilful and substantial breach of his employment duties, illness, disability or otherwise) each Loan made to such Eligible Participant which is then outstanding shall be due and payable in full on the date which is the earlier of: (a) the maturity date of such Loan; and (b) the first anniversary of the date on which such Eligible Participant so ceased to be an employee of the Company or a subsidiary of the Company. The Board shall have the right in its sole discretion and at any time and from time to time to change the foregoing provisions relating to the repayment of Loans (save and except that the time in which any such Loan must be repaid shall not exceed 10 years from the date of the making thereof), it being acknowledged that the respective terms and conditions pertaining to the repayment of all Loans from time to time outstanding need not be the same. 10. SECURITY FOR REPAYMENT OF LOANS If a Loan is made to an Eligible Participant, such Eligible Participant shall, concurrently with the making of the Loan to him, pledge and hypothecate to and in favour of the Company, as continuing security for the repayment of the principal amount of such Loan and all interest accruing thereon, all of the Subordinate Voting Shares (collectively, the "Pledged Shares") purchased by him, any part of the purchase price of which was paid for out of the proceeds of such Loan. Certificates representing the Pledged Shares shall be held by the Company. Upon the payment in full of such Loan and all interest, if any, due thereon, the Company shall transfer and deliver to such Eligible Participant certificates representing the Pledged Shares so given as security for the repayment of such Loan duly registered in his name. In the event that an Eligible Participant should default in the repayment of the principal amount of his Loan and/or the interest, if any, due thereon and such default is not cured within 10 days of the occurrence thereof, the Company shall at any time thereafter be entitled to: (a) sell, on behalf of such Eligible Participant, such part of the Pledged Shares as shall be necessary to repay the outstanding principal balance of such Eligible Participant's Loan and all interest, if any, then accrued thereon and the expenses referred to in the following paragraph (b); (b) retain from the proceeds of such sale all amounts necessary to pay the expenses incurred by the Company in connection with such sale and to repay the outstanding balance of the Loan including all interest, if any, then accrued thereon; and 7 (c) transfer and deliver the balance of the Pledged Shares and certificates therefor, if any, and/or the balance of the proceeds of such sale, if any, as the case may be, to such Eligible Participant. In the event that the proceeds of any sale of Pledged Shares are insufficient to repay the expenses of such sale and the outstanding principal balance of the Loan or any interest, if any, accrued thereon, the Eligible Participant shall forthwith pay to the Company the amount of the deficiency. If Pledged Shares which otherwise would be so sold by the Company pursuant to the foregoing would be a so-called "odd lot", the Company may in its discretion sell such greater number of Pledged Shares as is necessary to effect a sale consisting of one or more so-called "board lots". 11. DIVIDENDS AND RIGHTS Each Eligible Participant to whom a Loan has been made, shall have the right to exercise the votes appertaining to his Pledged Shares. So long as a Loan remains outstanding: (a) all dividends (other than stock dividends) and other distributions paid by the Company in respect of Pledged Shares of an Eligible Participant shall be retained by the Company and applied, firstly, in payment of interest, if any, accrued on such Loan which is then due and payable and, secondly, in payment of the outstanding principal amount of such Loan in reverse order of maturity; and (b) if the Company should pay a stock dividend on Pledged Shares, the certificates representing the dividend so paid in stock shall be registered in the name of the Company (or such representative of the Company as the Board may stipulate) and shall be delivered to the Company to be held by it as an addition to and as part of the Pledged Shares in respect of which it was paid. 12. ADJUSTMENTS IN EVENT OF CHANGE IN STRUCTURE OF CAPITAL Appropriate adjustments in the number of Subordinate Voting Shares and in the purchase price per Subordinate Voting Share, relating to Rights granted or to be granted, shall be made by the Board in its sole discretion to give effect to adjustments in the number of Subordinate Voting Shares resulting, subsequent to the issuance of Rights, from any subdivisions, consolidations or reclassifications of the Subordinate Voting Shares of the Company, the payment of stock dividends by the Company or other relevant changes in the capital structure of the Company. Any such adjustments shall be subject to the approval thereof by The Toronto Stock Exchange and any other stock exchange upon which the Subordinate Voting Shares may be posted and listed for trading. 13. AMENDMENT OR DISCONTINUANCE OF PLAN The Board may amend, vary or discontinue the Plan at any time either prospectively or retrospectively; provided, however, that no such amendment may increase the maximum number of Subordinate Voting Shares that may be reserved for issuance under the Plan or, without the 8 prior written consent of the holder of a Right, alter or impair any Right previously granted to such holder under the Plan. Any such amendment, variance or discontinuance of the Plan shall be subject to the approval thereof by The Toronto Stock Exchange and any other stock exchange upon which the Subordinate Voting Shares may be posted and listed for trading. 14. MISCELLANEOUS Nothing contained in the Plan nor in any option granted thereunder shall be deemed to give any Eligible Participant any interest or title in or to any shares of the Company or any rights as a shareholder of the Company or any other legal or equitable right against the Company whatsoever other than as set forth in the Plan and pursuant to the exercise of any Right. The Plan does not give any Eligible Participant the right or obligation to or to continue to serve as an employee of the Company or any of its subsidiaries. The awarding of Rights and Loans to any Eligible Participant is a matter to be determined solely in the discretion of the Board. The Plan shall not in any manner fetter, limit, obligate, restrict or constrain the Board with regard to the allotment or issue of any shares or any other securities in the capital of the Company or any of its subsidiaries other than as specifically provided for in the Plan. No fractional Subordinate Voting Shares shall be issued upon the exercise of Rights granted under the Plan and, accordingly, if an Eligible Participant would become entitled to a fractional Subordinate Voting Share upon the exercise of a Right, such Eligible Participant shall only have the right to purchase the next lowest whole number of Subordinate Voting Shares and no payment or other adjustment will be made with respect to the fractional interest so disregarded. 15. AGREEMENT The Company and every Eligible Participant to whom a Right or Loan is granted shall be bound by the terms and conditions of the Plan. 16. COMPLIANCE WITH APPLICABLE LAW If any provision of the Plan or any agreement entered into pursuant to the Plan contravenes any law or any order, policy, by-law or regulation of any regulatory body or stock exchange having authority over the Company or the Plan, then such provision shall be deemed to be amended to the extent required to bring such provision into compliance therewith. EX-21 4 ex-21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF FIRSTSERVICE CORPORATION
- -------------------------------------------------------------- ---------------- ------------------- PERCENTAGE OWNED BY REGISTRANT JURISDICTION OF NAME OF SUBSIDIARY (1) INCORPORATION - -------------------------------------------------------------- ---------------- ------------------- American Pool Enterprises, Inc. (2) 80.00% Delaware - -------------------------------------------------------------- ---------------- ------------------- BDP Business Data Services, Ltd. 86.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- California Closet Company, Inc. 72.00% California - -------------------------------------------------------------- ---------------- ------------------- Certa ProPainters (U.S.) Ltd. 80.00% Massachusetts - -------------------------------------------------------------- ---------------- ------------------- Certa ProPainters Ltd. 80.00% Canada - -------------------------------------------------------------- ---------------- ------------------- Cleanol Services Inc. 90.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- College Pro Painters (U.S.) Ltd. 80.00% Maryland - -------------------------------------------------------------- ---------------- ------------------- College Pro Painters Ltd. 80.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- DDS Distribution Services (U.S.) Ltd. 89.00% Delaware - -------------------------------------------------------------- ---------------- ------------------- DDS Distribution Services, Ltd. 89.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- DDS Harris Fulfillment Ltd. 89.00% Delaware - -------------------------------------------------------------- ---------------- ------------------- DDS Harris Limited 89.00% Delaware - -------------------------------------------------------------- ---------------- ------------------- DDS Southwest Distribution Services Ltd. (3) 89.00% Delaware - -------------------------------------------------------------- ---------------- ------------------- FirstService (U.S.A.), Inc. 100.00% Delaware - -------------------------------------------------------------- ---------------- ------------------- FirstService Continental Inc. 100.00% Florida - -------------------------------------------------------------- ---------------- ------------------- FirstService Delaware, LLC 85.90% Delaware - -------------------------------------------------------------- ---------------- ------------------- FirstService Delaware, LP 85.90% Delaware - -------------------------------------------------------------- ---------------- ------------------- FirstService Financial Inc. 100.00% Pennsylvania - -------------------------------------------------------------- ---------------- ------------------- FirstService GP, Inc. 100.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- FirstService Nova Scotia Corp. 85.90% Nova Scotia - -------------------------------------------------------------- ---------------- ------------------- Greenspace Services Ltd. (4) 90.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- Intercon Security Inc. (5) 85.10% Delaware - -------------------------------------------------------------- ---------------- ------------------- Intercon Security Ltd. 85.10% Ontario - -------------------------------------------------------------- ---------------- ------------------- Nutrilawn (U.S.) Inc. 45.60% Massachusetts - -------------------------------------------------------------- ---------------- ------------------- Nutrilawn International Inc. 45.60% Canada - -------------------------------------------------------------- ---------------- ------------------- Paul W. Davis Systems, Inc. 80.00% Florida - -------------------------------------------------------------- ---------------- ------------------- Prime Management Group, Inc. (6) 100.00% Florida - -------------------------------------------------------------- ---------------- ------------------- Rossmar & Graham Community Association Management Company 100.00% Arizona - -------------------------------------------------------------- ---------------- ------------------- Stained Glass Overlay Inc. 80.00% California - -------------------------------------------------------------- ---------------- ------------------- Superior Pool, Spa and Leisure Ltd. 65.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- The Continental Group, Inc. 80.10% Florida - -------------------------------------------------------------- ---------------- ------------------- The Continental Group, Ltd. (7) 80.02% Florida - -------------------------------------------------------------- ---------------- ------------------- The Franchise Company (U.S.) Inc. 80.00% Delaware - -------------------------------------------------------------- ---------------- ------------------- The Franchise Company, Inc. 80.00% Ontario - -------------------------------------------------------------- ---------------- ------------------- The Franchise Development Center Inc. 80.00% Georgia - -------------------------------------------------------------- ---------------- ------------------- The Wentworth Group, Inc. (8) 80.00% Pennsylvania - -------------------------------------------------------------- ---------------- -------------------
NOTES (1) The percentage of each subsidiary not owned by the Registrant is owned by operating management of each respective subsidiary. (2) American Pool Enterprises, Inc. has 17 subsidiaries. (3) DDS Southwest Distribution Services Ltd. has 8 subsidiaries. (4) Greenspace Services Ltd. has 2 subsidiaries. (5) Intercon Security Inc. has 3 subsidiaries. (6) Prime Management Group, Inc. has 4 subsidiaries. (7) The Continental Group, Ltd. has 3 subsidiaries. (8) The Wentworth Group, Inc. has 9 subsidiaries. EX-23 5 ex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF AUDITORS We consent to the inclusion in this Form 10-K of our report dated May 9, 2000, relating to the financial statements appearing in the FirstService Corporation Annual Report to Shareholders for the year ended March 31, 2000. PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario June 29, 2000 -----END PRIVACY-ENHANCED MESSAGE-----