Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The restated consolidated financial statements, including the notes thereto, set forth in this Item 8 have been revised to reflect
the restatements and, except for the revisions, do not reflect events and developments subsequent to March 31, 2003.
Set
forth below is the report of PricewaterhouseCoopers LLP dated May 9, 2003 and January 27, 2004, the consolidated balance sheets of FirstService Corporation as at
March 31, 2003 and 2002, the consolidated statements of earnings, shareholders' equity and cash flows for each year in the three year period ended March 31, 2003 and the notes to the
consolidated financial statements.
12
REPORT OF MANAGEMENT
To
the shareholders of FirstService Corporation:
Management
is responsible for the preparation of FirstService Corporation's consolidated financial statements. Management believes that the consolidated financial statements fairly
reflect the form and substance of transactions and that the consolidated financial statements reasonably present the Company's financial condition and results of operations. The consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States, in all material respects. Management has included in the Company's consolidated
financial statements amounts based on estimates and judgments that it believes are reasonable under the circumstances.
PricewaterhouseCoopers LLP,
the independent accountants of the Company, have audited the Company's consolidated financial statements in accordance with generally accepted auditing
standards, and they provide an objective, independent review of the fairness of reported operating results and financial position.
The
Board of Directors of the Company has an Audit Committee that meets with financial management and the independent accountants to review accounting, auditing, internal accounting
controls, and financial reporting matters.
/s/ JAY S. HENNICK
President and CEO
/s/ JOHN B. FRIEDRICHSEN
Senior Vice President and CFO
REPORT OF INDEPENDENT ACCOUNTANTS
To
the shareholders of FirstService Corporation:
We
have audited the consolidated balance sheets of FirstService Corporation as at March 31, 2003 and 2002 and the consolidated statements of earnings, shareholders' equity and
cash flows for each year in the three-year period ended March 31, 2003. These consolidated financial statements and the financial statement schedules listed in the index appearing
under Item 15 are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedules 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. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at March 31, 2003 and 2002 and the
results of its operations and cash flows for each year in the three-year period ended March 31, 2003 in accordance with United States generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules referred to above present fairly, in all material respects, the information set forth herein when read in conjunction with
the related consolidated financial statements.
As
described in note 3 to the consolidated financial statements, the accompanying consolidated financial statements as of March 31, 2003 and 2002 and for each year
in the three-year period ended March 31, 2003 have been restated.
We
also reported separately on May 9, 2003 (January 27, 2004 as to the effects of the restatements described in note 3) to the shareholders of the Company on
our audit, conducted in accordance with Canadian generally accepted auditing standards, where we expressed an opinion without reservation on the March 31, 2003 and 2002 consolidated financial
statements, prepared in accordance with Canadian generally accepted accounting principles.
/s/
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto,
Canada
May 9, 2003 (January 27, 2004 as to the effects of the restatements described in note 3)
13
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
2003
2002
2001
(restated
see note 3)
(restated
see notes 3 and 23)
(restated
see note 3)
Revenues
$
542,692
$
512,689
$
424,174
Cost of revenues
372,003
343,415
284,474
Selling, general and administrative expenses (note 6)
118,472
112,348
91,845
Other (income) expense (note 7)
(1,106
)
(196
)
Depreciation and amortization
14,439
12,879
12,328
Operating earnings
38,884
44,243
35,527
Interest
9,032
12,991
9,767
Earnings before income taxes and minority interest
29,852
31,252
25,760
Income taxes (note 15)
8,249
10,441
10,156
Earnings before minority interest
21,603
20,811
15,604
Minority interest share of earnings
3,163
3,782
2,973
Net earnings
$
18,440
$
17,029
$
12,631
Earnings per share (note 16)
Net earnings:
Basic
$
1.32
$
1.26
$
0.97
Diluted
1.27
1.17
0.91
The
accompanying notes are an integral part of these consolidated financial statements.
14
FIRSTSERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars)in accordance with
United States generally accepted accounting principles
As at March 31
2003
2002
(restated
see note 3)
(restated
see note 3)
Assets
Current assets
Cash and cash equivalents
$
5,378
$
7,332
Accounts receivable, net of an allowance of $5,343 (2002$4,084)
85,484
88,290
Inventories (note 8)
15,095
10,518
Prepaids and other (note 8)
13,617
12,160
Deferred income taxes (note 15)
2,808
2,571
122,382
120,871
Other receivables (note 9)
5,839
4,908
Interest rate swap (note 18)
6,279
Fixed assets (note 10)
46,600
45,367
Other assets (note 10)
2,777
5,411
Deferred income taxes (note 15)
103
972
Intangible assets (note 11)
31,427
28,132
Goodwill (note 12)
173,624
160,268
266,649
245,058
$
389,031
$
365,929
Liabilities
Current liabilities
Accounts payable
$
22,564
$
20,587
Accrued liabilities (note 8)
34,270
38,269
Income taxes payable
1,209
2,259
Unearned revenue
8,369
9,654
Long-term debtcurrent (note 13)
3,030
7,193
Deferred income taxes (note 15)
1,066
583
70,508
78,545
Long-term debt less current portion (note 13)
161,889
158,418
Interest rate swap (note 18)
2,070
Deferred income taxes (note 15)
19,404
16,353
Minority interest
13,824
11,322
195,117
188,163
Shareholders' equity
Capital stock (note 14)
60,571
57,712
Issued and outstanding 13,501,343 (200213,112,418) Subordinate Voting Shares and 662,847 (2002662,847) convertible Multiple Voting Shares
Receivables pursuant to share purchase plan (note 14)
(2,434
)
(2,630
)
Retained earnings
62,948
44,765
Cumulative other comprehensive earnings (loss)
2,321
(626
)
123,406
99,221
$
389,031
$
365,929
Commitments and contingencies (note 19)
On
behalf of the Board,
/s/ JAY S. HENNICK
Director
/s/ PETER F. COHEN
Director
The accompanying notes are an integral part of these consolidated financial statements.
15
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars)in accordance with
United States generally accepted accounting
principles
Issued and outstanding shares (note 14)
Capital stock (note 14)
Receivables pursuant to share purchase plan
Retained earnings
Cumulative other comprehensive earnings (loss)
Total shareholders' equity
Balance, March 31, 2000, as previously reported
12,989,530
$
53,849
$
(3,294
)
$
15,614
$
2,169
$
68,338
Restatement adjustment
(160
)
(160
)
Balance, March 31, 2000, as restated (see note 3)
12,989,530
$
53,849
$
(3,294
)
$
15,454
$
2,169
$
68,178
Comprehensive earnings:
Net earnings
12,631
12,631
Foreign currency translation adjustments (note 17)
(2,352
)
(2,352
)
Comprehensive earnings
10,279
Subordinate Voting Shares:
Issued for purchase of minority interest
69,360
649
649
Stock options exercised
158,850
580
580
Purchased for cancellation
(49,500
)
(215
)
(349
)
(564
)
Cash payments on share purchase plan
98
98
Balance, March 31, 2001 (restatedsee note 3)
13,168,240
54,863
(3,196
)
27,736
(183
)
79,220
Comprehensive earnings:
Net earnings
17,029
17,029
Foreign currency translation adjustments (note 17)
(443
)
(443
)
Comprehensive earnings
16,586
Subordinate Voting Shares:
Stock options exercised
607,025
2,849
2,849
Cash payments on share purchase plan
566
566
Balance, March 31, 2002 (restatedsee note 3)
13,775,265
57,712
(2,630
)
44,765
(626
)
99,221
Comprehensive earnings:
Net earnings
18,440
18,440
Foreign currency translation adjustments (note 17)
2,947
2,947
Comprehensive earnings
21,387
Subordinate Voting Shares:
Stock options exercised
421,625
3,002
3,002
Purchased for cancellation
(32,700
)
(143
)
(257
)
(400
)
Cash payments on share purchase plan
196
196
Balance, March 31, 2003 (restatedsee note 3)
14,164,190
$
60,571
$
(2,434
)
$
62,948
$
2,321
$
123,406
The accompanying notes are an integral part of these consolidated financial statements.
16
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
2003
2002
2001
(restated
see note 3)
(restated
see note 3)
(restated
see note 3)
Cash provided by (used in)
Operating activities
Net earnings
$
18,440
$
17,029
$
12,631
Items not affecting cash:
Depreciation and amortization
14,439
12,879
12,328
Deferred income taxes
2,804
153
748
Minority interest share of earnings
3,163
3,782
2,973
Write-off of financing fees on early debt retirement
1,375
Other
(287
)
471
451
Changes in operating assets and liabilities:
Accounts receivable
9,550
(6,746
)
(5,235
)
Inventories
(4,239
)
(658
)
(450
)
Prepaids and other
(918
)
(1,908
)
(1,270
)
Accounts payable
(609
)
(2,047
)
3,304
Accrued liabilities
(6,738
)
279
(4,103
)
Income taxes payable
(914
)
489
2,520
Unearned revenue
(2,137
)
(133
)
(1,607
)
Net cash provided by operating activities
32,554
24,965
22,290
Investing activities
Acquisitions of businesses, net of cash acquired
(9,907
)
(15,363
)
(40,583
)
Purchases of minority shareholders' interests
(6,352
)
(4,623
)
(4,070
)
Purchases of fixed assets
(10,660
)
(15,611
)
(10,502
)
Purchases of intangible assets
(743
)
(1,153
)
(221
)
Decrease in other assets
2,069
683
130
(Increase) decrease in other receivables
(578
)
80
(705
)
Net cash used in investing activities
(26,171
)
(35,987
)
(55,951
)
Financing activities
Increases in long-term debt
14,946
168,817
43,374
Repayments of long-term debt
(28,683
)
(155,246
)
(7,006
)
Financing fees paid
(3,030
)
Proceeds received on exercise of stock options
3,002
2,849
580
Repayment of receivables pursuant to share purchase plan
196
566
98
Repurchases of Subordinate Voting Shares
(400
)
(564
)
Dividends paid to minority shareholders of subsidiaries
(191
)
(139
)
(475
)
Net cash (used in) provided by financing activities
(11,130
)
13,817
36,007
Effect of exchange rate changes on cash
2,793
(578
)
(528
)
(Decrease) increase in cash and cash equivalents during the year
(1,954
)
2,217
1,818
Cash and cash equivalents, beginning of year
7,332
5,115
3,297
Cash and cash equivalents, end of year
$
5,378
$
7,332
$
5,115
The
accompanying notes are an integral part of these consolidated financial statements.
17
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 commercial, residential and institutional customers in the
United States and Canada. The Company's operations are conducted through four segments: Residential Property Management, Integrated Security Services, Consumer Services and Business Services.
2. Summary of significant accounting policies
The preparation of the financial statements in conformity with United States 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 goodwill, intangible assets and the collectibility of accounts receivable. 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 original 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 (200230% and 70%).
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. The cost of additions and improvements are capitalized, while maintenance and repairs are expensed
as incurred. Fixed assets are depreciated over their estimated useful lives as follows:
Buildings
5% declining balance and 20 to 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
5 to 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. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of the impairment loss is based on the excess of the carrying amount of the asset over fair value calculated using discounted expected future cash flows.
18
Financial instruments
The Company uses interest rate swaps to hedge its interest rate exposure. The swaps are carried at fair value on the balance sheet, with gains or losses
recognized in earnings. The carrying value of the hedged debt is adjusted for changes in fair value attributable to the hedged interest rate risk; the associated gain or loss is recognized currently
in earnings.
Financing fees
Financing fees related to the revolving credit facility are amortized to interest expense on a straight-line basis over the term of the associated
debt. Financing fees related to the senior secured notes are amortized to interest expense using the effective interest method.
Goodwill and intangible assets
Goodwill and intangible assets are accounted for in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 141, Business Combinations , ("SFAS 141") and SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). Goodwill represents the excess of purchase price over the fair value of identifiable assets acquired in a business combination and is not
subject to amortization.
Intangible
assets are recorded at cost and are amortized over their estimated useful lives as follows:
Management contracts and other
straight-line over life of contract
Customer lists and relationships
straight line over 2 to 15 years
Trademarks and trade names
straight-line over 25 to 35 years
Franchise rights
by pattern of use
The
Company reviews the carrying value of intangible 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. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of the impairment loss is based on the excess of the carrying amount of the asset over fair value calculated using discounted expected future cash flows.
Goodwill
is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired, in which case the carrying value of the asset is
written down to fair value. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit.
The fair values of the reporting units are estimated using a discounted cash flows approach. If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to
measure the amount of impairment loss, if any.
Revenue recognition and unearned revenue
(a) Company-owned services
Revenues from Residential Property Management, Company-owned Consumer Services, Integrated Security Services and Business Services are recognized at the time the
service is rendered or the product is shipped. Revenues from Integrated Security Services installation contracts and Residential Property Management painting and restoration contracts in process are
recognized on the percentage of completion method, generally in the ratio of actual costs to total estimated contract costs, unless the Company cannot reasonably estimate its gross margins in which
case the completed contract method is used. Amounts received from customers in advance of services being provided are recorded as unearned revenue when received.
(b) Franchised services
The Company's franchised Consumer Services are conducted principally through subsidiaries California Closet Company, Inc., Paul Davis
Restoration, Inc., Certa ProPainters Ltd. and College Pro Painters Ltd. Royalties are charged as a percentage of revenues, as defined, where reported by the franchisees except for
Certa ProPainters Ltd., where the franchisees are charged either a fixed monthly amount or a percentage of revenues. Revenues from administrative and other support services, as applicable, are
recognized as the services are provided.
19
Advertising costs
Advertising costs are expensed as incurred except for prepaid 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
Assets and liabilities of the Company's subsidiary operations that are measured in a functional currency other than the U.S. Dollar are translated into
U.S. Dollars at the exchange rates prevailing at year-end and revenues and expenses at the weighted average exchange rates for the year. Realized exchange gains and losses are
included in earnings. Currency translation adjustments are included in a separate component of shareholders' equity.
Income taxes
Income taxes have been provided using the asset and liability method whereby deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted 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. A valuation allowance is recorded when there is uncertainty regarding realization of a deferred income tax asset.
Income
taxes are not provided on the unremitted earnings of U.S. subsidiaries because it has been the practice and is the intention of the Company to reinvest these earnings
indefinitely in its U.S. subsidiaries.
Stock-based compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and related interpretations in accounting for its stock option plan. No compensation expense is recognized when shares or stock options are issued
to employees or directors. Any consideration paid on the exercise of stock options is credited to share capital. However, the Company discloses pro forma earnings and earnings per share to
reflect compensation costs in accordance with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS 123").
3. Restatements
As a result of a detailed review of the accounting for certain intangible assets, including purchase accounting at the times of acquisition and accounting upon
the adoption of SFAS 142 at April 1, 2001, the Company has made certain restatements. In particular, the Company recorded deferred income taxes with respect to franchise intangible
assets acquired upon the October 1998 acquisition of California Closet Company, Inc. ("CCC") and the October 1997 acquisition of Paul Davis Restoration, Inc. ("PDR"). In
addition, the Company reevaluated the estimated useful lives of the franchise intangible assets associated with CCC and PDR. It was determined that the amortization of franchise rights should follow
the pattern of use, specifically the attrition rate of the franchisees that were present at the dates of acquisition. The amortization of trademarks and trade names was determined to be 35 and
25 years for CCC and PDR, respectively. Previously, all of these assets were treated as indefinite life intangible assets.
20
The
following presents the impact on net earnings of the restatement adjustments for the years ended March 31, 2003, 2002, 2001 and prior years.
2003
2002
2001
Prior years
Net earnings as previously reported
$
18,836
$
17,414
$
12,707
Adjustments:
Amortization expense
(822
)
(800
)
(399
)
(765
)
Income tax recovery
345
336
308
572
Minority interest
81
79
15
33
Restated net earnings
$
18,440
$
17,029
$
12,631
The
consolidated balance sheets as at March 31, 2003 and 2002 were restated to reflect the recognition of deferred income taxes related to the CCC and PDR franchise intangible
assets. This resulted in an increase to goodwill and an increase to deferred income taxes long-term liability. In addition, the balance sheets were restated to take into account the
amortization expense, income tax recovery, minority interest, and effect on retained earnings resulting from the restatement adjustments to net earnings described in the chart above. A reconciliation
of the consolidated balance sheets at March 31, 2003 and 2002 follows.
As at March 31, 2003
As previously reported
Restatement adjustment
Restated
Assets
Current assets
Cash and cash equivalents
$
5,378
$
$
5,378
Accounts receivable
85,484
85,484
Inventories
15,095
15,095
Prepaids and other
13,617
13,617
Deferred income taxes
2,808
2,808
122,382
122,382
Other receivables
5,839
5,839
Interest rate swap
6,279
6,279
Fixed assets
46,600
46,600
Other assets
2,777
2,777
Deferred income taxes
103
103
Intangible assets
33,539
(2,112
)
31,427
Goodwill
164,610
9,014
173,624
259,747
6,902
266,649
$
382,129
$
6,902
$
389,031
Liabilities
Current liabilities
Accounts payable
$
22,564
$
$
22,564
Accrued liabilities
34,270
34,270
Income taxes payable
1,209
1,209
Unearned revenue
8,369
8,369
Long-term debtcurrent
3,030
3,030
Deferred income taxes
1,066
1,066
70,508
70,508
Long-term debt less current portion
161,889
161,889
Interest rate swap
Deferred income taxes
11,277
8,127
19,404
Minority interest
14,032
(208
)
13,824
187,198
7,919
195,117
Shareholders' equity
Capital stock
60,571
60,571
Receivables pursuant to share purchase plan
(2,434
)
(2,434
)
Retained earnings
63,965
(1,017
)
62,948
Cumulative other comprehensive earnings
2,321
2,321
124,423
(1,017
)
123,406
$
382,129
$
6,902
$
389,031
21
As at March 31, 2002
As previously reported
Restatement adjustment
Restated
Assets
Current assets
Cash and cash equivalents
$
7,332
$
$
7,332
Accounts receivable
88,290
88,290
Inventories
10,518
10,518
Prepaids and other
12,160
12,160
Deferred income taxes
2,571
2,571
120,871
120,871
Other receivables
4,908
4,908
Interest rate swap
Fixed assets
45,367
45,367
Other assets
5,411
5,411
Deferred income taxes
972
972
Intangible assets
29,422
(1,290
)
28,132
Goodwill
151,254
9,014
160,268
237,334
7,724
245,058
$
358,205
$
7,724
$
365,929
Liabilities
Current liabilities
Accounts payable
$
20,587
$
$
20,587
Accrued liabilities
38,269
38,269
Income taxes payable
2,259
2,259
Unearned revenue
9,654
9,654
Long-term debtcurrent
7,193
7,193
Deferred income taxes
583
583
78,545
78,545
Long-term debt less current portion
158,418
158,418
Interest rate swap
2,070
2,070
Deferred income taxes
7,881
8,472
16,353
Minority interest
11,449
(127
)
11,322
179,818
8,345
188,163
Shareholders' equity
Capital stock
57,712
57,712
Receivables pursuant to share purchase plan
(2,630
)
(2,630
)
Retained earnings
45,386
(621
)
44,765
Cumulative other comprehensive loss
(626
)
(626
)
99,842
(621
)
99,221
$
358,205
$
7,724
$
365,929
22
4. Adoption of SFAS 142
SFAS 142 was adopted effective April 1, 2001. Had the provisions of SFAS 142 been applied for the year ended March 31, 2001, the
Company's comparative earnings and earnings per share would be as follows:
2003
2002
2001
Reported net earnings
$
18,440
$
17,029
$
12,631
Goodwill amortization, net of income taxes
2,884
Minority interest
(232
)
Adjusted net earnings
$
18,440
$
17,029
$
15,283
Net earnings per share:
Basic
Reported
$
1.32
$
1.26
$
0.97
Goodwill amortization, net of income taxes
0.22
Minority interest
(0.02
)
Adjusted
$
1.32
$
1.26
$
1.17
Diluted
Reported
$
1.27
$
1.17
$
0.91
Goodwill amortization, net of income taxes
0.21
Minority interest
(0.02
)
Adjusted
$
1.27
$
1.17
$
1.10
5. Business acquisitions
2003 acquisitions:
The Company completed seven small acquisitions during the year, three in Consumer Services and two in each of Residential Property Management and Business
Services, which collectively are shown in the Acquisitions column below.
The
Company also acquired minority interests from several shareholders during the year comprised of shares of Herbert A. Watts Ltd. ("Watts"), The Wentworth Group, Inc.,
American Pool Enterprises, Inc., and BLW, Inc. d/b/a Security Services and Technologies ("SST").
2002 acquisitions:
In February 2002, an 87.5% owned subsidiary of the Company (DDS Distribution Services Ltd.) acquired 100% of the assets of the Fulfillment Division
of Right Choice Services, Inc. ("Right Choice") of Mascoutah, Illinois. Right Choice is a rebate processing and fulfillment business.
In
July 2001, an 80% owned subsidiary of the Company (SST) acquired an 80% voting equity interest of VASEC Virginia Security and Automation, Inc. ("VASEC") of Springfield,
Virginia. VASEC is a provider of integrated security services.
In
addition, the Company and its subsidiaries acquired three other businesses and acquired minority shareholdings in two subsidiaries.
23
Details
of the 2003 acquisitions are as follows:
2003
Acquisitions
Purchases of minority shareholders' interests
Current assets
$
821
$
Long-term assets
1,347
Current liabilities
(1,389
)
Long-term liabilities
(942
)
(840
)
Minority interest
(229
)
775
(392
)
(65
)
Cash consideration
6,599
6,352
Acquired intangibles
$
2,226
$
2,064
Acquired goodwill
$
4,765
$
4,353
Contingent consideration
at date of acquisition
$
4,074
$
1,000
The
purchase price allocations for the 2003 acquisitions have not yet been finalized. They will be finalized during 2004.
Details
of the 2002 acquisitions are as follows:
2002
Right Choice
VASEC
Aggregate other
Current assets
$
2,212
$
841
$
441
Long-term assets
219
86
433
Current liabilities
(1,992
)
(539
)
(1,044
)
Long-term liabilities
(191
)
(2,293
)
Minority interest
(78
)
710
439
119
(1,753
)
Note consideration
1,720
Cash consideration
3,300
1,700
7,287
Acquired intangibles
$
527
$
286
$
3,084
Acquired goodwill
$
2,334
$
1,295
$
7,676
Contingent consideration at date of acquisition
$
3,300
$
860
$
1,985
In
2002, the Company finalized the allocation of the purchase price with respect to the March 2001 Watts acquisition. The final adjustment to this purchase equation and the
purchase equations on other acquisitions resulted in additional goodwill and accrued liabilities in the amount of $1,860, net of income taxes, principally to reflect costs to restructure operations of
one of the acquired Watts subsidiaries. At March 31, 2003, an accrual of $1,667 still exists relating to that acquired subsidiary.
Certain
vendors, at the time of acquisition, are entitled to receive contingent consideration if the acquired businesses achieve specified earnings levels during the twoto
four-year periods following the dates of acquisition. Such contingent consideration is issued at the expiration of the contingency period. As at March 31, 2003, there was contingent
consideration outstanding of up to $12,700 ($21,300 as at March 31, 2002).
24
The
contingencies will expire during the period extending to April 2007. Vendors are entitled to receive interest on contingent consideration issued to them, which interest is calculated from
the acquisition date to the payment date at interest rates ranging from 5% to 7%. The contingent consideration will be recorded when the contingencies are resolved and the consideration is issued or
becomes issuable, at which time the Company will record the fair value of the consideration issued or issuable, including interest, as additional costs of the acquired businesses. Contingent
consideration issued or issuable during the year ended March 31, 2003 was $3,143, net of deferred income tax of $165 (2002$7,425, net of deferred income tax of $273).
The
acquisitions referred to above were accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of earnings 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 credit facility.
Following
are the Company's unaudited pro forma results assuming the 2003 acquisitions and the acquisitions of Right Choice and VASEC occurred on April 1 of 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.
2003
2002
(unaudited)
Pro forma revenue
$
556,075
$
538,416
Pro forma net earnings
19,066
18,680
Pro forma earnings per share:
Basic
$
1.37
$
1.39
Diluted
1.31
1.29
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.
6. Unusual item
During the year, the Company received $4,228 (2002 and 2001nil) of executive life insurance proceeds upon the deaths of two senior management
employees, one in the Business Services segment in the amount of $3,228 and one in Residential Property Management in the amount of $1,000. The amounts received were recorded as reductions of selling,
general and administrative costs.
7. Other income
In March 2003, the Company sold a 7.5% interest in Paul Davis Restoration, Inc. ("PDR") to two officers of PDR, resulting on a gain on sale of
$1,106. In 2002, the Company recorded gains totaling $196 relating to the sale of shares of two subsidiaries (2001nil).
8. Components of working capital accounts
2003
2002
Inventories
Work-in-progress
$
6,009
$
2,445
Finished goods
4,560
4,642
Supplies and other
4,222
3,143
Small equipment
304
288
$
15,095
$
10,518
25
2003
2002
Prepaids and other
Insurance
$
3,108
$
2,562
Advertising
2,441
2,467
Transportation
1,248
234
Security deposits
1,129
1,216
Other
5,691
5,681
$
13,617
$
12,160
Accrued liabilities
Accrued payroll and benefits
$
16,707
$
15,360
Customer advances
10,663
14,838
Costs to restructure operations of acquired subsidiary
1,667
2,089
Other
5,233
5,982
$
34,270
$
38,269
During
the year, the Company incurred $1,904 of severances and related costs in its Business Services segment as part of a plan to reduce overheads and more aggressively realize
synergies within the segment. Of this amount, $1,124 remained unpaid at March 31, 2003 and was included in accrued payroll and benefits within accrued liabilities. The expected date of
completion of the plan is September 2003.
9. Other receivables
Other receivables are comprised of:
(a) $2,578
(2002$1,426) of secured interest and non-interest bearing loans due from minority shareholders of four (2002four) subsidiaries.
(b) $1,347
(2002$1,682) of long-term receivables, certain of which are interest bearing, relating to painting, restoration and integrated security systems
installation projects conducted by the Residential Property Management and Integrated Security Services segments; and
(c) $1,914
(2002$1,800) of interest bearing franchise fees receivable from franchisees in the Consumer Services segment.
10. Fixed assets and other assets
Cost
Accumulated depreciation/ Amortization
Net 2003
Fixed assets
Land
$
2,234
$
$
2,234
Buildings
7,228
1,156
6,072
Vehicles
16,788
10,182
6,606
Furniture and equipment
36,345
23,112
13,233
Computer equipment and software
24,835
14,397
10,438
Enterprise system software
4,549
2,402
2,147
Leasehold improvements
11,612
5,742
5,870
Total
$
103,591
$
56,991
$
46,600
Other assets
Investments
$
756
$
$
756
Financing fees
3,119
1,098
2,021
Total
$
3,875
$
1,098
$
2,777
26
Cost
Accumulated depreciation/ Amortization
Net 2002
2002
Fixed assets
Land
$
2,209
$
$
2,209
Buildings
6,790
834
5,956
Vehicles
15,153
9,169
5,984
Furniture and equipment
33,430
19,476
13,954
Computer equipment and software
20,349
11,184
9,165
Enterprise system software
4,377
1,669
2,708
Leasehold improvements
10,034
4,643
5,391
Total
$
92,342
$
46,975
$
45,367
Other assets
Funds held in trust
$
1,892
$
$
1,892
Investments
850
850
Financing fees
3,030
361
2,669
Total
$
5,772
$
361
$
5,411
Included
in fixed assets are vehicles under capital lease at a cost of $5,846 (2002$5,697) with a net book value of $3,130 (2002$2,542), furniture and equipment
under capital lease at a cost of $882 (2002$743) and net book value of $497 (2002$435) and computer equipment and software under capital lease at a cost of $822
(2002$757) with a net book value of $393 (2002$604).
11. Intangible assets
Gross carrying amount
Accumulated amortization
Net 2003
2003
Management contracts and other
$
2,085
$
1,067
$
1,018
Customer lists and relationships
6,506
1,122
5,384
Trademarks and trade names
11,327
970
10,357
Franchise rights
16,464
1,796
14,668
36,382
4,955
31,427
Gross carrying amount
Accumulated amortization
Net 2002
2002
Management contracts and other
$
2,376
$
1,639
$
737
Customer lists and relationships
2,536
733
1,803
Trademarks and trade names
11,327
592
10,735
Franchise rights
15,870
1,013
14,857
32,109
3,977
28,132
During
the year ended March 31, 2003, the company acquired the following intangible assets:
Amount
Weighted average amortization period in years
Amortized intangible assets
Management contracts and other
$
259
12
Customer lists and relationships
4,407
10
Franchise rights
392
12
$
5,058
10
27
The following is the estimated annual amortization expense for each of the next five years ending March 31:
2004
$
2,100
2005
1,841
2006
1,632
2007
1,632
2008
1,417
12. Goodwill
Residential Property Management
Integrated Security Services
Consumer Services
Business Services
Corporate
Consolidated
Balance, April 1, 2001
$
48,268
$
21,774
$
23,982
$
45,654
$
$
139,678
Goodwill resulting from adjustments to purchase price allocations
101
(166
)
(255
)
2,180
1,860
Goodwill resulting from contingent acquisition payments
3,363
1,853
2,209
7,425
Goodwill resulting from purchases of minority shareholders' interests
2,143
2,056
4,199
Goodwill acquired during year
1,608
1,351
1,775
2,372
7,106
Balance, March 31, 2002
55,483
24,812
27,558
52,415
160,268
Goodwill resulting from adjustments to purchase price allocations
(238
)
69
(143
)
19
(293
)
Goodwill resulting from contingent acquisition payments
1,450
1,693
3,143
Goodwill resulting from purchases of minority shareholders' interests
3,013
380
960
4,353
Goodwill acquired during year
2,557
2,208
4,765
Foreign exchange
34
149
1,205
1,388
Balance, March 31, 2003
$
62,265
$
26,988
$
29,772
$
54,599
$
$
173,624
13. Long-term debt
2003
2002
Revolving credit facility of $140,000 U.S., of which up to $40,000 U.S. may be drawn in Canadian funds, $14,000 U.S. due June 24, 2005 and the balance due June 24, 2006
$
52,026
$
56,160
8.06% Senior Secured Notes due June 29, 2011
100,000
100,000
Adjustment to Senior Secured Notes resulting from interest rate swaps
6,279
(2,070
)
Capital leases bearing interest ranging from 5% to 10%, maturing at various dates through 2007
3,478
3,132
Other long-term debt bearing interest primarily at 8%, maturing at various dates through 2008
3,136
8,389
164,919
165,611
Less: current portion
3,030
7,193
$
161,889
$
158,418
The
revolving credit facility at March 31, 2003 is comprised of borrowings of $35,281 U.S. and $24,578 Cdn. ($16,745 U.S.) (2002$44,681 U.S. and $18,300 Cdn. ($11,479
U.S.)).
Included
in capital leases at March 31, 2003 and 2002 are obligations in Canadian dollars of $2,478 ($1,689 U.S.) and $2,263 ($1,420 U.S.), respectively. Included in other
long-term debt at March 31, 2003 and 2002 are obligations in Canadian dollars of $1,569 ($1,069 U.S.) and $6,202 ($3,891 U.S.), respectively.
28
At
March 31, 2003, 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:
2004
$
3,030
2005
1,720
2006
29,815
2007
52,590
2008
14,343
Thereafter
57,142
The
Company's amended and restated credit agreement provides a $140,000 committed senior revolving credit facility (the "Credit Facility") renewable and extendible in 364-day
increments, and if not renewed, a two-year final maturity. The Credit Facility was most recently renewed and extended on May 7, 2003. The Credit Facility bears interest at 1.50% to
3.00% over floating reference rates, depending on certain leverage ratios. The average interest rate during fiscal 2003 was 3.90%. At March 31, 2003, the Company had drawn $52,026 on the Credit
Facility, had outstanding letters of credit in the amount of $4,436 and had $83,538 of available un-drawn credit.
The
Company has outstanding $100,000 of ten-year 8.06% fixed-rate Senior Secured Notes (the "Notes"). The Notes have a final maturity of June 29, 2011,
with seven equal annual principal repayments beginning on June 29, 2005, resulting in a seven-year average life. The Company has indemnified the holders of the Notes from all taxes
that are or may become applicable to any payments made by the Company on the Notes. The Company has two interest rate swap agreements related to the Notes. See note 17 for hedge
accounting.
The
Credit Facility and the Notes rank equally in terms of seniority. The Company has granted these lenders collateral including the following: an interest in all of the assets of the
Company including the shares of the Company's subsidiaries, an assignment of material contracts and an assignment of the Company's "call rights" with respect to shares of the subsidiaries held by
minority interests.
The
covenants and other limitations within the Credit Facility and the Notes agreement are substantially the same. The covenants require the Company to maintain certain ratios including
leverage, fixed charge coverage, interest coverage and net worth. The Company is prohibited from undertaking certain mergers, acquisitions and dispositions without prior approval.
14. 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 each Multiple
Voting Share outstanding.
The
following table provides a summary of total capital stock:
Subordinate Voting Shares
Multiple Voting Shares
Total Amount
Number
Amount
Number
Amount
Total Number
Balance, March 31, 2001
12,505,393
$
54,490
662,847
$
373
13,168,240
$
54,863
Balance, March 31, 2002
13,112,418
57,339
662,847
373
13,775,265
57,712
Balance, March 31, 2003
13,501,343
60,198
662,847
373
14,164,190
60,571
During
the year, the Company repurchased 32,700 (2002nil; 200149,500) Subordinate Voting Shares under a Normal Course Issuer Bid filed with the Toronto Stock
Exchange, which allows the Company to repurchase up to 5% of its outstanding shares on the open market during a twelve-month period.
The
Company has $2,434 ($3,439 Cdn.) (2002$2,630 ($3,714 Cdn.)) of interest bearing loans related to the purchase of 387,500 Subordinate Voting Shares
(2002412,500 shares). The loans, which are collateralized by the shares issued, have a fiveor ten-year term from the grant date, however, they are open for
repayment at any time. The maturities of these loans are as follows, for the years ending March 31.
2004
$
286
2005
2006
2007
916
2008
467
2009
765
$
2,434
29
The
Company has a stock option plan for officers, key full-time employees and directors of the Company and its subsidiaries. Options are granted at the market price for the
underlying shares on the date of grant. Each option vests over a four-year term and expires five years from the date granted and allows for the purchase of one Subordinate Voting Share.
Options are exercisable in either U.S. or Canadian Dollars. At March 31, 2003, there were 1,782,990 options outstanding to 54 individuals at prices ranging from $9.24 to $23.14 ($14.25 to
$36.89 Cdn.) per share, expiring on various dates through February 2008. At March 31, 2003, there were 54,030 options available for future grants.
The
number of Subordinate Voting Shares issuable under options and the average option prices per share are as follows:
Shares issuable under options
Weighted average price per share ($U.S.)
2003
2002
2001
2003
2002
2001
Shares issuable under optionsBeginning of year
2,119,115
2,119,640
1,879,200
$
13.20
$
8.57
$
8.02
Granted
101,500
625,000
419,790
15.58
20.93
12.69
Exercised for cash
(421,625
)
(607,025
)
(158,850
)
7.41
4.70
3.69
Expired or forfeited
(16,000
)
(18,500
)
(20,500
)
19.00
7.25
10.28
Shares issuable under optionsEnd of year
1,782,990
2,119,115
2,119,640
$
15.95
$
13.20
$
8.57
Options exercisableEnd of year
876,506
925,498
1,117,624
Weighted average price per share ($Cdn.)
2003
2002
2001
Shares issuable under optionsBeginning of year
$
21.05
$
13.52
$
11.62
Granted
24.14
32.77
19.08
Exercised for cash
11.48
7.35
5.55
Expired or forfeited
29.43
11.35
15.46
Shares issuable under optionsEnd of year
$
23.41
$
21.05
$
13.52
The
weighted average fair value of options granted in 2003, 2002 and 2001 was $5.10 ($7.90 Cdn.), $6.59 ($10.31 Cdn.) and $4.84 ($7.28 Cdn.) per share, respectively.
The
options outstanding as at March 31, 2003 to purchase Subordinate Voting Shares are as follows:
Options outstanding
Options exercisable
Range of exercise prices ($U.S.)
Number outstanding
Weighted average remaining contractual life (years)
Weighted average exercise price
($U.S.)
Number exercisable
Weighted average exercise price
($U.S.)
$9.24 to $11.68
574,165
1.72
$
11.10
371,156
$
11.08
$11.96 to $14.62
564,825
2.25
13.45
349,450
13.15
$15.70 to $23.14
644,000
3.56
22.46
155,900
22.41
1,782,990
2.50
$
15.95
876,506
$
13.92
30
Options outstanding
Options exercisable
Range of exercise prices ($Cdn.)
Number outstanding
Weighted average remaining contractual life (years)
Weighted average exercise price
($Cdn.)
Number exercisable
Weighted average exercise price
($Cdn.)
$14.25 to $17.25
574,165
1.72
$
16.29
371,156
$
16.27
$18.00 to $22.50
564,825
2.25
19.75
349,450
19.30
$25.00 to $36.89
644,000
3.56
32.97
155,900
32.89
1,782,990
2.50
$
23.41
876,506
$
20.43
SFAS 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.
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.
2003
2002
2001
Pro forma net earnings
$
16,261
$
15,885
$
11,661
Pro forma net earnings per share:
Basic
$
1.17
$
1.18
$
0.90
Diluted
1.12
1.09
0.84
Assumptions:
Risk-free interest rate
4.5%
5.0%
5.5%
Expected life in years
4.4
4.0
4.5
Volatility
30%
30%
35%
Dividend yield
0.0%
0.0%
0.0%
15. 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:
2003
2002
2001
Income tax expense using combined statutory rates of approximately 40% (200241%; 200144%)
$
11,925
$
12,791
$
11,201
Non-deductible expenses:
Amortization of goodwill and intangibles
1,085
Loss not tax effected
443
Other
735
250
210
Non-taxable proceeds of life insurance policies
(1,691
)
Foreign tax rate reduction
(2,720
)
(3,043
)
(2,340
)
Provision for income taxes as reported
$
8,249
$
10,441
$
10,156
Earnings
before income taxes and minority interest by tax jurisdiction comprise the following:
2003
2002
2001
Canada
$
15,180
$
12,537
$
7,494
United States
14,672
18,715
18,266
Total
$
29,852
$
31,252
$
25,760
31
The
provision for income taxes comprises the following:
2003
2002
2001
Current
Canada
$
2,212
$
3,426
$
2,664
United States
5,129
6,862
6,744
7,341
10,288
9,408
Deferred
Canada
585
(1,130
)
633
United States
323
1,283
115
908
153
748
Total
$
8,249
$
10,441
$
10,156
The
significant components of deferred income taxes are as follows:
2003
2002
Deferred income tax assets
Expenses not currently deductible
$
900
$
1,100
Provision for doubtful accounts
410
507
Inventory and other reserves
350
427
Loss carry-forwards
1,251
1,509
2,911
3,543
Deferred income tax liabilities
Depreciation and amortization
18,277
15,391
Prepaid and other expenses deducted for tax purposes
865
583
Financing fees
1,328
962
20,470
16,936
Net deferred income tax liability
$
(17,559
)
$
(13,393
)
Cumulative
undistributed earnings of U.S. subsidiaries approximated $39,933 as at March 31, 2003 (2002 -$31,078).
16. Shares outstanding for earnings per share calculations
2003
2002
2001
Shares issued and outstanding at beginning of year
13,775,265
13,168,240
12,989,530
Weighted average number of shares:
Issued in the year
148,141
397,077
117,728
Repurchased in the year
(2,346
)
(33,396
)
Weighted average number of shares used in computing basic earnings per share
13,921,060
13,565,317
13,073,862
Assumed exercise of stock options, net of shares assumed acquired under the Treasury Stock Method
576,485
1,034,551
767,134
Number of shares used in computing diluted earnings per share
14,497,545
14,599,868
13,840,996
32
17. Other supplemental information
2003
2002
2001
Products and services segmentation
Revenue
Products
$
96,219
$
75,337
$
54,091
Services
446,473
437,352
370,083
Total
542,692
512,689
424,174
Cost of revenue
Products
$
57,633
$
46,060
$
36,557
Services
314,370
297,355
247,917
Total
372,003
343,415
284,474
Franchised operations
Revenue
$
57,497
$
54,173
$
55,661
Operating earnings
11,121
9,283
7,999
Initial franchise fee revenue
3,822
2,951
4,157
Cash payments made during the year
Income taxes
$
7,667
$
10,649
$
4,308
Interest
7,916
9,633
9,616
Non-cash financing activities
Increases in capital lease obligations
$
1,565
$
1,965
$
1,170
Issuance of Subordinate Voting Shares to acquire minority interest
649
Depreciation and amortization expense
Fixed assets
$
12,369
$
11,394
$
7,708
Goodwill
3,067
Intangible assets
2,070
1,485
1,553
$
14,439
$
12,879
$
12,328
Other expenses
Advertising expense
$
12,066
$
9,582
$
8,264
Rent expense
14,756
13,943
10,599
The
foreign currency translation adjustment for the year ended March 31, 2003 is net of current income taxes of nil on realized exchange gains for income tax purposes
(2002nil) (2001$444).
18. Financial instruments
Concentration of credit risk
The company is subject to credit risk with respect to its accounts receivable and other receivables. Concentrations of credit risk with respect to these
receivables are limited due to the large number of entities comprising the Company's customer base and their dispersion across many different service lines in two countries.
Interest rate risk
The Company maintains an interest rate risk management strategy that uses interest rate swaps to lower the long-term cost of borrowed funds. The
Company's specific goals are to (i) manage interest rate sensitivity by modifying the characteristics of some of its debt and (ii) lower the long-term cost of its borrowed
funds. Fluctuations in interest rates create an unrealized appreciation or depreciation in the market value of the Company's fixed-rate debt when that fair value is compared with the cost
of the borrowed funds. The effect of this unrealized appreciation or depreciation in market value, however, will generally be offset by the gain or loss on the interest rate swaps that are linked to
the debt.
33
The
Company has entered into two interest rate swap agreements to exchange the fixed rate on its 8.06% Notes for variable rates. The first swap, entered into in December 2001, has
a notional value of $75,000 and a variable interest rate of LIBOR + 250.5 basis points. The second swap, entered into in October 2002, has a notional value of $25,000 and a
variable interest rate of LIBOR + 445 basis points. The terms of the swaps match the term of the Notes with a maturity of June 29, 2011. The swaps are being accounted for as fair
value hedges in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The swaps are carried at fair
value on the balance sheet, with gains or losses recognized in earnings. The carrying value of the hedged debt is adjusted for changes in fair value attributable to the hedged interest rate risk; the
associated gain or loss is recognized currently in earnings. The fair values of the swaps are determined based on the present value of the estimated future net cash flows using implied rates in the
applicable yield curve as of the valuation date. Due to changes in the yield curve, the fair value of the swaps fluctuates and at March 31, 2003, the fair values represented a gain of $6,279
(2002a loss of $2,070).
Fair values of financial instruments
The carrying amounts for cash and cash equivalents, funds held in trust, accounts receivable, accounts payable and accrued liabilities approximate fair values due
to the short maturity of these instruments, unless otherwise indicated.
2003
2002
Carrying amount
Fair value
Carrying amount
Fair value
Other receivables
$
5,839
$
5,784
$
4,908
$
4,829
Long-term debt including current portion
158,640
166,892
165,611
168,941
Interest rate swaps
6,279
6,279
(2,070
)
(2,070
)
19. Commitments and contingencies
(a) Lease commitments
Minimum operating lease payments are as follows:
Year ending March 31
2004
$
16,585
2005
14,589
2006
11,183
2007
8,580
2008
7,831
Thereafter
12,296
(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 net earnings before extraordinary items, minority interest share of earnings, income taxes, interest, 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. The total obligation if
all call or put options were exercised at March 31, 2003 was approximately $26,000 (2002$30,000). The acquisition of all outstanding minority interests would materially increase
net earnings.
(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.
(d) Guarantee
In connection with a contract, the Company has assumed risks associated with work to be performed by a third party. In the unlikely event of
non-performance by the third party, the maximum exposure to the Company would be $6,813.
34
20. Related party transactions
During the year, the Company paid $847 (2002$465) in rent to entities controlled by an officer and a director of the Company. In addition, the
Company paid $853 (2002$648) in rent to minority shareholders of subsidiaries. The transactions were completed at market rates.
21. Segmented information
Operating segments
The Company has four reportable operating segments. The segments are grouped with reference to the types of services provided and the types of clients that use
those services. The Company assesses each segment's performance based on operating earnings or operating earnings before depreciation and amortization. Residential Property Management provides
property management, maintenance, landscaping, painting and restoration and other services to residential community associations in the United States. Integrated Security Services provides
security systems installation, maintenance, monitoring and manpower to primarily commercial customers in Canada and the United States. Consumer Services provides franchised and Company-owned
property services to consumers in the United States and Canada. Business Services provides customer support and fulfillment and business process outsourcing services to corporate and
institutional clients in Canada and the United States. Corporate includes the costs of operating the Company's headquarters.
Residential Property Management
Integrated Security Services
Consumer Services
Business Services
Corporate
Consolidated
2003
Revenues
$
214,965
$
107,548
$
93,417
$
126,373
$
389
$
542,692
Depreciation and amortization
4,089
1,502
3,078
5,620
150
14,439
Operating earnings
10,531
5,834
13,344
14,153
(4,978
)
38,884
Interest expense
(9,032
)
Income taxes
(8,249
)
Minority interest
(3,163
)
Net earnings
$
18,440
Total assets
$
107,998
$
64,803
$
83,923
$
117,432
$
14,875
$
389,031
Total additions to long-lived assets
$
10,991
$
3,942
$
7,749
$
7,781
$
41
$
30,504
Residential Property Management
Integrated Security Services
Consumer Services
Business Services
Corporate
Consolidated
2002
Revenues
$
205,376
$
95,507
$
83,964
$
127,478
$
364
$
512,689
Depreciation and amortization
3,716
1,377
2,706
4,964
116
12,879
Operating earnings
15,118
5,158
11,140
17,412
(4,585
)
44,243
Interest expense
(12,991
)
Income taxes
(10,441
)
Minority interest
(3,782
)
Net earnings
$
17,029
Total assets
$
106,268
$
57,515
$
77,060
$
117,874
$
7,212
$
365,929
Total additions to long-lived assets
$
13,237
$
5,154
$
8,984
$
13,365
$
478
$
41,218
35
Residential Property Management
Integrated Security Services
Consumer Services
Business Services
Corporate
Consolidated
2001
Revenues
$
181,730
$
81,007
$
78,838
$
82,346
$
253
$
424,174
Depreciation and amortization
4,505
1,371
2,954
3,397
101
12,328
Operating earnings
13,546
4,654
9,548
12,491
(4,712
)
35,527
Interest expense
(9,767
)
Income taxes
(10,156
)
Minority interest
(2,973
)
Net earnings
$
12,631
Total assets
$
84,332
$
42,033
$
63,818
$
124,580
$
7,420
$
322,183
Total additions to long-lived assets
$
15,652
$
10,194
$
8,535
$
25,796
$
$
60,177
Geographic information Revenues in each geographic segment are reported by customer location.
2003
2002
2001
Canada
Revenues
$
169,135
$
168,669
$
119,372
Total long-lived assets
$
68,710
$
53,082
$
49,651
United States
Revenues
$
373,557
$
344,020
$
304,802
Total long-lived assets
$
182,941
$
180,685
$
155,834
Consolidated
Revenues
$
542,692
$
512,689
$
424,174
Total long-lived assets
$
251,651
$
233,767
$
205,485
22. Comparative amounts
Certain comparative amounts in the consolidated balance sheets and notes to the consolidated financial statements have been reclassified to conform with the
current year's presentation.
23. Impact of recently issued accounting standards
In April 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets . The adoption of this standard did not have a material impact on results of operations or financial condition.
In
April 2002, FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13
and Technical Corrections as of April 2002 . Among other changes, this new standard impacts the reporting of gains and losses from extinguishment of debt and
accounting for leases, and is effective for the Company's fiscal year beginning April 1, 2003. The Company implemented this standard effective for the year ended March 31, 2003. The
impact of the change was to eliminate the Company's 2002 extraordinary loss on the early retirement of debt of $797, net of income tax benefit of $578, and report instead increased interest expense of
$1,375 and a reduction of income tax expense of $578.
36
In
July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities
("SFAS 146"). This statement requires recording costs associated with such activities at their fair values when a liability has been incurred. Previously, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual liability has been incurred. SFAS 146 is effective for such activities initiated after December 31, 2002. The
adoption of this standard had no impact on the results of operations.
In
November 2002, FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34) ("FIN 45") was issued.
FIN 45 clarifies the requirements relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45's provisions for initial recognition
and measurement were effective for guarantees issued or modified by the Company after December 31, 2002, and disclosure requirements were effective for financial statements issued after
December 15, 2002. The impact of the adoption of FIN 45 was not material.
In
December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of
SFAS No. 123 ("SFAS 148"). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation, as well as amended disclosure requirements in annual and interim financial statements. The standard is effective for the Company's annual financial statements
for the year ended March 31, 2003. The adoption of this standard did not impact results of operations or financial condition as the Company elected to continue to account for its stock option
plan in accordance with APB 25.
In
January 2003, FASB Interpretation No. 46, Consolidation of Variable Interest Entities (an interpretation of ARB
No. 51) ("FIN 46") was issued. FIN 46 addresses consolidation by business enterprises of variable interest entities having certain characteristics and
applies immediately to variable interest entities created after January 31, 2003. The adoption of FIN 46 had no impact on the Company's results of operations or financial condition.
37
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.