EXHIBIT 2
MANAGEMENT’S REPORTS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements and management discussion and analysis (“MD&A”) of FirstService Corporation (the “Company”) and all information in this annual report are the responsibility of management and have been approved by the Board of Directors.
The consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America using the best estimates and judgments of management, where appropriate. The most significant of these accounting principles are set out in note 2 to the consolidated financial statements. Management has prepared the financial information presented elsewhere in this annual report and has ensured that it is consistent with the consolidated financial statements.
The MD&A has been prepared in accordance with National Instrument 51-102 of the Canadian Securities Administrators, taking into consideration other relevant guidance, including Regulation S-K of the US Securities and Exchange Commission.
The Board of Directors of the Company has an Audit Committee consisting of three independent directors. The Audit Committee meets regularly to review with management and the independent auditors any significant accounting, internal control, auditing and financial reporting matters.
These consolidated financial statements have been audited by PricewaterhouseCoopers LLP, which have been appointed as the independent auditors of the Company by the shareholders. As auditors, PricewaterhouseCoopers LLP obtain an understanding of the Company’s internal controls and procedures for financial reporting to plan and conduct such audit procedures as they consider necessary to express their opinion on the consolidated financial statements. As auditors, PricewaterhouseCoopers LLP have full and independent access to the Audit Committee to discuss their findings.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of its effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has excluded Field Asset Services, Inc. and 14 other individually insignificant entities acquired by the Company during the last fiscal year from its assessment of internal control over financial reporting as at March 31, 2008. The total assets and total revenues of these majority-owned entities of the Company represent 5.5% and 9.9%, respectively, of the related consolidated financial statement amounts including discontinued operations as at and for the fiscal year ended March 31, 2008.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as at March 31, 2008, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that, as at March 31, 2008, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company's internal control over financial reporting as at March 31, 2008, has been audited by PricewaterhouseCoopers LLP, the Company’s independent auditors. The attestation report of PricewaterhouseCoopers LLP is included in PricewaterhouseCoopers LLP’s report to the shareholders of the Company dated May 20, 2008, which accompanies the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2008.
| | |
/s/ Jay S. Hennick Chief Executive Officer | /s/ John B. Friedrichsen Chief Financial Officer |
May 21, 2008
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of FirstService Corporation
We have completed an integrated audit of FirstService Corporation’s 2008 consolidated financial statements and of its internal control over financial reporting as at March 31, 2008 and audits of its 2007 and 2006 consolidated financial statements. Our opinions, based on our audits, are presented below.
Consolidated financial statements
We have audited the accompanying consolidated balance sheets of FirstService Corporation as at March 31, 2008 and March 31, 2007, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2008. 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 audit of the Company’s financial statements as at March 31, 2008 and for the year then ended in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). We conducted our audits of the Company’s financial statements as at March 31, 2007 and for each of the years in the two-year period then ended in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at March 31, 2008 and March 31, 2007 and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2008 in accordance with generally accepted accounting principles in the United States of America.
Internal control over financial reporting
We have also audited FirstService Corporation’s internal control over financial reporting as at March 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company���s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Field Asset Services, Inc. and 14 other individually insignificant entities acquired by the Company from its assessment of internal control over financial reporting as at March 31, 2008 because these entities were acquired by the Company in purchase business combinations during the year ended March 31, 2008. The total assets and total revenues of these majority owned entities represent 5.5% and 9.9%, respectively, of the related consolidated financial statement amounts including discontinued operations as at and for the year ended March 31, 2008.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at March 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by COSO.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
May 20, 2008
Comments by auditor for U.S. readers on Canada-U.S. reporting differences
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company’s consolidated financial statements, such as the change from the adoption of a new accounting standard described in note 14 to the consolidated financial statements. Our report to the shareholders dated May 20, 2008 is expressed in accordance with Canadian reporting standards which do not require a reference to such a change in accounting principles in the Auditors’ Report when the change is properly accounted for and adequately disclosed in the consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
May 20, 2008
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except per share amounts)
| For the years ended March 31 | | 2008 | | | 2007 | | | 2006 | |
| Revenues | | | | | | | | | |
| Services | | $ | 1,510,474 | | | $ | 1,114,098 | | | $ | 855,572 | |
| Products | | | 62,741 | | | | 66,892 | | | | 63,096 | |
| Total revenues | | | 1,573,215 | | | | 1,180,990 | | | | 918,668 | |
| Cost of revenues (exclusive of depreciation shown below) | | | | | | | | | | | | |
| Services | | | 906,403 | | | | 690,256 | | | | 539,855 | |
| Products | | | 32,851 | | | | 40,913 | | | | 34,309 | |
| Selling, general and administrative expenses | | | 521,906 | | | | 344,968 | | | | 262,496 | |
| Depreciation | | | 20,056 | | | | 14,012 | | | | 9,873 | |
| Amortization of intangible assets other than brokerage backlog | | | 13,207 | | | | 6,559 | | | | 3,494 | |
| Amortization of brokerage backlog | | | 5,216 | | | | 8,164 | | | | 7,554 | |
| | | | 73,576 | | | | 76,118 | | | | 61,087 | |
| Interest expense | | | 17,828 | | | | 14,137 | | | | 11,272 | |
| Interest income | | | (4,326 | ) | | | (6,402 | ) | | | (1,038 | ) |
| Other income, net (note 5) | | | (4,647 | ) | | | (4,848 | ) | | | (3,766 | ) |
| Impairment loss on available-for-sale securities (note 7) | | | - | | | | 3,139 | | | | - | |
| Earnings before income taxes and minority interest | | | 64,721 | | | | 70,092 | | | | 54,619 | |
| Income taxes (note 14) | | | 16,195 | | | | 20,261 | | | | 16,084 | |
| Earnings before minority interest | | | 48,526 | | | | 49,831 | | | | 38,535 | |
| Minority interest share of earnings | | | 15,461 | | | | 15,799 | | | | 11,778 | |
| Net earnings from continuing operations | | | 33,065 | | | | 34,032 | | | | 26,757 | |
| Net earnings from discontinued operations, net of income taxes (note 4) | | | 1,334 | | | | 2,184 | | | | 42,740 | |
| Net earnings before cumulative effect of change in accounting principle | | | 34,399 | | | | 36,216 | | | | 69,497 | |
| Cumulative effect of change in accounting principle, net of income taxes (note 2) | | | - | | | | (1,353 | ) | | | - | |
| Net earnings | | $ | 34,399 | | | $ | 34,863 | | | $ | 69,497 | |
| Preferred share dividends | | | 6,952 | | | | - | | | | - | |
| Net earnings available to common shareholders | | $ | 27,447 | | | $ | 34,863 | | | $ | 69,497 | |
| Net earnings per common share (note 15) | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | |
| Continuing operations | | $ | 0.87 | | | $ | 1.14 | | | $ | 0.89 | |
| Discontinued operations | | | 0.05 | | | | 0.07 | | | | 1.41 | |
| Cumulative effect of change in accounting principle | | | - | | | | (0.04 | ) | | | - | |
| | | $ | 0.92 | | | $ | 1.17 | | | $ | 2.30 | |
| Diluted | | | | | | | | | | | | |
| Continuing operations | | $ | 0.81 | | | $ | 1.05 | | | $ | 0.83 | |
| Discontinued operations | | | 0.04 | | | | 0.07 | | | | 1.38 | |
| Cumulative effect of change in accounting principle | | | - | | | | (0.04 | ) | | | - | |
| | | $ | 0.85 | | | $ | 1.08 | | | $ | 2.21 | |
The accompanying notes are an integral part of these consolidated financial statements.
FIRSTSERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars)
| As at March 31 | | 2008 | | | 2007 | |
Assets Current assets | | | | | | |
| Cash and cash equivalents | | $ | 76,818 | | | $ | 102,806 | |
| Restricted cash | | | 8,858 | | | | 16,930 | |
| Accounts receivable, net of an allowance of $10,716 (2007 - $7,543) | | | 177,048 | | | | 124,667 | |
| Income taxes recoverable | | | 16,887 | | | | 9,968 | |
| Inventories (note 6) | | | 20,519 | | | | 15,293 | |
| Prepaid expenses and other current assets | | | 20,982 | | | | 15,764 | |
| Deferred income taxes (note 14) | | | 19,540 | | | | 10,430 | |
| Assets held for sale (note 4) | | | 88,163 | | | | 66,499 | |
| | | | 428,815 | | | | 362,357 | |
Other receivables | | | 4,446 | | | | 6,599 | |
| Fixed assets (note 8) | | | 80,991 | | | | 61,692 | |
| Other assets (note 7) | | | 29,393 | | | | 28,952 | |
| Deferred income taxes (note 14) | | | 14,082 | | | | 3,647 | |
| Intangible assets (note 9) | | | 165,919 | | | | 95,241 | |
| Goodwill (note 10) | | | 322,095 | | | | 220,346 | |
| Assets held for sale (note 4) | | | 43,602 | | | | 38,164 | |
| | | | 660,528 | | | | 454,641 | |
| | | $ | 1,089,343 | | | $ | 816,998 | |
Liabilities Current liabilities | | | | | | | | |
| Accounts payable | | $ | 49,465 | | | $ | 28,906 | |
| Accrued liabilities (note 6) | | | 189,349 | | | | 154,354 | |
| Income taxes payable | | | 36 | | | | 5,229 | |
| Unearned revenues | | | 23,846 | | | | 17,281 | |
| Long-term debt – current (note 11) | | | 24,777 | | | | 22,101 | |
| Deferred income taxes (note 14) | | | 411 | | | | 3,318 | |
| Liabilities held for sale (note 4) | | | 45,758 | | | | 25,638 | |
| | | | 333,642 | | | | 256,827 | |
| Long-term debt – non-current (note 11) | | | 331,253 | | | | 213,030 | |
| Other liabilities | | | 18,236 | | | | 4,876 | |
| Deferred income taxes (note 14) | | | 41,618 | | | | 29,084 | |
| Liabilities held for sale (note 4) | | | 441 | | | | - | |
| Minority interest | | | 58,468 | | | | 48,306 | |
| | | | 450,016 | | | | 295,296 | |
| Shareholders’ equity | | | | | | | | |
| Preferred shares (note 12) | | | 149,477 | | | | - | |
| Common shares (note 12) | | | 88,919 | | | | 80,108 | |
| Contributed surplus | | | 13,135 | | | | 6,557 | |
| Receivables pursuant to share purchase plan (note 12) | | | (765 | ) | | | (1,232 | ) |
| Retained earnings | | | 43,415 | | | | 175,346 | |
| Cumulative other comprehensive earnings | | | 11,504 | | | | 4,096 | |
| | | | 305,685 | | | | 264,875 | |
| | | $ | 1,089,343 | | | $ | 816,998 | |
| Commitments and contingencies (notes 12 and 18) | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board of Directors,
/s/ Bernard I. Ghert /s/ Jay S. Hennick
Director Director
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands of US dollars, except share amounts)
| | Preferred shares | Common shares | | | | | |
| | Issued and out -standing shares (note 12) | Amount | Issued and outstanding shares (note 12) | Amount | Contributed surplus | Receivables pursuant to share purchase plan | Retained earnings | Cumulative other comprehensive earnings (loss) | Total shareholders’ equity |
| Balance, March 31, 2005 | - | - | 30,192,788 | $ 73,542 | $ 805 | $ (2,148) | $ 103,011 | $ 10,661 | $ 185,871 |
| Comprehensive earnings: | | | | | | | | | |
| Net earnings | - | - | - | - | - | - | 69,497 | - | 69,497 |
Foreign currency translation adjustments | - | - | - | - | - | - | - | (7,988) | (7,988) |
| Unrealized loss on available for-sale equity securities, net of income taxes of $335 | - | - | - | - | - | - | - | (1,528) | (1,528) |
| Comprehensive earnings | | | | | | | | | 59,981 |
| Subordinate Voting Shares: | | | | | | | | | |
| Stock option expense | - | - | - | - | 1,380 | - | - | - | 1,380 |
| Stock options exercised | - | - | 434,650 | 3,740 | (22) | - | - | - | 3,718 |
| Purchased for cancellation | - | - | (571,650) | (1,595) | - | - | (12,116) | - | (13,711) |
| Cash payments received | - | - | - | - | - | 513 | - | - | 513 |
| Balance, March 31, 2006 | - | - | 30,055,788 | 75,687 | 2,163 | (1,635) | 160,392 | 1,145 | 237,752 |
| SAB 108 adjustment (note 21) | - | - | - | - | - | - | (5,377) | - | (5,377) |
| Comprehensive earnings: | | | | | | | | | |
| Net earnings | - | - | - | - | - | - | 34,863 | - | 34,863 |
Foreign currency translation adjustments | - | - | - | - | - | - | - | 1,423 | 1,423 |
| Reclass to earnings of unrealized loss on available-for-sale equity securities, net of income taxes of $335 | - | - | - | - | - | - | - | 1,528 | 1,528 |
| Comprehensive earnings | | | | | | | | | 37,814 |
| Subsidiaries’ equity transactions | - | - | - | - | 2,562 | - | - | - | 2,562 |
| Subordinate Voting Shares: | | | | | | | | | |
| Stock option expense | - | - | - | - | 1,879 | - | - | - | 1,879 |
| Stock options exercised | - | - | 564,800 | 6,482 | (47) | - | - | - | 6,435 |
| Purchased for cancellation | - | - | (697,700) | (2,061) | - | - | (14,532) | - | (16,593) |
| Cash payments received | - | - | - | - | - | 403 | - | - | 403 |
| Balance, March 31, 2007 | - | - | 29,922,888 | 80,108 | 6,557 | (1,232) | 175,346 | 4,096 | 264,875 |
| FIN 48 adjustment (note 14) | - | - | - | - | - | - | (4,200) | - | (4,200) |
| Comprehensive earnings: | | | | | | | | | |
| Net earnings | - | - | - | - | - | - | 34,399 | - | 34,399 |
Foreign currency translation adjustments | - | - | - | - | - | - | - | 7,497 | 7,497 |
| Unrealized loss on available-for-sale equity securities, net of income taxes of $20 | - | - | - | - | - | - | - | (89) | (89) |
| Comprehensive earnings | | | | | | | | | 41,807 |
| Subsidiaries’ equity transactions | - | - | - | - | 1,634 | - | - | - | 1,634 |
| Subordinate Voting Shares: | | | | | | | | | |
Issued for purchase of minority interest | - | - | 282,649 | 5,868 | - | - | - | - | 5,868 |
| Stock option expense | - | - | - | 2,440 | 3,498 | - | - | - | 5,938 |
| Stock options exercised | - | - | 159,550 | 1,372 | (198) | - | - | - | 1,174 |
| Purchased for cancellation | - | - | (252,500) | (869) | - | - | (5,701) | - | (6,570) |
| Cash payments received | - | - | - | - | 1,644 | 467 | - | - | 2,111 |
| Stock dividend (note 12) | 5,979,074 | 149,477 | - | - | - | - | (149,477) | - | - |
Preferred Shares: Dividends (note 12) | - | - | - | - | - | - | (6,952) | - | (6,952) |
| Balance, March 31, 2008 | 5,979,074 | $ 149,477 | 30,112,587 | $ 88,919 | $ 13,135 | $ (765) | $ 43,415 | $ 11,504 | $ 305,685 |
The accompanying notes are an integral part of these consolidated financial statements.
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
| For the years ended March 31 | | 2008 | | | 2007 | | | 2006 | |
| Cash provided by (used in) | | | | | | | | | |
| Operating activities | | | | | | | | | |
| Net earnings from continuing operations | | $ | 33,065 | | | $ | 34,032 | | | $ | 26,757 | |
| Items not affecting cash: | | | | | | | | | | | | |
| Depreciation and amortization | | | 38,479 | | | | 28,735 | | | | 20,921 | |
| Deferred income taxes | | | (20,785 | ) | | | (7,267 | ) | | | (3,970 | ) |
| Minority interest share of earnings | | | 15,461 | | | | 15,799 | | | | 11,778 | |
| Stock option expense | | | 7,446 | | | | 3,707 | | | | 1,932 | |
| Other | | | 2,455 | | | | 2,103 | | | | 716 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | (18,787 | ) | | | (14,855 | ) | | | (12,664 | ) |
| Inventories | | | (5,087 | ) | | | (3,022 | ) | | | (3,124 | ) |
| Prepaid expenses and other assets | | | (3,409 | ) | | | (1,195 | ) | | | (2,658 | ) |
| Accounts payable | | | 1,058 | | | | (10,376 | ) | | | 7,425 | |
| Accrued liabilities | | | 20,587 | | | | 27,216 | | | | 13,531 | |
| Income taxes | | | (22,094 | ) | | | (6,611 | ) | | | (5,047 | ) |
| Unearned revenues | | | 3,994 | | | | 293 | | | | 190 | |
| Discontinued operations | | | 4,787 | | | | (8,769 | ) | | | 3,562 | |
| Net cash provided by operating activities | | | 57,170 | | | | 59,790 | | | | 59,349 | |
| Investing activities | | | | | | | | | | | | |
| Acquisitions of businesses, net of cash acquired | | | (152,529 | ) | | | (66,826 | ) | | | (14,105 | ) |
| Purchases of minority shareholders’ interests in subsidiaries | | | (6,773 | ) | | | (6,437 | ) | | | (11,625 | ) |
| Sales of interests in subsidiaries to minority shareholders | | | 3,294 | | | | 3,167 | | | | - | |
| Purchases of fixed assets | | | (32,183 | ) | | | (25,145 | ) | | | (16,242 | ) |
| (Increase) decrease in other assets | | | (1,139 | ) | | | (1,367 | ) | | | 109 | |
| Decrease (increase) in other receivables | | | 2,155 | | | | 2,350 | | | | (492 | ) |
| Increase in other liabilities | | | 2,725 | | | | - | | | | - | |
| Proceeds on sale of equity securities | | | - | | | | 4,875 | | | | - | |
| Disposals of businesses | | | - | | | | - | | | | 110,476 | |
| Changes in restricted cash | | | 8,071 | | | | (9,797 | ) | | | - | |
| Discontinued operations | | | (3,186 | ) | | | (2,965 | ) | | | (11,639 | ) |
| Net cash (used in) provided by investing activities | | | (179,565 | ) | | | (102,145 | ) | | | 56,482 | |
| Financing activities | | | | | | | | | | | | |
| Increase in long-term debt | | | 206,924 | | | | 5,935 | | | | 102,614 | |
| Repayment of long-term debt | | | (87,386 | ) | | | (21,430 | ) | | | (74,100 | ) |
| Financing fees paid | | | (544 | ) | | | (150 | ) | | | (1,396 | ) |
| Proceeds received on exercise of stock options | | | 1,174 | | | | 6,435 | | | | 3,740 | |
| Repurchase of Subordinate Voting Shares | | | (6,570 | ) | | | (16,593 | ) | | | (13,711 | ) |
| Collection of receivables pursuant to share purchase plan | | | 467 | | | | 403 | | | | 513 | |
| Capital contributions | | | 1,644 | | | | - | | | | - | |
| Dividends paid to preferred shareholders | | | (6,952 | ) | | | - | | | | - | |
| Distributions paid to minority shareholders of subsidiaries | | | (6,930 | ) | | | (3,524 | ) | | | (1,939 | ) |
| Discontinued operations | | | (5,132 | ) | | | 5,132 | | | | - | |
| Net cash provided by (used in) financing activities | | | 96,695 | | | | (23,792 | ) | | | 15,721 | |
| Effect of exchange rate changes on cash and cash equivalents | | | 2,196 | | | | 2,379 | | | | (1,072 | ) |
| (Decrease) increase in cash and cash equivalents during the year | | | (23,504 | ) | | | (63,768 | ) | | | 130,480 | |
| Cash and cash equivalents, beginning of year | | $ | 102,806 | | | $ | 164,407 | | | $ | 30,511 | |
| Amount held by discontinued operations, beginning of year | | | 1,364 | | | | 3,531 | | | | 6,947 | |
| | | | 104,170 | | | | 167,938 | | | | 37,458 | |
| Cash and cash equivalents, end of year | | $ | 76,818 | | | $ | 102,806 | | | $ | 164,407 | |
| Amount held by discontinued operations, end of year | | | 3,848 | | | | 1,364 | | | | 3,531 | |
| | | | 80,666 | | | | 104,170 | | | | 167,938 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars, except share and per share amounts)
| 1. | Description of the business |
FirstService Corporation (the “Company”) is a provider of real estate-related services to commercial, institutional and residential customers in North America and various other countries around the world. The Company’s operations are conducted through three segments: Commercial Real Estate Services, Residential Property Management, and Property Services. As described in note 4, the Company reported two former segments in discontinued operations: (i) the Business Services segment, which was disposed in March 2006 and (ii) the Integrated Security Services segment, which was held for sale as of March 31, 2008.
| 2. | Summary of significant accounting policies |
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 the fair value determination of assets acquired and liabilities assumed in business combinations, impairment testing of fair values of goodwill and intangible assets, the collectibility of accounts receivable and income taxes. 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, its majority-owned subsidiaries and those variable interest entities where the Company is the primary beneficiary. Where the Company does not have a controlling interest but does exert significant influence, the equity method is used. Inter-company 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.
Restricted cash
Restricted cash consists of cash and cash equivalents over which the Company has legal ownership but is restricted as to its availability or intended use, including funds restricted by statutory deposit requirements and funds held on behalf of clients.
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 26% and 74% (2007 - 39% and 61%) 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. The costs 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 Vehicles Furniture and equipment Computer equipment and software Leasehold improvements | 20 to 40 years straight-line 3 to 5 years straight-line 3 to 10 years straight-line 3 to 5 years straight-line term of the lease to a maximum of 10 years |
Investments in securities
The Company classifies investments in securities as a component of other assets. Investments in available-for-sale marketable equity securities are carried at fair value with unrealized gains and losses included in other comprehensive earnings on an after-tax basis. Other-than-temporary impairment losses are recorded in current period earnings. Investments in other equity securities are accounted for using the equity method or cost method, as applicable, and are subject to impairment testing. Income from securities is recorded in other income.
Financing fees
Financing fees related to the revolving credit facility and Senior Notes are amortized to interest expense using the effective interest method.
Goodwill and intangible assets
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, where lives are finite, are amortized over their estimated useful lives as follows:
| Customer lists and relationships | straight-line over 4 to 25 years |
| Franchise rights | by pattern of use, currently estimated at 2.5% to 15% per year |
| Trademarks and trade names: | |
| Indefinite life | not amortized |
| Finite life | straight-line over 15 to 35 years |
| Management contracts and other | straight-line over life of contract ranging from 2 to 15 years |
| Brokerage backlog | as underlying brokerage transactions are completed |
The Company reviews the carrying value of finite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. If the sum of the undiscounted 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 the fair value calculated using discounted expected future cash flows.
Goodwill and indefinite life intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired, in which case the carrying amount 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 flow 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. Impairment of indefinite life intangible assets is tested by comparing the carrying amount to fair value on an individual intangible asset basis.
Revenue recognition and unearned revenue
| (a) | Real estate brokerage operations |
Commission revenues from sales brokerage transactions are recognized at the time the service has been provided and the commission becomes legally due, except when future contingencies exist. In most cases, close of escrow or transfer of title is a future contingency, and accordingly revenue recognition is deferred until this contingency is satisfied.
Commission revenues from real estate leasing are recognized once obligations under the commission arrangement are satisfied. Terms and conditions of a commission arrangement generally include execution of the lease agreement and satisfaction of future contingencies such as tenant occupancy. In most cases, a portion of the commission is earned upon execution of the lease agreement, with the remaining portion contingent on a future event, typically tenant occupancy; revenue recognition for the remaining portion is deferred until all contingencies are satisfied.
| (b) | Service operations other than real estate brokerage |
Revenues are recognized at the time the service is rendered or the product is shipped. Revenues from painting, restoration and closet installation projects in process are recognized on the percentage of completion method, generally in the ratio of actual costs to total estimated contract costs. In cases where anticipated costs to complete a project exceed the revenue to be recognized, a provision for the additional estimated losses is recorded in the period when the loss becomes apparent. Amounts received from customers in advance of services being provided are recorded as unearned revenue when received.
The Company operates several franchise systems within its Property Services segment. Initial franchise fees are recognized when all material services or conditions related to the sale of the franchise have been performed or satisfied. Royalty revenues are recognized based on a contracted percentage of franchisee revenues, as reported by the franchisees. Revenues from administrative and other support services, as applicable, are recognized as the services are provided. In addition, the Company operates 12 franchise locations of its California Closets franchise system and these revenues are recognized as described in (b) above.
Stock based compensation
From April 1, 2003 until March 31, 2006, the Company recognized stock option compensation expense in the statements of earnings using the fair value method of accounting for stock-based compensation under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of SFAS 123 (“SFAS 148”). SFAS 148 provided alternative methods of transitioning to the fair value based method of accounting for employee stock options as compensation expense. The Company used the “prospective method” of SFAS 148 and expensed the fair value of new option grants awarded after March 31, 2003. Compensation expense was allocated to reporting periods using the graded attribution approach. Forfeitures of stock options were treated as a reduction of expense in the period of forfeiture.
On April 1, 2006, the Company adopted SFAS No. 123R, Share Based Payment, (“SFAS 123R”) using the modified prospective approach. Upon the adoption of SFAS 123R, the Company changed its approach to accounting for stock options issued by subsidiaries of the Company to subsidiary employees, where the employees have the ability to elect to receive cash payments upon exercise. Previously, these options were recorded as liabilities at their intrinsic value. Under SFAS 123R, these options are recorded as liabilities at their fair value, as determined using a Black-Scholes option pricing model. Also, the Company previously accounted for stock option forfeitures as a reduction to expenses in the period of forfeiture whereas under SFAS 123R, forfeitures are estimated at the grant date. The aggregate cumulative effect of the change in accounting principle, net of income taxes of nil, was $1,353.
Foreign currency translation
Assets, liabilities and operations of foreign subsidiaries are recorded based on the functional currency of each entity. For certain foreign operations, the functional currency is the local currency, in which case the assets, liabilities and operations are translated at current exchange rates from the local currency to the reporting currency, the US dollar. The resulting unrealized gains or losses are reported as a component of cumulative other comprehensive earnings. Realized and unrealized foreign currency gains or losses related to any foreign dollar denominated monetary assets and liabilities are included in net earnings.
Income taxes
Income taxes have been provided using the asset and liability method whereby deferred income tax assets and liabilities are recognized for the expected future income tax consequences of events that have been recognized in the consolidated financial statements or income tax returns. Deferred income tax assets and liabilities are measured using enacted income 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 income tax assets and liabilities of a change in income tax rates is recognized in earnings in the period in which the change occurs. A valuation allowance is recorded unless it is more likely than not that realization of a deferred income tax asset will occur.
Income taxes are not provided on the unremitted earnings of US and foreign subsidiaries because it has been the practice and is the intention of the Company to reinvest these earnings indefinitely in these subsidiaries.
On April 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, (“FIN 48”) which clarifies the accounting and reporting for uncertainties in income tax law (see note 14). In accordance with FIN 48, the Company classifies interest and penalties associated with income tax positions in income tax expense.
2008 acquisitions:
On October 1, 2007, the Company acquired 80% of the shares of Field Asset Services, Inc., a provider of property services to foreclosed residential properties on behalf of its financial institution clients, headquartered in Austin, Texas. The Company also completed 14 individually insignificant acquisitions in its Commercial Real Estate Services, Residential Property Management and Property Services segments during the year ended March 31, 2008. The Company acquired minority interests from shareholders in all three operating segments.
Certain of the purchase price allocations for the 2008 acquisitions are preliminary pending finalization of analyses of the assets acquired and liabilities assumed. Details of the 2008 acquisitions are as follows:
| | 2008 |
| | Field Asset Services, Inc. | | Aggregate other acquisitions | | Purchases of minority shareholders’ interests |
| | | | | | |
| Current assets | $ 9,012 | | $ 26,894 | | $ 92 |
| Long-term assets | 564 | | 9,052 | | (695) |
| Current liabilities | (10,855) | | (41,135) | | (276) |
| Long-term liabilities | - | | (16,880) | | (2,321) |
| | | | | | |
| Minority interest | (89) | | (3,109) | | 4,253 |
| | | | | | |
| | (1,368) | | (25,178) | | 1,053 |
| Stock consideration | $ - | | $ - | | $ 5,868 |
| Cash consideration | $ 43,337 | | $ 102,226 | | $ 6,773 |
| | | | | | |
| Acquired intangible assets | 22,080 | | 59,277 | | 6,069 |
| Goodwill | 22,625 | | 68,127 | | 5,519 |
2007 acquisitions:
On May 19, 2006, the Company acquired all of the shares of PRDnationwide Group, a commercial real estate services business headquartered in Brisbane, Australia. The Company also completed 12 individually insignificant acquisitions in its Commercial Real Estate Services, Residential Property Management and Property Services segments during the year ended March 31, 2007. The Company also acquired minority interests from shareholders in all segments, but primarily in Commercial Real Estate Services.
Details of the 2007 acquisitions are as follows:
| | 2007 |
| | PRDnationwide Group | | Aggregate other acquisitions | | Purchases of minority shareholders’ interests |
| | | | | | |
| Current assets | $ 2,134 | | $ 16,390 | | $ - |
| Long-term assets | 2,627 | | 22,162 | | (1,561) |
| Current liabilities | (4,796) | | (34,096) | | 201 |
| Long-term liabilities | (4,892) | | (7,074) | | (48) |
| | | | | | |
| Minority interest | (223) | | (6,200) | | 645 |
| | | | | | |
| | (5,150) | | (8,818) | | (763) |
| Note consideration | $ - | | $ 2,522 | | $ 1,044 |
| Cash consideration | $ 21,475 | | $ 43,604 | | $ 6,603 |
| | | | | | |
| Acquired intangible assets | 9,519 | | 29,156 | | 2,376 |
| Goodwill | 17,106 | | 25,788 | | 6,034 |
2006 acquisitions:
During the year ended March 31, 2006, the Company completed six individually insignificant acquisitions in the Commercial Real Estate Services, Property Services and Residential Property Management segments. The Company also acquired minority interests from shareholders in the Commercial Real Estate Services, Residential Property Management and Integrated Security Services segments.
Details of the 2006 acquisitions are as follows:
| | 2006 |
| | Acquisitions | | Purchases of minority shareholders’ interests |
| | | | |
| Current assets | $ 5,915 | | $ - |
| Long-term assets | 2,257 | | - |
| Current liabilities | (11,931) | | - |
| Long-term liabilities | (5,899) | | (2,254) |
| | | | |
| Minority interest | (840) | | 2,679 |
| | | | |
| | (10,498) | | 425 |
| Note consideration | $ 3,050 | | $ - |
| Cash consideration | $ 11,346 | | $ 11,998 |
| | | | |
| Acquired intangible assets | 14,854 | | 6,213 |
| Goodwill | 10,040 | | 5,360 |
| | | | |
The purchase prices of acquisitions resulted in the recognition of goodwill. The primary factors contributing to goodwill are assembled workforces, synergies with existing operations and future growth prospects. For acquisitions completed during the year ended March 31, 2008, goodwill in the amount of $49,410 is deductible for income tax purposes (2007 - $6,814; 2006 - nil).
Certain vendors, at the time of acquisition, are entitled to receive contingent consideration if the acquired businesses achieve specified earnings levels during the two- to four-year periods following the dates of acquisition. Such contingent consideration is paid in cash at the expiration of the contingency period. As at March 31, 2008, there was contingent consideration outstanding of up to $53,600 (2007 - $14,800). The contingencies will expire during the period extending to February 2011. The contingent consideration is recorded when the contingencies are resolved and the consideration is paid or becomes payable, at which time the Company records the fair value of the consideration paid or payable, including interest, if any, as additional costs of the acquired businesses. Total contingent consideration recognized for the year ended March 31, 2008 was $2,864 net of income tax of $1 (2007 - $5,732, net of income tax of $342). Contingent consideration paid during the year ended March 31, 2008 was $6,848 (2007 - $1,747) and the amount payable as at March 31, 2008 was nil (2007 - $4,306; see note 6).
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 their respective closing dates. The cash portions of the consideration for the 2008 acquisitions were financed from cash on hand and borrowings on the Company’s revolving credit facility.
Following are the Company’s unaudited consolidated pro forma results assuming the acquisitions occurred on the first day of the year of acquisition. The year immediately prior to the year of acquisition also includes the pro forma results of the acquisitions.
| (unaudited) | | 2008 | | | 2007 | |
| | | | | | | |
| Pro forma revenues | | $ | 1,689,527 | | | $ | 1,504,243 | |
| Pro forma net earnings from continuing operations | | | 35,723 | | | | 40,319 | |
| | | | | | | | | |
| Pro forma net earnings per share from continuing operations | | | | | | | | |
| Basic | | $ | 1.19 | | | $ | 1.35 | |
| Diluted | | | 1.12 | | | | 1.25 | |
These unaudited consolidated pro forma results have been prepared for illustrative 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.
On April 14, 2008, the Company entered into an agreement to sell the businesses comprising its Integrated Security Services (“ISS”) segment, as part of the Company’s strategy to sharpen its focus on global real estate-related services. As a condition to closing, the Company is required to acquire the minority interests of its non-wholly owned ISS subsidiaries. The closing of the sale is conditional upon receipt of regulatory approvals under competition legislation. The ISS segment has been reported as discontinued operations for all periods presented.
In January 2008, the Company decided to wind down its Canadian commercial mortgage securitization operation (“CCMS”) due to adverse credit market conditions. CCMS was previously reported within the Commercial Real Estate Services segment. The wind down was complete as of March 31, 2008 except for the disposal of the remaining mortgage loans receivable. The mortgage assets are expected to be sold as soon as practicable. This operation has been reported as discontinued operations for all periods presented.
On March 17, 2006, the Company sold its 88.3% interest in Resolve Corporation (“Resolve”), its Business Services segment, to a subsidiary of Resolve Business Outsourcing Income Fund (“RBO Fund”) upon the initial public offering of RBO Fund. The Company received aggregate consideration of $137,393, comprised of $116,972 in the form of cash ($110,476 net of cash sold) and $20,421 in the form of equity securities of a subsidiary of RBO Fund, which are exchangeable for publicly traded units of RBO Fund. These securities are classified as available-for-sale (note 7). The pre-tax gain on the disposal was $44,082, before current income taxes of $4,693 and deferred income taxes of $3,570, resulting in a net gain of $35,819. The net gain on disposal included the realization of a gain of $5,487 related to cumulative foreign currency translation on Canadian dollars. Resolve is reported as discontinued operations for all periods presented.
During the year ended March 31, 2008, a gain was recognized in connection with the settlement of a liability related to the Resolve disposal. The settlement resulted in a cash payment to the purchaser of the disposed operation in the amount of $1,036 and a gain on settlement in the amount of $2,265 (including an income tax benefit of $187).
The operating results of the discontinued operations are as follows:
| Operating results - years ended March 31 | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Revenues | | | | | | | | | |
| ISS | | $ | 208,430 | | | $ | 176,475 | | | $ | 149,064 | |
| CCMS | | | (9,064 | ) | | | 2,221 | | | | 402 | |
| Resolve | | | - | | | | - | | | | 160,204 | |
| | | | 199,366 | | | | 178,696 | | | | 309,670 | |
| | | | | | | | | | | | | |
| Operating earnings (loss) before income taxes | | | | | | | | | | | | |
| ISS | | | 10,174 | | | | 5,337 | | | | 3,217 | |
| CCMS | | | (11,413 | ) | | | (1,205 | ) | | | (816 | ) |
| Resolve | | | 2,078 | | | | (728 | ) | | | 7,429 | |
| | | | 839 | | | | 3,404 | | | | 9,830 | |
| (Recovery of) provision for income taxes | | | (495 | ) | | | 1,220 | | | | 2,909 | |
| Net operating earnings from discontinued operations | | | 1,334 | | | | 2,184 | | | | 6,921 | |
| Net gain on disposal of Resolve | | | - | | | | - | | | | 35,819 | |
| Net earnings from discontinued operations | | $ | 1,334 | | | $ | 2,184 | | | $ | 42,740 | |
| | | | | | | | | | | | | |
| Net earnings per share from discontinued operations | | | | | | | | | | | | |
| Basic | | $ | 0.05 | | | $ | 0.07 | | | $ | 1.41 | |
| Diluted | | | 0.04 | | | | 0.07 | | | | 1.38 | |
The assets and liabilities of the ISS segment are classified as held for sale and are as follows:
| Balance sheets as at March 31 | | 2008 | | | 2007 | |
| | | | | | | |
| Assets held for sale | | | | | | |
| Cash and cash equivalents | | $ | 3,834 | | | $ | 1,210 | |
| Accounts receivable, net | | | 46,937 | | | | 38,900 | |
| Inventories | | | 15,164 | | | | 16,475 | |
| Prepaid expenses and other current assets | | | 856 | | | | 1,158 | |
| Fixed assets | | | 5,153 | | | | 4,500 | |
| Goodwill | | | 30,630 | | | | 30,784 | |
| Other | | | 2,671 | | | | 2,272 | |
| Total | | $ | 105,245 | | | $ | 95,299 | |
| | | | | | | | | |
| Liabilities held for sale | | | | | | | | |
| Bank overdraft | | $ | - | | | $ | 5,132 | |
| Accounts payable | | | 11,765 | | | | 6,516 | |
| Accrued liabilities | | | 18,048 | | | | 15,139 | |
| Unearned revenues | | | 3,585 | | | | 3,001 | |
| Other | | | 472 | | | | 18 | |
| Total | | $ | 33,870 | | | $ | 29,806 | |
The assets and liabilities of CCMS are classified as held for sale and are as follows:
| Balance sheets as at March 31 | | 2008 | | | 2007 | |
| | | | | | | |
| Assets held for sale | | | | | | |
| Cash and cash equivalents | | $ | 14 | | | $ | 154 | |
| Mortgage loans receivable | | | 20,809 | | | | 13,716 | |
| Deferred income taxes | | | 6,803 | | | | 503 | |
| Other | | | 642 | | | | 124 | |
| Total | | $ | 28,268 | | | $ | 14,497 | |
| | | | | | | | | |
| Liabilities held for sale | | | | | | | | |
| Interest rate derivative contracts | | $ | 11,724 | | | $ | 368 | |
| Other | | | 2,354 | | | | 595 | |
| Total | | $ | 14,078 | | | $ | 963 | |
The Company has fixed-rate and floating-rate commercial mortgage loans receivable. The mortgages were funded under co-lending agreements whereby the Company advanced 20% or less of the principal amount. The co-lenders advanced 80% or more of the principal amount directly to the borrowers. The Company’s interest in the mortgages is subordinate to the co-lenders’ interests. The Company has the right to purchase the co-lenders’ interest in any mortgage at any time at par value and the co-lenders have the right to purchase the Company’s interest in the mortgages after six months. Mortgage loans receivable are carried on an individual basis at the lower of cost and market, which is calculated based on contractually established commitments from investors or current investor yield requirements.
The Company sells mortgage loans through public securitization and whole loan sales. When the Company sells mortgage loans, the mortgage loans are removed from the balance sheet and a gain or loss is recognized in current period earnings immediately, based on the carrying values of the mortgage loans transferred. Servicing rights are sold with the mortgages and it is the Company’s policy not to retain a residual interest in the mortgages sold.
The Company enters into interest rate derivative contracts to cover the full value of the mortgages written, including the portion funded by a co-lender which the Company has the right and intention to call, while mortgages await sale. The contracts are recorded on the consolidated balance sheets as assets or liabilities and carried at fair value. Changes in the fair value of contracts are recognized in current period earnings. The contracts convert the fixed-rate mortgage loans to floating rates. Hedge accounting has not been accorded to the portion of the contracts that match the mortgages held for sale as the contracts do not meet the criteria for hedge accounting.
As at March 31, 2008, the Company had interest rate derivative contracts to convert $143,500 of fixed-rate mortgage loans receivable to floating rates (2007 - $167,807) with a fair value loss of $11,724 (2007 - $368). The contracts have maturity dates ranging from June 2012 to June 2017. The fair values of contracts 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.
For the year ended March 31, 2008 a loss of $9,466 was recorded in revenues relating to these derivative contracts, which was comprised of $11,278 unrealized losses (2007 - -unrealized gains of $3,245) on outstanding contracts and $1,812 of realized gains (2007 - realized losses of $3,613) on the settlement of the contracts.
During the year ended March 31, 2008, the Company recognized pre-tax gains (after realized gains on derivatives contracts) of $2,516 (2007 - $2,120) on the securitization of mortgage loans with unpaid principal balances of $195,903 (2007 - $39,208). In connection with the sale of mortgages, the Company is obligated to cure or repurchase any mortgage sold that has a breach or defect related to the origination and underwriting process. As at March 31, 2008, the Company was unable to develop an estimate of the maximum potential of future payments under this obligation because the Company is not aware of any such breaches or defects.
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| Earnings from available-for-sale securities | | $ | 2,292 | | | $ | 2,078 | | | $ | - | |
| Earnings from equity method investments | | | 2,006 | | | | 1,625 | | | | 1,329 | |
| Net gain on sale of equity securities | | | - | | | | 1,145 | | | | 2,211 | |
| Gain on foreign exchange contracts | | | - | | | | - | | | | 121 | |
| Dilution gain on sale of subsidiary shares | | | - | | | | - | | | | 105 | |
| Other | | | 349 | | | | - | | | | - | |
| | | $ | 4,647 | | | $ | 4,848 | | | $ | 3,766 | |
| 6. | Components of working capital accounts |
| | | 2008 | | | 2007 | |
| Inventories | | | | | | |
| Work-in-progress | | $ | 12,871 | | | $ | 8,464 | |
| Finished goods | | | 4,251 | | | | 4,350 | |
| Supplies and other | | | 3,397 | | | | 2,479 | |
| | | $ | 20,519 | | | $ | 15,293 | |
| | | | | | | | | |
| Accrued liabilities | | | | | | | | |
| Accrued payroll, commission and benefits | | $ | 160,411 | | | $ | 95,884 | |
| Accrued interest | | | 3,871 | | | | 4,159 | |
| Customer advances | | | 2,937 | | | | 9,713 | |
| Contingent acquisition consideration payable | | | - | | | | 4,306 | |
| Liabilities in connection with Resolve operation | | | - | | | | 2,912 | |
| Other | | | 22,130 | | | | 37,380 | |
| | | $ | 189,349 | | | $ | 154,354 | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Available-for-sale equity securities | | $ | 17,291 | | | $ | 17,419 | |
| Equity method investments | | | 5,086 | | | | 5,046 | |
| Held-to-maturity debt securities | | | 2,280 | | | | 3,763 | |
| Financing fees, net of accumulated amortization of $1,703 (2007 - $1,554) | | | 1,754 | | | | 1,690 | |
| Other | | | 2,982 | | | | 1,034 | |
| | | $ | 29,393 | | | $ | 28,952 | |
The Company’s available-for-sale equity securities consist of securities of a subsidiary of RBO Fund (see note 4). As of March 31, 2007, the Company’s available-for-sale securities were in a continuous loss position for more than twelve months. Accordingly, these securities were deemed to be other-than-temporarily impaired and an unrealized, non-cash loss of $3,139 ($2,574 net of income taxes) was recorded in the statement of earnings as of March 31, 2007.
| 2008 | | | Accumulated | | Net |
| | Cost | | depreciation | | 2008 |
| | | | | | |
| Land | $ 3,070 | | $ - | | $ 3,070 |
| Buildings | 11,683 | | 2,517 | | 9,166 |
| Vehicles | 21,217 | | 13,050 | | 8,167 |
| Furniture and equipment | 51,784 | | 26,265 | | 25,519 |
| Computer equipment and software | 40,462 | | 18,681 | | 21,781 |
| Leasehold improvements | 24,874 | | 11,586 | | 13,288 |
| | $ 153,090 | | $ 72,099 | | $ 80,991 |
| 2007 | | | Accumulated | | Net |
| | Cost | | depreciation | | 2007 |
| | | | | | |
| Land | $ 3,070 | | $ - | | $ 3,070 |
| Buildings | 11,225 | | 2,093 | | 9,132 |
| Vehicles | 18,425 | | 10,742 | | 7,683 |
| Furniture and equipment | 36,387 | | 17,999 | | 18,388 |
| Computer equipment and software | 26,060 | | 11,452 | | 14,608 |
| Leasehold improvements | 16,138 | | 7,327 | | 8,811 |
| | $ 111,305 | | $ 49,613 | | $ 61,692 |
Included in fixed assets are vehicles and computer equipment under capital lease at a cost of $11,510 (2007 - $9,385) and net book value of $5,518 (2007 - $4,937).
| 2008 | Gross carrying amount | | Accumulated amortization | | Net 2008 |
| | | | | | |
| | | | | | |
| Customer lists and relationships | $ 101,649 | | $ 15,917 | | $ 85,732 |
| Franchise rights | 31,682 | | 7,941 | | 23,741 |
| Trademarks and trade names: | | | | | |
| Indefinite life | 18,559 | | - | | 18,559 |
| Finite life | 31,086 | | 3,918 | | 27,168 |
| Management contracts and other | 11,850 | | 3,518 | | 8,332 |
| Brokerage backlog | 30,595 | | 28,208 | | 2,387 |
| | $ 225,421 | | $ 59,502 | | $ 165,919 |
| 2007 | Gross carrying amount | | Accumulated amortization | | Net 2007 |
| | | | | | |
| | | | | | |
| Customer lists and relationships | $ 43,952 | | $ 6,997 | | $ 36,955 |
| Franchise rights | 26,862 | | 6,597 | | 20,265 |
| Trademarks and trade names: | | | | | |
| Indefinite life | 15,696 | | - | | 15,696 |
| Finite life | 18,931 | | 2,781 | | 16,150 |
| Management contracts and other | 6,502 | | 1,520 | | 4,982 |
| Brokerage backlog | 23,639 | | 22,446 | | 1,193 |
| | $ 135,582 | | $ 40,341 | | $ 95,241 |
During the year ended March 31, 2008, the Company acquired the following intangible assets:
| | Amount | | Estimated weighted average amortization period (years) |
| | | | |
| Customer lists and relationships | $ 56,624 | | 13.5 |
| Franchise rights | 4,498 | | 21.3 |
| Trademarks and trade names | 14,587 | | 24.1 |
| Management contracts and other | 4,329 | | 5.0 |
| Brokerage backlog | 6,861 | | 1.1 |
| | $ 86,899 | | 13.4 |
The following is the estimated annual amortization expense for recorded intangible assets for each of the next five years ending March 31:
| 2009 | $ 16,479 |
| 2010 | 15,135 |
| 2011 | 12,969 |
| 2012 | 11,146 |
| 2013 | 10,075 |
During the year ended March 31, 2008, charges of $1,149 (2007 - $437; 2006 - nil) were recognized in connection with impairments of intangible assets. In 2008 and 2007, the impairments were attributable to faster than expected erosion of customer relationships in the Commercial Real Estate and Residential Property Management segments. The charges were recorded in amortization expense. The fair value of the intangible assets was estimated using discounted expected future cash flows.
| | | Commercial Real Estate Services | | | Residential Property Management | | | Property Services | | | Consolidated | |
| | | | | | | | | | | | | |
| Balance, March 31, 2006 | | $ | 51,867 | | | $ | 71,297 | | | $ | 43,245 | | | $ | 166,409 | |
| Adjustments to goodwill resulting from adjustments to purchase price allocations | | | 363 | | | | - | | | | (566 | ) | | | (203 | ) |
| Goodwill resulting from contingent acquisition payments | | | - | | | | 5,654 | | | | - | | | | 5,654 | |
| Goodwill resulting from purchases of minority shareholders’ interests | | | 4,985 | | | | - | | | | 883 | | | | 5,868 | |
| Goodwill acquired during year | | | 40,389 | | | | 1,296 | | | | 1,209 | | | | 42,894 | |
| Goodwill disposed during year | | | - | | | | - | | | | (836 | ) | | | (836 | ) |
| Foreign exchange | | | 560 | | | | - | | | | - | | | | 560 | |
| Balance, March 31, 2007 | | | 98,164 | | | | 78,247 | | | | 43,935 | | | | 220,346 | |
Adjustments to goodwill resulting from adjustments to purchase price allocations | | | 15 | | | | (594 | ) | | | 71 | | | | (508 | ) |
| Goodwill resulting from contingent acquisition payments | | | 2,757 | | | | 26 | | | | 81 | | | | 2,864 | |
| Goodwill resulting from purchases of minority shareholders’ interests | | | 2,228 | | | | 1,109 | | | | 2,212 | | | | 5,549 | |
| Goodwill acquired during year | | | 39,103 | | | | 29,024 | | | | 22,625 | | | | 90,752 | |
| Goodwill disposed during year | | | (421 | ) | | | - | | | | - | | | | (421 | ) |
| Foreign exchange | | | 3,332 | | | | 11 | | | | 170 | | | | 3,513 | |
| Balance, March 31, 2008 | | $ | 145,178 | | | $ | 107,823 | | | $ | 69,094 | | | $ | 322,095 | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Revolving credit facility | | $ | 132,500 | | | $ | - | |
| 8.06% Senior Notes | | | 57,142 | | | | 71,428 | |
| 6.40% Senior Notes | | | 50,000 | | | | 50,000 | |
| 5.44% Senior Notes | | | 100,000 | | | | 100,000 | |
| Capital leases bearing interest ranging from 5% to 10%, maturing at various dates through 2012 | | | 5,589 | | | | 4,455 | |
| Other long-term debt bearing interest at 4% to 10%, maturing at various dates through 2014 | | | 10,799 | | | | 9,248 | |
| | | | 356,030 | | | | 235,131 | |
| Less: current portion | | | 24,777 | | | | 22,101 | |
| | | $ | 331,253 | | | $ | 213,030 | |
On September 6, 2007, the Company terminated its existing $110,000 revolving credit facility and entered into an amended and restated credit agreement with a syndicate of banks to provide a $225,000 committed senior revolving credit facility with a five-year term. The amended revolving credit facility bears interest at 0.75% to 1.30% over floating reference rates, depending on certain leverage ratios. The revolving credit facility had $70,700 of available un-drawn credit as at March 31, 2008 (nil was drawn at March 31, 2007). As of March 31, 2008, letters of credit in the amount of $4,300 were outstanding ($4,900 as at March 31, 2007). The revolving credit facility requires a commitment fee of 0.25% to 0.50% of the unused portion, depending on certain leverage ratios, and also includes an uncommitted accordion provision providing an additional $50,000 of borrowing capacity under certain circumstances.
The Company has outstanding $57,142 of 8.06% fixed-rate Senior Notes (the “8.06% Notes”) (2007 - $71,428). The 8.06% Notes have a final maturity of June 29, 2011, with seven equal annual principal repayments which began on June 29, 2005. The Company also has outstanding $50,000 of 6.40% fixed-rate Senior Notes (the “6.40% Notes”). The 6.40% Notes have a final maturity of September 30, 2015 with four equal annual principal repayments commencing on September 30, 2012. The Company also has outstanding $100,000 of 5.44% fixed-rate Senior Notes (the “5.44% Notes”). The 5.44% Notes have a final maturity of April 1, 2015 with five equal annual principal repayments beginning on April 1, 2011.
The Company has indemnified the holders of the 8.06% Notes, 6.40% Notes and 5.44% Notes (collectively, the “Notes”) from all withholding taxes that are or may become applicable to any payments made by the Company on the Notes. The Company believes this exposure is not material as of March 31, 2008.
The revolving 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 (note 18(b)).
The covenants and other limitations within the revolving credit facility and the Notes agreements 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.
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:
| 2009 | $ 24,777 |
| 2010 | 17,466 |
| 2011 | 15,441 |
| 2012 | 14,721 |
| 2013 | 166,943 |
| Thereafter | 116,682 |
The authorized capital stock of the Company is as follows:
An unlimited number of Preferred 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 issued and outstanding:
| | Preferred Shares | Subordinate Voting Shares | Multiple Voting Shares | Total Common Shares |
| | Number | Amount | Number | Amount | Number | Amount | Number | amount |
| | | | | | | | | |
| | | | | | | | | |
| Balance, March 31, 2006 | - | $ - | 28,730,094 | $ 75,314 | 1,325,694 | $ 373 | 30,055,788 | $ 75,687 |
| Balance, March 31, 2007 | - | - | 28,597,194 | 79,735 | 1,325,694 | 373 | 29,922,888 | 80,108 |
| Balance, March 31, 2008 | 5,979,074 | 149,477 | 28,786,893 | 88,546 | 1,325,694 | 373 | 30,112,587 | 88,919 |
| | On August 1, 2007, the Company issued a stock dividend in the form of 7% Cumulative Preference Shares, Series 1 (the “Preferred Shares”) to holders of Subordinate Voting Shares and Multiple Voting Shares (together the “Common Shares”). One Preferred Share was issued for every five outstanding Common Shares. The stock dividend resulted in the issuance of 5,979,074 Preferred Shares, with an aggregate par value of $149,477. Each Preferred Share has a stated amount of $25.00. Preferred dividends are payable quarterly on or about the last day of each quarter. |
As at March 31, 2008, the Company may redeem each Preferred Share for $26.00 payable in cash, or alternatively the Company may convert each Preferred Share into Subordinate Voting Shares based on a price of $26.00. The redemption or conversion price is scheduled to decline in annual increments of $0.25 such that the price will be fixed at $25.00 on and after August 1, 2011. Holders of the Preferred Shares have no redemption or conversion rights.
The following table provides the pro forma impact on diluted earnings per common share of the preferred dividends on the comparative periods.
| | 2008 | | 2007 | | 2006 |
| Diluted earnings per common share from continuing operations: | | | | | |
| As reported | $ 0.81 | | $ 1.05 | | $ 0.83 |
| Impact of preferred dividends on comparative periods | - | | (0.23) | | (0.23) |
| Pro forma | $ 0.81 | | $ 0.82 | | $ 0.60 |
| | During the year ended March 31, 2008, the Company repurchased 252,500 (2007 - 697,700; 2006 - 571,650) Subordinate Voting Shares for cancellation under a Normal Course Issuer Bid filed with the Toronto Stock Exchange, which allowed the Company to repurchase up to 5% of its outstanding shares on the open market during a twelve-month period. The repurchase cost is allocated to capital stock for the weighted average book value and to retained earnings for any excess. |
| | The Company has a $765 (2007 - $1,232) interest bearing loan receivable related to the purchase of 120,000 Subordinate Voting Shares (2007 - 240,000 shares). The loan, which is collateralized by the shares issued, has a ten-year term from the grant date; however, it is open for repayment at any time. The final maturity of the loan is January 2009. |
| | Pursuant to an agreement approved in February 2004, the Company agreed that it will make payments to its Chief Executive Officer (“CEO”) that are contingent upon the arm’s length sale of control of the Company or upon a distribution of the Company’s assets to shareholders. The payment amounts will be determined with reference to the price per Subordinate Voting Share received by shareholders upon an arm’s length sale or upon a distribution of assets. The right to receive the payments may be transferred among members of the CEO’s family, their holding companies and trusts. The agreement provides for the CEO to receive each of the following two payments. The first payment is an amount equal to 5% of the product of: (i) the total number of Subordinate and Multiple Voting Shares outstanding on a fully diluted basis at the time of the sale and (ii) the per share consideration received by holders of Subordinate and Multiple Voting Shares minus a base price of C$5.675. The second payment is an amount equal to 5% of the product of (i) the total number of shares outstanding on a fully diluted basis at the time of the sale and (ii) the per share consideration received by holders of Subordinate Voting Shares minus a base price of C$11.05. |
| 13. | Stock-based compensation |
The following table provides a summary of stock-based compensation expense:
| | 2008 | | 2007 | | 2006 |
| | | | | | |
| Stock option expense – Company plan | $ 5,938 | | $ 1,916 | | $ 1,380 |
| Stock option expense – subsidiaries | 1,508 | | 1,791 | | 552 |
| Stock value appreciation plans | 373 | | 1,249 | | 379 |
| | $ 7,819 | | $ 4,956 | | $ 2,311 |
Company stock option plan
The Company has a stock option plan for certain officers and key full-time employees of the Company and its subsidiaries, other than its CEO. 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. All Subordinate Voting Shares issued under the plan are new shares. As at March 31, 2008, there were 338,000 options available for future grants (2007 - 506,000).
Grants under the Company’s stock option plan are equity classified awards under SFAS 123R. Stock option activity for the three years ended March 31, 2008 was as follows:
| | | Number of options | | Weighted average exercise price | | Weighted average remaining contractual life (years) | | Aggregate intrinsic value |
Shares issuable under options – March 31, 2005 | | 1,844,000 | | $ 9.72 | | | | |
| Granted | | 328,000 | | 19.61 | | | | |
| Exercised | | (434,650) | | 8.60 | | | | |
| Forfeited | | (21,000) | | 9.38 | | | | |
Shares issuable under options – March 31, 2006 | | 1,716,350 | | 11.96 | | | | |
| Granted | | 305,000 | | 20.65 | | | | |
| Exercised | | (564,800) | | 11.40 | | | | |
| Forfeited | | (11,000) | | 13.43 | | | | |
Shares issuable under options – March 31, 2007 | | 1,445,550 | | 14.12 | | | | |
| Granted | | 175,500 | | 32.24 | | | | |
| Exercised | | (159,550) | | 7.28 | | | | |
| Forfeited | | (7,500) | | 27.81 | | | | |
Shares issuable under options – March 31, 2008 | | 1,454,000 | | $ 16.94 | | 2.58 | | $ 8,687 |
Options exercisable – March 31, 2008 | | 759,450 | | $ 12.91 | | 1.92 | | $ 6,832 |
As at March 31, 2008, the range of option exercise prices was $2.39 to $33.25 per share. Also as at March 31, 2008, the aggregate intrinsic value and weighted average remaining contractual life for options vested and expected to vest were $8,687 and 2.36 years, respectively.
The following table summarizes information about option exercises during the three years ended March 31, 2008:
| | 2008 | | 2007 | | 2006 |
| | | | | | |
| Number of options exercised | 159,550 | | 564,800 | | 434,650 |
| | | | | | |
| Aggregate fair value | $ 4,885 | | $ 13,266 | | $ 10,784 |
| Intrinsic value | 3,711 | | 6,831 | | 7,044 |
| Amount of cash received | $ 1,174 | | $ 6,435 | | $ 3,740 |
| | | | | | |
| Tax benefit recognized | $ - | | $ - | | $ - |
| | | | | | |
Stock option compensation expense recorded in the consolidated statement of earnings is allocated using the graded attribution method. As at March 31, 2008, there was $2,414 of unrecognized compensation cost related to non-vested awards which is expected to be recognized over the next 3.30 years. During the year ended March 31, 2008, the fair value of options vested was $1,734 (2007 - - $1,220; 2006 - $739).
In October 2007, the Company received an inquiry from the Ontario Securities Commission related to granting of Company stock options. A comprehensive review of historical stock option granting processes and the related accounting for the 13-year period from 1995 to 2007 was conducted by a Special Committee of the Company’s Board of Directors comprised of independent directors. As a result of the review, the Special Committee found that the practice followed by the Company in granting stock options was not accounted for correctly and recommended the measurement dates of certain option grants be revised for accounting purposes. As a result, $3,278 of incremental compensation expense was recorded in 2008 to correct the error and exercise prices of outstanding unexercised options were revised. In addition, cash payments of $1,644 were received in 2008 on account of adjustments to exercise prices of previously exercised options and recorded as contributed surplus.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, utilizing the following weighted average assumptions:
| | 2008 | | 2007 | | 2006 |
| | | | | | |
| Risk-free interest rate | 4.8% | | 4.3% | | 4.7% |
| Expected life in years | 3.75 | | 3.75 | | 4.40 |
| Expected volatility | 26.4% | | 25.2% | | 30.0% |
| Dividend yield | 0% | | 0% | | 0% |
| | | | | | |
| Weighted average fair value per option granted | $ 9.31 | | $ 6.70 | | $ 7.65 |
The risk-free interest rate is based on the implied yield of a zero-coupon US Treasury bond with a term equal to the option’s expected term. The expected term represents the estimated period of time until exercise and is based on historical experience. Prior to January 1, 2008, the expected term was calculated using the simplified method under SAB 107. The expected volatility is based on the historical prices of the Company’s shares. The dividend yield assumption is based on the Company’s present intention to retain all earnings in respect of the Common Shares.
Prior to April 1, 2003, the Company had accounted for stock options under the intrinsic value method under APB No. 25 Accounting for Stock Issued to Employees. Had compensation expense for stock options been determined under the fair value method under SFAS 123 for all periods, pro forma reported net earnings and earnings per share would reflect the following:
| | | | 2006 |
| | | | |
| Net earnings as reported | | $ | 69,497 |
Deduct: Stock-based compensation expense determined under fair value method, net of income taxes | | | (1,129) |
| Pro forma net earnings | | $ | 68,368 |
| | | | |
| Pro forma net earnings per share: | | | |
| Basic | | $ | 2.27 |
| Diluted | | | 2.17 |
| | | | |
| Reported net earnings per share: | | | |
| Basic | | $ | 2.30 |
| Diluted | | | 2.21 |
| | | | |
Subsidiary stock option and appreciation plans
The Company has stock option plans at certain of its subsidiaries. The impact of potential dilution from these plans is reflected in the Company’s diluted earnings per share (note 15).
The Company also has stock value appreciation plans at certain of its subsidiaries that provide for cash payments to be made to subsidiary employees based on the long-term appreciation of the stock value of subsidiaries. The Company’s accounting policy is to record the intrinsic value of these awards as accrued liabilities. If an award is subject to a vesting condition, then graded attribution is applied to the intrinsic value. The related compensation expense is recorded in the consolidated statement of earnings. Since these plans are settled in cash, no dilutive effect has been reflected in the Company’s diluted earnings per share.
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:
| | | 2008 | | 2007 | | 2006 |
| Income tax expense using combined statutory rate of approximately 35% (2007 - 36%; 2006 – 36%) | | $ 22,956 | | $ 25,317 | | $ 19,728 |
| Permanent differences | | 435 | | 1,270 | | (917) |
| Adjustments in tax liabilities of prior years | | 522 | | (1,788) | | - |
| Effects of changes in enacted tax rates | | (420) | | (451) | | - |
| Changes in provisions for uncertain tax positions | | 1,733 | | - | | - |
| Stock-based compensation | | (1,290) | | 1,353 | | 834 |
| Foreign tax rate reduction | | (9,019) | | (5,440) | | (3,561) |
| Withholding taxes | | 1,278 | | - | | - |
| Provision for income taxes as reported | | $ 16,195 | | $ 20,261 | | $ 16,084 |
Earnings before income taxes and minority interest by tax jurisdiction comprise the following:
| | | 2008 | | 2007 | | 2006 |
| | | | | | | |
| Canada | | $ 15,515 | | $ 3,340 | | $ 1,075 |
| United States | | 27,490 | | 45,372 | | 41,401 |
| Foreign | | 21,716 | | 21,380 | | 12,143 |
| Total | | $ 64,721 | | $ 70,092 | | $ 54,619 |
The provision for income taxes comprises the following:
| | | 2008 | | 2007 | | 2006 |
| | | | | | | |
| Current | | | | | | |
| Canada | | $ 8,839 | | $ (1,494) | | $ 328 |
| United States | | 17,251 | | 20,260 | | 14,936 |
| Foreign | | 12,743 | | 7,343 | | 4,482 |
| | | 38,833 | | 26,109 | | 19,746 |
| Deferred | | | | | | |
| Canada | | (10,829) | | (711) | | (1,235) |
| United States | | (8,420) | | (3,550) | | (2,146) |
| Foreign | | (3,389) | | (1,587) | | (281) |
| | | (22,638) | | (5,848) | | (3,662) |
| Total | | $ 16,195 | | $ 20,261 | | $ 16,084 |
The significant components of deferred income taxes are as follows:
| | | 2008 | | 2007 |
| Deferred income tax assets | | | | |
| Loss carry-forwards | | $ 24,106 | | $ 4,819 |
| Expenses not currently deductible | | 5,043 | | 8,568 |
| Stock-based compensation | | 3,284 | | - |
| Provision for doubtful accounts | | 1,092 | | 649 |
| Inventory and other reserves | | 97 | | 41 |
| | | 33,622 | | 14,077 |
| Deferred income tax liabilities | | | | |
| Depreciation and amortization | | 34,172 | | 28,365 |
| Unrealized foreign exchange gains | | 4,582 | | 1,010 |
| Investments | | 2,717 | | 2,397 |
| Prepaid and other expenses deducted for tax purposes | | 448 | | 458 |
| Financing fees | | 110 | | 172 |
| | | 42,029 | | 32,402 |
| Net deferred income tax liability | | $ (8,407) | | $ (18,325) |
As at March 31, 2008, the Company had Canadian net operating loss carry-forward balances of approximately $41,432 (2007 - $15,515) prior to a valuation allowance of $3,950 (2007 - $3,950). These amounts are available to reduce future federal and provincial income taxes. Net operating loss carry-forward balances attributable to Canada and the United States expire over the next 20 years. The Company also had foreign net operating loss carry-forward balances of approximately $43,582 (2007 - $17,619), prior to a valuation allowance of $19,062 (2007 - $15,416). Foreign capital loss carry-forward balances amounted to $9,870 (2007 - $9,870) as at March 31, 2008 prior to a valuation allowance of $9,870 (2007 - $9,870). Additional net operating loss and capital loss carry-forward balances of $15,416 (2007 - $15,416) and $9,870 (2007 - $9,870) respectively relate to losses acquired in the 2004 CMN acquisition. Any benefit realized with respect to these losses would be recorded as a reduction in goodwill.
Cumulative unremitted earnings of US and foreign subsidiaries approximated $141,674 as at March 31, 2008 (2007 - $109,928).
The cumulative effect of the adoption of FIN 48 was an increase in tax provisions of $3,800, including $700 of accrued interest, which was accounted for as a reduction to retained earnings as at April 1, 2007 of $4,200 and a reduction in goodwill of $400. The liability for income taxes associated with uncertain tax positions was $4,735 as at April 1, 2007 and $10,671 as at March 31, 2008.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefit is as follows:
| Balance, April 1, 2007 | | $ 4,735 |
| Increases based on tax positions related to the current year | | 445 |
| Increases for tax positions of prior years | | 1,470 |
| Decreases for tax positions of prior years | | (490) |
| Increases from acquisitions | | 4,511 |
| Balance, March 31, 2008 | | $ 10,671 |
Of the $10,671 in gross unrecognized tax benefits, $5,330 would affect the Company’s effective tax rate if recognized. Interest and penalties related to provisions for income taxes are recorded in income tax expense. As at March 31, 2008 and April 1, 2007, the Company had accrued $777 and $700, respectively for potential income-tax related interest and penalties.
The number of years with open tax audits varies depending on the tax jurisdictions. Generally, income tax returns filed with the Canada Revenue Agency and related provinces are open for three to four years and income tax returns filed with the U.S. Internal Revenue Service and related states are open for three to five years. Tax returns in Australia are generally open for four years. The Company’s significant tax jurisdictions include the United States of America, Canada and Australia. The Company does not currently expect any material impact on earnings to result from the resolution of matters related to open taxation years; however, actual settlements may differ from amounts accrued. Currently, it is not reasonably possible to determine whether unrecognized tax benefits will increase or decrease within the next twelve months with respect to settlements of tax audits. The Company has, as part of its FIN 48 analysis, made its current estimates on facts and circumstances known to date and cannot predict subsequent or changed facts and circumstances that may affect its current estimates.
The following table reconciles the numerator used to calculate diluted earnings per share:
| | | 2008 | | 2007 | | 2006 |
| | | | | | | |
| Net earnings from continuing operations | | $ 33,065 | | $ 34,032 | | $ 26,757 |
| Dilution of net earnings resulting from assumed exercise of stock options in subsidiaries | | (1,473) | | (2,228) | | (1,253) |
| Net earnings from continuing operations for diluted earnings per share calculation purposes | | $ 31,592 | | $ 31,804 | | $ 25,504 |
| | | | | | | |
| Net earnings | | $ 34,399 | | $ 34,863 | | $ 69,497 |
| Dilution of net earnings resulting from assumed exercise of stock options in subsidiaries | | (1,473) | | (2,228) | | (1,253) |
| Net earnings for diluted earnings per share calculation purposes | | $ 32,926 | | $ 32,635 | | $ 68,244 |
The Preferred Shares are anti-dilutive and thus not included in the denominator for diluted earnings per share calculations. The following table reconciles the denominator used to calculate earnings per share:
| | | 2008 | | 2007 | | 2006 |
| | | | | | | |
| Shares issued and outstanding at beginning of year | | 29,922,888 | | 30,055,788 | | 30,192,788 |
| Weighted average number of shares: | | | | | | |
| Issued during the year | | 106,139 | | 210,843 | | 137,943 |
| Repurchased during the year | | (124,371) | | (364,101) | | (160,040) |
| | | | | | | |
| Weighted average number of shares used in computing basic earnings per share | | 29,904,656 | | 29,902,530 | | 30,170,691 |
| Assumed exercise of stock options, net of shares assumed acquired under the Treasury Stock Method | | 642,310 | | 451,774 | | 725,286 |
| Number of shares used in computing diluted earnings per share | | 30,546,966 | | 30,354,304 | | 30,895,977 |
| 16. | Other supplemental information |
| | | 2008 | | 2007 | | 2006 |
| | | | | | | |
| Franchised operations | | | | | | |
| Revenues | | $ 99,351 | | $ 95,354 | | $ 88,531 |
| Operating earnings | | 26,199 | | 21,163 | | 16,728 |
| Initial franchise fee revenues | | 5,606 | | 5,571 | | 3,482 |
| | | | | | | |
| Cash payments made during the year | | | | | | |
| Income taxes | | $ 45,288 | | $ 25,764 | | $ 25,179 |
| Interest | | 19,268 | | 16,276 | | 12,481 |
Non-cash financing activities | | | | | | |
| Increases in capital lease obligations | | $ 4,115 | | $ 1,502 | | $ 3,284 |
| | | | | | | |
| Other expenses | | | | | | |
| Rent expense | | $ 47,910 | | $ 32,836 | | $ 26,762 |
| 17. | Financial instruments |
Concentration of credit risk
The Company is subject to credit risk with respect to its cash and cash equivalents, accounts receivable and other receivables. Concentrations of credit risk with respect to the 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 various countries.
Interest rate risk
The Company maintains an interest rate risk management strategy that uses interest rate hedging contracts from time to time. The Company’s specific goals are to: (i) manage interest rate sensitivity by modifying the characteristics of its debt and (ii) lower the long-term cost of its borrowed funds. Fluctuations in interest rates affect the fair value of the hedging contracts as their value depends on the prevailing market interest rate. Hedging contracts are monitored on a monthly basis.
As at March 31, 2008 and 2007, except as disclosed in note 4, the Company had no interest rate swaps. In May 2005, the Company settled a swap on $20,000 of principal on the 6.40% Notes for a net loss of $48. In December 2005, the Company settled swaps on $85,714 of principal on the 8.06% Notes for a net gain of $120.
Fair values of financial instruments
The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair values due to the short maturity of these instruments, unless otherwise indicated. The following are estimates of the fair values for other financial instruments:
| | 2008 | | 2007 |
| | Carrying amount | | Fair value | | Carrying amount | | Fair value |
| Other receivables | $ 3,419 | | $ 3,419 | | $ 7,215 | | $ 7,215 |
| Available-for-sale securities | 17,291 | | 17,291 | | 17,419 | | 17,419 |
| Long-term debt | 354,654 | | 392,429 | | 235,149 | | 261,009 |
| 18. | Commitments and contingencies |
Minimum operating lease payments are as follows:
Year ending March 31
| 2009 | $ 39,763 |
| 2010 | 33,284 |
| 2011 | 27,919 |
| 2012 | 23,130 |
| 2013 | 18,664 |
| Thereafter | 32,719 |
| (b) | Minority shareholder agreements |
The Company has shareholder agreements with the minority owners of its subsidiaries. These agreements allow the Company to “call” the minority position at fair value determined with the use of a formula price, which is usually equal to a multiple of average net earnings before extraordinary items, minority interest share of earnings, income taxes, interest, depreciation, and amortization for a defined period. 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 in cash or in Subordinate Voting Shares. Acquisitions of these minority interests, if any, would be accounted for using the purchase method. The total obligation if all call or put options were exercised as at March 31, 2008 was approximately $233,000 (2007 - $154,000).
In the normal course of operations, the Company is subject to routine claims and litigation incidental to its business. Litigation currently pending or threatened against the Company includes disputes with former employees and commercial liability claims related to services provided by the Company. The Company believes resolution of such proceedings, combined with amounts recorded, will not have a material impact on the Company’s financial condition or the results of operations.
| 19. | Related party transactions |
During the year, the Company paid $2,579 (2007 - $826; 2006 - $775) in rent to entities controlled by minority shareholders of subsidiaries. In addition, $1,168 (2007 - $388; 2006 - $335) of service revenues were earned from entities controlled by minority shareholders of subsidiaries and $493 (2007 - $66; 2006 - $62) of expenses were paid to entities controlled by minority shareholders of subsidiaries. The transactions were completed at market rates. During the year, the Company received $1,644 of cash payments from officers and directors on account of adjustments to exercise prices of previously exercised options.
| 20. | Segmented information |
Operating segments
The Company has three 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. Commercial Real Estate Services provides commercial property brokerage and other advisory services to clients in North America and in various other countries around the world. Residential Property Management provides property management and related property services to residential communities in the United States. Property Services (previously referred to as Property Improvement Services) provides franchised and Company-owned property services to customers in the United States and Canada. Corporate includes the costs of operating the Company’s corporate head office.
Included in total assets of the Commercial Real Estate Services segment at March 31, 2008 is $3,342 (2007 - $4,667; 2006 - $4,608) of investments in subsidiaries accounted for under the equity method.
| 2008 | Commercial Real Estate Services | Residential Property Management | Property Services | Corporate | Consolidated |
| | | | | | |
| Revenues | $ 810,969 | $ 544,926 | $ 216,972 | $ 348 | $ 1,573,215 |
Depreciation and amortization | 22,025 | 10,450 | 5,654 | 350 | 38,479 |
| Operating earnings | 17,008 | 39,790 | 32,745 | (15,967) | 73,576 |
| Other income, net | | | | | 4,647 |
| Interest expense, net | | | | | (13,502) |
| Income taxes | | | | | (16,195) |
| Minority interest | | | | | (15,461) |
| Net earnings from continuing operations | | | | | 33,065 |
| Net earnings from discontinued operations | | | | | 1,334 |
| Net earnings | | | | | $ 34,399 |
| Total assets | $ 426,858 | $ 290,692 | $ 191,553 | $ 48,475 | $ 957,578 |
| Discontinued operations | | | | | 131,765 |
| | | | | | $ 1,089,343 |
| Total additions to long-lived assets | 79,873 | 64,471 | 53,560 | 364 | 198,268 |
| 2007 | Commercial Real Estate Services | Residential Property Management | Property Services | Corporate | Consolidated |
| | | | | | |
| Revenues | $ 605,845 | $ 423,797 | $ 150,794 | $ 554 | $ 1,180,990 |
| Depreciation and amortization | 16,215 | 7,644 | 4,653 | 223 | 28,735 |
| Operating earnings | 32,363 | 32,622 | 25,911 | (14,778) | 76,118 |
| Other income, net | | | | | 1,709 |
| Interest expense, net | | | | | (7,735) |
| Income taxes | | | | | (20,261) |
| Minority interest | | | | | (15,799) |
| Net earnings from continuing operations | | | | | 34,032 |
| Net earnings from discontinued operations | | | | | 2,184 |
| Cumulative effect of change in accounting principle | | | | | (1,353) |
| Net earnings | | | | | $ 34,863 |
| Total assets | $ 315,503 | $ 206,977 | $ 123,832 | $ 66,023 | $ 712,335 |
| Discontinued operations | | | | | 104,663 |
| | | | | | 816,998 |
| Total additions to long-lived assets | 89,484 | 27,917 | 10,165 | 331 | 127,897 |
| 2006 | Commercial Real Estate Services | Residential Property Management | Property Services | Corporate | Consolidated |
| | | | | | |
| Revenues | $ 438,032 | $ 346,133 | $ 134,136 | $ 367 | $ 918,668 |
| Depreciation and amortization | 11,386 | 5,618 | 3,749 | 168 | 20,921 |
| Operating earnings | 25,940 | 25,767 | 22,016 | (12,636) | 61,087 |
| Other income, net | | | | | 3,766 |
| Interest expense, net | | | | | (10,234) |
| Income taxes | | | | | (16,084) |
| Minority interest | | | | | (11,778) |
| Net earnings from continuing operations | | | | | 26,757 |
| Net earnings from discontinued operations | | | | | 42,740 |
| Net earnings | | | | | $ 69,497 |
| Total assets | $ 204,042 | $ 150,641 | $ 114,188 | $ 149,375 | $ 618,246 |
| Discontinued operations | | | | | 92,758 |
| | | | | | 711,004 |
| Total additions to long-lived assets | 36,799 | 10,400 | 9,909 | 546 | 57,654 |
Geographic information
Revenues in each geographic segment are reported by customer location. Amounts reported in geographic regions other than the United States, Canada and Australia are primarily denominated in US dollars.
| | 2008 | | 2007 | | 2006 |
| | | | | | |
| United States | | | | | |
| Revenues | $ 1,002,370 | | $ 788,535 | | $ 621,548 |
| Total long-lived assets | 408,591 | | 267,760 | | 211,853 |
| | | | | | |
| Canada | | | | | |
| Revenues | $ 227,249 | | $ 177,940 | | $ 148,249 |
| Total long-lived assets | 75,181 | | 67,268 | | 37,130 |
| | | | | | |
| Australia | | | | | |
| Revenues | $ 156,812 | | $ 117,794 | | $ 78,011 |
| Total long-lived assets | 32,629 | | 29,514 | | 15,273 |
| | | | | | |
| Other | | | | | |
| Revenues | $ 186,784 | | $ 96,721 | | $ 70,860 |
| Total long-lived assets | 52,604 | | 12,737 | | 13,874 |
| | | | | | |
| Consolidated | | | | | |
| Revenues | $ 1,573,215 | | $ 1,180,990 | | $ 918,668 |
| Total long-lived assets | $ 569,005 | | $ 377,279 | | $ 278,130 |
| 21. | Application of Staff Accounting Bulletin No. 108 |
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. Traditionally, the impacts of misstatements were evaluated under either an earnings-based (“rollover”) approach or a balance sheet-based (“iron curtain”) approach. The rollover approach focuses on the impact of misstatements on the statement of earnings, including the reversing impact of prior year misstatements, but its use can lead to the accumulation of misstatements on the balance sheet. The iron curtain approach focuses on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior years’ errors on the statement of earnings. Prior to the application of SAB 108, the Company used the rollover approach for quantifying financial statement misstatements.
In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the rollover and iron curtain approaches.
The Company adopted the provisions of SAB 108 in connection with the annual consolidated financial statements for the year ended March 31, 2007. The provisions of SAB 108 may be applied by either (i) restating prior financial statements as if the dual approach had always been applied, or (ii) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of April 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. The Company elected to record the effects of applying SAB 108 using the cumulative effect transition method (method (ii)). The following summarizes the effects of applying SAB 108 to errors previously considered immaterial under the rollover approach:
| (a) | In the Company’s Commercial Real Estates Services operations, broker and management compensation vary during the calendar year based on exceeding pre-determined production or earnings thresholds. Since the time this segment was acquired in November 2004, the Company recorded compensation expense incrementally as thresholds were exceeded, but should have recorded compensation expense systematically on a basis approximating the expected average commission rate for the calendar year. As a result, the accrued compensation liability as of April 1, 2006 was understated by $7,951. The Company recorded a $7,951 increase in the liability as of April 1, 2006 with a corresponding reduction in retained earnings to correct this misstatement. |
| (b) | In the Company’s Residential Property Management operations, certain subsidiaries did not accrue vacation pay since the time they were acquired in 1996 and 1997. As a result, accrued vacation pay liability as of April 1, 2006 was understated by $1,607. The Company recorded a $1,607 increase in the liability as of April 1, 2006 with a corresponding reduction in retained earnings to correct this misstatement. |
| (c) | In the Company’s Residential Property Management operations, certain prepaid insurance expenses were not eliminated on consolidation. As a result, prepaid insurance as of April 1, 2006 was overstated by $467. The Company recorded a $467 decrease in the prepaid insurance as of April 1, 2006 with a corresponding reduction in retained earnings to correct this misstatement. |
As a result of the misstatements described above, the provision for income taxes was cumulatively overstated by $3,599 as at April 1, 2006. The Company recorded an increase in deferred income tax asset in the amount of $3,599 with a corresponding increase in retained earnings to correct this misstatement. The Company also recorded a reduction in minority interest in the amount of $1,049 with a corresponding increase to retained earnings. Accordingly, the net reduction to retained earnings recorded as of April 1, 2006 to record the initial application of SAB 108 was $5,377.
| 22. | Impact of recently issued accounting standards |
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements and is effective for the Company’s fiscal year commencing on April 1, 2008. FASB Staff Position FAS 157-2, Effective Date of SFAS 157, permits for the deferred effective date of SFAS 157 for non-financial assets and liabilities to fiscal year beginning after November 15, 2008. The Company elected this deferral option for its non-financial assets and liabilities. The Company has evaluated the impact of the adoption of SFAS 157 and does not expect a material effect on results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of SFAS No. 115 (“SFAS 159”). SFAS 159 permits the Company to measure certain financial instruments, assets and liabilities at fair value on an instrument-by-instrument basis under a fair value option. The standard is effective for the Company as of April 1, 2008. The Company has evaluated the impact of the adoption of SFAS 159 and does not expect to make use of the fair value option.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R changes the method of accounting for business acquisitions at the acquisition date and in subsequent periods. This standard is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is in the process of evaluating the impact of the adoption of SFAS 141R. The following changes in practice will be required for acquisitions completed under SFAS 141R: (i) transaction costs will be expensed, resulting in increases to selling, general and administrative expenses; (ii) contingent consideration will be recognized at the acquisition date, resulting in increases to goodwill and accrued liabilities; and (iii) the fair value of contingent consideration will be re-measured quarterly, resulting in increased volatility in earnings.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests. This standard is effective for fiscal years beginning on or after December 15, 2008. The Company is in the process of evaluating the impact of the adoption of SFAS 160. The following change in practice will be required under SFAS 160: non-controlling interest will be presented within shareholders’ equity rather than the “mezzanine” section of the balance sheet.
The Company agreed to sell its Integrated Security Services segment on April 14, 2008 for gross proceeds of $187,500, subject to working capital adjustments (see note 4). The closing of the sale is conditional upon receipt of regulatory approvals.
