EX-99.1 2 ex991.htm THIRD QUARTER REPORT Third Quarter Report
EXHIBIT 99.1






FIRSTSERVICE CORPORATION






INTERIM FINANCIAL STATEMENTS







Third Quarter
December 31, 2006
 
 
 
- 4 -

FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands of US Dollars, except per share amounts) - in accordance with generally accepted accounting principles in the United States
 
   
Three months ended
December 31
  
Nine months ended
December 31
  
   
2006
  
2005
  
2006
  
2005
  
                   
Revenues
  
$
374,757
  
$
296,651
  
$
1,038,942
  
$
820,187
  
                           
Cost of revenues
    
247,044
    
193,580
    
669,275
    
522,099
  
Selling, general and administrative expenses
    
100,897
    
82,408
    
273,515
    
219,403
  
Depreciation
    
4,156
    
3,035
    
11,707
    
8,914
  
Amortization of intangibles other than brokerage backlog
    
2,436
    
986
    
4,847
    
2,638
  
Amortization of brokerage backlog
    
2,720
    
3,712
    
6,870
    
4,870
  
Operating earnings
    
17,504
    
12,930
    
72,728
    
62,263
  
Interest expense, net
    
2,395
    
2,774
    
7,702
    
8,766
  
Other income, net (note 6)
    
(2,546
)
  
(2,542
)
  
(4,929
)
  
(3,729
)
Earnings before income taxes and minority interest
    
17,655
    
12,698
    
69,955
    
57,226
  
Income taxes
    
5,254
    
4,835
    
22,962
    
19,223
  
Earnings before minority interest
    
12,401
    
7,863
    
46,993
    
38,003
  
Minority interest share of earnings
    
4,644
    
2,492
    
13,130
    
10,440
  
Net earnings from continuing operations
    
7,757
    
5,371
    
33,863
    
27,563
  
Net earnings from discontinued operations, net of income tax  (note 4)
    
-
    
2,782
    
-
    
5,502
  
Net earnings before cumulative effect of change in accounting principle
    
7,757
    
8,153
    
33,863
    
33,065
  
Cumulative effect of change in accounting principle, net of income tax (note 11)
    
-
    
-
    
(1,353
)
  
-
  
Net earnings
  
$
7,757
  
$
8,153
  
$
32,510
  
$
33,065
  
                           
Net earnings (loss) per share (note 10)
                          
Basic
                          
    Continuing operations
  
$
0.26
  
$
0.18
  
$
1.14
  
$
0.91
  
    Discontinued operations
    
-
    
0.09
    
-
    
0.18
  
    Cumulative effect of change in accounting principle
    
-
    
-
    
(0.05
)
  
-
  
   
$
0.26
  
$
0.27
  
$
1.09
  
$
1.09
  
                           
Diluted
                          
    Continuing operations
  
$
0.25
  
$
0.16
  
$
1.06
  
$
0.86
  
    Discontinued operations
    
-
    
0.09
    
-
    
0.18
  
    Cumulative effect of change in accounting principle
    
-
    
-
    
(0.04
)
  
-
  
   
$
0.25
  
$
0.25
  
$
1.02
  
$
1.04
  
 
 
The accompanying notes are an integral part of these financial statements.


- 5 -


FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of US Dollars) - in accordance with generally accepted accounting principles in the United States
 
   
December 31,
2006
  
March 31,
2006
  
   
(unaudited)
      
Assets
              
Current assets
              
Cash and cash equivalents
  
$
137,281
  
$
167,938
  
Restricted cash
    
14,797
    
-
  
Accounts receivable, net of allowance of $9,564 (March 31, 2006 - $7,482)
    
170,862
    
128,276
  
Mortgage loans receivable
    
10,561
    
6,874
  
Income taxes recoverable
    
5,395
    
6,665
  
Inventories
    
29,375
    
27,267
  
Prepaids and other assets
    
16,975
    
12,858
  
Deferred income taxes
    
5,190
    
5,531
  
     
390,436
    
355,409
  
               
Other receivables
    
7,337
    
8,311
  
Fixed assets
    
59,690
    
48,733
  
Other assets
    
35,071
    
26,908
  
Deferred income taxes
    
6,950
    
4,381
  
Intangible assets
    
91,304
    
70,775
  
Goodwill
    
246,767
    
196,487
  
     
447,119
    
355,595
  
   
$
837,555
  
$
711,004
  
               
Liabilities and shareholders’ equity
              
Current liabilities
              
Accounts payable
  
$
55,999
  
$
41,790
  
Accrued liabilities
    
176,800
    
108,085
  
Income taxes payable
    
6,020
    
5,726
  
Unearned revenues
    
19,742
    
5,349
  
Long-term debt - current (note 8)
    
20,756
    
18,646
  
Deferred income taxes
    
4,755
    
5,112
  
     
284,072
    
184,708
  
               
Long-term debt - non-current (note 8)
    
215,886
    
230,040
  
Deferred income taxes
    
35,297
    
30,041
  
Minority interest
    
42,974
    
28,463
  
     
294,157
    
288,544
  
               
Shareholders’ equity
              
Capital stock
    
75,419
    
75,687
  
Contributed surplus
    
5,760
    
2,163
  
Receivables pursuant to share purchase plan
    
(1,635
)
  
(1,635
)
Retained earnings
    
179,076
    
160,392
  
Cumulative other comprehensive earnings
    
706
    
1,145
  
     
259,326
    
237,752
  
   
$
837,555
  
$
711,004
  
               
 
The accompanying notes are an integral part of these financial statements.


- 6 -

FIRSTSERVICE CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(in thousands of US Dollars, except share information) - in accordance with generally accepted accounting principles in the United States


   
Issued and outstanding
shares
  
Capital stock
  
Contributed surplus
  
Receivables pursuant to share purchase plan
  
Retained
earnings
  
Cumulative other comprehensive earnings
  
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
    
-
    
-
    
-
    
-
    
33,065
    
-
    
33,065
  
    Foreign currency translation adjustments
    
-
    
-
    
-
    
-
    
-
    
918
    
918
  
Comprehensive earnings
                                        
33,983
  
                                             
Subordinate Voting Shares:
                                            
    Stock option expense
    
-
    
-
    
905
    
-
    
-
    
-
    
905
  
    Stock options exercised
    
176,900
    
1,294
    
-
    
-
    
-
    
-
    
1,294
  
    Purchase for cancellation
    
(472,700
)
  
(1,278
)
  
-
    
-
    
(9,914
)
  
-
    
(11,192
)
Balance, December 31, 2005
    
29,896,988
  
$
73,558
  
$
1,710
  
$
(2,148
)
$
126,162
  
$
11,579
  
$
210,861
  
 
                               
Balance, March 31, 2006
    
30,055,788
  
$
75,687
  
$
2,163
  
$
(1,635
)
$
160,392
  
$
1,145
  
$
237,752
  
                                             
Comprehensive earnings:
                                            
    Net earnings
    
-
    
-
    
-
    
-
    
32,510
    
-
    
32,510
  
    Foreign currency translation adjustments
    
-
    
-
    
-
    
-
    
-
    
859
    
859
  
    Unrealized loss on available-for-sale equity securities, net of tax
    
-
    
-
    
-
    
-
    
-
    
(1,298
)
  
(1,298
)
Comprehensive earnings
                                        
32,071
  
Subsidiaries’ equity  transactions
    
-
    
-
    
2,343
    
-
    
-
    
-
    
2,343
  
Subordinate Voting Shares:
                                            
    Stock option expense
    
-
    
-
    
1,254
    
-
    
-
    
-
    
1,254
  
    Stock options exercised
    
165,445
    
1,696
    
-
    
-
    
-
    
-
    
1,696
  
    Purchased for cancellation
    
(659,200
)
  
(1,964
)
  
-
    
-
    
(13,826
)
  
-
    
(15,790
)
Balance, December 31, 2006
    
29,562,033
 
$
75,419
  
$
5,760
  
$
(1,635
)
$
179,076
  
$
706
  
$
259,326
  

The accompanying notes are an integral part of these financial statements.
 
 
- 7 -

FIRSTSERVICE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of US Dollars) - in accordance with generally accepted accounting principles in the United States
 

   
Three months ended
December 31
  
Nine months ended
December 31
  
   
2006
  
2005
  
2006
  
2005
  
                   
Cash provided by (used in)
                          
                           
Operating activities
                          
Net earnings from continuing operations
  
$
7,757
  
$
5,371
  
$
33,863
  
$
27,563
  
Items not affecting cash:
                          
    Depreciation and amortization
    
9,311
    
7,733
    
23,423
    
16,422
  
    Deferred income taxes
    
(607
)
  
(1,101
)
  
(3,941
)
  
(2,887
)
    Minority interest share of earnings
    
4,644
    
2,492
    
13,130
    
10,440
  
    Other
    
(849
)
  
(807
)
  
134
    
(801
)
Changes in non-cash working capital:
                          
    Accounts receivable
    
(11,443
)
  
(4,384
)
  
(33,856
)
  
(18,243
)
    Mortgage loans receivable
    
6,127
    
(7,436
)
  
(3,687
)
  
(7,436
)
    Inventories
    
5,641
    
(457
)
  
(1,167
)
  
(3,059
)
    Prepaids and other assets
    
(1,585
)
  
(9,373
)
  
(670
)
  
(10,610
)
    Payables and accruals
    
36,843
    
43,874
    
52,275
    
57,131
  
    Unearned revenues
    
(670
)
  
(913
)
  
152
    
(561
)
Discontinued operations
    
-
    
1,939
    
-
    
2,742
  
Net cash provided by operating activities
    
55,169
    
36,938
    
79,656
    
70,701
  
                           
Investing activities
Acquisitions of businesses, net of cash acquired (note 3)
    
(24,076
)
  
(9,738
)
  
(62,773
)
  
(14,015
)
Purchases of minority shareholders’ interests, net (note 5)
    
123
    
(10,428
)
  
(2,166
)
  
(11,612
)
Purchases of fixed assets
    
(4,716
)
  
(4,734
)
  
(15,469
)
  
(14,807
)
(Increases) decreases in other assets
    
3,590
    
(694
)
  
(887
)
  
(1,860
)
Decreases (increases) in other receivables
    
190
    
(1,790
)
  
1,666
    
(2,480
)
Proceeds on sale of equity securities
    
1,635
    
-
    
3,286
    
-
  
Disposals of businesses
    
-
    
2,326
    
-
    
2,326
  
Discontinued operations
    
-
    
(858
)
  
-
    
(5,774
)
Net cash used in investing activities
    
(23,254
)
  
(25,916
)
  
(76,343
)
  
(48,222
)
                           
Financing activities
                          
Increase (decrease) in long-term debt, net
    
(353
)
  
20,625
    
(15,318
)
  
48,165
  
Repurchases of Subordinate Voting Shares, net
    
(7,728
)
  
(12,271
)
  
(14,094
)
  
(11,601
)
Financing fees paid
    
-
    
(53
)
  
-
    
(1,207
)
Dividends paid to minority shareholders of subsidiaries
    
(1,698
)
  
(78
)
  
(3,034
)
  
(944
)
Discontinued operations
    
-
    
(18,595
)
  
-
    
(17,511
)
Net cash (used in) provided by financing activities
    
(9,779
)
  
(10,372
)
  
(32,446
)
  
16,902
  
Effect of exchange rate changes on cash
    
(1,799
)
  
(3,453
)
  
(1,524
)
  
(5
)
                           
Increase (decrease) in cash and cash equivalents
    
20,337
    
(2,803
)
  
(30,657
)
  
39,376
  
                           
Cash and cash equivalents, beginning of period
    
116,944
    
79,637
    
167,938
    
37,458
  
                           
Cash and cash equivalents, end of period
  
$
137,281
  
$
76,834
  
$
137,281
  
$
76,834
  
                     
 
The accompanying notes are an integral part of these financial statements.
 
 
- 8 -

FIRSTSERVICE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)
(in thousands of US Dollars, except per share amounts)


1.
DESCRIPTION OF THE BUSINESS - FirstService Corporation (the “Company”) is a provider of property services to commercial, residential and institutional customers in the United States, Canada and several other countries. The Company’s operations are conducted through four segments: Commercial Real Estate Services, Residential Property Management, Property Improvement Services and Integrated Security Services. The Company completed the disposal of its Business Services segment in March 2006 (see note 4).

2.
SUMMARY OF PRESENTATION - These condensed consolidated financial statements have been prepared by the Company in accordance with the disclosure requirements for the presentation of interim financial information pursuant to applicable Canadian securities law. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted in accordance with such disclosure requirements, although the Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2006.

These interim financial statements follow the same accounting policies as the most recent annual financial statements, except for (i) Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share Based Payment (“SFAS 123R”), which was adopted as of April 1, 2006 (see note 11) and (ii) as a result of a recent acquisition in the Residential Property Management segment, recognition of restricted cash subject to statutory limitations with respect to use. In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as at December 31, 2006 and the results of operations and its cash flows for the three and nine month periods ended December 31, 2006. All such adjustments are of a normal recurring nature. The results of operations for the nine month period ended December 31, 2006 are not necessarily indicative of the results to be expected for the year ending March 31, 2007.

3.
ACQUISITIONS - During the nine month period, the Company made three acquisitions in Commercial Real Estate Services, three acquisitions in property improvement services and six acquisitions in Residential Property Management for aggregate cash consideration of $61,309 which was allocated as follows: intangible assets $31,479; net tangible assets $5,029; minority interest $(4,806) and goodwill $29,607. The purchase price allocations are preliminary and are expected to be finalized within one year of the respective acquisition dates as assessments of the fair values of intangible assets acquired are completed. In the prior year period, acquisitions were made for cash consideration of $10,616.

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 issued at the expiration of the contingency period. As at December 31, 2006, there was contingent consideration outstanding of up to $14,700 ($8,600 as at March 31, 2006). The contingencies will expire during the period extending to January 2009. In certain circumstances, vendors are entitled to receive interest on contingent consideration issued to them, which interest is calculated from the acquisition date to the payment date at interest rates ranging from 5% to 7%. The contingent consideration will be recorded when the contingencies are resolved and the consideration is issued or becomes issuable, at which time the Company will record the fair value of the consideration issued or issuable, including interest, as additional costs of the acquired businesses. There was $1,464 of contingent consideration issued during the nine months ended December 31, 2006 (2005 - $3,399) which was allocated to goodwill.
The majority of the goodwill recognized during the nine months ended December 31, 2006 is not expected to be deductible for income tax purposes.
 
 
- 9 -


4.
DISPOSITION - On March 17, 2006, the Company sold its 88.3% interest in Resolve Corporation, its Business Services segment, to a subsidiary of Resolve Business Outsourcing Income Fund.

The disposed business is reported as discontinued operations. The operating results of the discontinued operations are as follows:

Operating results
    
Three months ended December 31, 2005
    
Nine months ended December 31, 2005
  
               
Revenues
  
$
45,351
  
$
125,883
  
Earnings from discontinued operation before income tax
    
4,553
    
8,916
  
Provision for income tax
    
1,771
    
3,414
  
Net earnings from discontinued operations
  
$
2,782
  
$
5,502
  
               
Net earnings per share from discontinued operations:
              
    Basic
  
$
0.09
  
$
0.18
  
    Diluted
  
$
0.09
  
$
0.18
  


5.
PURCHASES OF MINORITY SHAREHOLDERS’ INTERESTS - During the nine months ended December 31, 2006, the Company completed purchases of shares for cash consideration of $5,055 and note consideration of $258 (nine months ended December 31, 2005 - cash consideration of $11,612). The purchase prices for the 2006 transactions were allocated as follows: intangible assets $1,050; minority interest $257; net tangible assets ($434) and goodwill $4,182. The purchase price allocations are preliminary and are expected to be finalized by March 31, 2007 as assessments of the fair values of intangible assets acquired are completed. Also during the nine month period ended December 31, 2006, the Company sold shares in subsidiaries for cash proceeds of $2,889, which was allocated as follows: dilution gain $1,327; minority interest $414; and contributed surplus $1,148.

6.
OTHER INCOME - Other income is comprised of the following:

   
Three months ended
December 31
  
Nine months ended
December 31
  
   
2006
  
2005
  
2006
  
2005
  
                   
Net gain on sale of equity securities
  
$
1,915
  
$
2,012
  
$
874
  
$
2,012
  
Earnings from equity investments
    
820
    
732
    
2,917
    
1,544
  
Dilution gain on sale of subsidiary shares
    
-
    
-
    
1,327
    
115
  
(Loss) gain on financial instruments
    
(189
)
  
(202
)
  
(189
)
  
58
  
   
$
2,546
  
$
2,542
  
$
4,929
  
$
3,729
  

7.
AVAILABLE-FOR-SALE SECURITIES - Included under the balance sheet caption “other assets” is an available-for-sale investment in Resolve Business Outsourcing Income Fund with a fair value of $17,261 as at December 31, 2006 (March 31, 2006 - $18,943). The cost of this investment is $20,421.

8.
LONG-TERM DEBT - The Company has an amended and restated credit agreement with a syndicate of banks to provide a $110,000 committed senior revolving credit facility with a three year term ending April 1, 2008. The Revolving credit facility bears interest at 1.00% to 2.25% over floating reference rates, depending on certain leverage ratios.

 
- 10 -
 
The revolving credit facility and the Company’s three outstanding issues of Senior Notes rank equally in terms of seniority. The Company has granted the lenders and Note-holders various security including the following: an interest in all of the assets of the Company including the Company’s share of its subsidiaries, an assignment of material contracts and an assignment of the Company’s “call rights” with respect to shares of the subsidiaries held by minority partners.

The covenants and other limitations within the amended and restated credit agreement and the Senior Note agreements are substantially the same. The covenants require the Company to maintain certain ratios including financial leverage, fixed charge coverage, interest coverage and net worth. The Company is limited from undertaking certain mergers, acquisitions and dispositions without prior approval.

9.
FINANCIAL INSTRUMENTS - As at December 31, 2006, the Company had interest rate swaps to convert fixed-rate mortgage loans to floating rates in its mortgage origination and placement operations. The notional amount of these swaps at December 31, 2006 was $56,700. The swaps are being accounted for on a mark-to-market basis, with swap gains and losses recorded in the statement of earnings. As of December 31, 2006, the fair value of these swaps was a loss of $189.

10.
EARNINGS PER SHARE - The following table reconciles the numerators used to calculate diluted earnings per share:
 
   
Three months ended
December 31
  
Nine months ended
December 31
  
   
2006
  
2005
  
2006
  
2005
  
                   
Net earnings from continuing operations
  
$
7,757
  
$
5,371
  
$
33,863
  
$
27,563
  
Dilution of net earnings resulting from  assumed exercise of stock options in subsidiaries
    
(247
)
  
(283
)
  
(1,549
)
  
(984
)
Net earnings from continuing operations for diluted earnings per share calculation
    purposes
  
$
7,510
  
$
5,088
  
$
32,314
  
$
26,579
  
                           
Net earnings
  
$
7,757
  
$
8,153
  
$
32,510
  
$
33,065
  
Dilution of net earnings resulting from assumed exercise of stock options in subsidiaries
    
(247
)
  
(283
)
  
(1,549
)
  
(984
)
Net earnings for diluted earnings per share calculation purposes
  
$
7,510
  
$
7,870
  
$
30,961
  
$
32,081
  

The following table reconciles the denominators used to calculate earnings per share:

(in thousands)
  
Three months ended
December 31
  
Nine months ended
December 31
  
   
2006
  
2005
  
2006
  
2005
  
                   
Basic shares
    
29,844
    
30,185
    
29,899
    
30,215
  
Assumed exercise of Company stock options
    
393
    
730
    
439
    
736
  
Diluted shares
    
30,237
    
30,915
    
30,338
    
30,951
  


11.
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 SFAS No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148.

On April 1, 2006, the Company adopted 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 classified as liability-classed
 
 
- 11 -
 
awards with the fair value of the option, as determined using generally accepted stock option valuation methods, recorded as liabilities. Also upon the adoption of SFAS 123R, the Company changed its method of measuring and recognizing compensation expense on share-based awards from recognizing forfeitures as incurred to estimating forfeitures at the date of grant. The aggregate cumulative effect of change in accounting principle, net of income taxes of nil, was $1,353.

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, expires five years from the date granted and allows for the purchase of one Subordinate Voting Share. All Subordinate Voting Shares issued are new shares. As at December 31, 2006, there were 795,000 options available for future grants (March 31, 2006 - nil).

The Company’s stock option plan is equity-classed. There were 5,000 stock options granted during the nine months ended December 31, 2006 (2005 - 50,000). Stock option activity for the nine months ended December 31, 2006 was as follows:

   
Number of options
  
Weighted average exercise price
  
Weighted average
 remaining
contractual life
 (years)
  
Aggregate
intrinsic value
  
Shares issuable under options - Beginning of period
    
1,716,350
  
$
13.74
              
Granted
    
5,000
    
23.88
              
Exercised
    
(165,445
)
  
10.25
              
Forfeited
    
-
    
-
              
Expired
    
-
    
-
              
Shares issuable under options - End of period
    
1,555,905
  
$
14.50
    
2.93
  
$
13,384
  
Options exercisable - End of period
    
790,530
  
$
11.83
    
1.98
  
$
8,907
  
 
The amount of compensation expense recorded in the statement of earnings for the three months ended December 31, 2006 was $396 (2005 - $343) and for the nine months ended December 31, 2006 was $1,254 (2005 - $905). As of December 31, 2006, there was $1,891 of unrecognized compensation cost related to non-vested awards which is expected to be recognized over the next 3.50 years. During the nine month period ended December 31, 2006, the fair value of options vested was $245 (2005 - $178).
 
Subsidiary stock option plans
The Company has stock option plans at certain of its subsidiaries. The related stock option compensation expense recorded in the statement of earnings during the three months ended December 31, 2006 was $136 (2005 - $133) and for the nine month period ended December 31, 2006 was $405 (2005 - $398). The impact of potential dilution from these plans is reflected in the Company’s diluted earnings per share (see note 10).

12.
CONTINGENCIES - 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 set aside, will not have a material impact on the Company’s financial condition or the results of operations.

13.
SEGMENTED INFORMATION - The Company has four reportable operating segments. The segments are grouped with reference to the nature of services provided and the types of clients that use those services. The Company assesses each segment’s performance based on operating earnings. Commercial Real Estate Services provides brokerage, property management, mortgage and advisory services to clients in North America, Australia and several other countries. Residential Property Management provides property management, maintenance, landscaping and other ancillary
 
 
- 12 -
 

 
 services to residential community associations in the United States. Integrated Security Services provides security systems installation, maintenance, monitoring and security officers to primarily commercial customers in Canada and the United States. 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.
 
OPERATING SEGMENTS
 
   
Commercial
 Real Estate
Services
  
Residential
Property
Management
  
Property
Improvement
 Services
  
Integrated
Security
 Services
  
Corporate
  
Consolidated
  
Three months ended December 31
                                      
                                       
2006
                                      
    Revenues
  
$
189,972
  
$
101,726
  
$
35,373
  
$
47,610
  
$
76
  
$
374,757
  
    Operating earnings
    
8,721
    
6,213
    
2,523
    
3,544
    
(3,497
)
  
17,504
  
                                       
2005
                                      
    Revenues
  
$
141,241
  
$
82,751
  
$
32,454
  
$
40,091
  
$
114
  
$
296,651
  
    Operating earnings
    
6,921
    
5,879
    
2,082
    
2,076
    
(4,028
)
  
12,930
  
 

 
Nine months ended December 31
                                      
                                       
2006
                                      
    Revenues
  
$
470,260
  
$
316,075
  
$
121,066
  
$
131,320
  
$
221
  
$
1,038,942
  
    Operating earnings
    
25,443
    
26,320
    
24,984
    
6,383
    
(10,402
)
  
72,728
  
                                       
2005
                                      
    Revenues
  
$
344,493
  
$
258,791
  
$
108,210
  
$
108,465
  
$
228
  
$
820,187
  
    Operating earnings
    
23,408
    
21,271
    
22,682
    
4,254
    
(9,352
)
  
62,263
  
 
GEOGRAPHIC INFORMATION
 
   
United States
  
Canada
  
Other
  
Consolidated
  
                   
Three months ended December 31
                          
                           
2006
                          
Revenues
  
$
219,474
  
$
78,378
  
$
76,905
  
$
374,757
  
Total long-lived assets
    
276,511
    
79,813
    
41,437
    
397,761
  
                           
2005
                          
Revenues
  
$
193,354
  
$
55,333
  
$
47,964
  
$
296,651
  
   
282,941
    
82,436
    
21,623
    
387,000
  
 
 
Nine months ended December 31
                          
                           
2006
                          
Revenues
  
$
657,864
  
$
214,355
  
$
166,723
  
$
1,038,942
  
                           
2005
                          
Revenues
  
$
517,749
  
$
177,979
  
$
124,459
  
$
820,187
  

 
- 13 -


14.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes as well as transitional requirements upon adoption of FIN 48. The provisions of FIN 48 are effective for the Company’s fiscal year commencing on April 1, 2007. The Company is currently evaluating the impact of the adoption of FIN 48 on its financial position and results of operations.

In September 2006, the Securities and Exchange Commission (“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 approach or a balance sheet-based approach.

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 an earnings-based approach and a balance sheet-based approach. The Company will initially adopt the provisions of SAB 108 in connection with the annual financial statements for the year ending March 31, 2007. The Company is currently evaluating the impact of the adoption of SAB 108 on its financial position and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards 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. The Company is currently evaluating the impact of the adoption of SFAS 157 on its financial position and results of operations.

15.
SUBSEQUENT EVENT - On January 22, 2007, the Company announced two acquisitions to be included in its Commercial Real Estate Services segment. The cash purchase consideration was approximately $10,800.
 
 
- 14 -


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in US Dollars)
February 2, 2007


Consolidated review

Operating results for the three and nine month periods ended December 31, 2006, relative to the same period a year ago were up significantly, with higher revenues, operating earnings and net earnings from continuing operations generated through a combination of internal and acquired growth.

During the nine months ended December 31, 2006 we completed twelve acquisitions. The most significant acquisitions were in the Commercial Real Estate Services segment, where we added three businesses operating in Australia, Chicago, and on the US west coast. The remaining acquisitions were completed in the Residential Property Management and Property Improvement Services segments. The aggregate consideration for these acquisitions was $61.3 million.

On January 22, 2007, we announced the acquisitions of two Commercial Real Estate Services businesses. Cash consideration for these acquisitions was approximately $10.8 million.

On January 30, 2007, we updated our financial outlook for fiscal 2007 to reflect the operating results achieved in the first nine months of the fiscal year, as well as the recently announced acquisitions in our Commercial Real Estate Services operations. The updated outlook is for revenues for $1.275 to $1.325 billion, EBITDA (see “Reconciliation of non-GAAP measures” below) of $111.0 to $117.0 million and adjusted diluted earnings per share from continuing operations (see “Reconciliation of non-GAAP measures” below) of $1.27 to $1.32. The adjustment relates to amortization of short-lived brokerage backlog intangible assets acquired upon recent Commercial Real Estate Services acquisitions, and represents approximately $0.15 per diluted share. The previous outlook was issued on October 31, 2006 with the following ranges: revenues of $1.225 to $1.3 billion, EBITDA of $107.5 to $115.5 million and adjusted diluted earnings per share from continuing operations of $1.23 to $1.31. We also presented our preliminary outlook for the fiscal year ending March 31, 2008 with revenues of $1.45 to $1.55 billion, EBITDA of $126 to $136 million and adjusted diluted earnings per share from continuing operations of $1.40 to $1.50.

Results of operations - three months ended December 31, 2006 and 2005

Revenues for our third quarter of fiscal 2007 were $374.8 million, 26% higher than the prior year quarter. Internal growth was 12%, while acquisitions and changes in foreign exchange rates contributed 13% and 1%, respectively. Our Commercial Real Estate Services unit accounted for most of the acquisition revenue growth. All four operating segments contributed to internal growth.

Third quarter EBITDA was $26.8 million versus $20.7 million reported in the prior year quarter. Our EBITDA margin was 7.2% of revenues versus 7.0% of revenues in the prior year quarter, while our operating earnings margin was 4.7% versus 4.4% in the prior year quarter. The overall increase in margins was attributable to margin improvements in Integrated Security Services and Property Improvement Services. Operating earnings for the quarter were $17.5 million, up from $12.9 million in the prior year period. Adjusted for the impact of backlog amortization, operating earnings were $20.2 million and $16.6 million, respectively. The increase in operating earnings, aside from the effect of backlog amortization, was primarily driven by Commercial Real Estate Services and Integrated Security Services.

Net interest expense was $2.4 million versus $2.8 million recorded in the prior year quarter. The average interest rate on debt during the quarter was 7.1%, approximately 110 basis points higher than the prior year’s quarter. The increase in rate occurred upon the cancellation of floating-rate interest rate swaps in December 2005 as we elected to fix the rate of interest on substantially all of our outstanding debt. Net indebtedness at the end of the quarter was $72.6 million lower than one year ago as a result of proceeds received by the Company on the Resolve sale offset by acquisition spending during the past twelve months.
 
 
- 15 -
 
The consolidated income tax rate was approximately 30% of earnings before income taxes and minority interest, down from the 38% rate in the prior year’s quarter. The prior year’s rate was negatively affected by a decline in the effectiveness of the Company’s cross-border tax structure. The current year’s rate was positively affected by strong earnings in lower-tax jurisdictions outside of North America. For the full fiscal year, we expect our tax rate to approximate 34%.

Net earnings from continuing operations for the quarter were $7.8 million, up 44% versus the prior year quarter. Adjusting for the impact of backlog amortization, net earnings from continuing operations were $9.3 million, up 24%. The increase was primarily attributable to acquisitions in the Commercial Real Estate Services segment and strong profitability in the Integrated Security Services segment.

Earnings per share (“EPS”) and diluted EPS were impacted by higher net earnings, dilution from stock options granted to employees of subsidiaries, particularly Commercial Real Estate Services, and a reduction in the number of FirstService shares outstanding. The numerator of the diluted EPS calculation is reduced for the dilutive effect of stock options granted to employees of subsidiaries. As the fair value of subsidiary shares increases, the dilution increases. The weighted average number of FirstService shares outstanding declined 1.1% to 29.8 million as a result of share repurchases completed during the past twelve months that exceeded the number of shares issued upon stock option exercises. Diluted FirstService shares outstanding decreased 2.2% to 30.2 million as a result of a reduction in the number of stock options outstanding due to exercises and reduced grant activity.

The Commercial Real Estate Services segment generated $190.0 million of revenues and $13.6 million of EBITDA during the third quarter. Revenue growth was 35%, comprised of acquisitions 23%, internal growth of 11% and foreign exchange of 1%. The two acquisitions completed during the first quarter together with an acquisition completed in November 2006 represented the acquired revenue growth. Internal growth was the result of strong brokerage activity in the Asia-Pacific and Central European regions. The EBITDA margin was 7.2% relative to 8.2% during the year-ago period. Margins in the current period were impacted by the variable broker commission structure adopted for 2006 that resulted in lower commission expense in the first half of the calendar year until minimum thresholds were achieved and higher commission expense later in the calendar year.

Our Residential Property Management segment reported revenues of $101.7 million for the quarter, up 23% versus the prior year quarter. Internal growth was 13% and an additional 10% of growth came from acquisitions completed during the last twelve months, including Service America in November 2006. Internal growth was generated from property management contract wins primarily in the South Florida and New York City markets. Residential Property Management EBITDA was $8.5 million relative to $7.3 million in the prior year quarter and margins were 8.3% versus 8.8%. The decrease in margin was the result of (i) reductions in landscape maintenance productivity relative to the prior year, in which hurricane cleanup activities boosted productivity and (ii) a reduction in residential real estate resale activity, where we generate high margin ancillary revenues.

Property Improvement revenues were $35.4 million, an increase of 9% over the prior year period. Internal growth was 5%, while acquisitions accounted for 4%. Internal revenue growth was led by Certa Pro Painters, while acquisition growth was primarily attributable to the Handyman Connection franchise system acquired in July 2006. EBITDA was $4.0 million, up from $3.1 million in the prior year period, at a margin of 11.2% versus 9.5% last year. The margin improvement resulted from a change in revenue mix toward royalties, which carry a higher margin than service revenues.

The third quarter revenues of our Integrated Security Services segment were $47.6 million. Revenue growth was 19%, but after adjusting for changes in foreign exchange rates was 17%. The revenue growth was attributable to increased systems installation activity in the US and Canadian operations. Integrated Security Services EBITDA was $4.2 million versus $2.8 million reported one year ago, and margins improved to 8.9% versus 6.9% one year ago. The increase in margin was attributable to higher productivity and operating leverage.
 
 
- 16 -

 

Results of operations - nine months ended December 31, 2006 and 2005

Revenues for the nine months ended December 31, 2006 were $1.04 billion, 27% higher than the prior year period. Internal growth was 12%, while acquisitions and changes in foreign exchange rates contributed 13% and 2%, respectively. Our Commercial Real Estate Services unit accounted for most of the acquisition revenue growth. All four operating segments contributed to internal growth.

Nine month EBITDA was $96.2 million versus $78.7 million reported in the prior year period. Our EBITDA margin was 9.3% of revenues versus 9.6% of revenues in the prior year period, while our operating earnings margin was 7.0% versus 7.6% in the prior year period. The overall decline in margins was attributable to the Commercial Real Estate Services and Corporate segments, as discussed below. Operating earnings for the nine months were $72.7 million, up from $62.3 million in the prior year period. Adjusted for the impact of backlog amortization, operating earnings were $79.6 million and $67.1 million, respectively. The increase in operating earnings, aside from the effect of backlog amortization, was primarily driven by Residential Property Management.

Net interest expense was $7.7 million versus $8.8 million recorded in the prior year period. The average interest rate on debt during the nine months was 7.1%, approximately 80 basis points higher than the prior year period. The increase in rate occurred upon the cancellation of floating-rate interest rate swaps in December 2005 as we elected to fix the rate of interest on substantially all of our outstanding debt.

The consolidated income tax rate for the nine months was approximately 33% of earnings before income taxes and minority interest relative to the 34% rate in the prior year period. The tax rates of both periods were impacted by efficiencies generated from the cross-border tax structure we implemented in fiscal 2000.

Net earnings from continuing operations for the nine months were $33.9 million, up 23% versus $27.6 million in the prior year period. Adjusting for the impact of backlog amortization, net earnings from continuing operations were $37.7 million, up 24%. While all operating segments contributed to the increase, the strongest contributor was the Residential Property Management segment.

On April 1, 2006, the Company recorded a $1.4 million after-tax charge to recognize the cumulative effect of a change in accounting principle with respect to the adoption of SFAS No. 123(R), Share Based Payment (“SFAS 123R”). 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 classified as liability-classed awards with the fair value of the option, as determined using generally accepted stock option valuation methods, recorded as liabilities. Also upon the adoption of SFAS 123R, the Company changed its method of measuring and recognizing compensation expense on share-based awards from recognizing forfeitures as incurred to estimating forfeitures at the date of grant.

EPS and diluted EPS were impacted by higher net earnings, dilution from stock options granted to employees of subsidiaries, particularly Commercial Real Estate Services, and a reduction in the number of FirstService shares outstanding. The numerator of the diluted EPS calculation is reduced for the dilutive effect of stock options granted to employees of subsidiaries. As the fair value of subsidiary shares increases, the dilution increases. The weighted average number of FirstService shares outstanding declined 1.0% to 29.9 million as a result of share repurchases completed during the past twelve months that exceeded the number of shares issued upon stock option exercises. Diluted FirstService shares outstanding decreased 2.0% to 30.3 million as a result of a reduction in the number of stock options outstanding due to exercises and reduced grant activity.

The Commercial Real Estate Services segment generated $470.3 million of revenues and $37.6 million of EBITDA during the nine month period. Revenue growth was 37%, comprised of acquisitions 26%, internal growth of 10% and foreign exchange of 1%. The two acquisitions completed during the first quarter together
 
 
- 17 -
 

Our Residential Property Management segment reported revenues of $316.1 mil1ion for the period, up 22% versus the prior year period. Internal growth was 17% and an additional 5% of growth came from acquisitions completed during the last twelve months. Internal growth was generated from property management contract wins in several markets. Residential Property Management EBITDA was $31.7 million relative to $25.3 million in the prior year period and margins increased to 10.0% from 9.8%. The increase in margin was primarily the result of operating leverage.

Property Improvement revenues were $121.1 million, an increase of 12% over the prior year period. Internal growth was 8%, while acquisitions and foreign exchange accounted for 3% and 1%, respectively. Internal revenue growth was led by Certa Pro Painters, while acquisition growth was primarily attributable to the Handyman Connection franchise system acquired in July 2006. EBITDA was $28.6 million, up from $25.4 million in the prior year period, at a margin of 23.6% versus 23.5% last year.

The nine month revenues of our Integrated Security Services segment were $131.3 million. Revenue growth was 21%, but after adjusting for changes in foreign exchange rates was 17%. The majority of the revenue growth and margin expansion was attributable to increased systems installation activity in the US operations. Integrated Security Services EBITDA was $8.4 million versus $6.3 million reported one year ago, and margins were 6.4% versus 5.8% one year ago.

Corporate expenses for the nine months totaled $10.2 million, an increase of $1.0 million versus the prior year period. The increase was attributable to higher staffing levels to support compliance with securities regulations on controls over financial reporting as well as foreign exchange because most corporate operating expenses are denominated in Canadian dollars.

Seasonality and quarterly fluctuations

Certain segments of our operations are subject to seasonal variations. The demand for exterior painting (Property Improvement Services segment) and swimming pool management in the northeastern United States and Canada (Residential Property Management segment) is highest during late spring, summer and early fall and very low during winter. These operations generate most of their annual revenues and earnings between April and September and comprise approximately 9% of consolidated annual revenues.

The Commercial Real Estate Services operation generates peak brokerage revenues and earnings in the month of December followed by a low in January and February as a result of the timing of closings on commercial real estate brokerage transactions. Brokerage revenues and earnings during the balance of the year have historically been relatively even, however historical patterns are not necessarily indicative of future results. These brokerage operations comprise approximately 30% of consolidated annual revenues.

The seasonality of these service lines results in variations in quarterly revenues and operating margins. Variations can also be caused by acquisitions, which alter the consolidated service mix.
 

 
- 18 -
Summary of quarterly results (unaudited)

(in thousands of US$, except per share amounts)
  
Q1
  
Q2
  
Q3
  
Q4
  
                   
FISCAL 2007
                          
Revenues
  
$
325,504
  
$
338,681
  
$
374,757
        
Operating earnings
    
30,351
    
24,873
    
17,504
        
Net earnings
    
12,780
    
11,973
    
7,757
        
Net earnings per share:
                          
    Basic
    
0.43
    
0.40
    
0.26
        
    Diluted
    
0.39
    
0.38
    
0.25
        
                           
FISCAL 2006
                          
Revenues
  
$
251,216
  
$
272,320
  
$
296,651
  
$
247,947
  
Operating earnings
    
24,903
    
24,430
    
12,930
    
2,963
  
Net earnings from continuing operations
    
10,964
    
11,228
    
5,371
    
471
  
Net earnings per share from continuing operations:
                          
    Basic
    
0.36
    
0.37
    
0.18
    
0.02
  
    Diluted
    
0.34
    
0.35
    
0.17
    
0.01
  
Net earnings from discontinued operations
    
156
    
2,564
    
2,782
    
35,961
  
Net earnings
    
11,120
    
13,792
    
8,153
    
36,432
  
Net earnings per share:
                          
    Basic
    
0.37
    
0.46
    
0.27
    
1.21
  
    Diluted
    
0.35
    
0.44
    
0.26
    
1.18
  
                           
FISCAL 2005
                          
Revenues
                    
$
200,110
  
Operating loss
                      
(2,838
)
Net loss from continuing operations
                      
(2,874
)
Net loss per share from continuing operations
                          
    Basic
                      
(0.10
)
    Diluted
                      
(0.11
)
Net earnings from discontinued operations
                      
2,219
  
Net loss
                      
(655
)
Net loss per share:
                          
    Basic
                      
(0.02
)
    Diluted
                      
(0.04
)
                           
OTHER DATA
                          
EBITDA - Fiscal 2007
  
$
37,267
  
$
32,069
  
$
26,816
        
EBITDA - Fiscal 2006
    
29,343
    
28,679
    
20,663
  
$
10,119
  
EBITDA - Fiscal 2005
                      
5,337
  


Reconciliation of non-GAAP measures

We define EBITDA as net earnings before extraordinary items, discontinued operations, minority interest share of earnings, income taxes, interest, depreciation and amortization. We use EBITDA to evaluate operating performance and as a measure for debt covenants with our lenders. EBITDA is an integral part of our planning and reporting systems. We use multiples of current and projected EBITDA in conjunction with discounted cash flow models to determine our overall enterprise valuation and to evaluate acquisition targets. We believe EBITDA is a reasonable measure of operating performance because of the low capital intensity of our service operations. We also believe EBITDA is a financial metric used by many investors to compare companies, especially in the services industry, on the basis of operating results and the ability to incur and service debt. EBITDA is not a recognized measure of financial performance generally accepted accounting principles (“GAAP”) in the United States, and should not be considered as a substitute for operating earnings, net earnings from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. Our method of calculating EBITDA may differ from other issuers and accordingly, EBITDA may not be comparable to measures used by other issuers. A reconciliation of EBITDA to net earnings from continuing operations appears below.
 
 
- 19 -


(in thousands of US$)
  
Three months ended
December 31
  
Nine months ended
December 31
  
   
2006
  
2005
  
2006
  
2005
  
                   
EBITDA
  
$
26,816
  
$
20,663
  
$
96,152
  
$
78,685
  
Depreciation and amortization
    
9,312
    
7,733
    
23,424
    
16,422
  
Operating earnings
    
17,504
    
12,930
    
72,728
    
62,263
  
Other income, net
    
(2,546
)
  
(2,542
)
  
(4,929
)
  
(3,729
)
Interest expense, net
    
2,395
    
2,774
    
7,702
    
8,766
  
Income taxes
    
5,254
    
4,835
    
22,962
    
19,223
  
Minority interest
    
4,644
    
2,492
    
13,130
    
10,440
  
Net earnings from continuing operations
  
$
7,757
  
$
5,371
  
$
33,863
  
$
27,563
  
 
We are presenting adjusted earnings measures to eliminate the impact of amortization of short-lived brokerage backlog intangible assets recognized upon recent Commercial Real Estate Services acquisitions. The brokerage backlog intangible asset represents the fair value of the pipeline of pending commercial real estate brokerage transactions that existed at the acquisition date. The adjusted earnings measures are not recognized measures of financial performance under GAAP and should not be considered as a substitute for operating earnings, net earnings from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. The following tables provide a reconciliation of the adjusted measures:
 
(in thousands of US$, except per share amounts)
  
Three months ended
December 31
  
Nine months ended
December 31
  
   
2006
  
2005
  
2006
  
2005
  
                   
Adjusted operating earnings
  
$
20,224
  
$
16,642
  
$
79,598
  
$
67,133
  
Amortization of brokerage backlog
    
(2,720
)
  
(3,712
)
  
(6,870
)
  
(4,870
)
Operating earnings
  
$
17,504
  
$
12,930
  
$
72,728
  
$
62,263
  
                           
Adjusted net earnings from continuing operations
  
$
9,331
  
$
7,514
  
$
37,666
  
$
30,447
  
Amortization of brokerage backlog
    
(2,720
)
  
(3,712
)
  
(6,870
)
  
(4,870
)
Deferred income taxes
    
826
    
1,411
    
2,321
    
1,828
  
Minority interest
    
320
    
158
    
746
    
158
  
Net earnings from continuing operations
  
$
7,757
  
$
5,371
  
$
33,863
  
$
27,563
  
                           
Adjusted diluted net earnings per share from continuing operations
  
$
0.30
  
$
0.23
  
$
1.19
  
$
0.95
  
Amortization of brokerage backlog, net of deferred income taxes
    
(0.05
)
  
(0.07
)
  
(0.13
)
  
(0.09
)
Diluted net earnings per share from continuing operations
  
$
0.25
  
$
0.16
  
$
1.06
  
$
0.86
  
 
Liquidity and capital resources


Net indebtedness as at December 31, 2006 was $99.4 million, versus $80.7 million at March 31, 2006. Net indebtedness is calculated as the current and non-current portion of long-term debt less cash and cash
 
 
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equivalents. The change in indebtedness resulted from spending on acquisitions and capital expenditures. We are in compliance with the covenants within our financing agreements as at December 31, 2006 and, based on our outlook for the balance of the year, we expect to remain in compliance with these covenants. We had $104.1 million of available un-drawn credit as of December 31, 2006.

For the nine months ended December 31, 2006, capital expenditures were $15.5 million. Significant purchases included $3.5 million in leasehold improvements and office furniture to refurbish and expand Commercial Real Estate Services offices. Capital expenditures for the year are expected to be approximately $24 million.

In relation to acquisitions completed during the past three years, we have outstanding contingent consideration totaling $14.7 million as at December 31, 2006 ($8.6 million as at March 31, 2006). The amount of the contingent consideration is not recorded as a liability unless the outcome of the contingency is determined to be beyond a reasonable doubt. The contingent consideration is based on achieving specified earnings levels, and is issued or issuable at the end of the contingency period. When the contingencies are resolved and additional consideration is distributable, we will record the fair value of the additional consideration as additional costs of the acquired businesses.

In those operations where managers, employees or brokers are also minority owners, the Company is party to shareholders’ agreements or similar arrangements. These agreements allow us to “call” the minority position for a predetermined formula price, which is usually equal to the multiple of trailing two-year average EBITDA underlying the purchase price paid by the Company for the original acquisition, less debt. Minority owners may also “put” their interest to the Company at the same price, with certain limitations. The total value of the minority shareholders’ interests, as calculated in accordance with shareholders’ agreements or similar arrangements, was approximately $113 million at December 31, 2006 (March 31, 2006 - $79 million). The purchase prices of the minority interests may be satisfied with any combination of cash and/or Subordinate Voting Shares and, if paid with cash, could materially increase net earnings by eliminating minority interest expense and increasing interest expense.

The following table summarizes our contractual obligations as at December 31, 2006:

Contractual obligations
  
Payments due by period
  
(in thousands of US$)
  
Total
  
Less than 1 year
  
1-3 years
  
4-5 years
  
After 5 years
  
                       
Long-term debt
  
$
231,832
  
$
19,418
  
$
33,306
  
$
28,572
  
$
150,536
  
Capital lease obligations
    
4,810
    
1,338
    
3,472
    
-
    
-
  
Operating leases
    
135,753
    
29,892
    
46,107
    
37,295
    
22,459
  
Unconditional purchase obligations
    
-
    
-
    
-
    
-
    
-
  
Other long-term obligations
    
-
    
-
    
-
    
-
    
-
  
                                 
Total contractual obligations
  
$
372,395
  
$
50,648
  
$
82,885
  
$
65,867
  
$
172,995
  

At December 31, 2006, we had commercial commitments totaling $5.9 million comprised of letters of credit outstanding due to expire within one year. We are required to make semi-annual payments of interest on our long-term debt at a weighted average interest rate of 6.5%.

Off-balance sheet arrangements
The Company does not have any material off-balance sheet arrangements other than those disclosed in notes 12, 16 and 17 to the March 31, 2006 annual audited consolidated financial statements and notes 9 and 12 to the December 31, 2006 unaudited interim consolidated financial statements.

Transactions with related parties

During the nine month period, we paid rent to entities controlled by minority shareholders of subsidiaries of the Company. The business purpose of these transactions was to rent office and warehouse space. The amount of the transactions was $0.6 million (2005 - $0.9 million), and they were completed at market rates. The ongoing operating lease commitments associated with these transactions are included in the contractual obligations table above.
 

 
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Critical accounting policies and estimates

There has been no change in our critical accounting policies and estimates from those described in our annual report dated March 31, 2006.

Recently issued accounting standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes as well as transitional requirements upon adoption of FIN 48. The provisions of FIN 48 are effective for the Company’s fiscal year commencing on April 1, 2007. The Company is currently evaluating the impact of the adoption of FIN 48 on its financial position and results of operations.

In September 2006, the Securities and Exchange Commission (“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 approach or a balance sheet-based approach.

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 an earnings-based approach and a balance sheet-based approach. The Company will initially adopt the provisions of SAB 108 in connection with the annual financial statements for the year ending March 31, 2007. The Company is currently evaluating the impact of the adoption of SAB 108 on its financial position and results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards 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. The Company is currently evaluating the impact of the adoption of SFAS 157 on its financial position and results of operations.

Financial instruments

We use financial instruments as part of our strategy to manage the risk associated with interest rates and currency exchange rates. We do not use financial instruments for trading or speculative purposes.

As at December 31, 2006, we had interest rate swaps with a notional amount of $56.7 million to convert fixed-rate mortgage loans to floating rates. These swaps were entered into to mitigate interest rate risk associated with mortgages expected to be sold within three months. The swaps are accounted for on a mark-to-market basis, with gains and losses recorded in the statement of earnings. As of December 31, 2006, the fair value of these swaps was a loss of $0.2 million (March 31, 2006 - gain of $0.1 million).

Outstanding share data

The authorized capital of the Company consists of an unlimited number of preference shares, issuable in series, an unlimited number of Subordinate Voting Shares and an unlimited number of Multiple Voting Shares. The holders of Subordinate Voting Shares are entitled to one vote in respect of each Subordinate Voting Share held at all meetings of the shareholders of the Company. The holders of Multiple Voting Shares are entitled to twenty votes in respect of each Multiple Voting Share held at all meetings of the shareholders of the Company.
 
 
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During the period from May 25, 2006 to June 7, 2006 we purchased 317,200 Subordinate Voting Shares for cancellation through the facilities of the Toronto Stock Exchange and the NASDAQ National Market at an average cost of $24.55 per share pursuant to a normal course issuer bid. The repurchases represented approximately 1.1% of the total shares outstanding prior to the repurchases and were funded from cash on hand.

During the period from December 15, 2006 to December 20, 2006 we purchased 342,000 Subordinate Voting Shares for cancellation through the facilities of the Toronto Stock Exchange and the NASDAQ National Market at an average cost of $23.39 per share pursuant to a normal course issuer bid. The repurchases represented approximately 1.1% of the total shares outstanding prior to the repurchases and were funded from cash on hand.

As of the date hereof, the Company has outstanding 28,236,339 Subordinate Voting Shares, 1,325,694 Multiple Voting Shares and no preference shares. In addition, as at the date hereof, 1,555,905 Subordinate Voting Shares are issuable upon exercise of options granted under the Company’s stock option plan.

Forward-looking statements

This interim report contains certain forward-looking statements. Such forward-looking statements involve known and unknown risks and uncertainties and include, but are not limited to, statements regarding future events and our plans, goals and objectives. Such statements are generally accompanied by words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “project”, “will” or similar words and phrases. Our actual results may differ materially from such statements. Factors that could result in such differences, among others, are:
 
 
•
Economic conditions, especially as they relate to consumer spending.
 
•
Commercial real estate property values, vacancy rates, and general conditions of financial liquidity for real estate transactions.
 
•
Extreme weather conditions impacting demand for our services or our ability to perform those services.
 
•
Political conditions, including any outbreak or escalation of terrorism or hostilities and the impact thereof on our business.
 
•
Competition in the markets served by the Company.
 
•
Labor shortages or increases in wage and benefit costs.
 
•
The effects of changes in interest rates on our cost of borrowing and demand for mortgages.
 
•
Unexpected increases in operating costs, such as insurance, workers’ compensation, health care and fuel prices.
 
•
Changes in the frequency or severity of insurance incidents relative to our historical experience.
 
•
The effects of changes in foreign currency exchange rates in relation to the US dollar.
 
•
Our ability to make acquisitions at reasonable prices and successfully integrate acquired operations.
 
•
Changes in government policies at the federal, state/provincial or local level that may adversely impact our businesses.
 

Additional information

Additional information regarding the Company, including our Annual Information Form, is available on SEDAR at www.sedar.com.
 
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