Colliers International Group Inc.

FirstService Corporation is a North American leader in the rapidly growing service sector, providing services to commercial, residential and institutional customers across four operating segments: Residential Property Management, Integrated Security Services, Consumer Services and Business Services. Each service line provides essential or near-essential services, generates a high percentage of recurring revenues, has strong cash flows, generates high returns on invested capital and can be leveraged through margin enhancement, cross-selling or consolidation. Approximately 70% of the Company's revenues are generated in the United States, with the balance in Canada. The Company has posted a track record of consistent growth in revenues and profitability since going public in 1993, leveraging off expertise developed since the predecessor was founded by Jay S. Hennick, Chairman and CEO, in 1972.

FirstService is the largest manager of private residential communities in North America, managing approximately 2% of the nation's approximately 16 million units in community associations. The residential property management industry is extremely fragmented and dominated by numerous local and regional management companies, with only a small number having the expertise and capital to provide both traditional and full-service property management. In Integrated Security Services, FirstService is one of the largest providers in North America, competing in a highly fragmented $3 billion industry growing at an annual rate of approximately 10%, where larger competitors are driving consolidation in response to customer demands for comprehensive solution providers with national service capabilities. In Consumer Services, the Company operates through a network of approximately 1,400 franchised and 23 Company-owned locations across North America and internationally, with brands including California Closets, Paul Davis Restoration, Certa ProPainters, College Pro Painters, ChemLawn Canada, Green Lawn Care and Nutri-Lawn. In Business Services, the Company provides customer support and fulfillment as well as business process outsourcing services to Fortune 1000 companies through 24 branches in the United States and Canada, competing in a diverse industry where the outsourced portion of the $200 billion CRM industry is estimated to be $25 billion and growing at about 10% per year, and outsourced fulfillment services are a $3.5 billion industry growing at 10% annually. The Company has no single customer that accounts for more than 2% of its total revenues.

FirstService generates revenue through four operating segments: Residential Property Management, Integrated Security Services, Consumer Services and Business Services. Approximately 75% of the Company's revenues are contractual in nature. Residential Property Management contracts are generally for terms of one to three years, Integrated Security Services contracts are generally one year in duration with evergreen renewal clauses, Consumer Services franchise agreements are primarily for five to ten year periods, and Business Services contracts have terms of one to five years, with some larger contracts having longer terms. The Company has historically experienced contract renewal rates of approximately 90%. The Company owns a majority interest (on average, 85% of the equity) in all of its subsidiaries, while the operating management of each non-wholly owned subsidiary owns the remaining shares, designed to maintain control by FirstService while providing significant incentives to management.

Residential Property Management generated revenues of $214.965 million ¹ for the fiscal year ended March 31, 2003, an increase of 5% over the prior year. The segment manages more than 400,000 residential units in 2,000 community associations across multiple U.S. states. The aggregate budget of the community associations managed by FirstService is approximately $800 million ², and the Company currently accesses approximately 20% ³ of the aggregate budget of its communities through the various services it offers. The segment reported EBITDA of $14.6 million ⁴, down $4.2 million or 22% relative to the prior year, primarily due to insurance cost increases and poor results in painting and restoration activities. Insurance costs were approximately $2.0 million ⁵ higher than the prior year, and the painting and restoration service line operating in South Florida, which accounted for $22.1 million ⁶ or 10% of the segment's revenues, experienced a loss for the year. Included in the current year's results is $1.0 million ⁷ of executive life insurance proceeds received upon the death of a senior management employee.

Integrated Security Services reported revenues of $107.548 million ⁸ for the fiscal year ended March 31, 2003, representing growth of 13% over the prior year, all generated internally. The segment operates ten branches, six in the United States and four in Canada, under the Intercon and Security Services and Technologies brands. EBITDA for the segment was $7.3 million ⁹, while the margin remained constant at 6.8% ¹⁰. Consumer Services revenues were $93.417 million ¹¹, up 11% relative to the prior year, and factoring in the two California Closets franchises acquired in October 2002, internal revenue growth was 8% ¹². EBITDA in Consumer Services was $16.4 million ¹³, and the margin was 17.6% ¹⁴, increasing 110 basis points relative to the prior year. Business Services revenues were $126.373 million ¹⁵, down 1% or $1.1 million relative to the prior year, and internal revenues declined 7% ¹⁶ after considering the impact of acquisitions. Business Services EBITDA was $19.8 million ¹⁷ or 15.6% ¹⁸ of revenues, down from $22.4 million or 17.6% of revenues in the prior year. The segment received proceeds of $3.2 million ¹⁹ on an executive life insurance policy and incurred costs to reorganize and streamline operations in the amount of $1.9 million ²⁰.

During the fiscal year ended March 31, 2003, the Company completed three tuck-under acquisitions in its Consumer Services unit: Nature Plus, Inc., a Montreal lawn care provider with 5,000 residential customers, was acquired for total consideration of $0.3 million ²¹; and the California Closets franchises in Chicago and Jacksonville were acquired for aggregate consideration of $1.9 million ²². Two Residential Property Management acquisitions were completed: WE Landscape Group LLC, a Phoenix commercial landscaping operation acquired in December 2002, and a controlling interest in Cooper Square Realty, Inc., a condominium management and real estate services provider operating in Manhattan, New York, with total consideration on these two transactions of $3.6 million ²³. In Business Services, DDS acquired selected assets of Metro Fulfillment, a Los Angeles fulfillment provider, and ShipXact.com, Inc., a fulfillment provider located in Atlanta, for aggregate consideration of $0.8 million ²⁴. The Company also purchased minority shareholdings from 16 shareholders during the year. Acquisition expenditures during the year totaled $16.3 million ²⁵, comprised of $6.6 million ²⁶ for initial acquisition payments, $3.3 million ²⁷ of contingent consideration payments, and $6.4 million ²⁸ related to the acquisition of minority interests of subsidiaries. The Company repurchased 32,700 ²⁹ Subordinate Voting Shares under a Normal Course Issuer Bid for $400,000 ³⁰.

Consolidated revenues for the fiscal year ended March 31, 2003 were $542.692 million ³¹, a 6% increase from the $512.689 million ³² reported for the prior year. Approximately $12.8 million ³³ of the increase resulted from tuck-under acquisitions completed during the year, resulting in internal growth of 3% ³⁴. Operating earnings decreased 12% from $45.043 million ³⁵ to $39.706 million ³⁶ in Fiscal 2003. EBITDA decreased 7%, to $53.323 million ³⁷ from $57.122 million ³⁸ in the prior year, while the EBITDA margin declined 130 basis points to 9.8% ³⁹ of revenues. Net earnings were $18.836 million ⁴⁰, an 8% increase over the prior year's $17.414 million ⁴¹, while diluted earnings per share increased 9% to $1.30 ⁴² from $1.19 ⁴³ in the prior year. Net cash provided by operating activities for Fiscal 2003 was $32.554 million ⁴⁴, up 30% over the prior year.

The Company anticipates that the Fiscal 2004 tax rate will be approximately 30.5% ⁴⁵, resulting from expected efficiencies from the cross-border tax structure. For the Integrated Security Services segment, management expects margins to be in the 7-8% ⁴⁶ range in Fiscal 2004, resulting from expected higher margins on systems installations. For the Business Services segment, Fiscal 2004 revenues are expected to be stable, with the exception of the full-year impact of the departure of a large fulfillment client, which will impact segment revenues by approximately $5 million ⁴⁷.

In the Residential Property Management segment, the Company's strategy is to continue to add communities under management while striving to earn a greater percentage of the aggregate budget by introducing additional services and products. The aggregate budget of all the community associations in the United States is estimated to be $35 billion ⁴⁸, and the market is growing at a rate of 3-4% per year as a result of the 8,000-11,000 new community associations formed each year. The growing trend from self-management to professional management, currently almost 50% of the market, is believed to at least double the effective growth rate for professional property management companies. In the Integrated Security Services segment, the growth strategy going forward will be augmented by acquisitions in key U.S. markets enabling the Company to add strong regional operators that are leaders in their markets, establish national service capabilities and leverage existing national account relationships and supplier base. The U.S. security systems integration is a $3 billion ⁴⁹ industry growing at an annual rate of approximately 10% ⁵⁰, driven by the trend toward consolidation of security functions, continued development of network and information technology, and increased public awareness of security issues.

The Company's EBITDA margin declined 130 basis points to 9.8% ⁵¹ of revenues in Fiscal 2003, with the decline resulting from weakness in the Residential Property Management and Business Services segments. Consumer Services experienced increased profitability, while Integrated Security Services' margin was stable year-over-year. The Company incurred $1.904 million ⁵² of severances and related costs in its Business Services segment as part of a plan to reduce overheads and more aggressively realize synergies within the segment, with the expected date of completion of the plan being September 2003. The Company reviewed and amended its insurance coverages in response to dramatic increases in premiums, taking on additional risk in the form of higher deductibles on many coverages, which management believes will reduce overall costs in the long term but may cause fluctuations in earnings in the short term.

Looking forward to Fiscal 2004, capital expenditures are expected to be in the $11.0 to $12.0 million ⁵³ range. Several office relocations and expansions are planned in Residential Property Management including offices in Fairfax, Virginia; Manhattan, New York; and Dade County, Florida. The Company has approximately 11,000 full-time non-unionized employees, rising to a total of 14,000 with seasonal employees in the spring and summer months.

Capital expenditures totaled $10.660 million ⁵⁴ during Fiscal 2003, comprising approximately $2.6 million ⁵⁵ in expenditures on production equipment, $3.0 million ⁵⁶ on vehicles, $4.2 million ⁵⁷ on computer equipment and software and $0.9 million ⁵⁸ for leasehold improvements. The Company has an amended and restated credit agreement that provides $140 million ⁵⁹ of committed revolving credit facility that is renewable and extendible in 364-day increments, and if not renewed, a two-year final maturity. The Company has outstanding $100 million ⁶⁰ of ten-year 8.06% Senior Secured Notes with a final maturity date of June 29, 2011, with equal annual principal repayments beginning at the end of the fourth year, resulting in a seven-year average life. As at March 31, 2003, the Company had drawn $52.026 million ⁶¹ on the Credit Facility and was in compliance with all covenants. No dividends were declared by the Registrant during the two fiscal years ended March 31, 2003 and 2002, and the Company's agreements with its lenders prohibit declaring dividends without prior approval, which approval was obtained in May 2003.

The Company faces headwinds from insurance cost increases, with insurance costs in the Residential Property Management segment being approximately $2.0 million ⁶² higher than the prior year, and little of the cost increase was passed on to clients. The painting and restoration service line operating in South Florida experienced a loss for the year due to difficult market conditions and several poorly performing projects. In the Business Services segment, a major fulfillment client departed at the end of the third quarter, impacting annual revenues negatively by approximately $1.5 million ⁶³, and client volumes in the customer support and fulfillment areas were soft throughout the year. The Company is also subject to foreign currency risk, with approximately 30% of operations conducted in foreign currencies, principally in Canadian dollars, and a 10% ($0.07 U.S.) appreciation in the value of the Canadian dollar would have the impact of increasing revenue by $16.9 million ⁶⁴ and reducing net earnings by approximately $0.1 million ⁶⁵ over a full year.

The Company's operations are subject to seasonal variations, with certain segments comprising approximately 15% of revenues being subject to seasonal variations. The demand for lawn care services, exterior painting services and swimming pool maintenance in the northern United States and Canada is highest during late spring, summer and early fall and very low during winter, resulting in these operations generating a large percentage of their annual revenues between April and September. The Company has historically generated lower earnings or net losses during its third and fourth fiscal quarters, from October to March. The Company is also subject to regulation by the states in which it operates, and in most states, laws require that property managers must be licensed, which involves certain examinations and continuing education. Federal and provincial environmental laws are applicable in all jurisdictions in which Greenspace operates, dictating which products and methods may be used and requiring employees to be properly trained and licensed in the use of pesticides and herbicides, and if such laws change, the business may be adversely affected.

The Company faces material risks from insurance cost increases, with insurance costs in the Residential Property Management segment approximately $2.0 million ⁶⁶ higher than the prior year, and little of the cost increase was passed on to clients. The painting and restoration service line operating in South Florida, which accounted for $22.1 million ⁶⁷ or 10% of the segment's revenues, experienced a loss for the year due to difficult market conditions and several poorly performing projects. In the Business Services segment, a major fulfillment client departed at the end of the third quarter, impacting annual revenues negatively by approximately $1.5 million ⁶⁸, and client volumes in the customer support and fulfillment areas were soft throughout the year. The Company is subject to foreign currency risk, with approximately 30% of operations conducted in foreign currencies, principally in Canadian dollars, and a 10% ($0.07 U.S.) appreciation in the value of the Canadian dollar would reduce net earnings by approximately $0.1 million ⁶⁹ over a full year. The Company is also subject to interest rate risk, with a 10% increase in floating reference rates increasing interest expense by approximately $0.2 million ⁷⁰ and decreasing net earnings by $140,000 ⁷¹ over a full year, and a 10% increase in the Company's total debt to EBITDA leverage ratio increasing interest expense by approximately $0.4 million ⁷² and reducing net earnings by $270,000 ⁷³ over a full year.

Management's message emphasizes a track record of consistent growth in revenues and profitability since going public in 1993, with revenues and operating earnings for Fiscal 2003 of $542.7 million ⁷⁴ and $39.7 million ⁷⁵, respectively. The Company's objective is to increase the revenues, profitability and market position of each operating unit and subsequently acquired business, while maintaining the highest level of service to customers. Key elements of the operating strategy include senior management commitment through encouraging strong operators to retain a significant equity stake in the businesses they operate, performance-based compensation programs throughout each business, obtaining significant operating efficiencies through the implementation of best practices and economies of scale, and capitalizing on the complementary nature of businesses through marketing penetration and joint marketing. The acquisition strategy entails the systematic acquisition of established, well managed, and profitable service companies operating in fragmented industries that will enhance the market position of an existing service line, provide an entry into a new geographic region or market, or introduce a new service line, and provide a return on invested capital that exceeds the weighted average cost of capital. Management remains committed to a disciplined approach to acquisitions, including rigorous adherence to strict acquisition criteria and transaction structure, and only allocates financial and human resources to existing service lines for acquisitions if the management team has the capacity to integrate the acquisition and the performance of current operations is meeting or exceeding expectations.