AlarmForce Industries Inc.
-
Date: 2016-01-21
ALARMFORCE INDUSTRIES INC.
ANNUAL INFORMATON FORM
January 21, 2016
675 Garyray Drive, Toronto Ontario Canada, M9L 1R2
Telephone: 416-445-2001 Facsimile: 416-445-8358
Email: [email protected]
TABLE OF CONTENTS
Page
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.............................. 1
1.
CORPORATE STRUCTURE ........................................................................................... 2
2.
GENERAL DEVELOPMENT OF THE BUSINESS........................................................ 3
3.
NARRATIVE DESCRIPTION OF THE BUSINESS ....................................................... 7
4.
RISK FACTORS ............................................................................................................. 15
5.
DIVIDENDS .................................................................................................................... 19
6.
CAPITAL STRUCTURE ................................................................................................ 19
7.
MARKET FOR SECURITIES ........................................................................................ 21
8.
ESCROWED SECURITIES ............................................................................................ 21
9.
DIRECTORS AND OFFICERS ...................................................................................... 21
10.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL
TRANSACTIONS ........................................................................................................... 24
11.
TRANSFER AGENT AND REGISTRAR ...................................................................... 24
12.
INTERESTS OF EXPERTS ............................................................................................ 24
13.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS ........................................ 24
14.
MATERIAL CONTRACTS ............................................................................................ 25
15.
AUDIT COMMITTEE .................................................................................................... 25
16.
ADDITIONAL INFORMATION .................................................................................... 27
-i-
-1SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements which reflect management’s current
expectations about future events and financial and operating performance of the Company.
Words such as “may”, “will”, “should”, “could”, “anticipate”, “believe,” “expect, “intend”,
“plan”, “potential”, “continue” and similar expressions have been used to identify these
forward-looking statements. Forward-looking statements contained in this document may
include estimates, plans, expectations, opinions, forecasts, projections, guidance or other
statements that are not statements of fact. These statements reflect management’s current views
with respect to future events or conditions, including prospective financial performance,
financial position, and predictions of future actions, plans or strategies. Certain material factors
and assumptions were applied in drawing our conclusions and making these forward looking
statements. These statements reflect management’s current views, beliefs and assumptions and
are subject to certain inherent risks and uncertainties. Factors that could cause actual
performance to differ materially include, but are not limited to:
ability to develop or acquire new technology;
competition in the market;
development of new products;
economic growth and fluctuations;
proper performance of security equipment;
the reliability of our payroll processing services;
the protection and privacy of personal information which we hold;
the risks associated with credit, including customer delinquencies and the collection of
outstanding account balances;
capital expenditures;
the exchange rate of the U.S. currency fluctuations;
changes in accounting policies and estimates;
changes in consumer preferences, customer demand for our security products and
services and our ability to maintain customer relationships;
disruption to manufacturing and distribution activities due to labour disruptions, bad
weather, natural disasters and other unforeseen adverse events;
human resource matters, including recruitment and retention of competent personnel;
our inability to maintain or renew existing product sourcing arrangements; and
the discontinuation by our suppliers of certain technologies or the exiting by one of our
suppliers from the electronic securities systems market.
The above (and other) factors could cause actual results, performance or achievements to be
materially different from any future results, performance or achievements that may be expressed
or implied in such forward-looking information. See “Risks Factors” below. Should one or more
of these risks or uncertainties materialize, or should the assumptions underlying projections or
forward-looking information prove incorrect, actual results may vary materially from those
described in this AIF (as defined below) as intended, planned, anticipated, believed, estimated or
expected. We do not intend and do not assume any obligation to update such forward-looking
information whether as a result of new information, plans, events or otherwise, unless required
by law.
-2All monetary amounts in this annual information form (this “AIF”) are expressed in Canadian
dollars, unless otherwise indicated. Unless otherwise indicated the information appearing in this
AIF is stated as at October 31, 2015.
1.
CORPORATE STRUCTURE
1.1
Name, address and incorporation
AlarmForce Industries Inc. (the “Company” or “AlarmForce”) was incorporated under the
Canada Business Corporations Act (the “Act”) on November 16, 1988. By articles of
amendment effective August 31, 1991, the authorized capital of the Company was decreased by
the cancellation of the authorized Class “A” special shares and the “private company”
restrictions were deleted. By articles of amendment effective July 27, 1995, the maximum
number of directors of the Company was increased.
The Company’s registered office and head office is located at 675 Garyray Drive, Toronto,
Ontario M9L 1R2.
1.2
Inter-corporate Relationships
The percentage of votes attaching to all voting securities of the material subsidiaries beneficially
owned, or controlled or directed, directly or indirectly, by the Company, as well as the
jurisdiction where the subsidiary was incorporated, continued, formed or organized, as the case
may be, is set forth below.
AlarmForce
AlarmForce NC, Inc.
(North Carolina, United
States)
100%
AlarmForce LP
(North Carolina, United
States)
99.99%
AlarmForce NC Inc. was incorporated in North Carolina under the laws of the North Carolina
Business Corporation Act on August 31, 2004 for the purposes of carrying-out corporate
business activities in the United States.
AlarmForce LP is a limited partnership formed in, and under the laws of, the State of North
Carolina on August 30, 2004 for the purposes of carrying-out sales efforts in the United States.
The Company is the limited partner and AlarmForce NC Inc. is the general partner of
AlarmForce LP with equity interests of 99.99% and 0.01%, respectively.
-3The Company’s United States (the "US") registered office is located at 227 W. Trade Street,
Suite 12000, Charlotte, North Carolina 28210.
2.
GENERAL DEVELOPMENT OF THE BUSINESS
2.1
Three Year History
2013
On January 4, 2013, the Company announced the continuance of the strategic review process that
was being overseen by a special committee (the “Special Committee”) comprised of four
independent directors of the Company. The Company continued to explore and evaluate a range
of strategic options to enhance shareholder value.
On January 17, 2013, the Company declared a cash dividend of $0.025 per common share (each,
a “Common Share”) payable to all shareholders of record at the close of business on January
31, 2013. The quarterly cash dividend was subsequently paid out on February 20, 2013.
On March 12, 2013, the Board of Directors of the Company (the “Board”) approved the
adoption of an advance notice by-law (the “By-law”), which requires advance notice to the
Company in circumstances where nominations of persons for election as a director of the
Company are made by shareholders other than pursuant to: (i) a requisition of a meeting made
pursuant to the provisions of the Act; or (ii) a shareholder proposal made pursuant to the
provisions of the Act. The Company believes that adopting the By-law is considered to be good
corporate governance as the By-law facilitates an orderly and efficient annual or special meeting
process and it ensures that all shareholders receive adequate notice of director nominations with
sufficient information with respect to all nominees. This allows the Company and its
shareholders to evaluate the proposed nominees' qualifications and suitability as directors, which
further allows shareholders to cast an informed vote for the election of directors.
On April 17, 2013, the Company declared a cash dividend of $0.025 per Common Share to all
shareholders on record at the close of business on April 30, 2013. The quarterly cash dividend
was subsequently paid out on May 20, 2013.
On June 18, 2013, the Company announced that the Toronto Stock Exchange (the “TSX”)
approved AlarmForce’s Notice of Intention to Make a Normal Course Issuer Bid (the “NCIB”)
to purchase for cancellation, from time to time, Common Shares through the facilities of the TSX
and alternative Canadian trading platforms. AlarmForce received TSX approval to purchase for
cancellation up to a maximum of 5% of AlarmForce’s issued and outstanding Common Shares,
being 612,082 Common Shares. On June 17, 2013, the total number of issued and outstanding
Common Shares was 12,241,658 Common Shares. The price which AlarmForce will pay for any
Common Shares purchased by it will be the prevailing market price of the Common Shares on
the TSX or such other exchange or marketplace, as applicable, at the time of such purchase. The
NCIB commenced on June 20, 2013 and terminated on June 19, 2014.
On July 3, 2013, the Board announced that the strategic review that had been previously
announced on August 2, 2012 had been completed. The Special Committee explored and
considered available opportunities for the Company, including a possible sale of the Company
-4and concluded that the process did not identify a transaction adequately reflecting the
Company’s value.
On July 8, 2013, the Company declared a cash dividend of $0.025 per Common Share to all
shareholders of record at the close of business on July 31, 2013. The quarterly cash dividend was
subsequently paid out on August 20, 2013.
On July 23, 2013, following the strategic review, the Board terminated the employment of Mr.
Joel Matlin as President and Chief Executive Officer of the Company and its subsidiaries. Mr.
Anthony Pizzonia, Chief Financial Officer, became the interim President and Chief Executive
Officer. Subsequently, on July 31, 2013, Mr. Joel Matlin resigned from the Board.
On August 31, 2013, AlarmForce re-acquired the franchise rights from two of its franchises in
the west coast of Canada, specifically Victoria and North Island, British Columbia. The
Company sees a growth potential in these markets and plans to expedite the growth in these
markets going forward.
On September 11, 2013, the Company announced the appointment of Mr. Tobias Behrenwaldt to
serve as an independent director of the Company. Mr. Behrenwaldt is currently a private
investor, focusing on value-oriented investments. He served as vice president of finance of Flytxt
Technology Private Ltd. and Flytxt Ltd. until 2007 and as a financial advisor until 2013. Prior to
that, he served as a manager at CompuCredit, a US based specialty finance company engaged in
the marketing and distribution of consumer credit products. Mr. Behrenwaldt is a Chartered
Financial Analyst and obtained a Masters of Business Administration from the Goizueta
Business School at Emory University in Atlanta in 2003.
On October 9, 2013, the Company declared a cash dividend of $0.025 per Common Share to all
shareholders of record at the close of business on October 31, 2013. The quarterly cash dividend
was subsequently paid out on November 20, 2013.
Mr. Richard Boxer resigned on November 29, 2013 as a director of the Company.
2014
On January 14, 2014, the Company declared a cash dividend of $0.025 per Common Share
payable to all shareholders of record at the close of business on January 31, 2014. The quarterly
cash dividend was subsequently paid out on February 20, 2014.
On March 25, 2014, the Company declared a special dividend of $0.60 per share payable on
May 20, 2014 to all shareholders of record at the close of business on April 30, 2014.
On April 14, 2014, the Board of Directors had approved an increase in the annual cash dividend
on Common Shares from $0.10 to $0.12 per share commencing the quarter ended April 30, 2014.
A quarterly dividend of $0.03 was paid on May 20, 2014 to all shareholders of record at the close
of business on April 30, 2014.
On June 25, 2014, the Company announced that the TSX approved AlarmForce’s Notice of
Intention to Make a NCIB to purchase for cancellation, from time to time, Common Shares
-5through the facilities of the TSX and alternative Canadian trading platforms. AlarmForce
received TSX approval to purchase for cancellation up to a maximum of 5% of AlarmForce’s
issued and outstanding Common Shares, being 585,212 Common Shares. On June 24, 2014, the
total number of issued and outstanding Common Shares was 11,704,258 Common Shares. The
price which AlarmForce will pay for any Common Shares purchased by it will be the prevailing
market price of the Common Shares on the TSX or such other exchange or marketplace, as
applicable, at the time of such purchase. The NCIB commenced on June 26, 2014 and will
terminate on June 25, 2015 or such earlier time as the NCIB is completed or terminated at the
option of AlarmForce. The Company had purchased 602,400 shares under its previous NCIB at a
weighted average price of $10.22 per share.
On July 18, 2014, the Company declared a cash dividend of $0.03 per Common Share payable to
all shareholders of record at the close of business on July 31, 2014. The quarterly cash dividend
was subsequently paid out on August 20, 2014.
In August 2014, the Company launched AlarmForce Connect, its latest innovation of system
interactive services. AlarmForce Connect allows the subscriber to monitor and control their
home security system in real time using a mobile device. The enhanced capabilities of this
feature include remote arming and disarming, receiving email notifications, and viewing system
history or system status. When combined with our standard system, it provides convenience and
control to stay remotely connected to any home or business. AlarmForce Connect is a module
with Wi-Fi capabilities that functions with the AlarmForce mobile app and is available on IOS,
Android and Blackberry devices.
On September 30, 2014, the Company announced the appointments of Mr. Anthony Pizzonia as
the President and Chief Executive Officer and Ms. Chetna Kapadia as Chief Financial Officer.
Mr. Pizzonia joined AlarmForce in 1992 and held various key leadership positions in the
Company. Since 1995, he served as the Chief Financial Officer and was actively involved in
running the operations of the Company. He has also been a member of the Board since February
2004. Ms. Kapadia has been with AlarmForce since 1996 and has served as the corporate
controller. Her new responsibilities included leading the Company’s financial reporting and
corporate finance operations.
On October 17, 2014, the Company declared a cash dividend of $0.03 per Common Share
payable to all shareholders of record at the close of business on October 31, 2014. The quarterly
cash dividend was subsequently paid out on November 20, 2014.
2015
On January 14, 2015, the Board of Directors declared a cash dividend of $0.03 per Common
Share payable to all shareholders of record at the close of business on January 31, 2015. The
quarterly cash dividend was subsequently paid out on February 20, 2015.
On March 12, 2015, the Board of Directors approved an increase in the annual cash dividend on
Common Shares from $0.12 to $0.18 per share commencing the quarter ended April 30, 2015.
-6On April 16, 2015, following the shareholder vote at the AGM, George Christopolous joined the
Board of Directors, Peter Silverberg was not re-elected and Mike Brennan was appointed
Chairman of the Board.
On April 17, 2015, the Board of Directors declared a cash dividend of $0.045 per Common
Share payable to all shareholders of record at the close of business on April 30, 2015. The
quarterly dividend was subsequently paid out on May 20, 2015.
On April 29, 2015, the Company announced that it had been awarded the prestigious Central
Station Alarm Association Five Diamond Central Station Certification.
On May 4, 2015, the Company announced the appointment of Graham Badun as President and
Chief Executive Officer. Mr. Badun was the founder of Westport Partners, a Toronto based
advisory firm focused on the real estate services sector. Prior to starting Westport Graham was
Group Chief Executive Officer of Brookfield Residential Property Services, a division of
Brookfield Asset Management, where he worked from 1998 until 2012.
On June 17, 2015, the Company announced the appointment of Chris Lynch as Chief Financial
Officer. With a background in both financial advisory and as a senior finance executive, Mr.
Lynch joined from Brookfield Global Relocation Services where he was Senior Vice President,
Corporate Finance & Treasurer. Previously, Chris was with Brookfield Residential Property
Services and worked as an investment banker with CIBC World Markets. Chetna Kapadia
remained with the Company in a newly created Vice President, Finance role.
On June 29, 2015, the Company announced that the Toronto Stock Exchange had approved its
Notice of Intention to Make a Normal Course Issuer Bid to purchase for cancellation, from time
to time, its Common Shares through the facilities of the TSX and alternative Canadian trading
platforms. Approval was granted to purchase up to a maximum of 5% of AlarmForce’s issued
and outstanding shares, being 581,722.
On July 20, 2015, the Board of Directors declared a cash dividend of $0.045 per Common Share
payable to all shareholders of record at the close of business on July 31, 2015. The quarterly
dividend was subsequently paid out on August 20, 2015.
On July 30, 2015, the Company announced that it had entered into discussions with third-party
camera manufacturers specializing in security and home automation. The out-sourced
partnership is intended to bring advancements in technology to AlarmForce’s VideoRelay, with
the ability to bring new features and product enhancements to the market more quickly and cost
effectively.
On September 1, 2015, the Company announced the release of an updated AlarmForce Connect
mobile app for home security and monitoring, bringing increased user-functionality for
customers. In addition, AlarmForce announced it had partnered with Emerson to offer its Sensi™
Wi-Fi Programmable Thermostat to its suite of home control and monitoring products.
-7On October 15, 2015, the Board of Directors declared a cash dividend of $0.045 per Common
Share payable to all shareholders of record at the close of business on October 30, 2015. The
quarterly dividend was subsequently paid out on November 20, 2015.
2.2
Significant Acquisitions
The Company did not complete any significant acquisitions during the year ended October 31,
2015 for which disclosure was required under Part 8 of National Instrument 51-102- Continuous
Disclosure Obligations.
3.
NARRATIVE DESCRIPTION OF THE BUSINESS
3.1
General
The Company is a leading provider of home protection and personal monitoring services across
Canada and within selective markets in the United States. The Company markets, distributes,
installs, services and monitors home protection solutions primarily to the residential market and
has been focused on growing its subscriber base through its service offerings and integrated
customer experience. While AlarmForce has been vertically integrated, inclusive of the design
and manufacturing of monitoring products, the Company will be transitioning to the use of best
in class third-party offerings by partnering with leading manufacturers. This will enable the
Company to focus on its core competency of providing superior customer service, while
benefiting from the significant research and development budgets and manufacturing efficiencies
achieved by partners whose core focus is in the development of home protection and monitoring
products. AlarmForce will continue to provide excellent quality home security and automation
products and services at a fair price with the added benefit of being able to curate best-in-class
products.
The Company’s Central Monitoring Station (“Central Station”) is located at the Toronto head
office and will continue to provide audio verification, through the provision of two-way-voice,
for the existing proprietary alarm system across AlarmForce’s installed base as well as for new
customers who sign on using the new third-party product which will be launched in fiscal 2016.
As a result, customers will continue to benefit from the real-time audio response and assistance
in the event of emergencies. Two-way voice allows the Central Station to communicate directly
with the premises without having to call the premises to determine the nature of an incident. As
a result, it proves to intruders that the premise is actively monitored. It also helps to reduce the
incidents of false alarms where a police dispatch is sent. In addition, two-way voice also helps to
reduce the dispatch time in the event of an actual incident.
The Company’s line of personal protection products is comprised of its AlarmCare line of
personal emergency response (“PERS”) products. While AlarmCare benefits from professional
monitoring and two-way voice similar to the AlarmForce’s home protection solutions, it differs
in that it is always active to provide medical assistance in the event of emergency and cannot be
turned off. AlarmCare allows seniors and those requiring a level of personal monitoring to live
independently with the peace of mind of knowing that in the event of emergency, help can be
immediately dispatched. The user benefits from having both the base station as well as a water
-8resistant pendant that can be worn as either a necklace or a wristband. The Company’s
AlarmCare product portfolio also includes a fall detection sensor which uses sensors to detect a
fall and automatically activate an alert call to the Central Station. The fall detection sensor
distinguishes between an actual fall and normal activity by continuously measuring movements
through built in processors and accelerometers. In addition to 24-hour active, ongoing
monitoring, vital pertinent medical information is maintained by the Central Station which is
passed on to responding authorities in the event of a medical emergency.
In addition to its core alarm and PERS monitored offerings, the Company also offers a range of
peripheral products used to supplement and enhance its home protection solutions.
VideoRelay: the Company installs and services a video surveillance camera with the
capability to use its smartphone app and/or the internet to remotely monitor the protected
premises from anywhere in the world. The current first generation VideoRelay camera
facilitates both remote video and two-way voice audio capabilities. Utilizing the doorbell
and motion/audio detection, the two-way voice is initiated with images captured and
transmitted via email and VoIP communication to the customer. In addition, alerts can be
programmed to record audio and video under user selected parameters. A second
generation portfolio of camera offerings will be available in 2016 when the Company
transitions to third-party product offering(s). Recorded surveillance footage captured can
be accessed and used in the event of a crime.
Monitored peripherals: AlarmForce has a range of home protection products which
augment the security offering and monitor and protect the users home from additional
unwanted incidences. These offerings include monitored smoke, carbon monoxide, flood
detection, heat rise and low temperature sensors.
Home automation: increasingly in demand, AlarmForce offers a range of home
automation tools designed to meet the convenience needs of an increasingly active
consumer base.
Utilizing a network of authorized agents and 3 franchises, the Company services existing
customers and provides professional installation to new customers wishing to benefit from
AlarmForce’s product and service offerings. During 2016, the Company will be exploring the
development of an additional distribution channel, using authorized independent dealers to
supplement its current approach to attracting and servicing customers. It is believed that this
would provide the Company with an expanded reach and expanded distribution channels.
We believe we are well positioned to continue to grow and expand in the home protection and
personal monitoring markets including the evolving market for home automation, medical
monitoring and lifestyle services.
Management anticipates that growth in revenue will result from the Company’s ability to
continue to add new customers. Leveraging its brand and strong base of consumer awareness in
Canada, the Company believes it will be able to continue to drive growth through its traditional
direct-to-consumer sales channel while concurrently exploring the development and launch of a
dealer program in order to reach a broader customer base. AlarmForce continues to be one of
Canada’s largest providers of home protection and personal monitoring solutions. While the
U.S. has represented an increasing driver of growth in recent years, the Company will be
-9refocusing efforts on U.S. markets where key performance indicators and other measures of
success better align with the performance of our Canadian operations. For 2015, over 39% of
gross additions were from the U.S. while 43% of customer cancellations were in the U.S. At the
end of 2015, approximately 25% of total subscribers were in the U.S. representing 30% of the
Company’s revenue. Management believes that there are Canadian markets where the Company
is under-represented that provide for attractive growth opportunities. Servicing 144,200
customers paying a fixed monthly fee, the Company believes it has adequate liquidity and access
to capital to facilitate its growth plans.
Employees, franchisees and authorized agents located throughout Canada and the U.S. are
responsible for the installation and ongoing servicing of subscribers. Skilled technicians and
support personnel provide customer service excellence and best-in-class service tailored to the
needs of each customer.
Competition
The market for professionally monitored home and personal protection services remains highly
fragmented and is characterized by intensifying competition and increasing consumer awareness.
In its markets, the Company’s competition includes large national providers, regional offerings
as well as cable and telecommunication companies that have entered the market. AlarmForce
feels that it can continue to compete with these national, regional and local companies by
offering strong customer service and providing customers good value at a fair price. The
Company’s focus on marketing, distribution, installation and monitoring, reliability and strong
customer and technical services will continue to benefit the organization.
While innovation, product sophistication, the introduction of do-it-yourself offerings and the
adoption of convenience and home automation technologies continue to accelerate, management
believes that this provides an attractive opportunity for AlarmForce. It helps to increase overall
industry household penetration and reach consumers who were previously less interested in
monitored solutions and attracts those interested in taking advantage of technological
advancements at price points that were previously unavailable.
Security Industry
AlarmForce competes in the home protection market largely comprised of residential security
system marketing, distribution, installation and monitoring. This includes video surveillance
which is a growing segment of home protection driven by improved image quality, increased
storage and broader capabilities, all with reduced costs for features that were previously less
affordable. Industry revenue for North America is estimated to be over $12 billion in 2015.
Management estimates that there are over 3,600 security alarm providers in Canada and 14,000
local and regional alarm providers in the U.S. Assuming a 20% household penetration rate,
management estimates that there are over 2.9 million households in Canada and 25 million in the
U.S. with an active alarm system.
- 10 ADT is the largest provider of security services in Canada and the United States with an
estimated industry share of 25% of total subscribers. Management estimates that the Company
ranks in the top 25 North American security service providers by recurring monthly revenue.
The Company believes that it can take advantage of present industry conditions through its
strategy of providing professionally installed and monitored home protection solutions while
layering-on lifestyle services and maintaining its focus on delivering good value at a fair price
across its entire product and service offering.
Personal Emergency Response
The market for PERS and other personal (medical) monitoring solutions represents a large and
growing market in North America, driven by age demographics and life expectancies. With an
aging population driven by the baby boom generation now reaching 65+ years of age and
individuals’ desire to remain in their homes for longer, these products provide benefits to both
the user and the broader healthcare system. Living independently, while being monitored,
provides the user with greater independence resulting in more positive self esteem. It also
provides the users family and loved ones with peace of mind that if an event should occur, help
is dispatched immediately. The broader healthcare system benefits as it places less of a burden
on finite healthcare resources as individuals are able to remain in their homes independently for
longer periods. As baby boomers continue to age and comprise a larger proportion of the overall
population, they will want to continue to take an active role in managing their healthcare needs
using all of the technology and other tools available. These demographic trends make the
Company’s AlarmCare System a valuable service to the aging population. AlarmForce, through
its AlarmCare offering is well positioned to take advantage of these emerging trends.
Trends/Cycles
Although the Company’s financial and operating results are generally not subject to significant
seasonal fluctuations, subscriber activity may fluctuate from quarter to quarter. Operating profits
and subscriber additions may be influenced by the timing of the Company’s marketing and
promotional activities. Subscriber additions and attrition are in part influenced by seasonal
relocations during the summer months, re-opening of the school year during the fourth quarter,
as well as, concentrated marketing efforts. These seasonal impacts apply to both the Canadian
and the U.S. operations. While subscriber activity is generally subject to these fluctuations, it
may also be affected by new and existing competition, varying levels of promotional activity in
potential new markets and the success of those markets, as well as the introduction and launch of
new products and/or services.. The Company’s operations are not subject to customer
concentration risk or dependent upon any single or group of customers.
For fiscal 2015, the Company generated 94% of its revenue from security monitoring and related
services derived from recurring monthly payments.
Growth
Since its inception in 1988, the Company has grown organically. Through the use of direct-toconsumer marketing channels AlarmForce has successfully created strong brand awareness in
- 11 Canada and select markets in the U.S. while growing it subscriber base across the markets
served. To date, the Company has not acquired any companies, monitoring accounts or blocks of
accounts from dealers. Going forward, AlarmForce intends to explore the creation of a dealer
channel in order to supplement its direct-to-consumer account creation. In addition, the
Company will explore acquisitions on an opportunistic basis in order to expand its reach and take
advantage of opportunities which may arise. While the Company expects to continue to grow
organically through its direct-to-consumer channel, the exploration of additional channels and
opportunistic acquisitions will ensure that AlarmForce is better able to attain market share within
its core markets that more closely align with its awareness.
Business Branding
The Company’s key brands are ALARMFORCE®, ALARMFORCE VIDEORELAY® and
ALARMCARE®. The Company believes that these brands are well known, trusted and respected
by consumers. Due to the importance that customers place on reputation and trust when
purchasing home protection services, the Company believes that its brand has been a key
contributor to its success. The Company has invested heavily in marketing and advertising in
order to build brand awareness and develop a compelling market position with consumers. As a
result, AlarmForce enjoys strong brand awareness across Canada and increasingly in the U.S.
markets in which it is active. The Company’s advertising message, including its jingle has
become widely recognized and associated with the brand.
This past year represented the first year in which the Company engaged an external media
agency to manage media planning and buying. AlarmForce transitioned from managing all
advertising efforts in-house to taking advantage of the media market knowledge, scaled
purchasing and analytical capabilities of the external agency. Building on the learnings from
2015, the Company will continue to optimize spend in driving efficient allocation of advertising
spend across media channels and geographies in order to target the markets with the most
attractive subscriber acquisition costs and returns. During the 10 year period ended October 31,
2015, AlarmForce has spent over $100 million in advertising and brand development in order to
achieve leading awareness and brand recognition.
The Company’s messaging has focused on building brand awareness and educating consumers
about their choices related to AlarmForce’s product and service offering. Radio, television,
digital and other advertising provide important detail regarding the Company’s products,
enabling current and prospective customers to fully understand product attributes, capabilities
and the benefits of choosing AlarmForce.
All of the Company’s sales leads are currently generated through advertising outlets or customer
referrals. AlarmForce has not historically utilized an externally focused sales force or outbound
sales efforts. Leveraging its strong brand awareness and media spend, the Company has been
able to grow its customer base attracting those customers who proactively react to its advertising.
During 2016 AlarmForce will be exploring the establishment of a dealer channel to supplement
its strength in direct advertising. This new distribution channel will enable the Company to reach
consumers who might be less likely to phone into AlarmForce’s sales center in the absence of a
catalyst event. The Company believes that its strong brand recognition will benefit a dealer
channel as it currently does its direct advertising approach. The Company anticipates that
- 12 account creation under a dealer model would have similar economic attributes to those originated
under its current direct advertising approach.
AlarmForce continues to have one of the proportionally largest advertising budgets in the
industry. This has enabled the Company to achieve a level of control and effectiveness for its
customer acquisition process. The Company’s strong awareness and efficient media spend has
resulted in its ability to demonstrate attractive customer acquisition costs.
Intellectual Property
Patents, trademarks, copyrights and other proprietary rights are important and the Company
continuously refines its intellectual property strategy to maintain and improve its competitive
position. The Company registers new intellectual property to protect ongoing technological
innovations and strengthen its brand position. The Company will take appropriate action against
infringements or misappropriations of intellectual property rights by others. In addition, the
Company reviews third-party intellectual property rights to help avoid infringement, and to
identify strategic opportunities. We typically enter into confidentiality agreements to further
protect the Company’s intellectual property.
The Company currently has the following registered/pending trademarks:
Trade-mark
App. No.
Reg. No.
Country
Case Status
ALARMCARE
1,354,059
TMA736,084
Canada
Registered
ALARMFLOOD
1,409,852
TMA779,664
Canada
Registered
ALARMFOG
818,937
TMA479,985
Canada
Registered
ALARMFORCE
647,469
TMA525,189
Canada
Registered
ALARMFORCE & Design
625,552
TMA369,514
Canada
Registered
ALARMPLUS
869,348
TMA510,062
Canada
Registered
ALARMVOICE
662,101
TMA387,163
Canada
Registered
ALARMVOICE & Design
799,406
TMA465,683
Canada
Registered
HOUSE Design
799,407
TMA465,684
Canada
Registered
VIEWFORCE
1,086,212
TMA568,666
Canada
Registered
ALARMFORCE VIDEORELAY
ALARMFORCE VIDEORELAY
& Design
1,600,507
TMA865,860
Canada
Registered
1,600,508
TMA685,868
Canada
Registered
CellWave
1,619,920
N/A
Canada
CellWave & Design
1,619,926
N/A
Canada
Approved for advertisement
December 17, 2015
Approved for advertisement
December 17, 2015
AFCONNECT
1,670,619
N/A
Canada
Approved for advertisement
- 13 December 11, 2015
1,670,618
N/A
Canada
Approved for advertisement
November 26, 2015
ALARMCARE (U.S.)
77-225,285
3,917,363
US
Registered
ALARMFORCE (U.S.)
78-568,098
3,294,797
US
Registered
ALARMFORCE & Design (U.S.)
73-817,302
1,652,187
US
Registered
ALARMVOICE (U.S.)
78-568,106
3,263,504
US
Registered
VIDEORELAY (U.S.)
85-182,726
4,139,903
US
Registered
ALARMFORCE & Design
987340
987,340
Australia
Registered
ALARMFORCE
987341
987,341
Australia
Registered
ALARMFORCE CONNECT
The Company currently has the following registered/pending patents:
Title
Official No.
Case Status
Country
Property Type
Security Camera Housing
138272
Registered
Canada
Design
Security Camera Housing
140218
Registered
Canada
Design
Mounting Bracket
138908
Registered
Canada
Design
Security Camera Housing
D666,233
Issued
US
Design
Security Camera Housing
D706,852
Issued
US
Design
Mounting Bracket
D663,190
Issued
US
Design
Security Camera Assembly
Security System with Two-Way
Communication and Video
2,672,303
Pending
Canada
Patent
2,691,774
Allowed
Canada
Patent
Security Camera Assembly
Security System with Two-Way
Communication and Video
8,398,316
Issued
US
Patent
12/658,082
Issued
US
Patent
Cost Structure and Cancellations
The Company’s cost of creating new subscribers is competitive and it believes that in certain
core markets, is among the lowest in the industry. Authorized agents are responsible for
installation of systems with head office staff responsible for providing post-installation support,
service and monitoring. Ongoing servicing is provided by the Company’s technical support,
customer care and Central Station teams and where necessary the authorized agents. Support is
available at times convenient to consumers and ranges from telephone support and training to the
- 14 provision of on-site servicing. A focus on service quality and customer retention drives
operational decisions and customer service excellence.
The Company’s alarm and video subscribers sign up for an initial three-year term for monitoring
services. AlarmCare subscribers do not typically have a specified term to their agreement which
is cancellable at any time.
Historically, the Company has maintained ownership of the installed wireless systems. The use
of wireless technology makes the installation and relocation of the system and associated
components much more cost effective than traditional wired systems. The three-year subscriber
agreement entitles the Company to payments for the full term of the contract. In the event of
cancellation prior to the end of the contract term, it is the Company’s policy to collect any unpaid
contractual balance prior to effecting the cancellation.
Manufacturing Operations
The Company has historically manufactured its own proprietary control panels used for both its
alarm monitoring and PERS offering. The manufacturing process involves purchasing various
key components from foreign and domestic manufacturers and utilizing local subcontractors in
certain parts of the manufacturing process. The Company has controlled its technology and
intellectual property, as well as all aspects of purchasing, subcontracting and component
manufacturing.
While this provided the Company the ability to control all aspects of the development,
production and assembly with limited differentiation in the availability of products with feature
rich attributes, there are now manufacturers whose primary business is the manufacture and
assembly of feature rich control panels. As a result, the Company is in the process of assessing
available third-party product for alignment with functional and consumer desired feature
requirements. This will enable the Company to mitigate development risks and benefit from bestin-class product offerings while focusing on its core competencies of marketing, distribution and
customer service.
In addition, while the Company has established arrangements with certain manufacturers and key
suppliers of hardware for its products it may not be able to maintain or renew AlarmForce’s
existing product sourcing arrangements on terms and conditions acceptable to the Company, or
at all, if one or more of AlarmForce’s suppliers discontinue offering a technology that the
Company has relied on or if one or more of its suppliers exit the electronic security system
market. The adoption of third-party product will provide the Company with sourcing alternatives
for completed product, mitigating some of the current risks associated with the potential loss of a
hardware component provider including the incurrence of additional costs for creating new
supplier arrangements for the ongoing development of its proprietary equipment.
The Company applies stringent quality standards, testing and rigorous in-house quality controls
prior to installation of the Company’s products in customers’ homes. AlarmForce will continue
to maintain its focus on quality standards and defect mitigation through its contracting process
with third-party product providers. The Company owns and controls its in-house Central Station
that is listed with United Laboratories of Canada (ULC). To obtain and maintain a ULC listing, a
- 15 monitoring station must meet specific structural requirements including maintenance of back-up
computer and independent power systems. The monitoring station staff are required to complete
extensive initial and ongoing training and coaching. The Company’s Central Station has been
awarded the prestigious Central Station Alarm Association Five Diamond Central Station
Certification.
Installation and Service
The Company utilizes authorized agents and a franchise network to install and service its suite of
home and personal protection products. The Company currently has 98 independent authorized
agents and three franchisees installing and servicing security systems across Canada and in select
markets in the U.S. As at October 31, 2015, the franchisees service approximately 1,812 of the
144,200 subscribers.
Employees
As at October 31, 2015, the Company employed 172 full-time staff all centrally located at the
Company’s corporate head office. In addition, the Company has three small franchisees in
Canada and a total of 98 authorized agents across Canada and the U.S.
Environmental Matters
The Company is committed to addressing climate change – an important issue for its customers,
employees, shareholders and communities. The Company continues to assess environmental
implications of its operations and determine the best way to minimize their long-term effects.
Predominantly being a monitoring service provider, the Company’s operations generally do not
have a significant impact on the environment and the Company has not made, and does not
anticipate having to make, any significant capital expenditures to comply with environmental
regulations. Such regulations have not had, and are not expected to have, a material effect on the
Company’s earnings or competitive position.
4.
RISK FACTORS
Attrition of accounts
Customer attrition results from a variety of different factors, including relocation of subscribers,
financial difficulties experienced by the customer, competition and other socio-economic factors.
Demographic factors and credit quality of customers underwritten will have an impact on overall
attrition levels. Any significant increase in the Company’s attrition rates could have a materially
adverse effect on the Company’s business, financial condition, liquidity and operating results.
Technological changes
As technology continues to evolve in the home and personal protection and telecommunication
industries, the Company will attempt to keep abreast of the changes and to upgrade its offerings
to keep up with the pace of change. There are no assurances that the Company’s products or
services will continue to be competitive as a result of such technological advancements or that
the Company will be able to adapt its offering to reflect new developments and innovations.
- 16 There are also no guarantees that telecommunications or other companies will not enter the home
and personal protection business with improvements in technology.
Most of our recurring monthly services depend on wireless technology embedded into the home
and personal protection related systems installed at customers premises. Should the need arise
we may be required to implement new technology in order to adapt to technological innovation
which could require significant expenditures. The Company makes every attempt to fully
embrace and implement new technologies as they arise. The success of the Company’s new
product developments and product launches will depend on its ability to introduce unique
products and services that have a competitive advantage through differentiation. However, we
may not be able to successfully implement these new technologies or adapt to changing market
demands within time frames required to remain successful. If we are unable to adapt to changing
technologies, market conditions or customer requirements in a timely manner, such inability
could adversely affect our business operations and financial performance.
Competition
The Company competes with larger companies, as well as smaller regional and local companies,
in all of its operations. Furthermore, new competitors are continuing to enter the home and
personal protection segments of the residential home security industry and the Company may
encounter additional competition from these new entrants. Some of the Company’s current
competitors have, and new competitors may have, greater financial resources than the Company.
The effect of such increased competition may be a drop in the volume of potential subscribers
available to the Company, which could adversely affect the Company’s financial performance.
Risks of Litigation
The nature of the products and services provided by AlarmForce potentially exposes it to greater
risks of liability for employee acts or omissions or system failures. The Company’s subscriber
agreements pursuant to which it distributes its products and services contain provisions limiting
liability to subscribers in an attempt to reduce this risk. However, in the event of litigation with
respect to such matters, there can be no assurance that these limitations will be enforced, and the
costs of such litigation could have a material adverse effect on the Company.
Ability to Maintain Profitability and Manage Growth
There can be no assurances that the Company’s business and growth strategy will enable it to
remain profitable in the future. The Company’s future operating results will depend on a number
of factors, including (i) the efficiency and effectiveness of the Company’s marketing and
advertising programs, (ii) the Company’s ability to develop and drive growth through additional
channels, (iii) the Company’s ability to identify and develop markets for both organic and
acquisition based growth opportunities, (iv) the Company’s ability to continuously improve its
services to achieve new and enhanced customer benefits, better quality service and reduced
costs, (v) the Company’s ability to successfully identify and respond to emerging trends in the
home and personal protection industry, (vi) the level of competition in the home and personal
protection industry, (vii) the Company’s ability to continue to attract new subscribers, and (viii)
the ability to manage attrition levels and subscriber replacement costs.
- 17 There can be no assurance that the Company will be able to effectively manage its growth, and
any failure to do so could have a material adverse effect on the Company’s business, financial
condition, liquidity and results of operations.
Human Resources
The Company’s success is highly dependent on the abilities, experience and personal efforts of
the leadership team to manage its operations and growth. The future success of the Company is
dependent on the management of the Company. The departure of any of the operations or
management personnel or their inability to continue executing against their key competencies
could have an adverse impact on the Company’s growth, business, financial position, liquidity
and operating results.
Effectiveness and Efficiency of Advertising Expenditures
The Company’s future growth and profitability will be dependent in part on the effectiveness and
efficiency of the Company’s advertising expenditures, including the ability of the Company to (i)
create greater awareness of the Company’s products and services, (ii) determine the appropriate
creative message and media mix for future advertising expenditures, and (iii) effectively manage
advertising costs in order to maintain acceptable operating margins and customer acquisition
costs. There can be no assurance that the Company will experience benefits from advertising
expenditures in the future. In addition, no assurance can be given that the Company’s planned
advertising expenditures will result in increased sales, will generate sufficient levels of product
and service awareness or that the Company will be able to manage such advertising expenditures
on a cost-effective basis.
Development of Dealer Channel
The Company’s future growth and profitability could be dependent in part on its ability to
develop and implement an effective dealer strategy, including the ability of the Company to (i)
attract a pool of exclusive independent dealers capable of marketing and installing the
Company’s home protection systems, (ii) effectively manage the costs paid to dealers to
purchase the accounts underwritten and created on behalf of the Company, (iii) provide ongoing
training, development and support to dealers working on behalf of the Company, and (iv)
manage channel conflict which might arise between the Company’s traditional direct advertising
strategy and any dealer channel that is created.
Supply chain
The Company currently relies on major components to be manufactured on an Original
Equipment Manufacturer (“OEM”) basis, and with the introduction of third-party products will
be reliant upon those manufacturers with which it chooses to partner. Reliance upon OEMs and
third-party product manufacturers as well as industry supply conditions generally involves
several risks, including the possibility of defective products (which can adversely affect the
Company’s reputation for reliability), a shortage or discontinuation of products or components
and delays in delivery schedules (which can adversely affect the Company’s distribution
schedules), and increases in product and component costs (which can adversely affect the
- 18 Company’s profitability). The Company has some single-sourced manufacturer relationships,
either because alternative sources are not readily or economically available or because the
relationship is advantageous due to performance, quality, support, delivery, capacity, or price
considerations. If these sources are unable or unwilling to manufacture the Company’s products
in a timely and reliable manner, the Company could experience temporary distribution
interruptions, delays, or inefficiencies, adversely affecting the Company’s results of operations.
Even where alternative OEMs or third-party product manufacturers are available, qualification of
the alternative manufacturers and establishment of reliable suppliers could result in delays
affecting operating results adversely.
Possible Adverse Effect of “False Alarm” Ordinances
According to American industry sources, approximately 98% of alarm activations that result in
the dispatch of police or fire department personnel are not emergencies, and thus are false
alarms. Significant concern has arisen in certain municipalities about the high incidence of false
alarms. Although AlarmForce maintains a relatively low number of false alarms by providing
live two-way voice communication with the residence and thereby minimizing the number of
dispatches, this concern could cause a decrease in the likelihood or timeliness of police response
to alarm activations and thereby decrease the propensity of consumers to purchase or maintain
home protection monitoring services. A number of municipalities have implemented or are
considering adopting various measures aimed at reducing the number of false alarms. Such
measures include (i) subjecting monitoring companies to fines for transmitting false alarms, (ii)
licensing individual security systems and the revocation of such licences following a specified
number of false alarms, (iii) imposing fines on security subscribers for false alarms, (iv)
imposing limitations on the number of times police will respond to alarms at a particular location
after a specified number of false alarms, and (v) requiring further verification of an emergency
signal before the police will respond. The Company has determined that the most appropriate
and cost effective method to address police service policies is to retain a private dispatch security
response team to respond to the alarm signals.
Expansion
The success of the Company’s expansion in the U.S. and growth in Canada will depend upon
many factors, including the ability of the Company to maintain acceptable attrition rates,
efficient customer acquisition costs and control of operating costs while pursuing gross
subscriber additions. There can be no assurance that the Company will be able to grow or
achieve expansion. Such risks, if they materialize, could have a material adverse effect on the
Company’s business, financial condition, liquidity and results of operations.
Possible Adverse Effect of Future Government Regulations
The Company’s operations are subject to a variety of laws, regulations and licensing
requirements of federal, provincial, municipal and regulatory authorities. The loss of such
licenses, or the imposition of conditions to the granting or retention of such licenses, could have
a material adverse effect on the Company. The Company believes that it is in material
compliance with applicable laws and regulatory requirements.
- 19 5.
DIVIDENDS
The Company has a cash dividend policy and intends to pay future cash dividends on a quarterly
basis such that the total annual dividend rate will equal $0.18 per Common Share, which is
equivalent to a dividend yield of approximately 1.6% based on the closing price of the Common
Shares as of October 30, 2015.
The dividends per Common Share declared with respect to each quarter by the Company, during
the three year period ended October 31, 2015, are shown below:
Quarter ended (1)
January 31
April 30
July 31
October 31
Total
2015
0.03
0.045
0.045
0.045
$0.165
2014
0.025
0.63
0.03
0.03
$0.715
2013
0.025
0.025
0.025
0.025
$0.10
Note:
(1) Paid on or about the 20th of the next month.
Although, the Company intends to pay quarterly dividends, there can be no assurance that the
Company will pay a dividend in a specific amount, or at all, in the future. The timing, declaration
and payment of future dividends to holders of Common Shares fall within the discretion of the
Board and will depend on many factors, including the Company’s financial condition and results
of operations, the capital requirements of the business, covenants associated with debt
obligations, legal requirements, regulatory constraints, industry practice and other factors that the
Board deems relevant.
The Board's cash dividend policy reflects the Company’s long-term ability to continue
generating profits and cash flows, while sustaining a regular dividend to shareholders. Following
a period of positive growth in subscribers and recurring cash flows, the Board intends that
shareholders obtain an additional opportunity to benefit from the Company’s success and
operational strength.
6.
CAPITAL STRUCTURE
The Company is authorized to issue an unlimited number of Common Shares of which
11,591,158 were issued and outstanding as at October 31, 2015.
Shareholders are entitled to receive notice of and attend all meetings of shareholders and are
entitled to one vote per Common Share held at all such meetings. In the event of the liquidation,
dissolution or winding up of the Company or other distribution of assets of the Company among
the shareholders for the purpose of winding up its affairs, shareholders will be entitled to receive
the remaining property of the Company.
The Company has a stock option plan (“Stock Option Plan”) to encourage Common Share
ownership in the Company by directors, officers, employees and consultants of the Company and
its affiliates and other designated persons. Stock options (“Options”) may be granted under the
- 20 Stock Option Plan only to directors, officers, employees and consultants of the Company and its
subsidiaries and other designated persons as designated from time to time by the Board. The
maximum number of Common Shares authorized for issuance under the Stock Option Plan is
limited to 2,250,000 Common Shares, provided that the Board has the right, from time to time, to
increase such number, subject to the approval of the shareholders and all stock exchanges and
regulatory authorities having jurisdiction over the affairs of the Company. The maximum
number of Common Shares which may be reserved for issuance to any one person under the
Stock Option Plan is 5% of the Common Shares outstanding at the time of the grant (calculated
on a non-diluted basis) less the number of Common Shares reserved for issuance to such person
under other compensation or incentive mechanisms. Any Common Shares subject to an Option
which for any reason is cancelled or terminated prior to exercise will be available for a
subsequent grant under the Stock Option Plan. The exercise price of any Common Share cannot
be less than the closing price of the Common Shares on the day immediately preceding the day
upon which the Option is granted. Options granted may be exercised during a period not
exceeding five years, subject to earlier termination upon the termination of the optionee’s
employment, within 90 days of optionee ceasing to be an employee, senior officer, director or
consultant of the Company or any of its subsidiaries or ceasing to have a designated relationship
with the Company, as applicable, or upon the optionee retiring or becoming permanently
disabled or within 180 days of the death of an optionee. The Stock Option Plan does not provide
for the vesting of Options granted, but the Board may, from time to time, grant Options which
are subject to vesting over such period as the Board may determine at the time of granting. The
Options are non-transferable.
During the year ended October 31, 2015, 43,683 Options were granted and no options were
exercised pursuant to the Stock Option Plan. As of the date hereof, Options to purchase an
aggregate of 218,683 Common Shares have been granted under the Stock Option Plan.On June
29, 2015, the TSX approved AlarmForce’s Normal Course Issuer Bid to purchase for
cancellation, from time to time, its Common Shares. The price which AlarmForce will pay under
the NCIB for any Common Shares purchased by it will be the prevailing market price of the
Common Shares on the TSX or such other exchange or marketplace, as applicable, at the time of
such purchase.
The Company believes that, from time to time, the market price of the Common Shares may not
fully reflect the underlying value of the Common Shares and that at such time the purchase of
Common Shares represents an attractive investment value and would be in the best interest of
AlarmForce’s shareholders. Such purchases will increase the proportionate interest of, and may
be advantageous to, all remaining shareholders
During fiscal 2015, the Company repurchased 113,100 of the Company’s Common Shares at an
average price of $10.98, representing approximately 1.0% of the outstanding shares.
- 21 7.
MARKET FOR SECURITIES
7.1
Trading Price and Volume
The Common Shares are listed and posted for trading on the TSX under the symbol "AF". The
following table sets forth the price ranges and volume of the Common Shares traded as reported
by the TSX for the periods indicated.
Period
2014
November
December
2015
January
February
March
April
May
June
July
August
September
October
8.
High
Low
Close
Volume
$12.25
$11.68
$11.17
$10.75
$11.20
$11.00
179,178
417,871
$10.51
$10.36
$10.30
$10.50
$10.46
$10.45
$11.11
$11.35
$11.90
$11.60
329,574
86,629
137,072
213,302
72,694
389,070
169,452
36,840
77,276
62,370
2,171,328
$11.59
$10.56
$10.43
$11.00
$10.64
$10.57
$11.25
$11.65
$11.91
$11.97
$10.42
$10.03
$10.15
$10.31
$10.28
$9.87
$10.40
11.10
$11.18
$11.44
Total volume traded:
ESCROWED SECURITIES
As at October 31, 2015, and as of the date hereof, to the knowledge of the Company no securities
are subject to escrow or otherwise subject to restrictions on transfer.
9.
DIRECTORS AND OFFICERS
9.1
Name, Occupation and Security Holding
The following table sets forth as of the date hereof, the names and residences of the directors and
executive officers of the Company, their positions with the Company and their principal
occupations:
Name and Municipality
of residence
Office and Principal
Occupation or Employment (1)
Directors/Officers
Since
Graham Badun
Toronto, Ontario Canada
Chief Executive Officer
May 4, 2015
Chris Lynch
Toronto, Ontario Canada
Chief Financial Officer
July 6, 2015
Anthony Pizzonia
Toronto, Ontario Canada
Director
February 13, 2004
- 22 Name and Municipality
of residence
Pavel Begun (2)(3)(4)
Toronto, Ontario Canada
Office and Principal
Occupation or Employment (1)
Director
Directors/Officers
Since
March 12, 2010
Tobias Behrenwaldt((4)
Atlanta, Georgia USA
Director
September 11, 2013
Michael A. Brennan(3)(4)
Darien, Connecticut, USA
Director
April 17, 2014
Alain Côté (2)(4)
Montreal, Quebec Canada
Director
April 17, 2014
Richard Peddie (3)
Toronto, Ontario Canada
Director
April 17, 2014
George Christopoulos (2)
Toronto, Ontario Canada
Director
April 14, 2015
Notes:
(1)
The principal occupation of the each of the above-noted directors and executive officers during the past five years is as follows:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(2)
(3)
(4)
Mr. Badun is and has been the Chief Executive Officer of the Company since May 2015. Prior thereto, he had founded
Westport Partners and was Group CEO at Brookfield Residential Property Services.
Mr. Lynch is and has been the Chief Financial Officer since July 2015. Prior thereto, he held senior finance leadership
positions with Brookfield Global Relocation Services and Brookfield Residential Property Services.
Mr. Pizzonia was previously the Chief Executive Officer of the Company until May 2015. Prior thereto, he was the Chief
Financial Officer of the Company.
Mr. Begun is a managing partner of 3G Capital Management LLC, in Toronto, Canada, a global value-oriented investment
vehicle that invests in a concentrated portfolio of high-quality publicly-traded businesses.
Mr. Behrenwaldt is a private investor, focusing on value oriented investments.
Mr. Brennan is and has been President of Global Direct Consultants, a consulting firm specializing in the management of
direct-to-consumer businesses. Prior thereto he was president, Europe at Reader’s Digest, a global publishing and direct
marketing company from 2007 to 2010.
Mr. Côté is and has been Executive Vice President of Genetec Inc., a Canadian software company that specializes in IP
security solutions for video surveillance, access control and license plate recognition.
Mr. Peddie is currently retired. Prior to retiring in December of 2011, he was president and Chief Executive Officer of
Maple Leaf Sports & Entertainment Ltd.
Mr. Christopoulos is currently a consultant at Arthur Gelgoot and Associate, Chartered Accounts. Previously he was a
consultant associated with BDO LLP and a tax partner at KPMG LLP.
Member of the Audit Committee.
Member of the Compensation Committee.
Member of the Strategic Planning Committee.
Directors of the Company shall hold office until the next annual meeting of shareholders of the
Company or until their successors are elected or appointed.
As of the date hereof, the directors and executive officers, as representing groups beneficially
own or control or direct, directly or indirectly, 2,259,528 Common Shares, representing
approximately 19.5% of the issued and outstanding Common Shares.
- 23 9.2
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
No director or executive officer of the Company is, as of the date hereof, or was within 10 years
before the date hereof, a director, chief executive officer or chief financial officer of any
company (including the Company), that:
(a)
was subject to a cease trade order, an order similar to a cease trade order or an
order that denied the relevant company access to any exemption under securities
legislation that was in effect for a period of more than 30 consecutive days while
the director or executive officer was acting in the capacity as director, chief
executive officer or chief financial officer, or
(b)
was subject to a cease trade order, an order similar to a cease trade order or an
order that denied the relevant company access to any exemption under securities
legislation that was in effect for a period of more than 30 consecutive days after
the director or executive officer ceased to be a director, chief executive officer or
chief financial officer and which resulted from an event that occurred while that
person was acting in the capacity as director, chief executive officer or chief
financial officer.
Except as noted below, no director or executive officer of the Company, and no shareholder
holding a sufficient number of Common Shares to affect materially the control of the Company
nor any personal holding company of any such person:
(a)
is, as of the date hereof, or has been within the 10 years before the date hereof, a
director or executive officer of any company (including the Company) that, while
that person was acting in that capacity, or within a year of that person ceasing to
act in that capacity, became bankrupt, made a proposal under any legislation
relating to bankruptcy or insolvency or was subject to or instituted any
proceedings, arrangement or compromise with creditors or had a receiver,
receiver manager or trustee appointed to hold its assets, or
(b)
has, within 10 years before the date hereof, become bankrupt, made a proposal
under any legislation relating to bankruptcy or insolvency, or become subject to
or instituted any proceedings, arrangement or compromise with creditors, or had a
receiver, receiver manager or trustee appointed to hold the assets of the director,
executive officer or shareholder.
In 2008, Mr. Tobias Behrenwaldt was a director and former Vice President Finance of Flytxt
Ltd., a private company incorporated under the laws of United Kingdom, which appointed an
administrator as a result of becoming insolvent.
No director or executive officer of the Company, and no shareholder holding a sufficient number
of Company Shares to affect materially the control of the Company nor any personal holding
company of any such person, has been subject to:
- 24 -
9.3
(a)
any penalties or sanctions imposed by a court relating to securities legislation or
by a securities regulatory authority or has entered into a settlement agreement
with a securities regulatory authority; or
(b)
any other penalties or sanctions imposed by a court or regulatory body that would
be likely to be considered important to a reasonable investor making an
investment decision.
Conflicts of Interest
To the knowledge of management, there are no existing or potential material conflicts of interest
between the Company or any of its subsidiaries and any director or officer of the Company or
any of its subsidiaries.
However, circumstances may arise in the future where members of the Board are directors or
officers of corporations which are in competition to the interests of the Company. Pursuant to
the Act, directors who have an interest in a proposed transaction upon which the Board is voting
are required to disclose their interests and refrain from voting on the transaction.
10.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL
TRANSACTIONS
No director, executive officer or person or company that beneficially owns, controls or directs,
directly or indirectly, more than 10% of the Common Shares, nor any associate or affiliate of the
foregoing have had a material interest, direct or indirect, in any transaction in which the
Company has participated within the last three completed financial years or during the current
fiscal year of the Company, or will have any material interest in any proposed transaction, which
has materially affected or is reasonably expected to materially affect the Company.
11.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is Equity Financial Trust Company at its
principal office in Toronto, Canada.
12.
INTERESTS OF EXPERTS
SF Partnership LLP is the external auditor of the Company and is independent within the Rules
of Professional Conduct of the Institute of Charted Accountants of Ontario.
13.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
13.1
Legal Proceedings
There are currently no legal proceedings material to the Company to which the Company or its
subsidiaries, are or were a party to, or of which any of their respective property is or was the
subject matter, during the fiscal year ended October 31, 2015 with the exception of the
following:
- 25 On September 24, 2013 the Company was named as a defendant in a lawsuit filed by former
employee Joel Matlin with the Ontario Superior Court of Justice, claiming wrongful dismissal.
The plaintiff alleges damages of approximately $11.3 million, comprised of $1.3 million for
damages relating to wrongful dismissal, and $10 million for punitive and aggravated damages
and/or damages for breach of the Ontario Human Rights Code, in addition to interest and costs.
The Company contests this claim and has filed a Statement of Defence. The Company believes
it has fulfilled its obligations pursuant to the termination provision of the employee’s
employment agreement, and believes the claim for punitive and aggravated damages and/or
damages for breach of the Ontario Human Rights Code are excessive and without merit. While
the Company cannot predict the final outcome of these legal proceedings, as at October 31, 2015,
no amount has been accrued in the consolidated financial statements.
The Company is also involved in litigation matters arising out of the ordinary course of business.
Although such matters cannot be predicted with certainty, the Company does not consider its
exposure to such litigation to be material. Since the Company cannot predict the final outcome of
these legal matters, as at October 31, 2015, no amount had been accrued in the consolidated
financial statements.
13.2
Regulatory Actions
To the knowledge of the directors and officers of the Company, there were no penalties or
sanctions imposed against the Company or its subsidiaries by a court relating to securities
legislation or by a securities regulatory authority during the Company’s most recently completed
financial year, nor any other penalties or sanctions imposed by a court or regulatory body against
the Company that would likely be considered important to a reasonable investor in making an
investment decision, and no settlement agreements have been entered into by the Company
before a court relating to securities legislation or with a securities regulatory authority during the
Company’s most recently completed financial year.
14.
MATERIAL CONTRACTS
Except for contracts entered into in the ordinary course of business, the Company has not entered
into any material contracts within the most recently completed financial year, or before the most
recently completed financial year that are still in effect.
15.
AUDIT COMMITTEE
National Instrument 52-110-Audit Committees (“NI 52-110”) requires the Company to disclose
certain information concerning the constitution of the audit committee of the Board (the “Audit
Committee”) and its relationship with its independent auditor, as set forth below. A copy of the
text of the Audit Committee’s charter, established in accordance with NI 52-110, is included in
Schedule “A” attached hereto.
Composition of the Audit Committee
The current members of the Audit Committee are Pavel Begun (Chair), Alain Côté and George
Christopoulos. Each member of the Audit Committee is considered to be “financially literate”
and “independent” within the meaning of NI 52-110.
- 26 Education and Experience
Mr. Begun is a Chartered Financial Analyst and has a Masters Degree in Business
Administration (with concentrations in Accounting and Finance) from the University of Chicago.
Mr. Begun is a managing partner of 3G Capital Management LLC, a global value-oriented
investment vehicle. Mr. Begun is a non-executive director of Grafenia PLC, a UK-based printing
services provider whose shares are listed on the London Stock Exchange.
Mr. Côté earned a combined B.C.L./LL.B. Law degree from McGill University and is currently
the Chief Financial and Chief Legal Officer of Genetec Inc. Mr. Côté was formerly a director in
corporate finance at Merrill Lynch Canada and prior thereto a partner in corporate taxation at
Ogilvy Renault (now Norton Rose Fulbright). Mr. Côté also sits on the board of a charitable
organization and a non-profit organization.
Mr. Christopoulos obtained a BComm from the University of Toronto in in 1981, and his CA
designation in 1984. Since 2013 he has been employed as a consultant at Arthur Gelgoot and
Associate, Chartered Accountants, an accounting firm. From 2001 to 2013 he was a consultant
associated with BDO LLP, an accounting firm, and from 1993 to 2001 was a tax partner at
KPMG LLP.
Pre Approval Policies and Procedures
In the event that the Company wishes to retain the services of the Company’s external auditors
for tax compliance, tax advice, tax planning or other non-audit services, such services must be
pre-approved by the Audit Committee.
Auditor Services Fees
The following chart summarizes the aggregate fees billed by the external auditors of the
Company for professional services rendered to the Company during the fiscal years ended
October 31, 2014 and October 31, 2013, for audit and non-audit related services:
Type of Work
Audit fees
Audit-related fees(1)
Tax fees(2)
All other fees (3)
Notes:
(1)
(2)
(3)
Year Ended
October 31, 2015
$93,000
$12,000
$19,200
$18,500
Year Ended
October 31, 2014
$90,000
Nil
$18,500
Nil
"Audit-related fees" include the aggregate fees paid to the external auditors for services related to the audit services, including a readthrough of the quarterly financial statements, management's discussion thereon and consulting with the Board and Audit Committee
regarding financial reporting and accounting standards.
"Tax fees" include the aggregate fees paid to external auditors for tax compliance, tax advice, tax planning and advisory services,
including preparation of tax returns, customs and duties.
"All other fees" include the aggregate fees paid to the external auditors for assurance procedures in connection with filings statements
and information circulars and services related to financings.
- 27 16.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found on SEDAR at www.sedar.com.
Additional information including directors’ and officers’ remuneration and indebtedness,
principal holders of the Company’s securities, and securities authorized for issuance under equity
compensation plans is contained in the Company’s information circular for its most recent
annual meeting of shareholders that involved the election of directors, and additional financial
information is provided in the Company’s comparative financial statements and management
discussion and analysis for its most recently completed financial year.
SCHEDULE “A”
AlarmForce Industries Inc.
(The “Corporation”)
Audit Committee Charter
1)
General
The Board of Directors of the Corporation (the “Board”) has established an Audit Committee
(the “Committee”) to take steps on its behalf as are necessary to assist the Board in fulfilling its
responsibilities regarding:
2)
(a)
the integrity of the Corporation’s financial statements;
(b)
the internal control systems of the Corporation;
(c)
the external audit process; and
(d)
investment opportunities and any other duties set out in this Charter or otherwise
delegated to the Committee by the Board.
Membership
The Board will in each year appoint a minimum of 3 directors as members of the Committee. All
members of the Committee shall be non-management directors and financially literate.
Financially literate, shall be defined as at minimum to include the ability to read and understand
a set of financial statements that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of the issues that can reasonably be
expected to be raised by the Corporation’s financial statements.
3)
Responsibilities
The Committee shall have the following responsibilities:
(a)
Financial reporting and Disclosure
(1)
Review the audited financial statements, all related management
discussion and analysis (“MD & A”) and earnings press releases.
(2)
Review the unaudited interim financial statements, all related MD & A
and earnings press releases and discuss with the auditors.
(3)
Confirm through discussions with management and the external auditors
that IFRS and all its applicable laws or regulations related to financial
reporting and disclosure have been complied with.
(4)
Review any actual or anticipated litigation or other events including tax
assessments which could have a material current or future effect on the
I
Corporation’s financial statements and the manner in which they have
been disclosed in the financial statements.
(5)
(b)
(c)
Discuss with management the effect of any off balance sheet transactions
arrangements or obligations and other relationships that have a material
current or future effect on the Corporation’s financial condition, results of
operations, liquidity, capital expenditures, capital resources, or significant
components of revenue and expenses.
Oversight of internal controls
(1)
Discuss and assess the adequacy and effectiveness of the Corporation’s
systems of internal controls through discussions with management and the
external auditor.
(2)
Oversee investigations of alleged fraud and illegality relating to the
Corporation’s finances.
(3)
Review with management that appropriate procedures exist for the receipt,
retention and treatment of complaints received by the Corporation
regarding internal accounting controls or auditing matters, anonymous
submissions by employees of concerns regarding questionable accounting
or auditing matters and for protection from retaliation of those who report
such complaints in good faith.
(4)
Recommend the appointment or replacement of the external auditor to the
Board, who will consider the recommendation prior to submitting the
nomination to the shareholders for their approval.
External Audit
(1)
Review with management, and make recommendations to the Board,
regarding the compensation of the external auditor. In making a
recommendation with respect to compensation, the Committee shall
consider the number and nature of reports issued by the external auditor,
the quality of internal controls, the size, complexity and financial
condition of the Corporation, and the extent of internal audit and other
support provided by the Corporation to the external auditor.
(2)
Review with management, on a regular basis, the terms of the external
auditor’s engagement, accountability, experience, qualifications and
performance. Evaluate the performance of the external auditor.
(3)
Review, in the absence of management, the results of the annual external
audit, the audit report thereon and the auditor’s review of the related
MD&A, and discuss with the external auditor the quality (not just the
acceptability) of accounting principles used, any alternative treatments of
financial information that have been discussed with management, the
II
ramifications of their use and the auditor’s preferred treatment, and any
other material communications with management.
(d)
(4)
At least annually, and before the external auditor issues its report on the
annual financial statements, review and confirm the independence of the
external auditor through discussions with the auditor on their relationship
with the Corporation, including details of all non-audit services provided.
Consider the safeguards implemented by the external auditor to minimize
any threats to their independence, and take action to eliminate all factors
that might impair, or be perceived to impair, the independence of the
external auditor. Consider the number of years the lead audit partner has
been assigned to the Corporation, and consider whether it is appropriate to
recommend to the Board a policy of rotating the lead audit partner more
frequently than every five years, as is required under the rules of the
Canadian Public Accountability Board.
(5)
Pre-approve any non-audit services to be provided to the Corporation by
the external auditor, with reference to compatibility of the service with the
external auditor’s independence.
Financial Planning, Investments, Compliance and Other
(1)
Review and recommend the Business Plan, including the annual Operating
and Capital Budgets for submission to the Board for approval. Review
periodic financial forecasts.
(2)
Review and assess investment opportunities of a value exceeding
management’s authority, in accordance with procedures established by the
Board from time to time.
(3)
Review with management all related party transactions and the
development of policies and procedures related to those transactions.
(4)
Review and assess the adequacy of the Committee Charter annually and
submit such amendments as the Committee proposes to the Board.
(5)
Oversee appropriate disclosure of the Committee’s Charter, and other
information required to be disclosed by applicable legislation, in the
Corporation’s AIF and all other applicable disclosure documents.
(6)
Report regularly to the Board on Committee activities, issues and related
recommendations.
(7)
The Board will in each year appoint the Chair of the Committee. The
Chair shall have accounting or related financial expertise. In the Chair’s
absence, or if the position is vacant, the Committee may select another
member as Chair. The Chair will have the right to exercise all powers of
the Committee between meetings but will attempt to involve all other
III
members as appropriate prior to the exercise of any powers and will, in
any event, advise all other members of any decisions made or powers
exercised.
(8)
The Committee shall meet at the request of its Chair, but in any event it
will meet at least four times a year. Notices calling meetings shall be sent
to all Committee members, to the CEO of the Corporation. The external
auditor or any member of the Committee may call a meeting of the
Committee.
(9)
A majority of members of the Committee, present in person, by
teleconferencing, or by videoconferencing will constitute a quorum.
(10)
A member may resign from the Committee, and may be removed and
replaced at any time by the Board, and will automatically cease to be a
member as soon as the member ceases to be a director. The Board will fill
vacancies in the Committee by appointment from among the directors of
the Board in accordance with Section 2 of this Charter. Subject to quorum
requirements, if a vacancy exists on the Committee, the remaining
members will exercise all its powers.
(11)
The Committee may retain or appoint, at the corporation’s expense, such
experts and advisors as it deems necessary to carry out its duties. The
Committee shall provide notice to the Board of Directors of its actions in
this regard.
(12)
The Chief Financial Officer of the Corporation, or such other person as
may be appointed by the Chair of the Committee, will act as Secretary of
the Committee. The minutes of the Committee will be in writing and duly
entered into the books of the Corporation. The minutes of the Committee
will be circulated to all members of the Committee and will be available
for review by the other Board members upon request.
IV