AlarmForce Industries Inc.
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
GENERAL DEVELOPMENT OF THE BUSINESS........................................................ 3
NARRATIVE DESCRIPTION OF THE BUSINESS ....................................................... 7
RISK FACTORS ............................................................................................................. 15
DIVIDENDS .................................................................................................................... 19
CAPITAL STRUCTURE ................................................................................................ 19
MARKET FOR SECURITIES ........................................................................................ 21
ESCROWED SECURITIES ............................................................................................ 21
DIRECTORS AND OFFICERS ...................................................................................... 21
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS ........................................................................................................... 24
TRANSFER AGENT AND REGISTRAR ...................................................................... 24
INTERESTS OF EXPERTS ............................................................................................ 24
LEGAL PROCEEDINGS AND REGULATORY ACTIONS ........................................ 24
MATERIAL CONTRACTS ............................................................................................ 25
AUDIT COMMITTEE .................................................................................................... 25
ADDITIONAL INFORMATION .................................................................................... 27
-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.
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
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 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
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
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
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
ALARMFORCE & Design
ALARMVOICE & Design
ALARMFORCE VIDEORELAY ALARMFORCE VIDEORELAY & Design
CellWave & Design
Approved for advertisement December 17, 2015 Approved for advertisement December 17, 2015
Approved for advertisement
- 13 December 11, 2015 1,670,618
Approved for advertisement November 26, 2015
ALARMFORCE & Design (U.S.)
ALARMFORCE & Design
The Company currently has the following registered/pending patents: Title
Security Camera Housing
Security Camera Housing
Security Camera Housing
Security Camera Housing
Security Camera Assembly Security System with Two-Way Communication and Video
Security Camera Assembly Security System with Two-Way Communication and Video
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.
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.
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.
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
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
$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:
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
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)
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
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
September 11, 2013
Michael A. Brennan(3)(4) Darien, Connecticut, USA
April 17, 2014
Alain Côté (2)(4) Montreal, Quebec Canada
April 17, 2014
Richard Peddie (3) Toronto, Ontario Canada
April 17, 2014
George Christopoulos (2) Toronto, Ontario Canada
April 14, 2015
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
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
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 -
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
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
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
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.
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.
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)
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 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)
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:
the integrity of the Corporation’s financial statements;
the internal control systems of the Corporation;
the external audit process; and
investment opportunities and any other duties set out in this Charter or otherwise delegated to the Committee by the Board.
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)
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.
Review the unaudited interim financial statements, all related MD & A and earnings press releases and discuss with the auditors.
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.
Review any actual or anticipated litigation or other events including tax assessments which could have a material current or future effect on the
Corporation’s financial statements and the manner in which they have been disclosed in the financial statements. (5)
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.
Oversee investigations of alleged fraud and illegality relating to the Corporation’s finances.
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.
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.
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.
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
ramifications of their use and the auditor’s preferred treatment, and any other material communications with management.
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.
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.
Review and assess investment opportunities of a value exceeding management’s authority, in accordance with procedures established by the Board from time to time.
Review with management all related party transactions and the development of policies and procedures related to those transactions.
Review and assess the adequacy of the Committee Charter annually and submit such amendments as the Committee proposes to the Board.
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.
Report regularly to the Board on Committee activities, issues and related recommendations.
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
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.
A majority of members of the Committee, present in person, by teleconferencing, or by videoconferencing will constitute a quorum.
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.
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.
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.