As filed with the Securities and Exchange Commission on December 2, 2019.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM F-10
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRSTSERVICE CORPORATION
(Exact name of Registrant as specified in its charter)
Ontario, Canada | 6500 | NOT APPLICABLE | ||
(Province or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial
(if applicable)) |
(I.R.S. Employer Identification No.
(if applicable)) |
1140 Bay Street, Suite 4000
Toronto, Ontario, Canada M5S 2B4
416-960-9500
(Address and telephone number of Registrants principal executive offices)
Mr. Santino Ferrante, Ferrante & Associates
126 Prospect Street, Cambridge, MA 02139
617-868-5000
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)
Copies to:
Jeremy Rakusin Chief Financial Officer FirstService Corporation 1140 Bay Street, Suite 4000 Toronto, Ontario M5S 2B4 (416) 960-9500 |
Mile T. Kurta, Esq. Torys LLP 1114 Avenue Of The Americas New York, New York 10036 (212) 880-6000 |
Elliott A. Vardin Fogler, Rubinoff LLP 77 King Street West Suite 3000, P.O. Box 95 TD Centre North Tower Toronto, Ontario M5K 1G8 (416) 864-9700 |
Christopher J. Cummings Paul, Weiss, Rifkind, Wharton & Garrison LLP 77 King Street West, Suite 3100 P.O. Box 226 Toronto, ON M5K 1J3 (416) 504-0520 |
David Weinberger Stikeman Elliott LLP Commerce Court West, 199 Bay Street, Suite 5300 Toronto, Ontario M5L 1B9 (416) 869-5515 |
Approximate date of commencement of proposed sale of the securities to the public:
As soon as practicable after this Registration Statement becomes effective.
Ontario, Canada
(Principal jurisdiction regulating this offering)
It is proposed that this filing shall become effective (check appropriate box):
A. |
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upon filing with the Commission pursuant to Rule 467(a) (if in connection with an offering being made contemporaneously in the United States and Canada). |
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B. |
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at some future date (check the appropriate box below) |
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1. |
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pursuant to Rule 467(b) on ( ) at ( ) (designate a time not sooner than 7 calendar days after filing). |
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2. |
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pursuant to Rule 467(b) on ( ) at ( ) (designate a time 7 calendar days or sooner after filing) because the securities regulatory authority in the review jurisdiction has issued a receipt or notification of clearance on ( ). |
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3. |
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pursuant to Rule 467(b) as soon as practicable after notification of the Commission by the Registrant or the Canadian securities regulatory authority of the review jurisdiction that a receipt or notification of clearance has been issued with respect hereto. |
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4. |
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after the filing of the next amendment to this Form (if preliminary material is being filed). |
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to the home jurisdictions shelf prospectus offering procedures, check the following box. ☐
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered |
Amount to be
Registered |
Proposed Maximum Offering Price Per Share |
Proposed Maximum Aggregate Offering Price(1) |
Amount of Registration Fee |
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Common Shares |
N/A(1) | N/A(1) | $230,000,000 | $29,854 | ||||
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(1) |
Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the Securities Act). There are being registered under this Registration Statement such indeterminate number of Common Shares of the Registrant as shall have an aggregate offering price not to exceed $230,000,000. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registration Statement shall become effective as provided in Rule 467 under the Securities Act, or on such date as the Commission, acting pursuant to Section 8(a) of the Securities Act, may determine.
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
Information contained herein may not be complete and may have to be amended. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. The securities may not be sold nor may offers to buy be accepted until the registration statement becomes effective. This preliminary short form prospectus shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any U.S. state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such U.S. state.
A copy of this preliminary short form prospectus has been filed with the securities regulatory authorities in each of the provinces of Canada (except Québec) but has not yet become final for the purpose of the sale of securities. The securities may not be sold nor may offers to buy be accepted until a receipt for the short form prospectus is obtained from the applicable Canadian securities regulatory authorities.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This short form prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. See Plan of Distribution.
Information has been incorporated by reference in this short form prospectus from documents filed with securities commissions or similar authorities in Canada (except Québec) and with the U.S. Securities and Exchange Commission. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Corporate Secretary of FirstService Corporation at 1140 Bay Street, Suite 4000, Toronto, Ontario, Canada M5S 2B4, Telephone 416-960-9500, and are also available electronically at www.sedar.com and www.sec.gov.
PRELIMINARY SHORT FORM PROSPECTUS
New Issue |
December 2, 2019 |
FIRSTSERVICE CORPORATION
US$ ●
● Common Shares
This short form prospectus qualifies the distribution (the Offering) from treasury of ● common shares (the Offered Shares) in the capital of FirstService Corporation (the Corporation, FirstService, we, our or us) at a price of US$ ● per Offered Share (the Offering Price). See Plan of Distribution.
The Offering is being made concurrently in Canada under the terms of this short form prospectus and in the United States of America (the United States or the U.S.) pursuant to our registration statement on Form F-10 (the Registration Statement) filed with the United States Securities and Exchange Commission (the SEC).
Our outstanding common shares (the Common Shares) are listed and posted for trading on the Toronto Stock Exchange (the TSX) and the NASDAQ Global Select Market (Nasdaq) under the symbol FSV. We have applied to list the Offered Shares (including the Common Shares issuable pursuant to the exercise of the Over-Allotment Option (as defined herein)) being distributed under this short form prospectus on the TSX. Listing will be subject to us fulfilling all of the listing requirements of the TSX. We will provide notice of the Offering to Nasdaq in accordance with the rules of that exchange. On November 29, 2019, the last trading day prior to the date of this short form prospectus, the closing prices of the outstanding Common Shares on the TSX and Nasdaq were C$127.08 and US$95.89, respectively.
Offering Price: US$ ● per Offered Share
Price to Public |
Underwriters Fee (1) |
Net Proceeds to
|
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Per Offered Share |
US$ ● | US$ ● | US$ ● | |||
Total(3) |
US$ ● | US$ ● | US$ ● |
Notes:
(1) |
We have agreed to pay the Underwriters a fee equal to ● % of the aggregate gross proceeds of the Offering, equal to US$ ● per Offered Share, including any Common Shares sold pursuant to the exercise of the Over-Allotment Option (as defined herein). See Plan of Distribution. |
(2) |
Before deducting the expenses of the Offering, estimated to be US$ ● , which, together with the Underwriters fee, will be payable from the proceeds of the Offering. |
(3) |
We have granted to the Underwriters an option to purchase up to an additional ● Common Shares at a price of US$ ● per Common Share (the Over-Allotment Option) exercisable at the Underwriters sole option and without obligation, in whole or in part, at any time up to 30 days after the closing of the Offering, to cover over-allotments, if any, and for market stabilization purposes. If the Over-Allotment Option is exercised in full, the Price to Public, Underwriters Fee and Net Proceeds to the Corporation (before deducting the estimated expenses of the Offering) will be US$ ● , US$ ● and US$ ●, respectively. This short form prospectus also qualifies for distribution the grant of the Over-Allotment Option and the distribution of any Common Shares pursuant to the exercise of the Over-Allotment Option. A purchaser who acquires Common Shares forming part of the Underwriters over-allocation position acquires those securities under this short form prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. See Plan of Distribution. |
Underwriters Position |
Maximum Size |
Exercise Period |
Exercise Price |
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Over-Allotment Option |
● Common Shares | Up to 30 days after the closing of the Offering | US$ ● per Common Share |
NEITHER THE SEC NOR ANY STATE OR CANADIAN SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED HEREBY, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS SHORT FORM PROSPECTUS OR DETERMINED IF THIS SHORT FORM PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
This Offering is being made by a Canadian issuer that is permitted, under a multijurisdictional disclosure system adopted in the United States and Canada, to prepare this short form prospectus in accordance with Canadian disclosure requirements. Prospective investors should be aware that such requirements are different from those of the United States. We prepare our financial statements in accordance with generally accepted accounting principles in the United States as promulgated from time to time by the Financial Accounting Standards Board (GAAP).
Purchasers of the Offered Shares should be aware that the acquisition of such Offered Shares may have tax consequences both in the United States and in Canada. This short form prospectus may not describe these tax consequences fully. See Certain Canadian Federal Income Tax Considerations and Certain U.S. Federal Income Tax Considerations. Purchasers of the Offered Shares are urged to consult their own tax advisors.
The enforcement by investors of civil liabilities under United States federal securities laws may be affected adversely by the fact that we are incorporated under the laws of the Province of Ontario, Canada, that most of our officers and directors and some of the experts named in this short form prospectus are residents of Canada, and that some of our assets and all or a substantial portion of the assets of these persons are located outside of the United States. In addition, some or all of the underwriters named in this short form prospectus are not resident in the United States. See Enforceability of Civil Liabilities.
An investment in Offered Shares involves significant risks that should be carefully considered by prospective investors before purchasing Offered Shares. The risks outlined in this short form prospectus and in the documents incorporated by reference herein and therein should be carefully reviewed and considered by prospective investors in connection with any investment in Offered Shares. See Risk Factors and Forward-Looking Statements.
BMO Nesbitt Burns Inc. and TD Securities Inc. (collectively, the Lead Underwriters), as co-lead underwriters and joint bookrunners, and ● , ● , ● , ● and ● (together with the Lead Underwriters, the Underwriters), as principals, conditionally offer the Offered Shares, subject to prior sale, if, as and when issued by us and accepted by the Underwriters in accordance with the conditions contained in the underwriting agreement referred to under Plan of Distribution and subject to the approval of certain legal matters on our behalf by Fogler, Rubinoff LLP with respect to Canadian law and Torys LLP with respect to United States law, and on behalf of the Underwriters by Stikeman Elliott LLP with respect to Canadian law and Paul, Weiss, Rifkind, Wharton & Garrison LLP with respect to United States law.
The Offering Price is payable in U.S. dollars only. The Offering Price was determined by negotiation between us and the Underwriters with reference to prevailing market conditions. The Underwriters propose to offer the Offered Shares initially at the Offering Price. After a reasonable effort has been made to sell all of the Offered Shares at the Offering Price, the Underwriters may subsequently reduce the selling price to investors from time to time in order to sell any Offered Shares remaining unsold. Any such reduction will not affect the proceeds received by us. See Plan of Distribution.
Subscriptions for the Offered Shares will be received subject to rejection or allotment, in whole or in part, and the right is reserved to close the subscription books at any time without notice. It is intended that the closing of the Offering will occur on or about ● , 2019 or such other date as may be agreed upon by us and the Underwriters but in any event, no later than 42 days following the date of the receipt issued by the Ontario Securities Commission for our (final) short form prospectus filed to qualify the distribution of the Offered Shares (the Closing Date).
All dollar amounts in this short form prospectus are in United States dollars, unless otherwise indicated. See Currency Presentation and Exchange Rate Information.
The Offered Shares will be issued and deposited in electronic form with CDS Clearing and Depository Services Inc. (CDS) or its nominee pursuant to the book-based system administered by CDS. No certificates evidencing the Offered Shares will be issued to purchasers, and registration will be made in the depository service of CDS. Purchasers of Offered Shares will receive only a customer confirmation from the registered dealer who is a CDS participant and from or through whom a beneficial interest in the Offered Shares is purchased. See Plan of Distribution.
The Underwriters may, in connection with the Offering and subject to applicable laws, effect transactions which stabilize or maintain the market price for the Common Shares at levels other than those which might otherwise prevail in the open market. Such transactions, if commenced, may be discontinued at any time. See Plan of Distribution.
Each of BMO Nesbitt Burns Inc., TD Securities Inc., ● and ● is, directly or indirectly, a subsidiary of a Canadian chartered bank which is a lender to FirstService under a revolving credit facility and term loan provided pursuant to an amended and restated credit agreement dated as of June 21, 2019 (the Credit Agreement). Consequently, we may be considered to be a connected issuer of BMO Nesbitt Burns Inc., TD Securities Inc., ● and ● under applicable Canadian securities legislation. We intend to use the full amount of the net proceeds of the Offering to repay a portion of our existing indebtedness under the Credit Agreement. The amount so repaid will be used to reduce amounts owing under the revolving credit facility contained in the Credit Agreement (and such amount will then be available to be drawn by us under the Credit Agreement, as required, for working capital, acquisitions and associated contingent purchase consideration and/or for general corporate purposes). See Relationship Between the Corporation and Certain Underwriters, Use of Proceeds and Plan of Distribution Conflicts of Interest.
Each of Frederick F. Reichheld and Erin J. Wallace, directors of FirstService, and BDO USA LLP, the independent auditors of FirstOnSite USA Holdings Inc. (Global Restoration), a subsidiary of FirstService, reside outside of Canada, and each such director has appointed FirstService, at its address at 1140 Bay Street, Suite 4000, Toronto, Ontario, Canada M5S 2B4, as his or her agent for service of process in Canada. Purchasers are advised that it may not be possible for investors to enforce judgments obtained in Canada against any person or company that resides outside of Canada, or that is incorporated, continued or otherwise organized under the laws of a foreign jurisdiction, even if the person has appointed an agent for service of process in Canada. See Enforceability of Judgments.
We were formed under the Business Corporations Act (Ontario) (the OBCA). Our registered and head office is located at 1140 Bay Street, Suite 4000, Toronto, Ontario, Canada M5S 2B4.
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RELATIONSHIP BETWEEN THE CORPORATION AND CERTAIN UNDERWRITERS |
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IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
Readers should rely only on the information contained or incorporated by reference in this short form prospectus. We have not authorized any person to provide different or additional information. The information contained on or available through our websites, including at www.firstservice.com, is not intended to be included in or incorporated by reference into this short form prospectus, and prospective investors should not rely on such information when deciding whether or not to invest in the Offered Shares. Any graphs, tables or other information demonstrating our historical performance or of any other entity contained in or incorporated by reference into this short form prospectus are intended only to illustrate past performance and are not necessarily indicative of our or such entitys future performance. The Offered Shares may be sold only in those jurisdictions where offers and sales are permitted. This short form prospectus is not an offer to sell or a solicitation of an offer to buy the Offered Shares in any jurisdiction where it is unlawful. The information contained in this short form prospectus is accurate only as of the date specified in this short form prospectus or the date specified in the document incorporated by reference herein, as applicable, regardless of the time of delivery of this short form prospectus or of any sale of the Offered Shares.
Unless the context otherwise permits, indicates or requires, all references in this short form prospectus to the Corporation, FirstService, we, our, us and similar expressions are references to FirstService Corporation and the business carried on directly or indirectly by it. Unless otherwise indicated, all financial information included or incorporated by reference in this short form prospectus and the documents incorporated by reference herein and therein, including financial statements, has been prepared in accordance with GAAP.
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Certain statements contained in this short form prospectus, and in certain documents incorporated by reference herein, constitute forward-looking statements or information about FirstServices business outlook, objectives, strategies, plans, priorities and results of operations as well as other statements that are not historical facts. All such forward-looking statements are made under the provisions of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the United States Securities Act of 1933, as amended (the U.S. Securities Act), and Section 21E of the United States Securities Exchange Act of 1934, as amended (the U.S. Exchange Act), and constitute forward-looking information within the meaning of applicable Canadian securities legislation. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as seek, anticipate, plan, continue, estimate, expect, may, will, project, predict, potential, targeting, intend, could, might, should, believe and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. As well as those factors discussed in the section entitled Risk Factors in this short form prospectus and the documents incorporated by reference herein, these risks and uncertainties include, among other things: the completion of the Offering; use of proceeds from the Offering; economic conditions, especially as they relate to credit conditions, consumer spending and demand for managed residential property; residential real estate property values, resale rates and general conditions of financial liquidity for real estate transactions; extreme weather conditions impacting demand for our services or our ability to perform those services; economic deterioration impacting our ability to recover goodwill and other intangible assets; a decline in our ability to generate cash from our businesses to fund future acquisitions and meet our debt obligations; the effects of changes in foreign exchange rates in relation to the U.S. dollar on our Canadian dollar denominated revenues and expenses; competition in the markets served by FirstService; labour shortages or increases in wage and benefit costs; the effects of changes in interest rates on our cost of borrowing; a decline in our performance impacting our continued compliance with the financial covenants under our debt agreements, or our ability to negotiate a waiver of certain covenants with our lenders; unexpected increases in operating costs, such as insurance, workers compensation, health care and fuel prices; changes in the frequency or severity of insurance incidents relative to our historical experience; a decline in our ability to make acquisitions at reasonable prices and successfully integrate acquired operations (including the acquisition of Global Restoration and recent and future tuck-under acquisitions); the performance of Global Restorations business and potential liabilities acquired in connection with the acquisition of Global Restoration; changes in laws, regulations and government policies at the federal, state/provincial or local level that may adversely impact our businesses; risks related to liability for employee acts or omissions, or installation/system failure, in our fire protection businesses; a decline in our performance impacting our ability to pay dividends on Common Shares; risks arising from any regulatory review and litigation; risks associated with intellectual property and other proprietary rights that are material to our business; disruptions or security failures in our information technology systems; political conditions, including any outbreak or escalation of terrorism or hostilities and the impact thereof on our business; performance in our commercial and large loss property restoration business; volatility of the market price of the Common Shares; the loss of qualified investment eligibility of the Common Shares; potential future dilution to the holders of the Common Shares; and risks related to our qualification as a foreign private issuer. Readers are cautioned that the foregoing list is not exhaustive.
While we believe that the expectations reflected in the forward-looking statements contained in this short form prospectus and in the documents incorporated by reference herein are reasonable, no assurance can be given that these expectations will prove to be correct, and such forward-looking statements included, or incorporated by reference, in such documents should not be unduly relied upon. These statements speak only as of the date of this short form prospectus or as of the date specified in the documents incorporated by reference herein, as the case may be. Except as required by law, we do not assume any obligation to update the aforementioned forward-looking statements. Our actual results could differ materially from those anticipated in the aforementioned forward-looking statements, as applicable, including as a result of the risk factors set forth elsewhere in this short
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form prospectus and in our filings with Canadian securities regulatory authorities which are available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com and our filings with the SEC available on the SECs Electronic Document Gathering and Retrieval System (EDGAR) at www.sec.gov.
CURRENCY PRESENTATION AND EXCHANGE RATE INFORMATION
Unless otherwise indicated, all references in this short form prospectus and any document incorporated by reference herein or therein to dollars, $ and US$ are to United States dollars, and all references to Canadian dollars and C$ are to Canadian dollars.
The following table sets out the high and low rates of exchange for one United States dollar expressed in Canadian dollars during each of the following periods, the average rate of exchange for those periods and the rate of exchange in effect at the end of each of those periods, each based on the rate of exchange published by the Bank of Canada for conversion of United States dollars into Canadian dollars.
Nine Months Ended | Year Ended | |||||||||||||||
September 30,
2019 |
September 30,
2018 |
December 31,
2018 |
December 31,
2017 |
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(C$) | (C$) | (C$) | (C$) | |||||||||||||
Highest rate during the period |
1.3600 | 1.3310 | 1.3642 | 1.3743 | ||||||||||||
Lowest rate during the period |
1.3038 | 1.2288 | 1.2288 | 1.2128 | ||||||||||||
Average rate for the period |
1.3292 | 1.2876 | 1.2957 | 1.2986 | ||||||||||||
Rate at the end of the period |
1.3243 | 1.2945 | 1.3642 | 1.2545 |
On November 29, 2019, the last banking day prior to the date of this short form prospectus, the rate of exchange posted by the Bank of Canada for conversion of United States dollars into Canadian dollars was US$1.00 equals C$1.3289. No representation is made that United States dollars could be converted into Canadian dollars at that rate or any other rate.
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this short form prospectus from documents filed with securities commissions or similar regulatory authorities in Canada (except Québec) and with the SEC in the United States. Copies of these documents may be obtained on request without charge from the Corporate Secretary of FirstService at our head office located at 1140 Bay Street, Suite 4000, Toronto, Ontario, Canada M5S 2B4, by telephone at 416-960-9500, or by accessing these documents through the Internet on our website at www.firstservice.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.
Except to the extent that their contents are modified or superseded by a statement contained in this short form prospectus or in any other subsequently filed document that is also incorporated by reference in this short form prospectus, the following documents of FirstService filed with the securities commissions or similar regulatory authorities in Canada (except Québec) and with the SEC in the United States are specifically incorporated by reference into, and form an integral part of, this short form prospectus:
(a) |
our annual information form for the year ended December 31, 2018 dated February 20, 2019 (the Current AIF); |
(b) |
our management information circular dated March 25, 2019 relating to our annual and special meeting of shareholders held on May 3, 2019 (the Current Circular); |
(c) |
our audited consolidated financial statements and the notes thereto as at December 31, 2018 and 2017 and for each of the years then ended and managements annual report on internal controls over financial reporting as of December 31, 2018, together with the report of our independent registered public accounting firm thereon; |
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(d) |
our managements discussion and analysis for the year ended December 31, 2018 dated February 20, 2019 (the Current Annual MD&A); |
(e) |
our unaudited interim consolidated financial statements and the notes thereto as at September 30, 2019 and for the three and nine-month periods then ended; |
(f) |
our managements discussion and analysis for the nine-month period ended September 30, 2019 dated November 8, 2019 (the Current Interim MD&A); |
(g) |
our material change reports dated March 13, 2019 and May 10, 2019 with respect to entering into an agreement to settle the Restated Management Services Agreement (the MSA), including the long-term incentive arrangement (the LTIA) therein, between FirstService, Jay S. Hennick and Jayset Management FSV Inc. and the elimination of FirstServices dual class share structure, and the completion of such settlement and elimination, respectively; |
(h) |
our material change report dated April 12, 2019 with respect to the expansion of our revolving credit facility by $100 million, to a total borrowing capacity of $450 million; |
(i) |
our material change reports dated May 27, 2019 and June 21, 2019 with respect to our entering into a definitive agreement to acquire Bellwether FOS Holdco, Inc. (the Global Restoration Acquisition), which wholly owns Global Restoration, and the completion of such acquisition and the advance of the term loan under the Credit Agreement, respectively; and |
(j) |
our business acquisition report dated August 23, 2019 in respect of the Global Restoration Acquisition (and the business of Global Restoration) completed on June 21, 2019 (the Business Acquisition Report). |
Documents referenced in any of the documents incorporated by reference in this short form prospectus but not expressly incorporated by reference therein or herein and not otherwise required to be incorporated by reference therein or in this short form prospectus are not incorporated by reference in this short form prospectus. Any documents of the type required by National Instrument 44-101 Short Form Prospectus Distributions to be incorporated by reference in a short form prospectus, including any annual information form, annual financial statements and the auditors report thereon, interim financial statements, managements discussion and analysis, material change reports (except confidential material change reports), business acquisition reports and information circulars, filed by us with securities commissions or similar authorities in Canada (except Québec) after the date of this short form prospectus and before the termination of the distribution are deemed to be incorporated by reference in this short form prospectus. In addition, all documents filed on Form 6-K or Form 40-F by us with the SEC on or after the date of this short form prospectus shall be deemed to be incorporated by reference into the Registration Statement, of which this short form prospectus forms a part, if and to the extent, in the case of any Report on Form 6-K, expressly provided in such document. The documents incorporated or deemed to be incorporated herein by reference contain meaningful and material information relating to FirstService and readers should review all information contained in this short form prospectus and the documents incorporated or deemed to be incorporated by reference herein and therein.
Notwithstanding anything herein to the contrary, any statement contained in this short form prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purposes of this short form prospectus to the extent that a statement contained herein or in any other subsequently filed document incorporated or deemed to be incorporated by reference herein modifies or supersedes such prior statement. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes. The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. Any statement so modified or superseded shall thereafter neither constitute, nor be deemed to constitute, a part of this short form prospectus, except as so modified or superseded.
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ENFORCEABILITY OF CIVIL LIABILITIES
We are a corporation incorporated under and governed by the OBCA. Most of our directors and officers and some of the experts named in this short form prospectus reside principally in Canada, and some of our assets and all or a substantial portion of the assets of these persons is located outside the United States. In addition, some or all of the underwriters named in this short form prospectus are not resident in the United States. We have appointed an agent for service of process in the United States, but it may be difficult for investors who reside in the United States to effect service of process upon these persons in the United States, or to enforce a U.S. court judgment predicated upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons. There is substantial doubt whether an action could be brought in Canada in the first instance predicated solely upon U.S. federal securities laws.
We filed with the SEC, concurrently with our Registration Statement, an appointment of agent for service of process on Form F-X. Under the Form F-X, we appointed Mr. Santino Ferrante of Ferrante & Associates as our agent for service of process in the United States in connection with any investigation or administrative proceeding conducted by the SEC and any civil suit or action brought against or involving us in a United States court arising out of or related to or concerning the offering of Offered Shares under this short form prospectus.
Any template version of marketing materials (as such terms are defined in National Instrument 41-101 General Prospectus Requirements) will be incorporated by reference in the final short form prospectus. However, such template version of marketing materials will not form part of the final short form prospectus to the extent that the contents of the template version of marketing materials are modified or superseded by a statement contained in the final short form prospectus. Any template version of marketing materials filed on SEDAR after the date of the final short form prospectus and before the termination of the distribution under the Offering will be deemed to be incorporated into the final short form prospectus.
This short form prospectus and the documents incorporated by reference herein include non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Non-GAAP financial measures do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other issuers. We use these non-GAAP financial measures to assist management and investors in understanding our operating performance, our ability to service debt, to assist in determining our overall enterprise valuation and to evaluate acquisition targets, and such measures are an integral part of our planning and reporting systems. We provide non-GAAP financial measures because we believe such measures are useful to investors as a reasonable indicator of our operating performance given the low capital intensity of our service operations and provide a supplemental way to understand our underlying operating performance that enhances the comparability of operating results from period to period, and such measures are commonly used by many investors to compare companies, especially in the services industry. We have also chosen to provide such measures to investors so they can analyze our operating results in the same way that management does and use such measures in their assessment of our core business and valuation. Investors are cautioned that non-GAAP financial measures should not be relied upon as a substitute for financial measures prepared in accordance with GAAP. Please see the reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures in the documents incorporated herein by reference. See Reconciliation of non-GAAP financial measures in the Current AIF and Current Annual MD&A, and Reconciliation of non-GAAP measures in the Current Interim MD&A.
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In the opinion of Fogler, Rubinoff LLP, Canadian counsel to FirstService, and Stikeman Elliott LLP, Canadian counsel to the Underwriters, based on the provisions of the Income Tax Act (Canada) (the Tax Act) in force as of the date hereof, provided the Offered Shares are listed on a designated stock exchange in Canada as defined in the Tax Act (which currently includes the TSX) on the Closing Date, the Offered Shares will, as at the Closing Date, be qualified investments under the Tax Act and the regulations thereunder for trusts governed by registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), deferred profit sharing plans, registered disability savings plans (RDSPs), registered education savings plans (RESPs) and tax-free savings accounts (TFSAs and, together with RRSPs, RRIFs, RDSPs and RESPs, the Plans).
Notwithstanding that the Offered Shares may be a qualified investment for a Plan, the holder of a TFSA or RDSP, the annuitant of a RRSP or RRIF or the subscriber of a RESP, as the case may be, which acquires Offered Shares will be subject to a penalty tax under the Tax Act if such Offered Shares are a prohibited investment (within the meaning of the Tax Act) for the particular Plan. Offered Shares will not be a prohibited investment for a Plan provided the holder of the TFSA or RDSP, the annuitant of the RRSP or RRIF or the subscriber of a RESP, as applicable, deals at arms length with FirstService for purposes of the Tax Act and does not have a significant interest (within the meaning of the Tax Act) in FirstService. A significant interest of a shareholder of FirstService generally means ownership by the shareholder, either alone or together with persons with which the shareholder does not deal at arms length for purposes of the Tax Act, of 10% or more of the issued shares of any class of the capital stock of FirstService. In addition, the Offered Shares will not be a prohibited investment if they are excluded property as defined in the Tax Act for trusts governed by a Plan. Holders, annuitants and subscribers should consult their own tax advisors to ensure that the Offered Shares would not be a prohibited investment for a trust governed by a Plan in their particular circumstances.
WHERE YOU CAN FIND MORE INFORMATION
FirstService files certain reports with, and furnishes other information to, each of the SEC and certain securities regulatory authorities of Canada. Under a multijurisdictional disclosure system adopted by the United States and Canada, such reports and other information may be prepared in accordance with the disclosure requirements of the securities regulatory authorities of Canada, which requirements are different from those of the United States. As a foreign private issuer, FirstService is exempt from the rules under the U.S. Exchange Act prescribing the furnishing and content of proxy statements, and FirstService officers and directors are exempt from the reporting and short swing profit liability provisions contained in Section 16 of the U.S. Exchange Act. FirstServices reports and other information filed or furnished with or to the SEC are available from EDGAR at www.sec.gov, as well as from commercial document retrieval services, and on our website at www.firstservice.com. FirstServices Canadian filings are available on SEDAR at www.sedar.com.
FirstService has filed the Registration Statement with the SEC under the U.S. Securities Act relating to the securities being offered hereunder, of which this short form prospectus forms a part. This short form prospectus does not contain all of the information set forth in the Registration Statement, certain items of which are contained in the exhibits to the Registration Statement as permitted or required by the rules and regulations of the SEC. Items of information omitted from this short form prospectus but contained in the Registration Statement will be available on EDGAR at www.sec.gov.
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We were formed under the OBCA as New FSV Corporation pursuant to Articles of Incorporation effective on October 6, 2014. On June 1, 2015, our predecessor, FirstService Corporation (Old FSV), completed a plan of arrangement (the spin-off) which separated Old FSV into two independent publicly traded companies FirstService and Colliers International Group Inc. Under the spin-off, Old FSV shareholders received one FirstService share and one Colliers International Group Inc. share of the same class as each Old FSV share previously held, Old FSV amalgamated with a wholly-owned subsidiary and changed its name to Colliers International Group Inc., and FirstServices name was changed to FirstService Corporation.
On May 10, 2019, we completed the settlement of the MSA and eliminated FirstServices dual class share structure. On that date, FirstService also effected an amendment to its articles that eliminated the multiple voting shares and the blank cheque preference shares as part of the authorized capital of FirstService, and re-classified its subordinate voting shares as Common Shares. See Recent Developments Settlement of Long-Term Incentive Arrangement and Elimination of Dual Class Voting Structure.
Our registered and head office is located at 1140 Bay Street, Suite 4000, Toronto, Ontario, Canada M5S 2B4.
SUMMARY DESCRIPTION OF THE BUSINESS
Overview
FirstService is a leading provider of branded essential property services comprised of two operating divisions: FirstService Residential, the largest provider of residential property management services in North America, and FirstService Brands, a leading provider of essential property services to residential and commercial customers through both franchise systems and company-owned operations. With our recently completed Global Restoration Acquisition, FirstService Brands has significantly expanded its scale and capabilities in commercial and large loss property restoration in North America. See FirstService Brands Segment Global Restoration and Recent Developments Global Restoration Acquisition.
FirstService Residential and FirstService Brands both rely on the same operational foundations for success a core competency in managing and growing market-leading, value-added outsourced essential property services businesses; a focus on client service excellence; economies of scale that are leveraged wherever possible to create more value for clients; and strong brand recognition. These pillars provide our businesses with competitive advantages that are difficult to replicate. Our two business lines also have similar highly attractive financial profiles, including a high proportion of recurring revenue streams, low capital expenditure and working capital requirements, high free cash flow generation, and significant financial strength to grow both organically and through consolidation of highly fragmented industries.
For a more detailed description of our business than that set out herein, see the sections entitled General development of the business and Business description in the Current AIF.
FirstService Residential Segment
FirstService Residential is North Americas largest manager of private residential communities, offering a full range of services across multiple geographies to a wide variety of clients, including condominiums (high, medium and low-rise), co-operatives, homeowner associations, master-planned communities, active adult and lifestyle communities, and a variety of other residential developments governed by common interest or multi-unit residential community associations. Our more than 15,000 employees in approximately 100 offices across 25 U.S. states and 3 Canadian provinces manage approximately 8,500 communities, representing more than 4 million residents in over 1.7 million residential units. Our operational and client coverage footprint is extensive, with a presence in major markets that constitute over 70% of the North American population. In 2018, FirstService Residential segment revenues were $1.25 billion.
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Typically, owners of residential units within these communities are required to pay monthly or quarterly fees to cover all expenses to operate and maintain the common areas of the communities. Resident owners elect volunteer homeowners to serve on a board of directors to oversee the operations of the community association. Historically, decision-making for the day-to-day operations of the communities was delegated to these volunteer board members, although, increasingly, these boards outsource this responsibility to professional property management companies like FirstService Residential.
There are two types of professional property management companies within the industry traditional or full-service:
|
Traditional property management: Traditional property managers focus principally on administrative and governance property management functions on behalf of community association clients, including advising homeowner boards on matters relating to the operation of their communities, collection of monthly maintenance fees, sourcing and payments to suppliers, financial statement preparation, and outsourcing of support services. |
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Full service property management: Full service property managers provide all of the traditional functions, plus a range of ancillary services including, among other things, on-site staffing (in areas such as building engineering and maintenance, full-service amenity management, security and concierge/front desk), banking and insurance products, energy conservation and management solutions, and resale processing services. |
Only a small number of industry participants have the expertise and capital to provide full-service property management services comparable to FirstService Residential. We have the scale, highly recognized brand, geographic footprint, resources, operating expertise and innovation to deliver a full-service offering. We combine our advantages of size and national presence with a local touch and dedication focusing on service excellence, which solidifies our client relationships and market-leading reputation. The annual aggregate budget of the community associations managed by FirstService Residential exceeds $8 billion.
As a full-service property manager, FirstService Residential provides a full range of ancillary services, including on-site staffing for building engineering and maintenance, full-service swimming pool and amenity management, security and concierge/front desk. In most markets, we provide financial services (cash management, other banking transaction-related services, and specialized property insurance brokerage), energy management solutions and advisory services, and resale processing services, utilizing the scale of our operations to economically benefit clients.
We generally provide residential property management and recurring ancillary services under contract, with a fixed monthly fee. These contracts typically range in duration from one to three years, yet are generally cancellable by either party with 30 to 90 days notice. Historically, a significant proportion of our revenue is recurring due to the nature of our contracts, which have a 95% retention rate, and therefore have a long-term tenure.
FirstService Brands Segment
FirstService Brands is a leading North American operator and provider of essential property services to residential and commercial customers. The principal brands in this division include Paul Davis Restoration, Interstate Restoration, FirstOnSite Restoration, Century Fire Protection, CertaPro Painters, California Closets, Pillar to Post Home Inspectors, and Floor Coverings International. In 2018, FirstService Brands segment revenues were $676.6 million.
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Franchised Operations
We own and operate five franchise networks as follows:
(i) |
Paul Davis Restoration is a franchisor of residential and light commercial restoration services serving the insurance industry in the United States and Canada through 313 franchises. Paul Davis provides full service water, fire and mold cleanup, construction rebuild and restoration services for property damaged by natural or man-made disasters. Royalties are earned from franchisees based on a percentage of franchisee gross revenues. |
(ii) |
CertaPro Painters is the largest provider of residential and commercial painting services in North America. CertaPro has 353 franchises operating in major markets across the United States and Canada, as well as master franchises in other countries around the world. CertaPro Painters focuses on high-end residential and commercial painting and decorating work. CertaPro completes more than 100,000 projects in a typical year. Royalties are earned based on a percentage of franchisee gross revenues or a fixed monthly fee, plus administrative fees for various ancillary services. |
(iii) |
California Closets is North Americas largest provider of custom-designed and installed closet and home storage solutions. California Closets has 86 franchises in the United States and Canada, as well as master franchises in other countries around the world. There are currently approximately 145 branded California Closets retail showrooms in operation in North America which are used by franchisees to demonstrate and sell the product. California Closets franchise and corporate locations install more than 64,000 jobs annually across North America. Royalties are earned based on a percentage of franchisee gross revenues. |
(iv) |
Pillar to Post Home Inspectors is one of North Americas largest home inspection service providers. Services are provided through a network of nearly 800 home inspectors in 538 franchises. Through its proprietary inspection model, Pillar to Post Home Inspectors can assess many categories or items inside and outside the home as part of its evaluation process. Pillar to Post Home Inspectors inspects more than $50 billion in residential real estate each year. Royalties are earned on a percentage of franchisee gross revenues. |
(v) |
Floor Coverings International is a residential and commercial floor coverings design and installation franchise system operating in North America with 141 franchises. Royalties are earned based on a percentage of franchisee gross revenues. |
The aggregate system-wide revenues of our 1,794 franchisees were greater than $1.9 billion for 2018. Franchise agreements are for terms of five or ten years. Royalties are reported and paid to us monthly in arrears. All franchise agreements contain renewal provisions that can be invoked by FirstService Brands at little or no cost.
The franchised property services industry is highly fragmented, consisting principally of a large number of smaller, single-service or single-concept companies. Due to the large size of the overall market for these services, dominant market share is not considered necessary for becoming a major player in the industry. However, because of the low barriers to entry in this segment, we believe that brand name recognition among consumers is a critical factor in achieving long-term success in the businesses we operate.
Company-Owned Operations
FirstService Brands owns and operates 19 California Closets locations and 11 Paul Davis Restoration locations in major metropolitan markets in the United States and Canada. The California Closets and Paul Davis Restoration operations were acquired from franchisees with the goal of accelerating revenue growth and realizing operating margin expansion potential.
Century Fire Protection
FirstService acquired Century Fire Protection in April 2016. Century Fire Protection is one of the largest full-service fire protection companies in the Southeastern United States. The acquisition added an important service
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capability to FirstServices portfolio of essential property services. Headquartered in Duluth, Georgia, Century Fire Protection provides end-to-end fire protection solutions, including design, fabrication, installation, maintenance, repair, service and inspection services for commercial, residential, industrial and institutional clients. Century Fire Protection employs approximately 1,500 staff operating out of 24 offices throughout Georgia, Alabama, North Carolina, South Carolina, Tennessee and Texas. Century Fire Protection has completed tuck-under acquisitions of Fort Lauderdale, Florida-based Advanced Fire, Georgia-based ASA Fire, Swift Fire and Advantage Fire Sprinkler, southwestern Florida-based Commercial Fire, North Carolina-based Allied Fire and Houston, Texas-based Chief Fire Systems.
Global Restoration
On June 21, 2019, we completed the acquisition of Global Restoration, the second largest commercial and large loss property restoration firm in North America. This acquisition expanded FirstServices scale and capabilities in the property restoration sector and complements our Paul Davis Restoration franchised and company-owned operations, which collectively are a leading player in the residential segment of the industry. FirstService acquired approximately 95% of Bellwether FOS Holdco, Inc., which wholly owns Global Restoration, for a purchase price of approximately $505 million. We funded the purchase price through a combination of cash-on-hand and funds borrowed pursuant to the revolving credit facility and term loan under the Credit Agreement. See Recent Developments Global Restoration Acquisition.
Headquartered in Denver, Colorado and founded in 1998, Global Restoration provides integrated end-to-end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance companies. Global Restoration operates under two highly recognized brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs more than 1,500 staff operating out of approximately 60 regional offices throughout North America. In 2018, Global Restoration generated revenues of $436 million and operating income of $40 million.
The following is an overview of the recent developments at FirstService.
Credit Agreement Expansion
On June 21, 2019, we entered into the Credit Agreement with a syndicate of lenders. The Credit Agreement is comprised of a committed multi-currency revolving credit facility of $450 million (of which $343.5 million is outstanding as at November 29, 2019) and a term loan (drawn in a single advance) in the aggregate amount of $440 million (all of which remains outstanding as at November 29, 2019). The Credit Agreement replaced our prior credit agreement which had been in effect since June 1, 2015 and which was comprised solely of a revolving credit facility with an initial financing capacity of $200 million, which financing capacity was increased to $250 million in January 2018, further increased to $350 million in March 2019 through FirstServices exercise in full of the incremental facility therein and lastly increased to $450 million in April 2019. The revolving credit facility portion of the Credit Agreement has a term ending on January 17, 2023 and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios (which is the same rate as under our prior credit agreement). The term loan portion of the Credit Agreement was implemented in order to substantially finance the purchase price for the Global Restoration Acquisition, has a five-year term (from the closing of the Global Restoration Acquisition) ending on June 21, 2024 (with repayments of 5% of the principal amount of the term loan per annum in years 2, 3, 4 and 5 of the term, payable in equal quarterly payments, with the balance due at maturity) and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios. The Credit Agreement requires a commitment fee of 0.25% to 0.50% of the unused portion, depending on certain leverage ratios (which is the same commitment fee as under our prior credit agreement). See Consolidated Capitalization and Global Restoration Acquisition.
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Global Restoration Acquisition
On June 21, 2019, we acquired approximately 95% of the shares in the capital of Bellwether FOS Holdco, Inc., which wholly owns Global Restoration, a commercial and large loss property restoration firm. Global Restorations senior management team retained the balance of the equity. At closing, we paid approximately $505 million, utilizing cash-on-hand and funds borrowed pursuant to the revolving credit facility and the term loan under the Credit Agreement. Global Restoration provides integrated end-to-end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance companies. See Summary Description of the Business FirstService Brands Segment Global Restoration.
Settlement of Long-Term Incentive Arrangement and Elimination of Dual Class Voting Structure
On May 10, 2019, we completed the settlement of the MSA and eliminated FirstServices dual class share structure. On that day, we also effected an amendment to our articles that eliminated the multiple voting shares and the blank cheque preference shares as part of the authorized capital of FirstService, and re-classified our subordinate voting shares as Common Shares. The Common Shares commenced trading under the symbol FSV on the TSX and Nasdaq at the start of trading on May 14, 2019.
As part of this transaction: (a) all multiple voting shares of FirstService were converted into subordinate voting shares of FirstService (now re-classified as Common Shares) on a one-for-one basis and for no consideration, thereby eliminating FirstServices dual class share structure; (b) FirstService acquired, indirectly, all of the shares of Jayset Management FSV Inc., the recipient of all fees and other entitlements under the MSA, for a purchase price determined with reference to the LTIA formula provided in the MSA which would have applied on a change of control transaction, and thereafter FirstService terminated the MSA thereby eliminating the LTIA and all future fees and other entitlements owing thereafter; (c) Jay S. Hennick remained as Chairman of FirstService, at the discretion of our board of directors, with compensation commensurate with that of a Non-Executive Chairman of a public company of similar size to FirstService; and (d) FirstService paid C$84.3 million ($62.9 million) in cash (less an adjustment to account for certain tax liabilities) and issued a total of 2,918,860 subordinate voting shares of FirstService (now re-classified as Common Shares) to the relevant entity controlled by Mr. Hennick. The cash portion was funded under FirstServices prior credit agreement. See Credit Agreement Expansion. This transaction is further described in the Current Circular under Business of the Meeting Approval of Transaction and Business of the Meeting Approval of Amendment to the Articles.
Our board of directors has adopted a dividend policy pursuant to which we intend to make quarterly cash dividends to holders of Common Shares of record at the close of business on the last business day of each calendar quarter. The quarterly dividend post-spin-off during 2015 was set at $0.10 per Common Share (a rate of $0.40 per annum), which was increased during 2016 to $0.11 per Common Share (a rate of $0.44 per annum), which was further increased during 2017 to $0.1225 per Common Share (a rate of $0.49 per annum), which was further increased during 2018 to $0.135 per Common Share (a rate of $0.54 per annum), and which was again increased for 2019 to the current rate of $0.15 per Common Share (a rate of $0.60 per annum). Each quarterly dividend is paid within 30 days after the applicable record date. The first dividend which purchasers of Offered Shares are expected to be eligible to receive is the dividend payable to holders of Common Shares of record at the close of business on the last business day in December 2019, such dividend being paid in January 2020. For the purposes of the Tax Act and any similar provincial legislation, all dividends on the Common Shares will be eligible dividends unless indicated otherwise.
The terms of our dividend policy remain, among other things, at the discretion of our board of directors. Future dividends on the Common Shares, if any, will depend on the results of our operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other
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relevant factors. Under the terms of the Credit Agreement and the Note Agreement (as defined under Consolidated Capitalization), we are not permitted to pay dividends, whether in cash or in specie, in the circumstances of an event of default thereunder occurring and continuing or an event of default occurring as a consequence thereof. See Risk Factors Risks Relating to the Offering Dividends.
The aggregate cash dividends declared per Common Share in respect of the years ended December 31, 2018 and 2017 were $0.54 and $0.49, respectively.
The net proceeds to FirstService from the issue and sale of the Offered Shares, after payment of the Underwriters fee of $ ● and the expenses of the Offering estimated to be $ ● , will be approximately $ ● . If the Over-Allotment Option is exercised in full, the net proceeds to FirstService (after payment of the Underwriters fee of $ ● and the expenses of the Offering estimated to be $ ● ) will be approximately $ ● .
We intend to use the full amount of the net proceeds of the Offering to repay a portion of our indebtedness under the Credit Agreement, which as at the close of business on November 29, 2019, had an outstanding balance owing of $783.5 million. The amount so repaid will be used to reduce amounts owing under the revolving credit facility contained in the Credit Agreement (and such amount will then be available to be drawn by us under the Credit Agreement, as required). See Recent Developments Credit Agreement Expansion. Our indebtedness under the Credit Agreement (and our prior credit agreement) was used by us for the purposes of providing funding for working capital, acquisitions (including the Global Restoration Acquisition and recent tuck-under acquisitions) and any associated contingent purchase consideration, and for general corporate purposes.
As a result of current market conditions, combined with our ongoing strategic interest in value-enhancing acquisitions, we evaluate potential acquisition targets and business opportunities on a regular basis. By creating further capacity under the revolving credit facility contained in our Credit Agreement, the net proceeds of this Offering will increase our ability to pursue acquisitions and respond to those opportunities.
While we currently anticipate that we will use the net proceeds from the Offering as outlined above, the actual use of the net proceeds may vary depending upon numerous factors, including but not limited to our operating and capital requirements, our strategy and other conditions in effect at the time. See Risk Factors.
Authorized and Issued Capital
Our authorized capital consists of an unlimited number of Common Shares, of which, as at the date hereof, there were 39,330,957 Common Shares issued and outstanding.
Common Shares
Holders of Common Shares are entitled to receive: (i) notice of, to attend and speak at and to vote at any meeting of the shareholders of FirstService, and at such meeting holders of Common Shares have one vote for each Common Share held; (ii) dividends as may be declared thereon by our board of directors; and (iii) our remaining property and assets, in equal amounts per share on all Common Shares at the time outstanding without preference or distinction, upon our liquidation, dissolution or winding up, or other distribution of our assets among our shareholders for the purposes of winding-up our affairs. The holders of Common Shares do not have any right to vote separately upon any proposal to amend our articles to increase any maximum number of authorized shares of any class or series having rights or privileges equal or superior to the Common Shares or to create a new class
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of shares equal or superior to the Common Shares. The Common Shares are not redeemable nor retractable but are, subject to applicable law, able to be purchased for cancellation by FirstService in the open market, by private contract or otherwise.
The following table sets forth the consolidated capitalization of FirstService as at September 30, 2019 both before and after giving effect to the Offering:
Designation |
Authorized |
As at September 30, 2019
before giving effect to the Offering |
As at September 30, 2019
after giving effect to the Offering |
|||||||||
(in millions, other than share amounts) | ||||||||||||
Credit Agreement(1) |
$890.0 | $790.3 | $ ● | (7) | ||||||||
Senior Notes(2) |
$150.0 | $150.0 | $ 150.0 | |||||||||
Common Shares(3)(4)(5)(6) |
Unlimited |
|
$411.5
(39,244,457 shares) |
|
|
$ ●
( ● shares) |
|
Notes:
(1) |
On June 21, 2019, we entered into the Credit Agreement with a syndicate of lenders. The Credit Agreement replaced our prior credit agreement which had been in effect since June 1, 2015. See Recent Developments Credit Agreement Expansion. The Credit Agreement is comprised of a committed multi-currency revolving credit facility of $450 million and a term loan (drawn in a single advance) in the aggregate amount of $440 million. The revolving credit facility portion of the Credit Agreement has a term ending on January 17, 2023 and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios (which is the same rate as under our prior credit agreement). The term loan portion of the Credit Agreement was implemented in order to substantially finance the purchase price for the Global Restoration Acquisition, has a five-year term (from the closing of the Global Restoration Acquisition) ending on June 21, 2024 (with repayments of 5% of the principal amount of the term loan per annum in years 2, 3, 4 and 5 of the term, payable in equal quarterly payments, with the balance due at maturity) and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios. The Credit Agreement requires a commitment fee of 0.25% to 0.50% of the unused portion, depending on certain leverage ratios (which is the same commitment fee as under our prior credit agreement). The indebtedness under the Credit Agreement and the Senior Notes (as defined in note 2 below) rank equally in terms of seniority. We have granted the lenders under the Credit Agreement and the holders of the Senior Notes various security, including an interest in all of our assets (including our share of our material subsidiaries), an assignment of material contracts and an assignment of our call rights with respect to securities of our subsidiaries held by non-controlling interests. We may repay amounts owing under the Credit Agreement at any time without penalty. Advances under the revolving credit facility portion of the Credit Agreement are subject to certain conditions of drawdown, and may be made by way of US and Canadian prime rate/base rate/LIBOR loans, bankers acceptances or letters of credit. The financial covenants contained in the Credit Agreement require (and in our prior credit agreement required) that we maintain a total debt to consolidated EBITDA ratio of not more than 3.5 to 1.0, on a consolidated and rolling four quarters basis, an interest coverage ratio of greater than 2.0 to 1 and minimum shareholders equity of $165 million, plus one-half of our consolidated net earnings and the net proceeds from certain sales of our shares. To date, we have always complied with the foregoing covenants. All outstanding amounts under the Credit Agreement will be accelerated and must be repaid upon the occurrence of an event of default under the Credit Agreement, in certain circumstances, following written notice from the lenders to such effect. We are prohibited under the Credit Agreement from undertaking certain acquisitions and dispositions, and incurring certain indebtedness and encumbrances, without prior approval of the lenders under the Credit Agreement. See Recent Developments and Relationship Between the Corporation and Certain Underwriters. |
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(2) |
On June 1, 2015, we entered into an Amended and Restated Note and Guarantee Agreement (the Note Agreement) pursuant to which FirstService assumed from Old FSV $150 million of senior secured notes (the Senior Notes) bearing interest at a rate of 3.84% to 4.84%, depending on leverage ratios. As of September 30, 2019, the current interest rate on the Senior Notes is 4.84%. The Senior Notes are due on January 16, 2025, with five annual equal repayments beginning on January 16, 2021, and rank equally with the indebtedness under the Credit Agreement in terms of seniority. We may prepay the Senior Notes at any time in an amount of not less than $5 million at the principal amount of the notes then being repaid, plus accrued interest and a make whole payment. The financial covenants contained in the Note Agreement require that we maintain a total debt to consolidated EBITDA ratio of not more than 3.5 to 1.0, on a consolidated and rolling four quarters basis, an interest coverage ratio of greater than 2.0 to 1, a consolidated net worth as of the end of a fiscal quarter that is greater than $165 million, plus one-half of our consolidated net earnings and the net proceeds from certain sales of our shares, and ensure that our priority debt does not at any time exceed 10% of our consolidated total tangible assets. To date, we have complied with the foregoing covenants. All outstanding amounts under the Senior Notes will be accelerated and must be repaid upon the occurrence of certain events of default under the Note Agreement. We are prohibited under the Note Agreement from undertaking certain acquisitions and dispositions, and incurring certain indebtedness and encumbrances, without prior approval of the holders of the Senior Notes. |
(3) |
Prior to May 10, 2019, the issued share capital of FirstService was comprised of subordinate voting shares and multiple voting shares of FirstService. On May 10, 2019, we eliminated FirstServices dual class share structure and effected an amendment to our articles that eliminated the multiple voting shares and the blank cheque preference shares as part of the authorized capital of FirstService, and re-classified our subordinate voting shares as Common Shares. See Recent Developments Settlement of Long-Term Incentive Arrangement and Elimination of Dual Class Voting Structure. |
(4) |
After deducting the Underwriters fee and the estimated expenses for the Offering. Excludes up to ● Common Shares which may be issued on exercise of the Over-Allotment Option. See Plan of Distribution. |
(5) |
Excludes: (i) 1,725,600 Common Shares issuable upon exercise of options granted under our stock option plan as at September 30, 2019; (ii) 689,500 Common Shares issuable upon exercise of options reserved for future grants under our stock option plan as at September 30, 2019; and (iii) up to 1,500,000 Common Shares issuable upon settlement of put or call options under redeemable non-controlling interests in respect of our minority equity positions in subsidiaries. See note 11 to our unaudited interim consolidated financial statements as at September 30, 2019 and for the three and nine-month periods then ended. |
(6) |
We commenced a normal course issuer bid on August 24, 2019 pursuant to which we may make open market purchases of up to 2,500,000 Common Shares (for cancellation) through the facilities of the TSX or Nasdaq. |
(7) |
Assumes that the net proceeds of the Offering, after payment of the Underwriters fee of $ ● and the expenses of the Offering estimated to be $ ● and before any exercise of the Over-Allotment Option, are applied to repay amounts owing under the revolving credit facility contained in the Credit Agreement. |
There have been no material changes in our equity or loan capital structure since September 30, 2019, other than: (a) we issued an aggregate of 86,500 Common Shares during the period from September 30, 2019 to the date hereof pursuant to the exercise of stock options under our stock option plan; and (b) net repayments under the revolving credit facility of the Credit Agreement (up to the close of business on November 29, 2019) of $6.8 million (such that, as at the close of business on November 29, 2019, there was $783.5 million of indebtedness under the Credit Agreement). See Recent Developments.
As at the date hereof, there are 39,330,957 Common Shares issued and outstanding, and options granted under our stock option plan to acquire an aggregate of 1,639,100 Common Shares. In addition, as of the date hereof, there are 689,500 Common Shares issuable upon exercise of options reserved for future grants under our stock option plan.
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Under an agreement (the Underwriting Agreement) dated ● , 2019 among us and the Underwriters, we have agreed to sell and the Underwriters have agreed to purchase on the Closing Date, subject to the terms and conditions contained therein, ● Offered Shares at a price of $ ● per Offered Share payable in cash to us against delivery, for aggregate gross proceeds of $ ● . In connection with the Offering, we have agreed to pay the Underwriters a fee of $ ● per Offered Share issued by us (or ● % of the total gross proceeds of the Offering) for aggregate consideration of $ ● for their services performed in connection with the Offering, upon completion of the Offering. The obligations of the Underwriters under the Underwriting Agreement are several and not joint and may be terminated at their discretion upon the occurrence of certain stated events as follows: (a) there should occur any material change (actual, contemplated or threatened) in the business, affairs, operations, assets, liabilities (contingent or otherwise), condition (financial or otherwise) or capital of the Corporation or a change in any material fact, or the Underwriters become aware of any undisclosed material information, which in the opinion of an Underwriter, acting reasonably, would reasonably be expected to have a material adverse effect on the market price or value of the Offered Shares; (b) there should develop, occur or come into effect or existence any event, action, state, condition or major financial occurrence, catastrophe, accident, natural disaster, public protest, war or act of terrorism of national or international consequence or any new law or regulation or a change thereof which, in the opinion of an Underwriter, acting reasonably, seriously adversely affects, or involves, or is expected to seriously adversely affect, or involve, financial markets in Canada or the United States generally or the business, operations, assets, liabilities (contingent or otherwise) or capital of the Corporation; (c) there should occur or commence or be announced or threatened any inquiry, action, suit, investigation or other proceeding (whether formal or informal) by any governmental authority or any order or ruling is issued under or pursuant to any statute of Canada or the United States or of any province or territory of Canada, or state of the United States by any governmental authority (other than any such inquiry, action, suit, investigation or other proceeding or order relating solely to any of the Underwriters), which in the reasonable opinion of an Underwriter would be expected to operate to prevent or materially restrict trading in or distribution of the Offered Shares or would have a material adverse effect on the market price or value of the Offered Shares; or (d) the Corporation is in breach of any term, condition or covenant of the Underwriting Agreement in any material respect.
Our expenses of the Offering, estimated to be approximately $ ● , will be paid for by us out of the gross proceeds of the Offering. The Underwriters are responsible for their expenses of the Offering. Subject to certain exceptions contained in the Underwriting Agreement, if an Underwriter fails to purchase the Offered Shares which it has agreed to purchase, the other Underwriters may, but are not obligated to, purchase such Offered Shares. The Underwriters are, however, obligated to take up and pay for all the Offered Shares if any Offered Shares are purchased under the Underwriting Agreement.
This Offering is being made concurrently in each of the provinces of Canada (except Québec) and in the United States pursuant to the multi-jurisdictional disclosure system implemented by securities regulatory authorities in the United States and Canada. The Underwriters will offer the Offered Shares for sale in the United States and Canada either directly or through their respective broker-dealer affiliates or agents registered in each jurisdiction. No securities will be sold in any jurisdiction except by a dealer appropriately registered under the securities laws of that jurisdiction or pursuant to an exemption from the registered dealer requirements of the securities laws of that jurisdiction. Subject to applicable law and the terms of the Underwriting Agreement, the Underwriters may offer the Offered Shares outside the United States and Canada.
The Offering Price was determined by negotiation between us and the Underwriters with reference to prevailing market conditions. All fees payable to the Underwriters will be paid on account of services rendered in connection with the Offering and will be paid from the proceeds of the Offering.
We have also granted the Underwriters the Over-Allotment Option, exercisable at the Underwriters sole option and without obligation, in whole or in part, at any time up to 30 days after the Closing Date, to purchase up to an additional ● Common Shares at a price of $ ● per Common Share on the same terms as set out above to
15
cover over-allotments, if any, and for market stabilization purposes. If the Over-Allotment Option is exercised in full, the price to the public, Underwriters fee and net proceeds to the Corporation (before payment of the estimated expenses of the Offering) will be $ ● , $ ● and $ ● , respectively. This short form prospectus also qualifies for distribution the grant of the Over-Allotment Option and the distribution of any Common Shares pursuant to the exercise of the Over-Allotment Option. A purchaser who acquires Common Shares forming part of the Underwriters over-allocation position acquires those Common Shares under this short form prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases.
We have applied to list the Offered Shares (including the Common Shares issuable pursuant to the exercise of the Over-Allotment Option) being distributed under this short form prospectus on the TSX. Listing will be subject to us fulfilling all of the listing requirements of the TSX. We will provide notice of the Offering to Nasdaq in accordance with the rules of that exchange.
Pursuant to rules and policy statements of certain Canadian securities regulators, the Underwriters may not, at any time during the period ending on the date the selling process for the Offered Shares ends and all stabilization arrangements relating to the Offered Shares are terminated, bid for or purchase Common Shares. The foregoing restrictions are subject to certain exceptions including: (i) a bid for or purchase of Common Shares if the bid or purchase is made through the facilities of the TSX or Nasdaq in accordance with the Universal Market Integrity Rules of the Investment Industry Regulatory Organization of Canada; (ii) a bid or purchase on behalf of a client, other than certain prescribed clients, provided that the clients order was not solicited by the Underwriter or if the clients order was solicited, the solicitation occurred before the commencement of a prescribed restricted period; and (iii) a bid or purchase to cover a short position entered into prior to the commencement of a prescribed restricted period. In connection with this Offering, the Underwriters may over-allot or effect transactions that stabilize or maintain the market price of the Common Shares at levels other than those which otherwise might prevail on the open market, including: stabilizing transactions; short sales; purchases to cover positions created by short sales; imposition of penalty bids; and syndicate covering transactions. The Underwriters may conduct these transactions on the TSX or Nasdaq. If the Underwriters commence any of these transactions, they may discontinue them at any time.
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the Common Shares while the Offering is in progress. These transactions may also include making short sales of the Common Shares, which involve the sale by the Underwriters of a greater number of Offered Shares than they are required to purchase under the Offering. Short sales may be covered short sales, which are short positions in an amount not greater than the Over-Allotment Option, or may be naked short sales, which are short positions in excess of that amount.
The Underwriters may close out any covered short position either by exercising the Over-Allotment Option, in whole or in part, or by purchasing Common Shares in the open market. In making this determination, the Underwriters will consider, among other things, the price of Common Shares available for purchase in the open market compared to the price at which they may purchase Common Shares through the Over-Allotment Option. The Underwriters must close out any naked short position by purchasing Common Shares in the open market. A naked short position is more likely to be created if the Underwriters are concerned that there may be downward pressure on the price of the Common Shares in the open market that could adversely affect investors who purchase under the Offering. Any naked short position would form part of the Underwriters over-allocation position.
The Offering Price is payable in U.S. dollars only. The Underwriters propose to offer the Offered Shares initially at the Offering Price. After the Underwriters have made a reasonable effort to sell all of the Offered Shares offered by this short form prospectus at the Offering Price, the offering price may be decreased, and further changed from time to time, by the Underwriters to an amount not greater than the Offering Price and, in such case, the compensation realized by the Underwriters will be decreased by the amount that the aggregate price
16
paid by the purchasers for the Offered Shares is less than the gross proceeds paid by the Underwriters to us. Any such reduction to the Offering Price will not affect the proceeds received by us.
We have agreed to indemnify the Underwriters and their affiliates and their respective directors, officers, employees and agents against certain liabilities, including liabilities under applicable Canadian securities laws and the U.S. Securities Act.
We have agreed that, subject to certain stated exceptions set forth in the Underwriting Agreement, we will not, without the prior written consent of the Lead Underwriters (such consent not to be unreasonably withheld or delayed), on behalf of the Underwriters, directly or indirectly issue, offer, pledge, sell, contract to sell, contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer, lend or dispose of, directly or indirectly, any Common Shares or securities or other financial instruments convertible into or having the right to acquire Common Shares, or enter into any agreement or arrangement under which the Corporation would acquire or transfer to another, in whole or in part, any of the economic consequences of ownership of Common Shares, whether that agreement or arrangement may be settled by the delivery of Common Shares or other securities or cash, or agree to become bound to do so, or disclose to the public any intention to do so, at any time prior to the expiry of 90 days following the closing of the Offering. Our directors and senior officers will also agree, prior to the closing of the Offering and subject to certain exceptions, not to, without the prior written consent of the Lead Underwriters (such consent not to be unreasonably withheld or delayed), on behalf of the Underwriters, directly or indirectly, offer to sell, sell, contract to sell, transfer, assign, pledge, grant any option to purchase, make any short sale or otherwise dispose of or monetize any shares of the Corporation, or any options or warrants to purchase any shares of the Corporation, or any securities convertible into, exchangeable for, or that represent the right to receive, shares of the Corporation, presently owned directly or indirectly, or under control or direction or with respect to which he or she has beneficial ownership, or subsequently acquired, directly or indirectly, or under control or direction or with respect to which he or she acquires beneficial ownership, or enter into any swap, forward or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of such securities (regardless of whether any such arrangement is to be settled by the delivery of securities of the Corporation, securities of another person, cash or otherwise) or agree to do any of the foregoing or publicly announce any intention to do any of the foregoing, at any time prior to the expiry of 90 days following the closing of the Offering.
Subscriptions for Offered Shares will be received subject to rejection or allotment, in whole or in part, and the right is reserved to close the subscription books at any time without prior notice. The closing of the Offering will take place on the Closing Date. The Offered Shares will be issued and deposited in electronic form with CDS or its nominee pursuant to the book-based system administered by CDS. No certificates evidencing the Offered Shares will be issued to purchasers, and registration will be made in the depository service of CDS. Purchasers of Offered Shares will receive only a customer confirmation from the registered dealer who is a CDS participant and from or through whom a beneficial interest in the Offered Shares is purchased.
Other than in the United States and in each of the provinces of Canada (except Québec), no action has been taken by FirstService that would permit a public offering of the Offered Shares in any jurisdiction where action for that purpose is required. The Offered Shares may not be offered or sold, directly or indirectly, nor may this short form prospectus or any other offering material or advertisements in connection with the offer and sale of any Offered Shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this short form prospectus comes are advised to inform themselves about and to observe any restrictions relating to the Offering and the distribution of this short form prospectus. This short form prospectus does not constitute an offer to sell or a solicitation of an offer to buy any Offered Shares in any jurisdiction in which such an offer or a solicitation is unlawful.
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Conflicts of Interest
As described in Use of Proceeds, the net proceeds of the Offering will be used to repay a portion of our indebtedness under the Credit Agreement. As a result, affiliates of one or more of the Underwriters may receive more than 5% of the net proceeds from the Offering in the form of the repayment of such indebtedness. Accordingly, the Offering is being conducted in compliance with FINRA Rule 5121, as administered by the Financial Industry Regulatory Authority (FINRA). Pursuant to that rule, the appointment of a qualified independent underwriter is not necessary in connection with the Offering, as the Offering is of a class of equity securities for which there is a bona fide public market, as defined by FINRA rules.
Other than as set out below, we have not issued any Common Shares, nor any securities convertible into or exchangeable for Common Shares, in the twelve month period preceding the date of this short form prospectus. Except as otherwise noted, all of the issuances of Common Shares noted below (which includes issuances of the previous subordinate voting shares of FirstService, which subordinate voting shares were re-classified as Common Shares) are in respect of the exercise of stock options granted under our stock option plan.
Date of Issuance |
Number of
Common Shares Issued |
Exercise/Issue
Price per Common Share ($) |
||||||
September 18, 2018 |
9,900 | 21.40 66.31 | ||||||
November 16, 2018 |
2,400 | 20.52 | ||||||
November 23, 2018 |
45,000 | 20.52 | ||||||
November 29, 2018 |
5,000 | 16.84 | ||||||
February 8, 2019 |
25,500 | 20.52 | ||||||
February 14, 2019 |
10,900 | 21.40 66.31 | ||||||
February 19, 2019 |
18,750 | 54.88 66.31 | ||||||
March 4, 2019 |
63,750 | 20.52 23.96 | ||||||
March 6, 2019 |
8,400 | 20.52 23.96 | ||||||
March 21, 2019 |
3,600 | 23.96 | ||||||
March 26, 2019 |
3,750 | 20.52 | ||||||
April 22, 2019 |
54,000 | 23.96 | ||||||
May 1, 2019 |
4,500 | 54.88 | ||||||
May 6, 2019 |
6,400 | 35.96 83.89 | ||||||
May 8, 2019 |
11,500 | 20.52 | ||||||
May 10, 2019 |
111,250 | 20.52 | ||||||
May 10, 2019(1) |
1,325,694 | | ||||||
May 10, 2019(2) |
2,918,860 | 86.17 | ||||||
June 7, 2019 |
750 | 23.96 | ||||||
September 20, 2019 |
22,500 | 23.96 | ||||||
October 28, 2019 |
73,000 | 23.96 | ||||||
October 31, 2019 |
13,500 | 23.96 | ||||||
|
|
|||||||
Total: |
4,738,904 | |||||||
|
|
Notes:
(1) |
Relates to subordinate voting shares of FirstService issued in connection with the conversion of the multiple voting shares of FirstService on a one-for-one basis (and for no consideration) on May 10, 2019, thereby eliminating FirstServices dual class share structure (which subordinate voting shares were re-classified as Common Shares on May 10, 2019). See Recent Developments Settlement of Long-Term Incentive Arrangement and Elimination of Dual Class Voting Structure. |
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(2) |
Relates to subordinate voting shares of FirstService issued on May 10, 2019 in connection with the settlement of the MSA (which subordinate voting shares were re-classified as Common Shares on May 10, 2019) at an effective issue price of C$115.58 per share (converted into U.S. dollars using the Bank of Canada exchange rate on March 11, 2019 of C$1.00 = US$0.7455). See Recent Developments Settlement of Long-Term Incentive Arrangement and Elimination of Dual Class Voting Structure. |
As at the date hereof, there are options granted under our stock option plan to acquire an aggregate of 1,639,100 Common Shares.
The outstanding Common Shares are listed and posted for trading on the TSX and Nasdaq under the symbol FSV. No other securities of FirstService are listed for trading on any marketplace. The following table sets forth, for the periods indicated, the reported high and low trading prices and the aggregate volume of trading of the Common Shares on Nasdaq (in United States dollars) and on the TSX (in Canadian dollars):
Nasdaq(1) | TSX(1) | |||||||||||||||||||||||
Month |
High
Price (US$) |
Low
Price (US$) |
Volume
Traded |
High
Price (C$) |
Low
Price (C$) |
Volume
Traded |
||||||||||||||||||
December 2018 |
78.28 | 64.87 | 796,929 | 103.35 | 88.45 | 1,012,243 | ||||||||||||||||||
January 2019 |
81.95 | 65.55 | 809,624 | 108.11 | 88.42 | 1,037,007 | ||||||||||||||||||
February 2019 |
89.17 | 80.98 | 741,012 | 117.86 | 105.94 | 1,139,645 | ||||||||||||||||||
March 2019 |
89.67 | 83.22 | 677,200 | 119.76 | 111.19 | 986,016 | ||||||||||||||||||
April 2019 |
89.95 | 83.02 | 529,195 | 120.08 | 113.90 | 802,810 | ||||||||||||||||||
May 2019 |
95.55 | 85.17 | 1,130,105 | 129.95 | 114.40 | 1,056,050 | ||||||||||||||||||
June 2019 |
100.19 | 90.23 | 633,907 | 132.32 | 121.51 | 680,421 | ||||||||||||||||||
July 2019 |
106.73 | 95.02 | 897,845 | 140.36 | 124.52 | 899,643 | ||||||||||||||||||
August 2019 |
108.42 | 98.02 | 690,963 | 143.26 | 131.40 | 885,808 | ||||||||||||||||||
September 2019 |
111.09 | 98.62 | 512,588 | 140.99 | 131.00 | 741,549 | ||||||||||||||||||
October 2019 |
106.31 | 85.88 | 1,183,814 | 139.30 | 112.23 | 1,357,020 | ||||||||||||||||||
November 2019 |
97.14 | 86.53 | 828,496 | 129.00 | 113.74 | 1,181,832 |
Note:
(1) |
On May 10, 2019, FirstService effected an amendment to its articles that eliminated the multiple voting shares and the blank cheque preference shares as part of the authorized capital of FirstService, and re-classified its subordinate voting shares as Common Shares. See FirstService Corporation and Recent Developments Settlement of Long-Term Incentive Arrangement and Elimination of Dual Class Voting Structure. The information in the table provided prior to May 10, 2019 relates to the subordinate voting shares of FirstService. |
On November 29, 2019, the last trading day prior to the date of this short form prospectus, the closing prices of the outstanding Common Shares on the TSX and Nasdaq were C$127.08 and US$95.89, respectively. We have applied to list the Offered Shares (including the Common Shares issuable pursuant to the exercise of the Over-Allotment Option) being distributed under this short form prospectus on the TSX. Listing will be subject to us fulfilling all of the listing requirements of the TSX. We will provide notice of the Offering to Nasdaq in accordance with the rules of that exchange.
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CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Fogler, Rubinoff LLP, Canadian counsel to the Corporation, and Stikeman Elliott LLP, Canadian counsel to the Underwriters (collectively, Counsel), the following is a general summary, as of the date hereof, of the principal Canadian federal income tax considerations under the Tax Act and the regulations thereunder generally applicable to a holder who acquires, as beneficial owner, Offered Shares pursuant to the Offering. This summary only applies to a holder who, for the purposes of the Tax Act and at all relevant times: (i) deals at arms length with the Corporation and the Underwriters and is not affiliated with the Corporation or the Underwriters; and (ii) acquires and holds the Offered Shares as capital property (a Holder). The Offered Shares will generally be considered to be capital property to a Holder unless they are held in the course of carrying on a business or were acquired in one or more transactions considered to be an adventure or concern in the nature of trade.
This summary is based upon: (i) the current provisions of the Tax Act and the regulations thereunder in force as of the date hereof; (ii) all specific proposals (the Tax Proposals) to amend the Tax Act and the regulations thereunder that have been publicly announced by, or on behalf of, the Minister of Finance (Canada) prior to the date hereof; (iii) the Canada-United States Tax Convention (1980), as amended (the Treaty) and (iv) Counsels understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency (the CRA) made publicly available prior to the date hereof. This summary assumes that all such Tax Proposals will be enacted in the form currently proposed but no assurance can be given that they will be enacted in the form proposed or at all. This summary is not exhaustive of all possible Canadian federal income tax considerations and, except for the Tax Proposals, does not otherwise take into account or anticipate any changes in law, administrative policy or assessing practice, whether by legislative, regulatory, administrative, governmental or judicial interpretation, decision or action, nor does it take into account the tax laws of any province or territory of Canada or of any jurisdiction outside of Canada, which may differ from the Canadian federal income tax considerations described herein. In addition, this summary does not address the deductibility of interest by a Holder who has borrowed money or otherwise incurred debt in connection with the acquisition of Offered Shares.
Subject to certain exceptions that are not discussed in this summary, for the purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of Offered Shares must be determined in Canadian dollars based on the rate of exchange quoted by the Bank of Canada on the date such amount arose or such other rate of exchange as may be acceptable to the CRA.
This summary is not exhaustive of all possible Canadian federal income tax considerations of purchasing, holding or disposing of the Offered Shares. Moreover, this summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular Holder and no representation with respect to the income tax consequences to any particular Holder is made. Accordingly, Holders are urged to consult their own tax advisors about the specific tax consequences to them of acquiring, holding and disposing of Offered Shares in their particular circumstances.
Holders Resident in Canada
This portion of the summary applies to a Holder who, for purposes of the Tax Act and at all relevant times, is or is deemed to be a resident of Canada (a Resident Holder). This summary is not applicable to a Resident Holder: (i) that is a financial institution within the meaning of the Tax Act (including for the purposes of the mark-to-market rules in the Tax Act); (ii) that is a specified financial institution or restricted financial institution within the meaning of the Tax Act; (iii) that reports its Canadian tax results within the meaning of the Tax Act in a currency other than Canadian currency; (iv) an interest in which is a tax shelter investment within the meaning of the Tax Act; or (v) that enters into or has entered into, with respect to the Offered Shares, a derivative forward agreement or a synthetic disposition arrangement as those terms are defined in the Tax Act. Such Resident Holders should consult their own tax advisors.
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A Resident Holder whose Offered Shares might not otherwise qualify as capital property may, in certain circumstances, be entitled to make the irrevocable election provided by subsection 39(4) of the Tax Act to have its Offered Shares and every other Canadian security (as defined in the Tax Act) owned by such Resident Holder in the taxation year of the election and in all subsequent taxation years deemed to be capital property. Such Resident Holders should consult their own tax advisors as to whether an election under subsection 39(4) of the Tax Act is available and/or advisable in their particular circumstances.
Additional considerations, not discussed herein, may be applicable to a Resident Holder that is a corporation resident in Canada, and is, or becomes, or does not deal at arms length with a corporation resident in Canada that is, or becomes, as part of a transaction or event or series of transactions or events that includes the acquisition of Offered Shares, controlled by a non-resident corporation for purposes of the foreign affiliate dumping rules in section 212.3 of the Tax Act. Such Resident Holders should consult their tax advisors with respect to the consequences of acquiring Offered Shares.
Dividends on Offered Shares
A Resident Holder will be required to include in computing its income for a taxation year any taxable dividend received or deemed to be received on the Offered Shares. In the case of a Resident Holder that is an individual (other than certain trusts), such dividend will be subject to the gross-up and dividend tax credit rules normally applicable under the Tax Act to taxable dividends received from taxable Canadian corporations. Taxable dividends that are designated by the Corporation as eligible dividends will be subject to an enhanced gross-up and tax credit regime in accordance with the rules in the Tax Act. There may be limitations on the ability of the Corporation to designate dividends as eligible dividends.
In the case of a Resident Holder that is a corporation, the amount of any such taxable dividend that is included in its income for a taxation year will generally be deductible in computing its taxable income for that taxation year. In certain circumstances, a taxable dividend received by a Resident Holder that is a corporation may be treated as proceeds of disposition or a capital gain pursuant to the rules in subsection 55(2) of the Tax Act. Corporate Resident Holders should contact their own tax advisors with respect to the application of these rules in their particular circumstances.
Dispositions of Offered Shares
A Resident Holder who disposes of or is deemed for the purposes of the Tax Act to have disposed of an Offered Share (other than to the Corporation unless purchased by the Corporation in the open market in the manner in which shares are normally purchased by any member of the public in the open market) will generally realize a capital gain (or capital loss) in the taxation year of the disposition equal to the amount by which the proceeds of disposition are greater (or are less) than the total of: (i) the adjusted cost base, as defined in the Tax Act, to the Resident Holder of the Offered Shares immediately before the disposition or deemed disposition; and (ii) any reasonable costs of disposition. For purposes of determining the adjusted cost base to a Resident Holder of Offered Shares acquired pursuant to this Offering, the cost of such Offered Shares will be averaged with the adjusted cost base of all other Common Shares (if any) held by the Resident Holder as capital property immediately before that time.
A Resident Holder will generally be required to include in computing its income for the taxation year of disposition, one-half of the amount of any capital gain (a taxable capital gain) realized in such year. Subject to and in accordance with the provisions of the Tax Act, a Resident Holder will generally be required to deduct one-half of the amount of any capital loss (an allowable capital loss) realized in the taxation year of disposition against taxable capital gains realized in the same taxation year. Allowable capital losses in excess of taxable capital gains for the taxation year of disposition generally may be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in any subsequent taxation year against net taxable capital gains realized in such taxation years, to the extent and under the circumstances specified in the Tax Act.
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If a Resident Holder is a corporation, any capital loss realized on a disposition or deemed disposition of Offered Shares may, in certain circumstances prescribed by the Tax Act, be reduced by the amount of any dividends which have been received or which are deemed to have been received on such Offered Shares. Similar rules may apply where a Resident Holder that is a corporation is a member of a partnership or a beneficiary of a trust that owns Offered Shares directly or indirectly through a partnership or a trust. Resident Holders to whom these rules may be relevant should consult their own tax advisors.
Other Taxes
A Resident Holder that is a private corporation or a subject corporation, as defined in the Tax Act, will generally be liable to pay a refundable tax under Part IV of the Tax Act on dividends received on the Offered Shares to the extent such dividends are deductible in computing the Resident Holders taxable income for the year. This tax will generally be refunded to the corporation when sufficient taxable dividends are paid while it is a private corporation or a subject corporation.
A Resident Holder that is throughout the relevant taxation year a Canadian-controlled private corporation (as defined in the Tax Act) may be liable to pay an additional refundable tax on its aggregate investment income (as defined in the Tax Act) for the year, including taxable capital gains realized on the disposition of Offered Shares.
Capital gains realized and taxable dividends received by a Resident Holder who is an individual (other than certain trusts) may result in such Resident Holder being liable for alternative minimum tax under the Tax Act. Such Resident Holders should consult their own tax advisors in this regard.
Holders Not Resident in Canada
This portion of the summary applies to a Holder who, for purposes of the Tax Act and at all relevant times: (i) is not and is not deemed to be a resident of Canada; and (ii) does not use or hold, and is not deemed to use or hold, Offered Shares in the course of carrying on, or otherwise in connection with, a business in Canada (a Non-Canadian Holder). Special rules, which are not discussed in this summary, apply to a Non-Canadian Holder that is an insurer carrying on an insurance business in Canada and elsewhere. Such Non-Canadian Holders should consult their own tax advisors.
Dividends on Offered Shares
Dividends paid or credited or deemed to be paid or credited to a Non-Canadian Holder on the Offered Shares will be subject to Canadian withholding tax. The Tax Act imposes withholding tax at a rate of 25% on the gross amount of the dividend, although such rate may be reduced by virtue of an applicable tax treaty. For example, under the Treaty, where dividends on the Offered Shares are considered to be paid to a Non-Canadian Holder that is the beneficial owner of the dividends and is a United States resident for the purposes of, and is entitled to all of the benefits of, the Treaty (a Qualifying Person), the applicable rate of Canadian withholding tax is generally reduced to 15%. The Corporation will be required to withhold the applicable withholding tax from any dividend and remit it to the Canadian government for the Non-Canadian Holders account.
Disposition of Offered Shares
A Non-Canadian Holder will not be subject to Canadian federal income tax under the Tax Act on a capital gain realized on a disposition or deemed disposition of an Offered Share unless, at the time of disposition, such Offered Share constitutes taxable Canadian property to the Non-Canadian Holder for the purposes of the Tax Act and the Non-Canadian Holder is not entitled to relief under an applicable income tax convention between Canada and the country in which the Non-Canadian Holder is resident.
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If an Offered Share is listed on a designated stock exchange for purposes of the Tax Act (which includes the TSX) at the time it is disposed of, such Offered Share will generally not constitute taxable Canadian property to a Non-Canadian Holder unless, at that time or at any particular time within the preceding 60 months:
|
25% or more of the issued shares of any class or series of the Corporations shares were owned by one or any combination of: (1) the Non-Canadian Holder; (2) persons with whom the Non-Canadian Holder did not deal at arms length (within the meaning of the Tax Act); and (3) partnerships in which the Non-Canadian Holder or a person described in (2) holds a membership interest directly or indirectly through one or more partnerships; and |
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more than 50% of the fair market value of the Offered Share was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, Canadian resource properties (as defined in the Tax Act), timber resource properties (as defined in the Tax Act), and options in respect of, or interests in, or for civil law rights in, any such foregoing properties, whether or not such properties exist. |
If an Offered Share is taxable Canadian property to a Non-Canadian Holder that is a Qualifying Person, any capital gain realized on a disposition or deemed disposition of such share will nevertheless generally not be subject to Canadian federal income tax by virtue of the Treaty if the value of the Offered Share at the time of the disposition or deemed disposition is not derived principally from real property situated in Canada for purposes of the Treaty.
A Non-Canadian Holder whose Offered Shares may constitute taxable Canadian property is urged to consult with the Non-Canadian Holders own tax advisors.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the U.S. federal income tax considerations generally applicable to a U.S. Holder (as defined below) of the acquisition, ownership, and disposition of Common Shares. This summary does not purport to address all U.S. federal income tax matters that may be relevant to a particular U.S. Holder of Common Shares, nor is it a complete analysis of all potential U.S. federal income tax consequences. This summary does not address any tax consequences arising under any state, local or non-U.S. tax laws or U.S. federal estate or gift tax laws. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the Code), the Treasury regulations thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion is limited to U.S. Holders that hold Common Shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax considerations that may be relevant to shareholders that are subject to special tax rules, including, without limitation, expatriates and certain former citizens of the United States, partnerships and other pass-through entities, financial institutions, insurance companies, brokers, dealers or traders in securities, commodities or currencies, tax-exempt organizations, tax qualified retirement plans, persons subject to the alternative minimum tax, persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar, persons holding Common Shares as part of a hedge, straddle or other risk reduction strategy or as part of a hedging or conversion transaction or other integrated investment, persons that own or have owned (directly, indirectly, or by attribution) 10% or more of the total combined voting power or value of the outstanding shares of FirstService, and persons who acquired their Common Shares through stock option or stock purchase plan programs or from other compensatory arrangements.
If a partnership (or other entity taxed as a partnership for U.S. federal income tax purposes) holds Common Shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partnerships and partners in such a partnership are urged to consult their tax advisers regarding the tax consequences of acquiring, owning, and disposing of Common Shares.
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For purposes of this discussion, a U.S. Holder is a beneficial owner of Common Shares that is: (i) a citizen or an individual who is a resident of the United States as determined for U.S. federal income tax purposes; (ii) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any State or political subdivision thereof or the District of Columbia; (iii) an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust (1) if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons has the authority to control all of the substantial decisions of the trust or (2) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.
This summary is of a general nature only and is not intended to be tax advice to any prospective investor, and no representation with respect to the tax consequences to any particular investor is made. Prospective investors are urged to consult their tax advisers with respect to the U.S. federal, state, local and non-U.S. income and other tax considerations relevant to them, having regard to their particular circumstances.
Distributions
Subject to the passive foreign investment company rules discussed below, the gross amount of a distribution paid to a U.S. Holder with respect to Common Shares (including amounts withheld to pay Canadian withholding taxes) will be included in such holders gross income as dividend income to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent that the amount of a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of a U.S. Holders tax basis in its Common Shares, and to the extent the amount of the distribution exceeds such U.S. Holders tax basis, the excess will be taxed as a capital gain. Because we do not expect to calculate our earnings and profits in accordance with U.S. federal income tax principles, U.S. Holders should expect that a distribution generally will be treated as a dividend for U.S. federal income tax purposes.
Dividends received by individuals and other non-corporate U.S. Holders of Common Shares traded on the Nasdaq generally will be subject to tax at preferential rates applicable to long-term capital gains, provided that such holders meet certain holding period and other requirements and FirstService is not treated as a PFIC (as defined below) for the taxable year in which the dividend is paid or for the preceding taxable year. Dividends on Common Shares will generally not be eligible for the dividends-received deduction allowed to corporations. U.S. Holders are urged to consult their tax advisers regarding the application of the relevant rules to their particular circumstances.
Dividends paid on Common Shares generally will constitute foreign-source income for foreign tax credit limitation purposes. A U.S. Holder may be entitled to deduct or credit any Canadian withholding taxes on dividends in determining its U.S. income tax liability, subject to certain limitations (including that the election to deduct or credit foreign taxes applies to all of such U.S. Holders foreign taxes for a particular tax year). The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. Dividends distributed with respect to Common Shares generally will constitute passive category income. The rules governing the foreign tax credit are complex. U.S. Holders are urged to consult their tax advisers regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition of Common Shares
Subject to the passive foreign investment company rules discussed below, a U.S. Holder will recognize taxable gain or loss upon the sale, exchange, or other taxable disposition of a Common Share equal to the difference, if any, between the amount realized for the Common Share and the U.S. Holders tax basis in such Common Share. The gain or loss will be considered a capital gain or loss. Non-corporate U.S. Holders, including individual U.S. Holders that have held Common Shares for more than one year, currently are eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss recognized by a U.S. Holder generally will be treated as U.S.-source gain or loss for foreign tax credit limitation purposes.
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Passive Foreign Investment Company
Certain adverse tax consequences could apply to a U.S. Holder if we are treated as a passive foreign investment company (PFIC) for any taxable year during which the U.S. Holder holds Common Shares. A non-U.S. corporation, such as FirstService, will be classified as a PFIC for U.S. federal income tax purposes for any taxable year in which, after applying certain look-through rules, either: (i) 75% or more of its gross income for such year consists of certain types of passive income; or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income. Passive income generally includes dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of property producing such income, and net foreign currency gains. We do not believe that we were a PFIC for the preceding taxable year, nor do we expect to be a PFIC for the current taxable year or for the foreseeable future. However, the determination of whether we are or will be a PFIC must be made annually as of the close of each taxable year. Because PFIC status depends upon the composition of our income and assets from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year, or that the U.S. Internal Revenue Service (IRS) or a court will agree with our determination as to our PFIC status.
If we were a PFIC for any taxable year during which a U.S. Holder held Common Shares, then any gain recognized by such holder upon the sale or other disposition of the Common Shares would be allocated ratably over such holders holding period for the Common Shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate on ordinary income in effect for individuals or corporations, as appropriate for that taxable year, and an interest charge would be imposed on the resulting tax liability. Further, to the extent that any distribution received by a U.S. Holder on its Common Shares were to exceed 125% of the average of the annual distributions received on the Common Shares received during the preceding three years or the U.S. Holders holding period, whichever is shorter, such excess would be subject to taxation in the same manner as gain, described immediately above. Certain elections (including a mark-to-market election) may be available to U.S. Holders to mitigate some of the adverse tax consequences resulting from PFIC treatment. If we were a PFIC for any taxable year during which a U.S. Holder held Common Shares, then such U.S. Holder would be required to file an annual report on IRS Form 8621, subject to certain exceptions. U.S. Holders are urged to consult their tax advisers regarding the application of the PFIC rules to an investment in Common Shares.
Receipt of Foreign Currency
The U.S. dollar value of any distribution on Common Shares made in Canadian dollars generally will be calculated by reference to the exchange rate between the U.S. dollar and the Canadian dollar in effect on the date of actual or constructive receipt of such distribution by the U.S. Holder, regardless of whether the Canadian dollars so received are in fact converted into U.S. dollars. If the Canadian dollars so received are converted into U.S. dollars on the date of receipt, then a U.S. Holder generally will not recognize foreign currency gain or loss on such conversion. If the Canadian dollars so received are not converted into U.S. dollars on the date of receipt, then a U.S. Holder generally will have a tax basis in the Canadian dollars equal to the U.S. dollar value of such Canadian dollars on the date of receipt. Any gain or loss on a subsequent conversion or other disposition of the Canadian dollars generally will be treated as ordinary income or loss to a U.S. Holder and generally will be U.S.-source income or loss for U.S. foreign tax credit purposes. U.S. Holders are urged to consult their tax advisers regarding the U.S. federal income tax consequences of receiving distributions on Common Shares in Canadian dollars. The considerations set forth in this paragraph are not relevant for U.S. Holders that receive distributions on Common Shares in U.S. dollars.
Additional Tax on Net Investment Income
Certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their net investment income, which may include all or a portion of their dividend income and net gains from the
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disposition of Common Shares. Each U.S. Holder that is an individual, estate or trust is urged to consult its tax advisers regarding the applicability of this tax to its income and gains in respect of Common Shares.
Foreign Financial Asset Reporting
Citizens or individual residents of the United States holding specified foreign financial assets (which generally include stock and other securities issued by a foreign person unless held in an account maintained by a financial institution) that exceed certain U.S. dollar thresholds are required to report information relating to such assets, which could include Common Shares, by filing a completed IRS Form 8938 (Statement of Specified Foreign Financial Assets) with their tax returns. Significant penalties may apply for the failure to satisfy this reporting obligation. U.S. Holders are urged to consult their tax advisers regarding the foregoing reporting obligation with regard to their ownership of Common Shares.
Information Reporting and Backup Withholding
Distributions with respect to Common Shares and proceeds from the sale, exchange, or redemption of Common Shares may be subject to information reporting to the IRS and U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes other required certifications, or who is otherwise exempt from backup withholding and properly establishes such exempt status. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holders U.S. federal income tax liability, and a U.S. Holder generally may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
RELATIONSHIP BETWEEN THE CORPORATION AND CERTAIN UNDERWRITERS
BMO Nesbitt Burns Inc., TD Securities Inc., ● and ● are each, directly or indirectly, a subsidiary of a Canadian chartered bank which is a lender to FirstService and its subsidiaries and a member of syndicate of lenders (collectively, the lenders) under the Credit Agreement. Accordingly, FirstService may be considered to be a connected issuer of each of these Underwriters under applicable Canadian securities legislation. The net proceeds of this Offering will be used by FirstService to repay a portion of our existing indebtedness under the Credit Agreement, which will then be available to be drawn, as required, for working capital, acquisitions and associated contingent purchase consideration and/or for general corporate purposes. Our financial position has not changed substantially and adversely since the indebtedness under the Credit Agreement was incurred. As at November 29, 2019, we were indebted to the lenders in respect of the Credit Agreement in the aggregate amount of $783.5 million. See Consolidated Capitalization.
We will use the net proceeds of the Offering to reduce our indebtedness to the lenders under the Credit Agreement by approximately $ ● (approximately $ ● if the Over-Allotment Option is exercised in full). See Use of Proceeds and Plan of Distribution Conflicts of Interest. The decision to distribute the Offered Shares and the determination of the terms of distribution of the Offered Shares, including the Offering Price, were made through negotiations between us and the Underwriters with reference to prevailing market conditions. The lenders did not have any involvement in such decision or determination, however, the lenders have been advised of the Offering and the terms thereof. None of the Underwriters, including BMO Nesbitt Burns Inc., TD Securities Inc., ● and ● , will receive any benefit from the Offering other than its respective portion of the Underwriters fee payable by us. The lenders will receive the net proceeds from the Offering from us as a repayment of outstanding indebtedness under the Credit Agreement, and such amount so received by the lenders as a repayment of the revolving credit facility portion of the Credit Agreement will then be available to be drawn by us under the Credit Agreement, as required, for working capital, acquisitions and associated contingent purchase consideration and/or general corporate purposes.
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Before making an investment decision, prospective purchasers of Offered Shares should carefully consider the information described in this short form prospectus and the documents incorporated by reference herein. There are certain risks inherent in an investment in Common Shares and in our business and activities, and prospective purchasers should carefully consider those risks described under Forward-Looking Statements and the risks described below before investing in the Offered Shares. Readers are cautioned that such risk factors are not exhaustive. Our business, financial condition and results of operations could be materially adversely affected by any of these risks and past performance is no guarantee of future performance.
The risks and uncertainties set out below and incorporated by reference herein are not the only ones we are facing. Additional risks and uncertainties not currently known to us, or that we currently deem immaterial, may also impair our operations. If any of these risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of the Common Shares could decline and investors could lose part or all of their investment.
Risks Relating to FirstService and our Business
A prospective purchaser of Offered Shares should carefully consider the risk factors described under the heading Risk factors in the Current AIF and under the headings Market risk of financial instruments and Forward-looking statements and risks in the Current Annual MD&A. These risks and uncertainties include, among other things: economic conditions, especially as they relate to credit conditions, consumer spending and demand for managed residential property; residential real estate property values, resale rates and general conditions of financial liquidity for real estate transactions; extreme weather conditions impacting demand for our services or our ability to perform those services; economic deterioration impacting our ability to recover goodwill and other intangible assets; a decline in our ability to generate cash from our businesses to fund future acquisitions and meet our debt obligations; the effects of changes in foreign exchange rates in relation to the U.S. dollar on our Canadian dollar denominated revenues and expenses; competition in the markets served by FirstService; labour shortages or increases in wage and benefit costs; the effects of changes in interest rates on our cost of borrowing; a decline in our performance impacting our continued compliance with the financial covenants under our debt agreements, or our ability to negotiate a waiver of certain covenants with our lenders; unexpected increases in operating costs, such as insurance, workers compensation, health care and fuel prices; changes in the frequency or severity of insurance incidents relative to our historical experience; a decline in our ability to make acquisitions at reasonable prices and successfully integrate acquired operations (including the Global Restoration Acquisition and recent and future tuck-under acquisitions); changes in laws, regulations and government policies at the federal, state/provincial or local level that may adversely impact our businesses; risks related to liability for employee acts or omissions, or installation/system failure, in our fire protection businesses; a decline in our performance impacting our ability to pay dividends on Common Shares; risks arising from any regulatory review and litigation; risks associated with intellectual property and other proprietary rights that are material to our business; disruptions or security failures in our information technology systems; and political conditions, including any outbreak or escalation of terrorism or hostilities and the impact thereof on our business.
Risks Relating to the Global Restoration Acquisition and Business
No Assurance of Global Restorations Future Performance
Historic and current performance of the business of Global Restoration may not be indicative of success in future periods. The Global Restoration business may not perform as well as we anticipate or we may incur unanticipated costs and expenses relating to its operations. The future performance of the business of Global Restoration may be influenced by, among other factors, weather and climate patterns which are unpredictable, economic downturns, regulatory changes and other factors beyond the control of FirstService. There is no assurance that revenues generated from the Global Restoration business acquired by FirstService will increase in future years. As a result of any one or more of these factors, the operations and financial performance of the
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business of Global Restoration may be negatively affected, which could materially and adversely affect FirstServices financial results.
Indebtedness Following Completion of the Global Restoration Acquisition is Substantial
In connection with the closing of the Global Restoration Acquisition, we completed a refinancing of our long-term senior debt by entering into the Credit Agreement. The Credit Agreement is comprised of a committed multi-currency revolving credit facility of $450 million (of which $343.5 million is outstanding as at November 29, 2019) and a term loan (drawn in a single advance) in the aggregate amount of $440 million (all of which remains outstanding as at November 29, 2019). See Recent Developments Credit Agreement Expansion and Consolidated Capitalization. Although we expect to repay a portion of our indebtedness under the revolving credit facility portion of the Credit Agreement with the net proceeds of this Offering, we can provide no assurance that we will use the net proceeds in this manner, and the amount of our indebtedness under the Credit Agreement that remains outstanding after such repayment may still be substantial. FirstServices degree of leverage as a result of the financing required to complete the Global Restoration Acquisition could have adverse consequences for FirstService, including: limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and associated contingent purchase consideration, and/or for general corporate purposes; restricting our flexibility and discretion to operate our business; limiting our ability to declare dividends on the Common Shares; having to dedicate a portion of our cash flows from operations to the payment of interest on our existing indebtedness and not having such cash flows available for other purposes, including operations, capital expenditures, acquisitions and other future business opportunities; exposing us to increased interest expense on borrowings; limiting our ability to adjust to changing market conditions; placing us at a competitive disadvantage compared to its competitors that have less debt; making us vulnerable in a downturn in general economic conditions; and making us unable to make capital expenditures that are important to our growth and strategies. In the event that we are unable to make principal or interest payments on our indebtedness outstanding under the Credit Agreement or our other indebtedness as required, we could be in default and such indebtedness could be accelerated, and we may not be able to repay or refinance such indebtedness. Any such default and acceleration could require us to raise additional equity capital (resulting in dilution) or take on additional indebtedness, which could have more onerous terms than our existing indebtedness, or to sell assets or take other actions that could adversely affect our business.
Potential Liabilities Associated with the Global Restoration Acquisition
Under the Global Restoration Acquisition, the liabilities of the Global Restoration business remained with Global Restoration. There may be liabilities that FirstService failed to discover or was unable to quantify accurately or at all in the due diligence review that we conducted prior to entering into the Global Restoration Acquisition. Although FirstService has obtained buyer-side representation and warranty insurance in respect of the Global Restoration Acquisition and has certain limited indemnification rights, these may be insufficient to satisfy any losses resulting from such liabilities. In addition, FirstService is required to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values. The excess of the purchase price over those fair values is recorded as goodwill. As the transaction was completed recently, the accounting for the acquisition, including estimating the fair values of assets and liabilities acquired, is still being completed. As a result, the final purchase price allocation may differ significantly from the estimates. The reduction in the fair value of any assets or the discovery of any material liabilities could have a material adverse effect on FirstServices business, financial condition or future prospects.
Risks Relating to the Offering
Volatility of Market Price of the Common Shares
We have applied to list the Offered Shares (including the Common Shares issuable pursuant to the exercise of the Over-Allotment Option) being distributed under this short form prospectus on the TSX. Listing will be subject to us fulfilling all of the listing requirements of the TSX. We will provide notice of the Offering to Nasdaq in
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accordance with the rules of that exchange. There can be no assurance that an active public market for trading in the Common Shares will persist and, as a result, the market price of the Common Shares may be adversely affected.
The market price of the Common Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following:
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actual or anticipated fluctuations in our annual or quarterly results of operations; |
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changes in estimates of future results of operations by us or by securities research analysts; |
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changes in the economic performance or market valuations of other companies that investors deem comparable to us; |
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the addition or departure of our executive officers or other key personnel; |
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litigation or regulatory action against us; |
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issuances or expected issuances of additional Common Shares or other forms of our securities; |
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changes in applicable laws and regulations, including tax laws, or changes in the manner in which those laws are applied; |
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significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; and |
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news reports relating to the conditions in the economy in general and/or trends, concerns or competitive developments, regulatory changes and other related issues in our industry. |
The volatility may affect the ability of holders of Common Shares to sell the Common Shares at an advantageous price.
Financial markets have, at times, experienced significant price and volume fluctuations that have particularly affected the market prices of securities of companies and that have, in many cases, been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if our operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. As well, certain institutional investors may base their investment decisions on consideration of our environmental, governance and social practices and performance against such institutions respective investment guidelines and criteria, and failure to meet such criteria may result in a limited or no investment in the Common Shares by those institutions, which could adversely affect the trading price of the Common Shares. There can be no assurance that fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil occur, our operations could be adversely impacted and the trading price of the Common Shares may be adversely affected.
Qualified Investment Eligibility
We will endeavor to ensure that the Common Shares continue to be qualified investments for trusts governed by Plans. No assurance can be given in this regard. If the Common Shares are not qualified investments for Plans, such Plans (and, in the case of certain Plans, the annuitants, subscribers or beneficiaries thereunder or holders thereof) may be subject to adverse tax consequences including, in the case of RESPs, the revocation of such Plans.
Dividends
Although we intend to make cash dividends to shareholders in accordance with our existing dividend policy, these dividends are not assured. Future dividends on the Common Shares will depend on our results of operations, financial condition, capital requirements, general business conditions and other factors that our board
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of directors may deem relevant. Additionally, under the Credit Agreement and the Note Agreement, we are not permitted to pay dividends, whether in cash or in specie, in the circumstances of an event of default thereunder occurring and continuing or an event of default occurring as a consequence thereof. The market value of the Common Shares may deteriorate if we are unable to pay dividends pursuant to our existing dividend policy in the future.
Potential Dilution
We are authorized to issue an unlimited number of Common Shares for consideration and terms and conditions as established by our board of directors, in many cases, without any requirement for explicit shareholder approval, and shareholders have no pre-emptive rights in connection with such further issuances. Except as described under the heading Plan of Distribution, we may issue additional Common Shares in subsequent offerings (including through the sale of securities convertible into or exchangeable for Common Shares) and pursuant to the exercise of options under our stock option plan. We cannot predict the size of future issuances of Common Shares or the effect that future issuances and sales of Common Shares will have on the market price of the Common Shares. Issuances of a substantial number of additional Common Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices for the Common Shares. With any additional issuance of Common Shares, holders of Common Shares will suffer dilution and we may experience dilution in our earnings per share.
Foreign Private Issuer
We are a foreign private issuer, as such term is defined in Rule 405 under the U.S. Securities Act, and are permitted, under a multijurisdictional disclosure system adopted by the United States and Canada, to prepare our disclosure documents filed under the U.S. Exchange Act in accordance with Canadian disclosure requirements. Under the U.S. Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors, and principal shareholders are exempt from the reporting and short swing profit liability provisions of Section 16 of the U.S. Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are generally longer.
As a foreign private issuer, we are exempt from the rules and regulations under the U.S. Exchange Act related to the furnishing and content of proxy statements. We are also exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While we will comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the U.S. Exchange Act and Regulation FD, and shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies.
In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the Canadian practices we follow instead. We currently rely on this exemption with respect to requirements regarding the quorum for any meeting of our shareholders, the requirement to obtain shareholder approval prior to an issuance of securities in certain circumstances and certain responsibilities of the Executive Compensation Committee of our board of directors. We may in the future elect to follow home country practices in Canada with regard to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject to all corporate governance requirements.
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Certain legal matters relating to Canadian law with respect to the Offering will be passed upon on behalf of FirstService by Fogler, Rubinoff LLP and on behalf of the Underwriters by Stikeman Elliott LLP. Certain legal matters relating to United States law with respect to the Offering will be passed upon on behalf of FirstService by Torys LLP and on behalf of the Underwriters by Paul, Weiss, Rifkind, Wharton & Garrison LLP. As of the date hereof, the partners, counsel and associates, as a group, of each of Fogler, Rubinoff LLP and Stikeman Elliott LLP own beneficially, directly or indirectly, less than 1% of the outstanding Common Shares.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The independent auditors of FirstService are PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, Toronto, Ontario, Canada, who has advised that they are independent with respect to FirstService within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario and within the meaning of the U.S. Securities Act and the applicable rules and regulations thereunder adopted by the SEC. PricewaterhouseCoopers LLP is registered with the Public Company Accounting Oversight Board.
The independent auditors of Global Restoration for the purposes of Global Restorations audited consolidated financial statements and the notes thereto as at December 31, 2018 and for the year then ended included in the Business Acquisition Report are BDO USA LLP, Fort Worth, Texas, United States.
The transfer agent and registrar for the Common Shares is TSX Trust Company at its principal offices located in Toronto, Ontario, Canada.
Each of Frederick F. Reichheld and Erin J. Wallace, directors of FirstService, and BDO USA LLP, the independent auditors of Global Restoration for the purposes of Global Restorations audited consolidated financial statements contained in the Business Acquisition Report, reside outside of Canada, and each such director has appointed FirstService, at its address at 1140 Bay Street, Suite 4000, Toronto, Ontario, Canada M5S 2B4, as his or her agent for service of process in Canada. Purchasers are advised that it may not be possible for investors to enforce judgments obtained in Canada against any person or company that resides outside of Canada, or that is incorporated, continued or otherwise organized under the laws of a foreign jurisdiction, even if the person has appointed an agent for service of process in Canada.
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT
The following documents have been or will be filed with the SEC as part of the Registration Statement of which this short form prospectus forms a part: (a) the documents listed under the heading Documents Incorporated by Reference; (b) powers of attorney from our directors or officers, as applicable; (c) the consent of PricewaterhouseCoopers LLP; (d) the consent of BDO USA LLP; (e) the consent of Fogler, Rubinoff LLP; (f) the consent of Stikeman Elliott LLP; and (g) the Underwriting Agreement. Concurrently with the Registration Statement, we separately filed a Form F-X with the SEC. See Enforceability of Civil Liabilities.
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PART II
INFORMATION NOT REQUIRED TO BE DELIVERED TO
OFFEREES OR PURCHASERS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Business Corporations Act (Ontario), the Registrant may indemnify a director or officer of the Registrant, a former director or officer of the Registrant or another individual who acts or acted at the Registrants request as a director or officer, or an individual acting in a similar capacity, of another entity (each of the foregoing, an individual), against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Registrant or other entity, on the condition that (i) such individual acted honestly and in good faith with a view to the best interests of the Registrant or, as the case may be, to the best interests of the other entity for which such individual acted as a director or officer or in a similar capacity at the Registrants request; and (ii) if the matter is a criminal or administrative action or proceeding that is enforced by a monetary penalty, the Registrant shall not indemnify such individual unless such individual had reasonable grounds for believing that such individuals conduct was lawful.
Further, the Registrant may, with the approval of a court, indemnify an individual in respect of an action by or on behalf of the Registrant or other entity to obtain a judgment in its favour, to which the individual is made a party because of the individuals association with the Registrant or other entity as a director or officer, a former director or officer, an individual who acts or acted at the Registrants request as a director or officer, or an individual acting in a similar capacity, against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfills the condition in (i) above. Such individuals are entitled to indemnification from the Registrant in respect of all costs, charges and expenses reasonably incurred by the individual in connection with the defence of any civil, criminal, administrative, investigative or other proceeding to which the individual is subject because of the individuals association with the Registrant or other entity as described above, provided the individual seeking an indemnity: (A) was not judged by a court or other competent authority to have committed any fault or omitted to do anything that the individual ought to have done; and (B) fulfills the conditions in (i) and (ii) above.
The by-laws of the Registrant provide that the Registrant shall indemnify a director or officer of the Registrant, a former director or officer of the Registrant or another individual who acts or acted at the Registrants request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by such person in respect of any civil, criminal, administrative or investigative action or other proceeding in which the individual is involved because of that association with the Registrant or other entity. The by-laws of the Registrant further provide that the Registrant shall advance monies to such individual for the costs, charges and expenses of a proceeding referred to in the foregoing sentence provided that such individual agrees in advance, in writing, to repay the monies if the individual does not fulfill the following conditions. The Registrant may not indemnify an individual pursuant to its by-laws as provided above unless the individual: (a) acted honestly and in good faith with a view to the best interests of the Registrant or other entity for which the individual acted as a director or officer or in a similar capacity at the Registrants request, as the case may be; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, had reasonable grounds for believing that his or her conduct was lawful. To the extent required by the Business Corporations Act (Ontario) or applicable law, the by-laws of the Registrant provide that it shall also seek the approval of a court to indemnify an individual referred to above, or advance monies as provided above in respect of an action by or on behalf of the Registrant or other entity to procure a judgment in its favour, to which such individual is made a party because of the individuals association with the Registrant or other entity as described above, against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfills the conditions set out in (b) and (c) above. Subject to the Business Corporations Act (Ontario), the Registrants by-laws provide that it may indemnify its employees and agents on the same basis as that upon which the persons referred to above are indemnified.
The Registrant maintains directors and officers liability insurance which insures directors and officers for losses as a result of claims against the directors and officers of the Registrant in their capacity as directors and officers and also reimburses the Registrant for payments made pursuant to the indemnity provisions under the by-laws of the Registrant and the Business Corporations Act (Ontario).
Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
II-1
EXHIBITS
Exhibit |
Description |
|
3.1 |
Underwriting Agreement* |
|
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
4.7 | ||
4.8 | ||
4.9 | ||
4.10 | ||
5.1 | Consent of PricewaterhouseCoopers LLP. | |
5.2 | Consent of BDO USA, LLP. | |
5.3 | Consent of Fogler, Rubinoff LLP. | |
5.4 | Consent of Stikeman Elliott LLP. | |
6.1 | Powers of Attorney (included on the signature pages of this Registration Statement). |
* |
To be filed by amendment. |
II-2
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
ITEM 1. |
UNDERTAKING |
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to the securities registered pursuant to this Form F-10 or to transactions in said securities.
ITEM 2. |
CONSENT TO SERVICE OF PROCESS |
Concurrently with the filing of this Registration Statement on Form F-10, the Registrant will file with the Commission a written irrevocable consent and power of attorney on Form F-X.
Any change to the name or address of the agent for service of the Registrant shall be communicated promptly to the Commission by amendment of the Form F-X referencing the file number of this Registration Statement.
III-1
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-10 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toronto, Ontario, Canada, on the 2nd day of December 2019.
FIRSTSERVICE CORPORATION | ||||
By: |
/s/ Jeremy Rakusin |
|||
Name: | Jeremy Rakusin | |||
Title: | Chief Financial Officer |
Each person whose signature appears below constitutes and appoints Jeremy Rakusin as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement and registration statements filed pursuant to Rule 462(b) or Rule 429 under the Securities Act, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but when taken together shall constitute one instrument.
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated and on the 2nd day of December 2019.
Signature |
Title |
|
/s/ D. Scott Patterson D. Scott Patterson |
President, Chief Executive Officer and Director (principal executive officer) |
|
/s/ Jeremy Rakusin Jeremy Rakusin |
Chief Financial Officer (principal financial officer and principal accounting officer) |
|
/s/ Brendan Calder Brendan Calder |
Director |
|
/s/ Bernard L. Ghert Bernard I. Ghert |
Director |
|
/s/ Jay S. Hennick Jay S. Hennick |
Director |
|
/s/ Michael Stein Michael Stein |
Director |
|
/s/ Frederick F. Reichheld Frederick F. Reichheld |
Director |
|
/s/ Joan Eloise Sproul Joan Eloise Sproul |
Director |
|
/s/ Erin J. Wallace Erin J. Wallace |
Director |
III-2
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act, this Registration Statement on Form F-10 has been signed below by the undersigned, solely in its capacity as the Registrants duly authorized representative in the United States, on this 2nd day of December 2019.
By: |
/s/ Santino Ferrante |
|||
Name: |
Santino Ferrante |
III-3
Exhibit 4.4
Notice of Annual and Special Meeting
of Shareholders
and
Management Information Circular
of
FirstService Corporation
Friday, May 3, 2019
at 2:00 pm (Toronto time)
____________________________
The Design Exchange, 234 Bay Street
Toronto-Dominion Centre, Toronto, Ontario M5K 1B2
This Notice, Management Information Circular and the accompanying materials require your immediate attention. If you are in doubt as to how to deal with these documents or the matters they refer to, please consult your professional advisors. Any questions regarding the meeting or voting your shares can be directed to our strategic shareholder advisor and proxy solicitation agent Kingsdale Advisors at 1-866-851-2484, or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleadvisors.com.
March 25, 2019
Dear Shareholder:
On behalf of both our Board of Directors and management, we are pleased to invite you to attend an annual and special meeting (the Meeting) of holders of Subordinate Voting Shares (Subordinate Voting Shares) and Multiple Voting Shares (Multiple Voting Shares) of FirstService Corporation (FirstService) which will be held at The Design Exchange, 234 Bay Street, Toronto-Dominion Centre, Toronto, Ontario M5K 1B2 on Friday, May 3, 2019 at 2:00 p.m. (Toronto time). At the Meeting, you will be asked to consider the matters relating to our usual annual business as outlined in the accompanying Notice of Meeting. You will also be asked to consider the transaction described below.
On March 12, 2019, we announced that we entered into an agreement with Jay S. Hennick, FirstServices Founder, Chairman and largest voting shareholder, and entities related to him with respect to a proposed transaction (the Transaction) to settle the restated management services agreement (the Management Services Agreement), including the long-term incentive arrangement (the Long Term Arrangement), between FirstService, Mr. Hennick and Jayset Management FSV Inc. (Jayset Mgt), a corporation controlled by Mr. Hennick, and to eliminate the dual class voting structure of FirstService.
As part of the Transaction:
| Henset Capital Inc., a corporation controlled by Mr. Hennick, will convert 1,325,694 Multiple Voting Shares of FirstService (being 100% of the outstanding Multiple Voting Shares) into Subordinate Voting Shares on a one-for-one basis and for no consideration, thereby eliminating FirstServices dual class share structure; |
| FirstService will acquire, directly or indirectly, all of the shares of Jayset Mgt, the recipient of all fees and other entitlements under the Management Services Agreement, for a purchase price determined with reference to the Long Term Arrangement formula provided in the Management Services Agreement, and the Management Services Agreement will be terminated, thereby eliminating the Long Term Arrangement and all future fees and other entitlements owing thereafter. Mr. Hennick has agreed that 80% of the purchase price will be payable in Subordinate Voting Shares, with the balance paid in cash; |
| Mr. Hennick will retain his role as Chairman of FirstService, at the discretion of the Board, with compensation commensurate with that of a Non-Executive Chairman of a public company of similar size to FirstService; and |
| Mr. Hennick has agreed to waive entitlement to any termination fee under the Management Services Agreement. |
Subject to and following completion of the Transaction, FirstService proposes to amend its articles to eliminate the Multiple Voting Shares and the blank cheque preference shares as part of the authorized capital of FirstService and to re-designate its Subordinate Voting Shares as common shares, after which FirstService would have a single class of voting equity securities (being common shares), each having one vote per share, and Mr. Hennick would indirectly own or control approximately 14.8% of such outstanding shares.
The Board identified, among others, the following material benefits expected to be achieved on completion of the Transaction and the associated articles amendment:
| the Transaction will result in the elimination of FirstServices dual class voting structure for no consideration, the result of which: |
| provides all shareholders with the same vote in proportion to their relative equity stake in FirstService; and |
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| allows investors who may not wish to invest, or whose investment policies prevent them from investing in, shares of companies with dual class share structures to purchase Subordinate Voting Shares, thereby potentially enhancing liquidity; |
| the Transaction allows FirstService to use the Subordinate Voting Shares for purposes of raising additional capital, effecting an acquisition or merger transaction or issuing additional equity without further dilution resulting from the Management Services Agreement. Likewise, the removal of the preference shares as part of FirstServices authorized capital eliminates potential dilution and perceived anti-takeover measures previously faced by holders of Subordinate Voting Shares; |
| the Transaction will facilitate an orderly transition of effective control by FirstServices Founder to its shareholders, the Board and its professional management team and will provide shareholders with greater flexibility to determine the future direction of FirstService without a possible veto by Mr. Hennick; |
| Mr. Hennick agreed to: (i) forgo any entitlement to a termination fee and all future fees and other entitlements to which he would otherwise be permitted under the Management Services Agreement; (ii) give up his Multiple Voting Shares without a premium; and (iii) accept a substantial portion of the consideration under the Transaction in Subordinate Voting Shares; and |
| Mr. Hennick remains committed to the future direction of FirstService, and is expected to own or control approximately 14.8% of the outstanding shares of FirstService at the time of the completion of the Transaction. He has agreed to continue to serve as non-executive Chairman of the Board. |
The Board has reviewed the terms and conditions of the Transaction and, for the reasons set out in the accompanying Management Information Circular (the Circular), has (with Mr. Hennick recusing himself) unanimously concluded that the Transaction is in the best interests of FirstService and the holders of Subordinate Voting Shares.
The Board (with Mr. Hennick recusing himself) unanimously recommends that holders of Subordinate Voting Shares vote FOR the resolutions approving the Transaction and the amendment to FirstServices articles at the Meeting. The members of the Board and the executive officers of FirstService (in each case, excluding Mr. Hennick) have advised that they intend to vote their Subordinate Voting Shares FOR these resolutions. In addition, T. Rowe Price Associates, Inc., the largest holder of Subordinate Voting Shares, has advised FirstService that, based on the information provided to it by FirstService, it is supportive of the Transaction. As at March 25, 2019, to the knowledge of the directors and executive officers of FirstService, T. Rowe Price Associates, Inc. beneficially owned, or exercised control or direction over, 6,112,471 Subordinate Voting Shares, representing 17.6% of the outstanding Subordinate Voting Shares.
The resolution in respect of the Transaction must be approved by a simple majority of the votes cast at the Meeting by the disinterested minority holders of Subordinate Voting Shares, voting separately as a class. The resolution approving the amendment to FirstServices articles must be approved by not less than 66⅔% of the votes cast at the Meeting by the holders of Subordinate Voting Shares, voting separately as a class. The resolution approving the amendment to FirstServices articles will only be put to the Meeting and voted on if the resolution in respect of the Transaction is approved.
The Transaction is subject to the satisfaction of certain other conditions, including the receipt of required regulatory approvals from the Toronto Stock Exchange and The NASDAQ Global Select Market. Subject to the receipt of such approvals and the satisfaction or waiver, as applicable, of the other conditions to closing, it is anticipated that the Transaction will be completed on or around May 10, 2019.
The Circular provides a detailed description of the Transaction and the other matters to be considered at the Meeting. You are urged to read this information carefully and, if you require assistance, to consult your own legal, financial or other professional advisor.
Following the custom of past annual meetings, we will also review our business operations and will be answering your questions following the formal part of the Meeting.
- 3 - |
Your vote and participation in FirstServices business is important regardless of the number of shares that you own. You have the ability to exercise your vote by telephone, internet, mail, facsimile or by coming to the Meeting in person. Please consult the Circular and the notice of Meeting which, together, contain all of the information you need about the Meeting and how to exercise your vote.
Kingsdale Advisors has been engaged as our strategic shareholder advisor and proxy solicitation agent in connection with the solicitation of proxies with respect to the Transaction for the Meeting. Any questions regarding the Meeting or voting your shares can be directed to Kingsdale Advisors at 1-866-851-2484, or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleadvisors.com.
On behalf of the Board, management and the employees of FirstService, we would like to thank you for your support of FirstService. We look forward to seeing you at the Meeting.
Sincerely yours,
Bernard I. Ghert
Lead Director
FIRSTSERVICE CORPORATION
ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
THIS BOOKLET EXPLAINS:
| Details of the matters to be voted upon at the annual and special meeting (the Meeting) of shareholders of FirstService Corporation (FirstService); and | ||
| How to exercise your vote even if you are unable to attend the Meeting. |
THIS BOOKLET CONTAINS:
| The notice of annual and special meeting of shareholders (the Notice of Meeting); | ||
| A management information circular (the Circular); and | ||
| A form of proxy (a Form of Proxy) that registered shareholders may use to vote their shares without attending the Meeting. | ||
The Circular and Form of Proxy are furnished in connection with the solicitation of proxies by or on behalf of management of FirstService for use at the Meeting to be held on Friday, May 3, 2019, at 2:00 p.m. (Toronto time). | |||
At the Meeting, management will report on FirstServices performance for the year ended December 31, 2018 and FirstServices plans for the coming year. The Meeting will deal with, among other things, the usual matters of governance, including the presentation of financial results, the election of directors and the appointment of auditors, as well as seeking approval of a transaction that, if approved, will terminate the restated management services agreement with FirstServices Founder and Chairman, Jay S. Hennick, and entities controlled by Mr. Hennick and eliminate the dual class share structure of FirstService. Your presence, or at least your vote if you are unable to attend in person, is important. | |||
Any questions regarding the Meeting or voting your shares can be directed to our strategic shareholder advisor and proxy solicitation agent, Kingsdale Advisors, at 1-866-851-2484, or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleadvisors.com. | |||
REGISTERED SHAREHOLDERS | |||
A Form of Proxy is enclosed that may be used to vote your shares if you are unable to attend the Meeting in person. Instructions on how to vote using this Form of Proxy are found in the Circular. | |||
NON-REGISTERED BENEFICIAL SHAREHOLDERS | |||
If your shares are held on your behalf, or for your account, by a broker, securities dealer, bank, trust company or similar entity (an Intermediary), you may not be able to vote unless you carefully follow the instructions provided by your Intermediary with this booklet. | |||
|
|||
NOTICE TO UNITED STATES SHAREHOLDERS | |||
The solicitation of proxies by FirstService is not subject to the requirements of Section 14(a) of the United States Securities Exchange Act of 1934, as amended (the US Exchange Act), by virtue of an exemption applicable to proxy solicitations by foreign private issuers as defined in Rule 3b-4 under the US Exchange Act. Accordingly, this Circular has been prepared in accordance with the applicable disclosure requirements in Canada. Residents of the United States should be aware that such requirements are different than those of the United States applicable to proxy statements under the US Exchange Act. | |||
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that an annual and special meeting (the Meeting) of the shareholders of FirstService Corporation (FirstService) will be held at The Design Exchange, 234 Bay Street, Toronto-Dominion Centre, Toronto, Ontario M5K 1B2 on Friday, May 3, 2019, at 2:00 p.m. (Toronto time) for the following purposes:
1. | to receive the audited consolidated financial statements of FirstService for the year ended December 31, 2018 and the report of the auditors thereon; |
2. | to appoint PricewaterhouseCoopers LLP as independent auditors of FirstService and to authorize the directors to fix their remuneration; |
3. | to elect the directors of FirstService for the ensuing year; |
4. | to consider and, if deemed advisable, pass a non-binding advisory resolution on FirstServices approach to executive compensation; |
5. | for holders of subordinate voting shares of FirstService to consider and, if deemed advisable, approve a resolution (the Transaction Resolution), the full text of which is set out in Appendix A to the accompanying Management Information Circular (the Circular), approving a transaction (the Transaction) pursuant to which FirstService will terminate the restated management services agreement with FirstServices Founder and Chairman, Jay S. Hennick, and entities controlled by Mr. Hennick and eliminate the dual class share structure of FirstService, all as more particularly set forth and described in the accompanying Circular; |
6. | if the Transaction Resolution is approved, for holders of subordinate voting shares of FirstService to consider and, if deemed advisable, approve a special resolution, the full text of which is set out in Appendix B to the accompanying Circular, to amend the articles of FirstService, subject to and following completion of the Transaction, to remove all references to the multiple voting shares and preference shares of FirstService, and to re-designate the subordinate voting shares of FirstService as common shares; and |
7. | to transact such further or other business as may properly come before the Meeting or any adjournment(s) or postponement(s) thereof. |
Specific details relating to the Transaction and the other matters to be considered at the Meeting are set forth in the accompanying Circular.
The board of directors of FirstService has fixed the close of business on Friday, March 8, 2019 as the record date for determining shareholders of record who are entitled to receive notice of the Meeting and to attend and vote at the Meeting, or at any adjournment(s) or postponement(s) thereof.
If you are a registered shareholder and are unable to attend the Meeting in person, please complete, sign, date and return the enclosed form of proxy to TSX Trust Company, 301 100 Adelaide Street West, Toronto, Ontario M5H 4H1, or by facsimile to 416-595-9593, or complete the form of proxy by such other method as is identified, and pursuant to any instructions contained, in the form of proxy. In order to be valid for use at the Meeting, proxies must be received not less than 48 hours (excluding Saturdays, Sundays and holidays) prior to the Meeting or any adjournment(s) or postponement(s) thereof.
If you are a non-registered shareholder and receive these materials through your broker or through another intermediary, please complete and return the materials in accordance with the instructions provided to you by your broker or such other intermediary. If you are a non-registered shareholder and do not complete and return the materials in accordance with such instructions, you may lose the right to vote at the Meeting, either in person or by proxy.
- ii -
Further information with respect to voting by proxy is included in the accompanying Circular. Any questions regarding the Meeting or voting your shares can be directed to our strategic shareholder advisor and proxy solicitation agent Kingsdale Advisors at 1-866-851-2484, or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleadvisors.com.
DATED at Toronto, Ontario this 25th day of March, 2019.
By Order of the Board of Directors | ||
|
||
DOUGLAS G. COOKE | ||
Vice President, Corporate Controller and Corporate | ||
Secretary |
MANAGEMENT INFORMATION CIRCULAR
ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
MAY 3, 2019
GENERAL PROXY MATTERS
Introduction
This management information circular (this Circular) is furnished in connection with the solicitation of proxies by and on behalf of management (Management) of FirstService Corporation (FirstService) and its board of directors (the Board) for use at the annual and special meeting of shareholders of FirstService (the Meeting) to be held at the time and place and for the purposes set forth in the accompanying notice of Meeting (the Notice of Meeting), and at any adjournment(s) or postponement(s) thereof. This Circulars purpose is to:
| explain how you, as a shareholder of FirstService, can vote at the Meeting, either in person or by transferring your vote to someone else to vote on your behalf; | |
| request that you authorize the Lead Director of the Board (or his alternate) to vote on your behalf in accordance with your instructions set out on the accompanying form of proxy; | |
| inform you about the business to be conducted at the Meeting, including the election of directors of FirstService and the appointment of independent auditors of FirstService for the coming year, as well as seeking approval of a transaction that, if approved, will terminate the restated management services agreement with FirstServices Founder and Chairman, Jay S. Hennick, and entities controlled by Mr. Hennick and eliminate the dual class share structure of FirstService; and | |
| give you some important background information to assist you in deciding how to vote. |
FirstService provides detailed information on its business and financial results on its website located at www.firstservice.com. FirstServices news releases and other prescribed documents are required to be filed on the electronic database maintained by the Canadian Securities Administrators (known as SEDAR) located at www.sedar.com and by the U.S. Securities and Exchange Commission (the SEC) (known as EDGAR) located at www.sec.gov. A copy of this Circular is available on SEDAR and EDGAR.
Unless otherwise specifically stated, all information set forth herein is given as at March 25, 2019. In this Circular, references to $, C$ and Canadian dollars are to the lawful currency of Canada and references to US$ and United States dollars are to the lawful currency of the United States of America. All dollar amounts herein are in Canadian dollars, unless otherwise stated. The address of the registered office of FirstService is 1140 Bay Street, Suite 4000, Toronto, Ontario M5S 2B4.
Live Webcast of the Meeting
Shareholders who are unable to attend the Meeting in person have the opportunity to listen to a live webcast of the Meeting. The details concerning the live webcast will be provided on FirstServices website at www.firstservice.com prior to the Meeting. Shareholders unable to listen to the live webcast will also be able to listen to a recorded version of the Meeting at a later date, as one will be made available on FirstServices website.
- 2 - |
Solicitation of Proxies
The form of proxy accompanying this Circular is being solicited on behalf of Management in connection with the Meeting. The solicitation of proxies will be primarily by mail, but some proxies may be solicited by newspaper publication, personal interviews, email, telephone or facsimile communication by directors, officers or employees (or representatives thereof) of FirstService, who will not be specifically compensated therefor, or agents of FirstService who will be specifically compensated therefor. Kingsdale Advisors has been retained as our strategic shareholder advisor and proxy solicitation agent in connection with the solicitation of proxies for the Meeting and, in such capacity, is entitled to receive a fixed fee of $125,000 plus out-of-pocket expenses. Any questions regarding the Meeting or voting your shares can be directed to Kingsdale Advisors at 1-866-851-2484, or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleadvisors.com. All costs of the solicitation will be borne, directly or indirectly, by FirstService.
Management does not intend to pay for intermediaries to forward to objecting beneficial owners under National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer this Circular and related Meeting materials, and in the case of an objecting beneficial owner, the objecting beneficial owner will not receive these materials unless the objecting beneficial owners intermediary assumes the cost of delivery.
Information for Registered Shareholders
A registered holder may vote in any of the ways set out below:
In person at the Meeting: A registered shareholder who wishes to vote in person at the Meeting should not complete or return the form of proxy included with this Circular, and instead will have their votes taken at the Meeting.
Voting by Internet: A registered shareholder may submit his or her proxy over the Internet by going to www.voteproxyonline.com and following the instructions. Such shareholder will require a 12-digit control number (located on the front of the form of proxy) to identify himself or herself to the system.
Voting by Fax: 416-595-9593 or 1-866-623-5305 (send both pages of their completed and signed form of proxy).
Voting by Mail: Complete, sign, date and return the form of proxy to TSX Trust Company, 301 100 Adelaide Street West, Toronto, Ontario M5H 4H1
Any questions regarding the Meeting or voting your shares can be directed to Kingsdale Advisors at 1-866-851-2484, or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleadvisors.com.
Information for Non-Registered Shareholders
Holders of Shares who are Non-Registered Shareholders
Subject to applicable laws, the only shareholders entitled to vote at the Meeting are those whose names have been entered into FirstServices register as holders of subordinate voting shares or multiple voting shares (each, a Registered Shareholder). However, the shares of the majority of FirstServices shareholders are not held in their own name, but rather are registered in the name of nominee accounts (the Non-Registered Shareholders), usually The Canadian Depository for Securities Limited (CDS). CDS acts as clearing agent for brokers and other intermediaries (the Intermediaries) who, in turn, act on behalf of the holders of FirstService shares.
As a result, Non-Registered Shareholders can only exercise their rights as beneficial owners of voting shares through CDS or a participant in the CDS depository service. This means that in order for Non-Registered Shareholders to exercise their rights to vote their shares at the Meeting, they must provide voting instructions to the Registered Shareholder.
If Non-Registered Shareholders wish to vote their shares, they must carefully review and follow the voting instructions provided by their Intermediary.
- 3 - |
Delivery of Voting Instructions by Non-Registered Shareholders
Applicable regulatory policies require Intermediaries to seek voting instructions from Non-Registered Shareholders in advance of shareholder meetings. Each Intermediary has its own mailing procedures and provides its own return instructions, which should be carefully followed by Non-Registered Shareholders in order to ensure their FirstServices shares are voted at the Meeting. Generally, Non-Registered Shareholders who receive meeting materials will be given either:
(a) | a form of proxy which has already been signed by the Intermediary (typically by a facsimile, stamped signature), which is restricted as to the number of FirstServices shares beneficially owned by the Non-Registered Shareholder but which is otherwise not completed. This form of proxy need not be signed by the Non-Registered Shareholder. In this case, the Non-Registered Shareholder who wishes to submit a proxy should complete the rest of the form of proxy and deliver the proxy in accordance with the instructions provided by the Intermediary; or |
(b) | a voting instruction form which must be completed and signed by the Non-Registered Shareholder in accordance with the directions on the voting instruction form and returned to the Intermediary or its service company. In some cases, the completion of the voting instruction form by telephone, the internet or facsimile is permitted. |
The purpose of these procedures is to permit Non-Registered Shareholders to direct the voting of the FirstService shares that they beneficially own. These procedures do not permit a Non-Registered Shareholder to vote FirstService shares in person at the Meeting.
Voting in Person by Non-Registered Shareholders
A Non-Registered Shareholder who receives a form of proxy or a voting instruction form and wishes to vote at the Meeting in person should, in the case of a form of proxy, strike out the names of the persons designated in the form of proxy and insert the Non-Registered Shareholders name in the blank space provided or, in the case of a voting instruction form, follow the corresponding directions on the form. In either case, Non-Registered Shareholders should carefully follow the instructions of their Intermediary, including those regarding when and where the proxy or voting instruction form is to be delivered.
Any questions regarding the Meeting or voting your shares can be directed to Kingsdale Advisors at 1-866-851-2484, or collect call outside North America at 416-867-2272, or by e-mail at contactus@kingsdaleadvisors.com.
Appointment of Proxyholder
The individuals specified as proxyholders in the enclosed form of proxy are representatives of Management and are directors and/or officers of FirstService. A shareholder may, by properly marking, executing and depositing the accompanying form of proxy, appoint as proxyholder the individuals named in the accompanying form of proxy, or some other individual or entity, who need not be a shareholder. This latter right may be exercised by striking out the names of the designated individuals and inserting the name of such other proxyholder in the blank space provided in the enclosed form of proxy or by completing another proxy in proper form. The proxyholder may attend and act for the shareholder at the Meeting and any adjournment(s) or postponement(s) thereof.
Execution and Deposit of Proxy
If a shareholder is an individual, the form of proxy must be executed by the shareholder or a duly authorized attorney of the Registered Shareholder. If a shareholder is a corporation or other form of entity, the form of proxy must be executed by a duly authorized attorney or officer of the corporation or other form of entity. Where a form of proxy is executed by an attorney or officer of a corporation or other form of entity, the authorizing documents (or notarized copies thereof) may be requested to accompany the form of proxy. To be valid, an executed form of proxy must be received at the offices of TSX Trust Company, 301 100 Adelaide Street West, Toronto, Ontario M5H 4H1, if sent by facsimile, to 416-595-9593, or if by such other method as is identified in the form of proxy, in accordance with the instructions set out in the form of proxy, in any case, not later than 2:00 p.m. (Toronto time) on Wednesday, May 1, 2019 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned Meeting. The time limit for the deposit of proxies may be waived or extended by the Chair of the Meeting at his or her discretion without notice.
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Manner Proxies Will Be Voted
The FirstService shares represented by the accompanying form of proxy will be voted or withheld from voting, as the case may be, on any ballot that may be called for at the Meeting and, subject to the provisions of the Business Corporations Act (Ontario) (OBCA), where a choice is specified in respect of any matter to be acted upon, will be voted in accordance with the specification made. If a shareholder does NOT specify how to vote on a particular matter, the proxyholder is entitled to vote the FirstService shares as he or she sees fit. Please note that if a completed form of proxy does not specify how to vote on any particular matter, and if a shareholder has authorized either of the individuals named therein to act as proxyholder (by leaving the line for the proxyholders name blank on the form of proxy), your FirstService shares will be voted at the Meeting as follows:
| FOR the election of the eight nominees to the board of directors of FirstService, those nominees being the eight current directors of FirstService; |
| FOR the appointment of PricewaterhouseCoopers LLP, Chartered Accountants and Licensed Public Accountants, as independent auditors of FirstService and to authorize the board of directors of FirstService to fix the auditors remuneration; |
| FOR the approval of the non-binding advisory resolution on FirstServices approach to executive compensation; |
| FOR the approval of a resolution (the Transaction Resolution), the full text of which is set out in Appendix A to this Circular, approving a transaction (the Transaction) pursuant to which FirstService will terminate the restated management services agreement with FirstServices Founder and Chairman, Jay S. Hennick, and entities controlled by Mr. Hennick and eliminate the dual class share structure of FirstService; and |
| FOR the approval of a special resolution (the Articles Resolution), the full text of which is set out in Appendix B to this Circular, to amend the articles of FirstService, subject to and following completion of the Transaction, to remove all references to the multiple voting shares and preference shares of FirstService, and to re-designate the subordinate voting shares of FirstService as common shares. |
For more information on these matters, please see the section entitled Business of the Meeting below. If any other matters properly arise at the Meeting that are not described in the Notice of Meeting, or if any amendments are proposed to the matters described in the Notice of Meeting, a proxyholder is entitled to vote the FirstService shares as he or she sees fit. The Notice of Meeting sets out all the matters to be determined at the Meeting that are known to Management as of March 25, 2019.
Revocability of Proxy
A shareholder giving a proxy has the power to revoke it. Such revocation may be made by the shareholder attending the Meeting, duly executing another form of proxy bearing a later date and depositing it before the specified time, or may be made by written instrument revoking such proxy executed by the shareholder or by his or her attorney authorized in writing and deposited either at the registered office of FirstService at any time up to and including the last business day preceding the day of the Meeting or any adjournment thereof, or with the Chair of the Meeting on the day of the Meeting or any adjournment thereof or in any other manner permitted by law. If such written instrument is deposited with the Chair of the Meeting on the day of the Meeting or any adjournment thereof, such instrument will not be effective with respect to any matter on which a vote has already been cast pursuant to such proxy.
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Quorum
The by-laws of FirstService provide that a quorum for the Meeting is two or more individuals holding, or representing by proxy, not less than 5% of the votes attached to all outstanding shares of FirstService entitled to be voted at the Meeting. In the event that such quorum is not present at the appointed place on the date for which the Meeting is called within 30 minutes after the time fixed for the holding of the Meeting, the Meeting will stand adjourned to such day being not less than 10 days later and to such place and at such time as may be determined by the chair of the Meeting. If at such adjourned Meeting a quorum is not present, the shareholders present either personally or represented by proxy will constitute a quorum and any business which could have been brought before or dealt with at the original Meeting in accordance with the Notice of Meeting may be brought before or dealt with at such adjourned Meeting. A quorum need not be present throughout the Meeting provided that a quorum is present at the opening of the Meeting.
Voting Results
Voting results of the Meeting will be filed on SEDAR at www.sedar.com following the Meeting. Voting results on each of the matters voted on at FirstServices annual and special meeting of shareholders held on April 11, 2018 (together with the preceding year, as applicable) are as follows:
Brief Description of Matter Voted Upon |
Outcome of the Vote(1) | |||
2018 | 2017 | |||
Approved | For | Approved | For | |
Appointment of PricewaterhouseCoopers LLP as the independent auditors of FirstService | Yes | 99.74% | Yes | 99.43% |
The election of each of the following nominees as members of the Board: | ||||
Brendan Calder | Yes | 99.32% | Yes | 99.30% |
Bernard I. Ghert | Yes | 99.69% | Yes | 99.30% |
Jay S. Hennick | Yes | 98.57% | Yes | 98.28% |
D. Scott Patterson | Yes | 99.97% | Yes | 99.35% |
Frederick F. Reichheld | Yes | 99.65% | Yes | 99.33% |
Michael Stein | Yes | 99.61% | Yes | 98.20% |
Erin J. Wallace | Yes | 99.51% | Yes | 99.33% |
Approving an amendment to the FirstService Stock Option Plan | Yes | 84.83% | N/A | N/A |
Say-on-Pay | N/A | N/A | N/A | N/A |
___________
Note:
(1) | All votes were conducted and approved by way of a show of hands; the number of votes disclosed for these items reflects those proxies received by Management in advance of the applicable meeting. |
Authorized Capital, Outstanding Shares and Principal Holders of Shares
The authorized capital of FirstService consists of an unlimited number of preference shares, issuable in series, an unlimited number of subordinate voting shares (the Subordinate Voting Shares) and an unlimited number of multiple voting shares (the Multiple Voting Shares, and together with the Subordinate Voting Shares, the FirstService Shares). The holders of Subordinate Voting Shares are entitled to one vote in respect of each Subordinate Voting Share held at all meetings of the shareholders of FirstService. The holders of Multiple Voting Shares are entitled to twenty votes in respect of each Multiple Voting Share held at all meetings of the shareholders of FirstService. At the Meeting, if the Transaction Resolution and Articles Resolution are approved and the matters therein implemented, the dual class share structure of FirstService will be eliminated, all references to the Multiple Voting Shares and preference shares will be removed from FirstServices articles and the Subordinate Voting Shares will be re-designated as common shares. See Business of the Meeting Approval of Transaction and Business of the Meeting Approval of Amendment to the Articles.
As at March 25, 2019, FirstService has outstanding 34,785,253 Subordinate Voting Shares (having 56.7% of the total votes attached to all FirstService Shares) and 1,325,694 Multiple Voting Shares (having 43.3% of the total votes attached to all FirstService Shares). Only those holders of outstanding FirstService Shares of record at the close of business on March 8, 2019 (the Record Date) are entitled to vote their FirstService Shares at the Meeting or any adjournment(s) thereof. The Record Date was fixed by the Board.
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Voting at the Meeting will be by show of hands, except with respect to the Transaction Resolution, the Articles Resolution or where a ballot is demanded by a shareholder or proxyholder entitled to vote at the Meeting. Each shareholder will be entitled to vote with respect to such number of FirstService Shares shown as registered in his, her or its name on the list of shareholders as of the Record Date prepared by FirstService, which list is available for inspection by shareholders at the Meeting or, after the 10th day following the Record Date, during usual business hours at the registered office of FirstService or the office of the registrar and transfer agent of the Subordinate Voting Shares and/or Multiple Voting Shares.
The following table sets forth, as at March 25, 2019, the only persons who, to the knowledge of the directors and executive officers of FirstService, beneficially own, or control or direct, directly or indirectly, 10% or more of the issued and outstanding Subordinate Voting Shares or Multiple Voting Shares, the approximate number of outstanding Subordinate Voting Shares and Multiple Voting Shares beneficially owned, or controlled or directed, directly or indirectly, by such persons and the percentage of outstanding Subordinate Voting Shares and Multiple Voting Shares and votes represented by the number of Subordinate Voting Shares and Multiple Voting Shares so owned or controlled or directed:
Number of FirstService Shares
Owned or Controlled or Directed |
Percentage of | Percentage of | ||||
Subordinate Voting Shares |
Multiple Voting
Shares |
Subordinate Voting Shares |
Multiple Voting
Shares |
Total FirstService Shares |
Total Votes |
|
Jay S. Hennick (1) Toronto, Ontario
|
1,522,526 | 1,325,694 | 4.4% | 100.0% | 7.9% | 45.7% |
T. Rowe Price Associates, Inc. (2) Baltimore, Maryland
|
6,112,471 | 0 | 17.6% | 0.0% | 16.9% | 10.0% |
___________
Notes:
(1) | 1,522,526 Subordinate Voting Shares and 1,325,694 Multiple Voting Shares are held by Henset Capital Inc. and The Jay and Barbara Hennick Family Foundation, entities controlled by Mr. Hennick. See Business of the Meeting Approval of Transaction for additional Subordinate Voting Shares to be issued indirectly by Mr. Hennick in connection with the completion of the Transaction. |
(2) | Information provided is obtained from the most recent SEDAR filings made in accordance with applicable Canadian securities laws. |
Certain Rights of Holders of Subordinate Voting Shares
The following is a summary of the rights attaching to the Subordinate Voting Shares in the event that a take-over bid is made for Multiple Voting Shares. Reference should be made to the articles of FirstService for the full text of these provisions.
If a take-over bid (as defined in the Securities Act (Ontario)) is made to the holders of the Multiple Voting Shares, each Subordinate Voting Share shall become convertible into a Multiple Voting Share at the option of the holder thereof at any time during the period commencing on the eighth day after the date on which the offer is made and ending on the last date upon which holders of Multiple Voting Shares will be entitled to accept the offer. However, this conversion right shall not come into effect if:
(a) | an identical offer is made concurrently to purchase Subordinate Voting Shares (if any are then issued and outstanding), which offer has no condition attached to it other than the right to not take-up and pay for shares tendered if no shares are purchased pursuant to the take-over bid for Multiple Voting Shares; |
(b) | holders of more than 50% of the issued and outstanding Multiple Voting Shares deliver a certificate or certificates to FirstServices transfer agent certifying that such holders will not deposit such Multiple Voting Shares under the take-over bid therefor; or |
(c) | the take-over bid for Multiple Voting Shares is not completed by the offeror. |
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The articles of FirstService provide that a holder of Multiple Voting Shares is entitled at any time and from time to time to convert all or any part of the Multiple Voting Shares held by such holder into Subordinate Voting Shares on a share-for-share basis, upon irrevocable notice.
Jay S. Hennick and Henset Capital Inc. (the Multiple Voting Shareholder) are subject to an agreement (the Trust Agreement) with Equity Financial Trust Company (the Trustee) and FirstService in order to provide the holders of Subordinate Voting Shares with certain additional rights in the event that a take-over bid, having certain characteristics, is made for the Multiple Voting Shares. Under applicable securities laws, an offer to purchase Multiple Voting Shares would not necessarily require that an offer be made to purchase Subordinate Voting Shares.
The Trust Agreement prevents the sale, directly or indirectly, of Multiple Voting Shares owned by the Multiple Voting Shareholder pursuant to a take-over bid at a price per share in excess of 115% of the then current market price of the Subordinate Voting Shares, as determined under applicable legislation. This prohibition does not apply if: (a) such sale is made pursuant to an offer to purchase Multiple Voting Shares made to all holders of Multiple Voting Shares and an offer identical in all material respects is made concurrently to purchase Subordinate Voting Shares, which identical offer has no condition attached other than the right not to take-up and pay for shares tendered if no shares are purchased pursuant to the offer for Multiple Voting Shares; or (b) there is a concurrent unconditional offer to purchase all of the Subordinate Voting Shares at a price per share at least as high as the highest price per share paid pursuant to the take-over bid for the Multiple Voting Shares.
The Trust Agreement provides, among other things, that prior to any direct or indirect transfer of any or all of the Multiple Voting Shares owned by the Multiple Voting Shareholder to any party other than a member of the Hennick Family (as defined below), the transferred Multiple Voting Shares will be automatically converted to Subordinate Voting Shares. The Trust Agreement does not prevent certain indirect sales resulting from the transfer of shares of a corporation which, directly or indirectly, controls or is controlled by the Multiple Voting Shareholder or FirstService, where the transferor and transferee are members of the Hennick Family and the transferee is the spouse or child of the transferor and where the sale is otherwise made in accordance with applicable law. The phrase Hennick Family is defined to mean: (i) Jay S. Hennick; (ii) the spouse, children or estate of Jay S. Hennick; (iii) a trust, the sole beneficiaries of which are any of the foregoing; and (iv) any and all corporations or entities which are directly or indirectly controlled by any of the foregoing.
The Trust Agreement contains provisions for the authorization of action by the Trustee to enforce the rights thereunder on behalf of the holders of the Subordinate Voting Shares. No holder of Subordinate Voting Shares has the right, other than through the Trustee, to institute any action or proceeding or to exercise any other remedy to enforce any rights arising under the Trust Agreement unless the Trustee fails to act on a request authorized by holders of not less than 10% of the outstanding Subordinate Voting Shares after provision of reasonable funds and indemnity to the Trustee and evidence of the registered holdings of the requesting shareholders.
Holders of Subordinate Voting Shares may have additional rights under applicable securities legislation in the event of a take-over bid.
At the Meeting, if the Transaction Resolution and Articles Resolution are approved and the matters therein implemented, the dual class share structure of FirstService will be eliminated, all references to the Multiple Voting Shares and preference shares will be removed from FirstServices articles and the Subordinate Voting Shares will be re-designated as common shares. See Business of the Meeting Approval of Transaction and Business of the Meeting Approval of Amendment to the Articles. In such event, the rights described above attaching to the Subordinate Voting Shares will be removed from FirstServices articles, and the Trust Agreement described above will terminate.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
The Board considers good corporate governance practices to be an important factor in the overall success of FirstService. Under National Instrument 58-101 Disclosure of Corporate Governance Practices and National Policy 58-201 Corporate Governance Guidelines (collectively, the Corporate Governance Rules), FirstService is required to disclose information relating to its corporate governance practices, which disclosure is set out herein. FirstService is committed to adopting and adhering to corporate governance practices that either meet or exceed applicable corporate governance standards. FirstService believes that its corporate governance practices should be compared to the highest standards currently in force and applicable to it as well as to best market practices. In light of the foregoing, the Board believes FirstServices corporate governance practices can and should evolve over time. Accordingly, the Board has decided to present to shareholders an advisory resolution with respect to FirstServices approach to executive compensation as described below under Business of the Meeting Advisory Resolution on Executive Compensation. The Board will continue to follow market or regulatory initiatives, remain open to discussions with its shareholders and to consider potential corporate governance changes and refinements when and as appropriate.
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In addition, FirstService believes that director, officer and employee honesty and integrity are important factors in ensuring good corporate governance, which in turn improves corporate performance and benefits all shareholders. To that end, the Board has adopted a Code of Ethics and Conduct, which code applies to all directors, officers and employees of FirstService and its subsidiaries, and a Financial Management Code of Ethics and Conduct, which code applies to officers, senior management and senior financial and accounting personnel of FirstService and its subsidiaries. The Code of Ethics and Conduct and the Financial Management Code of Ethics and Conduct can each be viewed on FirstServices website (www.firstservice.com). Any deviations from the Code of Ethics and Conduct are required to be reported to an employees supervisor and, if appropriate, FirstServices Chief Financial Officer and the Board. Any deviations from the Financial Management Code of Ethics and Conduct are required to be reported to FirstServices Director, Compliance and Risk Management, the Chief Executive Officer (the CEO) and/or the Chair of the Audit Committee of the Board (the Audit Committee). Furthermore, FirstService maintains an ethics hotline, FirstLine, and an ethics hotline policy in which any director, officer and employee of FirstService or its subsidiaries has a responsibility to report any activity or suspected activity of which he or she may have knowledge relating to the integrity of FirstServices financial reporting or which otherwise might be considered sensitive in preserving FirstServices reputation. All reports made to the ethics hotline are reviewed by the Audit Committee.
With respect to the United States, FirstService is required to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules adopted by the SEC pursuant to that Act, as well as the governance rules of The NASDAQ Global Select Market (NASDAQ), in each case, as applicable to foreign private issuers like FirstService. Most of the NASDAQ corporate governance standards are not mandatory for FirstService as a foreign private issuer, but FirstService is required to disclose the significant differences between its corporate governance practices and the requirements applicable to U.S. issuers listed on NASDAQ under NASDAQ corporate governance standards. Except as may be summarized on FirstServices website, www.firstservice.com, FirstService is in compliance with the NASDAQ corporate governance standards.
Board Composition
The Board is currently comprised of eight members, seven of which were elected at FirstServices annual and special meeting of shareholders held in 2018, and one of which, Joan Eloise Sproul, was appointed as a director in May 2018. A majority of the Board is comprised of independent directors. Six of the current eight members of the Board (or 75%), being Brendan Calder, Bernard I. Ghert, Frederick F. Reichheld, Joan Eloise Sproul, Michael Stein and Erin J. Wallace, are considered by the Board to be independent directors within the meaning of the Corporate Governance Rules as each has no direct or indirect material relationship with FirstService. Jay S. Hennick and D. Scott Patterson, the other Board members, are not independent directors within the meaning of the Corporate Governance Rules. Mr. Hennick is the Founder and Chairman of the Board of FirstService and provides services to FirstService pursuant to a management services agreement (see Executive Compensation Management Contract below), and Mr. Patterson is the President and Chief Executive Officer of FirstService. In deciding whether a particular director is or is not an independent director, the Board examined the factual circumstances of each director and considered them in the context of many factors. All eight nominees for election to the Board at the Meeting are current members of the Board.
Majority Voting Policy
The Board has adopted a majority voting policy for the election of directors. See Business of the Meeting Election of Directors.
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Policy on Directors Tenure and Priorities
The Board has adopted a policy relating to a directors tenure and priorities. Under this policy, upon a FirstService director reaching the age of 75, and on each anniversary thereafter for so long as such individual continues to serve as a director, such director must tender his or her written resignation from the Board to the Nominating and Corporate Governance Committee (the Governance Committee). The Governance Committee will, within 30 days, consider the resignation offer and will recommend to the Board whether or not to accept it. The Board will thereafter act on the Governance Committees recommendation within 30 days. If a resignation is accepted, it will be effective either: (i) prior to the commencement of the next annual meeting of FirstServices shareholders at which directors are to be elected; or (ii) upon acceptance of such offer of resignation by the Board, as determined by the Board. The foregoing applies to all current and future directors of FirstService, other than Bernard I. Ghert, who was exempted by the Board after having regard to his age and his past service as a director and Chair of the Audit Committee. In addition, this policy provides that upon initially becoming a director of FirstService, and at each annual Board meeting occurring immediately prior to the annual meeting of FirstServices shareholders at which directors are to be elected, each director will represent to the Board that membership on the Board and the carrying out of such directors Board and committee duties is one of such directors top three priorities and that such directors personal or professional circumstances do not adversely affect such directors ability to effectively serve as a director of FirstService.
Independent Lead Director
The Board recognizes the importance of independent leadership on the Board, as evidenced by its designation of Bernard I. Ghert, an independent director, as Lead Director of the Board, thereby separating the roles of Lead Director (Mr. Ghert) and Chairman (Mr. Hennick). The Board has adopted a formal position description for the Lead Director of the Board, which requires that the Board appoint an independent director as Lead Director in the event that the Chairman of the Board is not independent. The formal position description for the Lead Director provides that the Lead Director will facilitate the functioning of the Board independently of management of FirstService and provide independent leadership to the Board, with the following included as part of the Lead Directors responsibilities: (i) reviewing with the Chairman and CEO items of importance for consideration by the Board; (ii) consulting and meeting with any or all of the independent directors and representing such directors in discussions with management of FirstService on corporate governance issues and other matters; (iii) recommending, where necessary, the holding of special meetings of the Board; (iv) promoting best practices and high standards of corporate governance; and (v) assisting in the process of conducting director evaluations.
Chairman
As Chairman of the Board, Mr. Hennick provides leadership to directors in discharging their mandate, including by leading, managing and organizing the Board consistent with the approach to corporate governance adopted by the Board from time to time, promoting cohesiveness among the directors and being satisfied that the responsibilities of the Board and its committees are well understood by the directors. The Chairman of the Board is responsible for taking all reasonable measures to ensure that the Board fully executes its responsibilities. The Board has adopted a formal position description for the Chairman of the Board, which position description provides, among other things, that the Chairman will: (i) ensure that all business required to come before the Board is brought before the Board such that the Board is able to carry out all of its duties to manage or supervise the management of the business and affairs of FirstService; (ii) arrange for an appropriate information package to be provided on a timely basis to each director in advance of a Board meeting and monitoring the adequacy of materials provided to the directors in connection with the Boards deliberations; (iii) ensure the Board has the opportunity, at each regularly scheduled meeting, to meet separately, without non-independent directors and management personnel present; and (iv) in conjunction with the relevant committee of the Board (and its Chair), review and assess the directors meeting attendance records and the effectiveness and performance of the Board, its committees (and their Chairs) and individual directors. The position description for the Chairman also provides that, in the event the Chairman is not independent, the Board appoint an independent Lead Director to carry out the responsibilities set out in the position description of the Lead Director.
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Board Mandate
The Board has adopted a written Board mandate, which mandate provides that the Board is responsible for the stewardship of FirstService and requires the Board to oversee the conduct of the business and affairs of FirstService (both directly and through committees) and approve FirstServices goals, objectives and strategies. The Board is also responsible for overseeing the implementation of appropriate risk assessment systems to identify and manage principal risks of FirstServices business. The Board mandate is annexed hereto as Appendix C and can also be viewed on FirstServices website (www.firstservice.com). The Board mandate further provides that all members of the Board have suitable experience, characteristics/traits and skills given the nature of FirstService and its businesses, and directors are expected to commit the time and resources necessary to properly carry out their duties. Members of the Board are also required to carry out their responsibilities objectively, honestly and in good faith with a view to the best interests of FirstService and are expected to conduct themselves according to the highest standards of personal and professional integrity. If an actual or potential conflict of interest arises, a director must promptly inform the Chairman or Lead Director and refrain from voting or participating in discussion of the matter in respect of which he has an actual or potential conflict of interest. If it is determined that a significant conflict of interest exists and cannot be resolved, the director is expected to resign.
The Board mandate also provides that the Board meet in accordance with a schedule established each year by the Board, and at such other times as the Board may determine. Meeting agendas are developed in consultation with the Chairman or Lead Director. Board members may propose agenda items though communication with the Chairman or Lead Director. The Chairman is responsible for ensuring that a suitably comprehensive information package is sent to each director in advance of each meeting. Independent directors are required to have the opportunity to meet at appropriate times without management present at all Board meetings. The Lead Director is responsible for presiding over meetings of the independent directors.
The Board mandate further provides that the Board is responsible for the following specific matters: reviewing and approving managements strategic plans; reviewing and approving FirstServices financial objectives, business plans and budgets; monitoring corporate performance against the strategic plans and budgets; management succession planning; assessing its own effectiveness in fulfilling its responsibilities, including monitoring the effectiveness of individual directors; ensuring the integrity of FirstServices internal control system and management information systems; developing FirstServices approach to corporate governance; and satisfying itself that appropriate policies and procedures are in place regarding public disclosure and restricted trading by insiders.
Women on the Board
Two (or 25%) of the eight members of the Board are women. While FirstService has not adopted a written policy relating to the identification and nomination of women directors, it has adopted a target regarding women on its Board and has developed a set of principles and practices regarding diversity and inclusion of women on its Board as set out below.
FirstService believes in diversity and values the benefit that diversity can bring to its Board. Diversity promotes the inclusion of different perspectives and ideas, mitigates against group think and ensures that FirstService has the opportunity to benefit from all available talent. FirstService seeks to maintain a Board comprised of talented and dedicated directors with a diverse mix of expertise, experience, skills and backgrounds. FirstService believes that the skills and backgrounds collectively represented on the Board should reflect the diverse nature of the business environment in which FirstService operates.
FirstService is committed to a merit based system for Board composition within a diverse and inclusive culture which solicits multiple perspectives and views and is free of bias and discrimination. When assessing Board composition or identifying suitable candidates for appointment or re-election to the Board, FirstService will consider candidates on merit against objective criteria having regard to the benefit of diversity and the needs of the Board.
In furtherance of Board diversity, FirstService aspires to attain as soon as practicably, but by the annual meeting held in 2024, and thereafter maintain, a Board composition in which at least one-third of the Board members are women. FirstService has made significant progress in this regard over the last few years. In 2018, the proportion of women on the Board increased to 25% from 14% in 2017. FirstService has a number of measures in place that are intended to further improve Board diversity over time. For example, the Chair of the Governance Committee conducts annual Board evaluations, which not only enhance the quality of the composition of the Board members, but are also an effective way to optimize Board renewal and encourage diversity, including gender diversity, and to identify where and how diversity improvements can be made. See Board Evaluation and Peer Review below. Moreover, a disciplined approach to Board renewal remains the most fundamental condition for refreshing Board composition and creating an opportunity to increase the diversity of the Board members. To this end, the Board has adopted a policy which provides an age limit to a directors tenure. See Board Composition Policy on Directors Tenure and Priorities above.
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FirstService will periodically assess the expertise, experience, skills and backgrounds of its directors in light of the needs of the Board, including the extent to which the current composition of the Board reflects a diverse mix of knowledge, experience, skills and backgrounds, including an appropriate number of women directors. Any search firm engaged to assist the Board or the Governance Committee in identifying candidates for appointment to the Board will be specifically directed to include diverse candidates generally, and women candidates in particular. The Board or the Governance Committee will annually assess its progress in promoting a diverse Board.
Gender Composition of Leaders, Managers and Executive Officers
In addition to Board diversity, FirstService understands the benefits of a diversified work force. 263 (48%) of the leaders, managers and executive officers of FirstService, including all of its major subsidiaries, are women. While FirstService does not have a fixed target for the representation of women in executive officer positions, it is committed to promoting diversity among its senior leadership and will consider the level of female representation and the other indicia of diversity when deliberating on hires and promotions regarding all senior leadership positions, including executive officers. In identifying and considering potential candidates for senior leadership, including executive officer appointments, FirstService considers factors such as years of service, regional background, merit, experience and qualifications. In addition, unlike the identification and selection process for the Board, the diversity of FirstServices senior leadership team is driven by other factors, some of which are outside of the control of FirstService, including the level of employee turnover, the times at which hiring and promotion opportunities arise, the available pipeline of employees with the necessary skills and experiences, and various other factors. FirstService has, and will continue to, assess and develop ways to promote women within FirstService and to ensure women are provided greater opportunities for advancement within FirstService. FirstServices commitment to diversity extends beyond formal programs and initiatives. FirstService strives to create a culture in which both visible and tacit differences are recognized and valued, and where all employees are able to contribute and fulfil their potential without artificial barriers.
People Development and Succession Planning
There is a process of annual leadership review and evaluation at each FirstService platform, and a ranked list of successors at each FirstService platform is maintained and refreshed annually. There is also a development plan to ensure leadership successors are prepared for their future role. The Board reviews the executive succession plan by platform and has the similar evaluation discussion and ranked list for FirstServices executive leadership, including its CEO.
Board Equity Ownership Policy
The Board approved a board equity ownership policy which provides that each member of the Board is required to achieve and maintain, at all times during the period that he or she is a director of FirstService, minimum ownership of shares of FirstService having a value of at least US$100,000 (which amount is subject to adjustment for share and other capital reorganizations). Newly elected or appointed directors of FirstService are permitted two years within which to attain the foregoing minimum ownership amount. All existing directors of FirstService currently comply with this policy. In addition, on December 31, 2018, all current directors of FirstService, other than those individuals who most recently became a director, Joan Eloise Sproul and Erin J. Wallace, owned securities of FirstService having a value of at least three times the amount of the cash retainer paid to non-employee directors. See the biographies, and the footnotes thereto, of each director nominee set out under Business of the Meeting Election of Directors.
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Board and Committee Process
In addition to having a Board comprised of a majority of independent directors, FirstService has adopted a variety of structures to allow for the independence of the Board from Management. Those structures include the appointment of Bernard I. Ghert, an independent director, as Lead Director of the Board with a mandate to facilitate the functioning of the Board independently of Management and provide independent leadership to the Board, the practice of having the independent members of the Board or its committees meet as a group (with no members of Management, including the CEO, present) regularly at every Board meeting and committee meeting, and members of the Board and its committees having the opportunity to initiate discussions with senior Management without the CEO present so that they may freely discuss any concerns they may have, and the ongoing monitoring of the relationship between the Board and its committees and Management by the Governance Committee, which is composed entirely of independent directors. The Board believes that it and its committees have functioned, and continue to function, independently of Management.
FirstServices CEO reports formally to the Board, and, where appropriate, to its committees, as well as less formally through discussions with members of the Board and its committees, to advise the Board and its committees on a timely basis of courses of action that are being considered by Management and are being followed. The Board exercises its responsibility for oversight through the approval of all significant decisions and initiatives affecting FirstService. The Board is satisfied that FirstServices CEO has reported to, and sought the consent of, the Board where necessary and appropriate. The Board has developed a formal position description for the CEO, which position description provides that the CEO has the primary responsibility for the management of the business and affairs of FirstService. As such, the CEO establishes the strategic and operational orientation of FirstService and, in so doing, provides leadership and vision for the effective overall management, profitability, increase in shareholder value and growth of FirstService and for conformity with policies agreed upon by the Board. The CEO is directly accountable to the Board for all activities of FirstService. The Board has not approved formal corporate objectives which the CEO is responsible for achieving; however, the Board and the CEO engage in regular dialogue regarding the performance of the senior management team, including the CEO, in achieving FirstServices strategic objectives as determined by Management and the Board.
Management, working with the Board and the Governance Committee, provides an orientation program for new directors and a continuing education program for all directors to familiarize and update them with respect to FirstService and its businesses. Prior to agreeing to join the Board, new directors are given a clear indication of the workload and time commitment required. The Chairman of the Board ensures the orientation program is carried out as directed by the Governance Committee. New directors to FirstService have generally been executives with extensive business experience. Orientation for these individuals is provided through a review of past Board materials and other private and public documents concerning FirstService and visits to certain of FirstServices businesses and offices. On a periodic basis, management of FirstService and its regions provide presentations for the Board to ensure that directors are fully informed of FirstService operations, major business and regional trends and industry practices, and directors are free to contact the CEO, the Chief Financial Officer and other members of Management at any time to discuss any aspect of FirstServices businesses. In September 2018, the Board received presentations from the executive leaders of Paul Davis Restoration, who provided the Board with an overview of the Paul Davis Restoration executive team, history, business, financial results and opportunities.
The Board, either directly or through Board committees, is responsible for overseeing the business and affairs of FirstService and for approving the overall direction of FirstService, in a manner which is in the best interests of FirstService and its shareholders. At least four regular meetings and, if required, strategy meetings of the Board are scheduled each year at which the directors review in detail the financial statements, operating reports, forecasts, future prospects, budgets and reports from the committees of the Board and from Management. The frequency of meetings as well as the nature of agenda items changes depending upon the state of FirstServices affairs and in light of opportunities or issues that FirstService may face. There were four Board meetings held in 2018. The meeting agenda is circulated in advance to all directors, meetings are scheduled well in advance and a core agenda of items, together with a book of materials, is circulated prior to each meeting.
Certain directors and executive officers of FirstService are engaged in and will continue to engage in activities outside FirstService, and as a result, certain directors and executive officers of FirstService may become subject to conflicts of interest. The OBCA provides that in the event that a director or executive officer has an interest in a contract or proposed contract or agreement, the director or executive officer shall disclose his or her interest in such contract or agreement and shall refrain from voting on any matter in respect of such contract or agreement unless otherwise provided under the OBCA. In addition, the Board mandate provides that if an actual or potential conflict of interest arises, a director must promptly inform the Chairman or Lead Director and refrain from voting or participating in discussion of the matter in respect of which he has an actual or potential conflict of interest. If it is determined that a significant conflict of interest exists and cannot be resolved, the director is expected to resign. To the extent that conflicts of interest arise, such conflicts will be resolved in accordance with the provisions of the OBCA and the Board mandate.
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During 2018, none of the proposed nominees for election to the Board at the Meeting have served together as directors on the boards of other companies or as trustees for other entities. Please see the biographies under Business of the Meeting Election of Directors for the name of each publicly traded issuers board (other than FirstServices) on which the nominees for election to the Board at the Meeting are currently, or were during the past five years, members.
Proportionate Representation
FirstService is controlled by Jay S. Hennick who, directly or indirectly, owns, controls or directs 4.4% of the total outstanding number of Subordinate Voting Shares and 100.0% of the total outstanding number of Multiple Voting Shares (7.9% of total outstanding number of FirstService Shares; 45.7% of total votes of all FirstService Shares). 92.1% of the outstanding FirstService Shares and 54.3% of the votes of all FirstService Shares are held by shareholders other than FirstServices significant shareholder. Six of the current eight directors, or 75% of the total number of current directors, are independent directors and are, therefore, free from any relationships with the significant shareholder. The Board believes that the membership on the Board of these six directors fairly reflects the investment in FirstService by shareholders other than FirstServices significant shareholder.
Board Committees
The Board has three standing committees: the Audit Committee, the Executive Compensation Committee (the Compensation Committee) and the Governance Committee. The roles of these committees are outlined below. Each committee reviews and assesses its mandate at least annually and has the authority to retain special legal, accounting or other advisors. From time to time ad hoc committees of the Board may be appointed. As the Board has plenary power, any responsibility which is not delegated to Management or a Board committee remains with the Board. The Board has not developed a formal position description for the Chair of any standing committee. However, the Board has developed a committee mandate for each standing committee which is sufficiently detailed and contains appropriate information to delineate the role and responsibilities of the applicable committee, and thereby the Chair of the applicable committee. The committee mandates are published on FirstServices website (www.firstservice.com). The Board delineates the role and responsibilities of the Chair of the Audit Committee, the Compensation Committee and the Governance Committee by tasking the Chair of the applicable committee with taking all reasonable measures to ensure that the applicable committee executes and fulfills its responsibilities under the applicable committee mandate and assumes each of the responsibilities specifically given to a Chair of a committee under the applicable committee mandate.
Audit Committee
The Audit Committee is comprised of three members who are each independent and financially literate as required by Multilateral Instrument 52-110 Audit Committees (the Audit Committee Rule). The members of the Audit Committee are Bernard I. Ghert (Chair), Michael Stein and Joan Eloise Sproul. The Audit Committee is appointed by, and assists, the Board in fulfilling its oversight responsibilities in the following principal areas: (i) accounting policies and practices; (ii) the financial reporting process; (iii) financial statements provided by FirstService to the public; (iv) risk management, including systems of internal accounting and financial controls; (v) appointing, overseeing and evaluating the work of the external auditors; and (vi) compliance with applicable legal and regulatory requirements. The Audit Committee has the resources and the authority to discharge its responsibilities, including the authority to engage, at the expense of FirstService, outside consultants, independent legal counsel and other advisors as it determines necessary to carry out its duties, without seeking approval of the Board or Management. The Audit Committee also has the authority to conduct any investigation necessary and appropriate to fulfilling its responsibilities, and has direct access to communicate with the external auditors, legal counsel and officers and employees of FirstService. The Audit Committee meets at least four times annually, or more frequently as circumstances dictate. There were five meetings of the Audit Committee held in 2018.
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The Audit Committee reviews the annual and interim financial statements intended for circulation among shareholders and reports upon these to the Board prior to their approval by the full Board. The Audit Committee is also responsible for reviewing the integrity of FirstServices financial reporting process, both internal and external, and any major issues as to the adequacy of the internal controls and any special audit procedures adopted in light of any material control deficiencies. The Audit Committee communicates directly with FirstServices external auditors in order to discuss audit and related matters whenever appropriate. In addition, the Board may refer to the Audit Committee such matters and questions relating to the financial position of FirstService and its subsidiaries. All reports made to FirstServices ethics hotline are reviewed by the Chair of the Audit Committee and then by the entire Audit Committee at its next meeting. The Board has adopted an Audit Committee mandate, a copy of which is annexed to the annual information form (the AIF) of FirstService for the year ended December 31, 2018 and is also published on FirstServices website (www.firstservice.com). The education and related experience of each of the members of the Audit Committee that is relevant to the performance by such members of their responsibilities on such committee is described in the AIF under the heading Audit Committee. A copy of the AIF is available on SEDAR at www.sedar.com.
The SEC requires that each member of a companys audit committee be independent. All of the members of the Audit Committee are independent, as that term is defined by the SEC. The SEC further requires a company, like FirstService, that files reports under the United States Securities Exchange Act of 1934, as amended, to disclose annually whether its Board has determined that there is at least one audit committee financial expert on its audit committee, and if so, the name of the audit committee financial expert. Two Audit Committee members, Mr. Ghert and Ms. Sproul, have been determined by the Board to be an audit committee financial expert as that term is defined by the SEC.
The Audit Committee is responsible for the selection, nomination, compensation, retention, termination and oversight of the work of the external auditors engaged for the purpose of issuing an auditors report or performing other audit, review or attest services for FirstService and, in such regard, recommend to the Board the external auditors to be nominated for approval by FirstService shareholders. The Audit Committee mandate provides that the Audit Committee must pre-approve all audit engagements and the provision by the external auditors of all non-audit services, including fees and terms for all audit engagements and non-audit engagements. The Audit Committee mandate further provides that the Audit Committee consider, assess and report to the Board with regard to the independence and performance of the external auditors. The Audit Committee has adopted a pre-approval policy pursuant to which FirstService may not engage FirstServices external auditor to carry out certain non-audit services that are deemed inconsistent with the independence of auditors under applicable U.S. and Canadian laws. The Audit Committee is also responsible for reviewing hiring policies for current and former partners or employees of the external auditors.
The Audit Committee mandate also provides, and the general practice at FirstService is, that the Audit Committee will review all material transactions and contracts entered into by FirstService with any insider or related party of FirstService, other than director, officer or employee compensation arrangements which are approved by the Compensation Committee. Material transactions and agreements related to compensation matters are generally reviewed and approved by the Compensation Committee. Otherwise, from time to time ad hoc committees of the Board may be appointed. In practice, and as is customary or appropriate, the Board will establish special or independent ad hoc committees of the Board as needed from time to time to review, pass upon or deal with material matters (including considering transactions and agreements in respect of which a director or executive officer has or may have a material interest), and the committee members of any such ad hoc committee are selected and appointed based on their independence from management as well as their independence from the matter at hand which has required the establishment of such ad hoc committee.
The Board and the Audit Committee have established procedures (which procedures are subject to monitoring by the Audit Committee) for the receipt, retention and treatment of complaints or concerns received by FirstService regarding accounting, internal accounting controls or auditing matters, including the anonymous submission by employees of concerns respecting accounting or auditing matters. Please refer to the Financial Management Code of Ethics and Conduct published on FirstServices website (www.firstservice.com). Additional information regarding the Audit Committee has been included in the AIF in accordance with the Audit Committee Rule.
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Compensation Committee
The Compensation Committee is comprised of three members, all of whom are independent directors within the meaning of the Corporate Governance Rules. The members of the Compensation Committee are Michael Stein (Chair), Brendan Calder and Bernard I. Ghert. The Compensation Committee, among other things, reviews and approves the compensation of the CEO and provides input to the CEO in terms of the compensation for the other executive officers of FirstService. The Compensation Committee also reviews the compensation of the directors of FirstService and any compensation programs applicable to senior management of FirstService, such as the stock option plan. In the case of grants of options under FirstServices stock option plan, all proposed option grants are submitted to Compensation Committee for review and a recommendation is made to the full Board. The Board has adopted a Compensation Committee mandate, a copy of which is published on FirstServices website (www.firstservice.com).
Governance Committee
The Governance Committee is comprised of Brendan Calder (Chair), Frederick F. Reichheld and Erin J. Wallace, all of whom are independent directors within the meaning of the Corporate Governance Rules. The Board has adopted a Governance Committee mandate, a copy of which is published on FirstServices website (www.firstservice.com). The Governance Committee, among other things, is responsible for identifying and recommending to the Board appropriate director nominee candidates. In addition, the Governance Committee is responsible for advising the Board with respect to the Boards composition, procedures and committees and developing, recommending and monitoring FirstServices corporate governance and other policies, assisting the Board and the committees in their annual review of their performance and their charters, reviewing and making recommendations to the Board with respect to the compensation of directors, succession plans and undertaking such other initiatives that may be necessary or desirable to enable the Board to provide effective corporate governance. The Governance Committee conducts annual surveys of the Boards effectiveness and, every few years, a peer review of the individual members of the Board.
The Governance Committee is mandated to assess at least annually the optimum Board size and beneficial skill sets and makes recommendations to the Board on any changes. The number of directors proposed for election to the Board at the Meeting is eight. The Board considers that the appropriate number of directors for FirstService is approximately seven to nine. The Governance Committee and the Board have considered the matter of Board size, Board diversity and the skill sets of the current and nominee directors and are of the view that the proposed Board membership has the necessary breadth and diversity of experience and background and is of an adequate size to provide for effective decision-making and staffing of Board committees.
The Governance Committee is responsible for determining the appropriate criteria for selecting and assessing potential directors and selects candidates for nomination to the Board accordingly. At such time as it is determined that a new director is desirable, the Governance Committee will engage in various activities to ensure an effective process for selecting candidates for nomination, including developing criteria for the selection of a new director, developing and maintaining a director skills matrix (identifying the desired competencies, independence, expertise, skills, background and personal qualities that are being sought in potential candidates) having regard to the benefit of diversity, identifying and recommending individuals qualified and suitable to become directors, the Chairman, the Lead Director and/or other directors will meet with potential new candidates prior to nomination to discuss the time commitments and performance expectations of the position and formal approval will be sought and obtained from the Board in respect of candidates for nomination.
Board Evaluation and Peer Review
At the end of 2018, an evaluation of the Board, as a whole, was conducted by the Chair of the Governance Committee in which each Board member was contacted by the Chair of the Governance Committee to complete a customized written questionnaire. Responses were reviewed by the Chair of the Governance Committee with the Governance Committee, the Chairman and the CEO and then reported to the full Board. The Chair of the Governance Committee discussed the results with each of the directors, as appropriate, and engaged in a full and frank discussion on any and all issues which any Board member wished to raise, including how the directors, both individually and collectively, could operate more effectively. At the conclusion of the evaluation, matters requiring follow-up were identified, responses were developed and there is ongoing monitoring by the Chair of the Governance Committee to ensure satisfactory results. An evaluation is expected to occur annually, either by telephone or by having Board members complete a detailed customized questionnaire.
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In addition, the Chair of the Governance Committee meets with the individual members of the Board on an ongoing basis to discuss the individuals contribution to the Board. A formal peer review of the individual members of the Board was completed at the end of 2018, and is expected to occur every few years. Whether a peer review is completed formally or informally, each director is encouraged to view any feedback as constructive advice to enhance both their individual contribution and overall Board effectiveness.
Attendance
The following table sets forth the record of attendance of the members of the Board (either in person or by phone) at meetings of the Board and its standing committees and the number of meetings of the Board and such committees held during 2018.
Director |
Board 4 Meetings |
Board Committees |
Overall
Attendance |
|||||||||
Audit 5 Meetings |
Compensation 2 Meetings |
Governance 1 Meeting |
Overall Committee Attendance | |||||||||
No. | % | No. | % | No. | % | No. | % | No. | % | No. | % | |
Brendan Calder | 4 of 4 | 100 | | | 2 of 2 | 100 |
1 of 1 (Chair)
|
100 | 3 of 3 | 100 | 7 of 7 | 100 |
Bernard I. Ghert |
3 of 4 (Lead Dir.)
|
75 |
4 of 5 (Chair)
|
80 | 2 of 2 | 100 | | | 6 of 7 | 86 | 9 of 11 | 82 |
Jay S. Hennick |
4 of 4 (Chair)
|
100 | | | | | | | | | 4 of 4 | 100 |
D. Scott Patterson | 4 of 4 | 100 | | | | | | | | | 4 of 4 | 100 |
Frederick F. Reichheld | 4 of 4 | 100 | | | | | 1 of 1 | 100 | 1 of 1 | 100 | 5 of 5 | 100 |
Joan Eloise Sproul(1) | 3 of 3 | 100 | 3 of 3 | 100 | | | | | 3 of 3 | 100 | 6 of 6 | 100 |
Michael Stein | 4 of 4 | 100 | 5 of 5 | 100 |
2 of 2 (Chair)
|
100 | | | 7 of 7 | 100 | 11 of 11 | 100 |
Erin J. Wallace(2) | 4 of 4 | 100 | 2 of 2 | 100 | | | 1 of 1 | 100 | 3 of 3 | 100 | 7 of 7 | 100 |
___________
Notes:
(1) | Ms. Sproul became a director of FirstService and a member of the Audit Committee in May 2018. The attendance noted reflects meetings held and attended only while she was such a member. |
(2) | Ms. Wallace ceased to be a member of the Audit Committee in May 2018. The attendance noted reflects meetings held and attended only while she was such a member. |
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
The Compensation Discussion and Analysis section of this Circular sets out the objectives of FirstServices executive compensation arrangements, FirstServices executive compensation philosophy and the application of this philosophy to FirstServices executive compensation arrangements. It also provides an analysis of the compensation design, and the decisions that the Compensation Committee made in 2018 with respect to the Named Executive Officers (as this term is defined below under Compensation of Named Executive Officers). When determining the compensation arrangements for the Named Executive Officers, the Compensation Committee considers the objectives of: (i) retaining an executive critical to the success of FirstService and/or its subsidiaries and the enhancement of shareholder value; (ii) providing fair and competitive compensation; (iii) balancing the interests of management and shareholders of FirstService; (iv) rewarding performance, both on an individual basis and with respect to the business in general; and (v) ensuring the recognition of the fact that FirstService carries on business with a small number of executive officers relative to other public companies of similar size.
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The Board and the Compensation Committee have considered the implications of the risks associated with FirstServices compensation policies and practices. In this regard, the Compensation Committee specifically considered various pertinent and relevant elements where compensation and risk may be related in relation to the current compensation policies and practices for senior executives of FirstService (such as pay philosophy, the mix of fixed versus variable compensation, the mix of short versus long term compensation, share ownership requirements and trading policies, reimbursement policies and the level of severance in any contractual arrangements). As further described hereunder, the components of compensation are fairly straightforward and include base salary, short-term incentive (annual bonus) and long-term incentive (stock options and, in the case of the Founder and Chairman, the Long Term Arrangement (as this term is defined below under Management Contract)). Where any risks were identified, the Board and the Compensation Committee have determined that processes and controls are in place to mitigate such risks and, overall, such risks were not significant and not reasonably likely to have a material adverse effect on FirstService. The risks and uncertainties that are likely to have a material adverse effect on FirstService are disclosed in the AIF. No such risks relate to FirstServices compensation policies and practices.
The Board has adopted a policy relating to the trading in securities of FirstService by directors, senior executives, employees and other insiders of FirstService and its subsidiaries (the Trading Policy). Among other things, the following are prohibited by the Trading Policy: (i) short sales of FirstServices securities; (ii) transactions in puts, calls or other derivative securities, on an exchange or in any other organized market; (iii) hedging or monetization transactions that allow an individual to continue to own the covered securities, but without the full risks and rewards of ownership; and (iv) the resale of securities of FirstService purchased in the open market prior to the expiration of three months from the purchase date. Consequently, the foregoing prohibitions in the Trading Policy do not permit a Named Executive Officer or director to purchase financial instruments that are designed to hedge or offset a decrease in market value of FirstServices equity securities granted as compensation or held, directly or indirectly, by a Named Executive Officer or director.
Role of the Compensation Committee
In 2018, Michael Stein (Chair), Brendan Calder and Bernard I. Ghert served as members of the Compensation Committee. None of these individuals was an officer, employee or former officer or employee of FirstService or any of its subsidiaries during 2018. The mandate of the Compensation Committee requires that the Compensation Committee be comprised of three or more members of the Board, each of whom is, in the business judgment of the Board, independent under the rules of the Toronto Stock Exchange (TSX) and NASDAQ. See Statement of Corporate Governance Practices Board Committees Compensation Committee for additional information on the Compensation Committee. Under the Compensation Committees mandate, the Compensation Committee is responsible for, among other things: (a) in consultation with senior management, establishing FirstServices general compensation philosophy, and overseeing the development and implementation of compensation programs; (b) reviewing and approving the compensation of the CEO; (c) reviewing compensation programs applicable to the senior management of FirstService; and (d) making recommendations to the Board with respect to FirstServices incentive compensation plans and equity-based plans, the activities of the individuals and committees responsible for administering these plans, and discharging any responsibilities imposed on the Compensation Committee by any of these plans.
During 2018, the Compensation Committee addressed a number of items, including considering and/or approving and/or making recommendations in respect of all option grants to officers, employees and directors of FirstService or subsidiaries of FirstService; any change to the CEOs base compensation for 2018; and determining, for the purposes of the FirstService annual performance-based bonus plan, 2018 adjusted earnings per share. In addition, the Compensation Committee played a central role in evaluating and negotiating the Transaction. See Business of the Meeting Approval of Transaction.
Independent Compensation Consultant
Under its mandate, the Compensation Committee has the sole authority to select, retain and terminate a compensation consultant and to approve the consultants fees and other retention terms. The Compensation Committee is also entitled to the resources and authority appropriate to discharge its duties and responsibilities, including the authority to retain counsel and other experts or consultants. In August 2015, the Compensation Committee engaged H. Wilkinson Consulting Group Inc. (the EC Consultant) as its independent compensation consultant. The EC Consultant was retained by the Compensation Committee to recommend a peer group for FirstService and market competitive compensation for the Founder and Chairman, CEO and CFO. The EC Consultant also made recommendations to the Compensation Committee in respect of market competitive compensation of non-employee directors. See Compensation of Directors below. During 2018, neither the EC Consultant nor any other compensation consultant provided any services to the Compensation Committee or FirstService, or to any affiliated or subsidiary entities of FirstService or to any member of the Board or Management. No fees were paid to the EC Consultant or any other compensation consultant by FirstService during the financial years ended December 31, 2017 and 2018. However, in January 2019, the Compensation Committee retained Hugessen Consulting, an independent compensation consultant, who advised the Compensation Committee and the Board in connection with the Transaction. See Business of the Meeting Approval of Transaction.
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Benchmarking
The Compensation Committee may consider many factors when designing and establishing executive compensation arrangements for the Founder and Chairman, CEO and CFO and reviewing and making recommendations for such arrangements for the other executive officers of FirstService. Every several years, a benchmarking analysis is expected to be conducted by the Compensation Committee to ensure that the executive compensation arrangements for the relevant executive officers remain appropriate and competitive. When a benchmarking analysis is conducted, FirstService will not typically position executive pay to reflect a single percentile within the peer group for each executive. Rather, in determining the compensation level for each executive, the Compensation Committee (for the Founder and Chairman and CEO) or the CEO (for the CFO) may look at factors such as the relative complexity of the executives role within the organization, the executives performance and potential for future advancement, the compensation paid by FirstServices peer group and other companies identified by relevant market survey data, and pay equity considerations.
The starting point for the benchmarking analysis is the analysis of comparable market data. At the end of 2015, the Compensation Committee, with the assistance of the EC Consultant, determined that the following service companies would constitute FirstServices peer group for benchmarking purposes: Altisource Residential Corporation, Lennox International Inc., ADT Corp., ServiceMaster Global Holdings Inc., ABM Industries, Inc., Apartment Investment and Management Co., Rollins, Inc., Essex Property Trust Inc., Ascent Capital Group Inc., GDI Integrated Facility Services Inc., Comfort Systems USA, Inc., G & K Services, Inc., Healthcare Services Group, Inc. and UniFirst Corporation. As FirstService has a client base that is primarily in the USA, the peer group members are primarily similarly sized USA service companies (by revenue). The Compensation Committee then reviewed the peer group data to determine where base salaries and total compensation for the Founder and Chairman, CEO and CFO should be appropriately positioned. While these benchmarks represent useful guidelines, discretion may be used in setting individual executive pay so that it appropriately reflects the value and contributions of each executive, as well as the executives leadership, commitment to FirstServices values and potential for advancement.
A range of factors was analyzed by the EC Consultant for each member of the peer group, including: (i) various financial size and performance metrics; (ii) number of employees; (iii) business lines and the extent that they overlap FirstServices business lines; and (iv) other indicia of common managerial skill sets. It is anticipated that the peer group will change if FirstServices size or lines of business change, or if the peer group members show changes in their businesses or operations.
Recommendations of Management
In general, the Compensation Committee (with the assistance and advice of a consultant, if applicable) reviews and discusses matters involving the compensation of the Founder and Chairman and CEO. After this review, the Compensation Committee prepares a recommendation for the Board to review and discuss. The independent members of the Board have the sole authority to approve compensation decisions made with respect to the Founder and Chairman and CEO.
With respect to FirstServices other senior management and employees, it is the CEO (with the assistance of the independent compensation consultant for senior management, if applicable) who develops the pay strategies and recommendations, which the Compensation Committee then reviews and discusses. However, the authority to approve those strategies and recommendations resides with different parties according to the employees level. For senior management, decisions must be approved by the CEO, subject to the Compensation Committees overall review and acceptance. For employees below the level of senior management, the CEO and his designees have the authority to approve pay actions. However, the Compensation Committee is responsible for approving actions related to other aspects of these employees compensation, such as any grant of options and, if appropriate, the amount of any discretionary bonus pool.
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Elements of Compensation
The compensation paid to the Named Executive Officers in any year consists of three primary components:
(a) | base salary; |
(b) | an annual performance-based bonus plan; and |
(c) | a long-term incentive in the form of stock options granted under the FirstService Stock Option Plan, as amended (the Option Plan) (other than Mr. Hennick, who is not entitled to participate in the Option Plan). |
FirstService believes that making a significant portion of the Named Executive Officers compensation both variable/performance-based and long-term supports FirstServices executive compensation philosophy, as these forms of compensation primarily depend on performance metrics that are fundamentally aligned with the best-interests of FirstServices shareholders. At the same time, FirstService utilizes stock option based compensation to allow those most accountable for FirstServices long-term success to acquire and hold shares of FirstService. The key features of the three primary components of compensation are described below.
Base Salary
Base salary recognizes the value of an individual to FirstService or a subsidiary based on his or her role, skill, performance, contributions, leadership and potential. It is critical in attracting and retaining executive talent in the markets in which FirstService or a subsidiary competes for talent. Base salaries for the Named Executive Officers are reviewed annually (for the Founder and Chairman and CEO, by the Compensation Committee, for the other executive officers of FirstService, by the CEO). For the Founder and Chairman, the base fee is determined in accordance with the Management Services Agreement (as this term is defined below under Management Contract) and is subject to increase annually in an amount in the discretion of the Board or the Compensation Committee, with any such annual increase to be, absent the consent of Jayset Management FSV Inc. (Jayset Mgt), not less than 5% of the then current base fee. See Management Contract below. FirstService also pays to Jayset Mgt a further annual fee equal to 2% of the aggregate of the base fee and the annual bonus payment pursuant to the Management Services Agreement.
For 2018, the Compensation Committee approved a 5% increase in the base fee of the Founder and Chairman and a 3.5% increase to the base compensation of the CEO, and the CEO approved increases to the base compensation of the remaining three Named Executive Officers.
Annual Performance-Based Bonus Plan
FirstService has an annual performance-based bonus plan pursuant to which an annual cash performance bonus is awarded to FirstService management and employees based entirely on percentage growth in adjusted earnings per share (AEPS) over the prior year. In the event that no such year-over-year growth in adjusted earnings per share occurs in a given year, no amounts would be payable pursuant to the annual performance-based bonus plan. Annual performance bonuses are paid as a percentage of base salary, which percentage increases the larger the percentage growth in adjusted earnings per share is for the year in question. FirstService believes that using annual AEPS growth as the sole metric in determining payments to Named Executive Officers pursuant to this annual performance-based bonus plan best aligns the interests of participants in this plan with those of FirstService shareholders, and is best suited to holding these individuals accountable for FirstServices overall operating performance. Furthermore, this annual performance-based bonus plan results in a significant proportion of the Named Executive Officers total compensation being wholly dependent on the operating performance of FirstService, and accordingly only rewards such individuals when FirstService as a whole is performing well.
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At the beginning of 2018, the Compensation Committee and the Board determined that, for the purposes of the annual performance-based bonus plan, 2017 adjusted diluted earnings per share was US$1.99. In February 2019, the Compensation Committee and the Board also determined that, for the purposes of the annual performance-based bonus plan, adjusted diluted earnings per share percentage growth over the prior year was 29%.
In determining the percentage growth, the impact on earnings per share of any disposition of material investments or assets are excluded. This establishes a direct link between executive compensation and FirstServices regular operating performance. For the Founder and Chairman, the formula to be used for determining the amount of the annual performance bonus is established in the Management Services Agreement (see Management Contract below) and, for 2018, the Founder and Chairman was entitled to earn 7.5% of the aggregate base fee in 2018 as an annual bonus for that year for each 1% growth in adjusted earnings per share in that year over the prior year. The remaining four Named Executive Officers earn an annual performance bonus calculated on the same basis as the Founder and Chairman, but determined using the following percentages of their respective base salaries in 2018: for the CEO, 6.5%; for the CFO, 4.5%; for the VP, Corporate Controller and Corporate Secretary, 3.25%; and for the VP, Strategy and Corporate Development, 3.5%. A summary of the bonuses paid to each of the Named Executive Officers and the applicable AEPS growth figures for each of 2016, 2017 and 2018 is set out below. See Executive Compensation Compensation of Named Executive Officers below.
Year | Adjusted Earnings Per Share Growth vs. Prior Year |
Named Executive Officer Annual Performance-Based Bonus Payments (US$)(1)
|
Total Annual Performance-Based Bonus Payments to Named Executive Officers (US$) | ||||
Jay S. Hennick,
Founder and Chairman |
D. Scott Patterson, President and Chief Executive Officer |
Jeremy Rakusin,
Chief Financial Officer |
Douglas G. Cooke,
VP, Corp. Controller and Corp. Secretary |
Alex Nguyen,
VP Strategy
|
|||
2018 | 29% | 1,310,400 | 1,146,400 | 469,200 | 202,600 | 197,200 | 3,325,800 |
2017 | 25% | 1,074,800 | 953,900 | 368,700 | 168,600 | 140,700 | 2,706,700 |
2016 | 35% | 1,473,300 | 1,263,300 | 449,200 | 223,300 | 186,300 | 3,595,400 |
___________
Note:
(1) | All Named Executive Officers annual bonus incentive amounts were paid in Canadian dollars (an average 2018 exchange rate of US$1.00 = C$1.2955 has been used in the table above). |
The Compensation Committee may also recommend, and the Board may also approve, a non-annual discretionary bonus based on an individual or FirstService achieving certain designated objectives (other than adjusted earnings per share) and for superior or exceptional performance in relation to such objectives. In 2018, no one-time special discretionary bonuses were awarded to any of the Named Executive Officers.
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FirstService Stock Option Awards
FirstService provides long-term incentive to the Named Executive Officers in the form of stock options as part of its overall executive compensation strategy. For a description of the material terms of the Option Plan and option grants to Named Executive Officers, see Incentive Award Plans of FirstService FirstService Stock Option Plan and NEO Outstanding Option-Based Awards below. The Compensation Committee believes that stock option grants serve FirstServices executive compensation philosophy in several ways. It helps attract, retain and motivate talent. It aligns the interests of the Named Executive Officers with those of shareholders by linking a significant portion of the officers total pay opportunity to share price. It also provides long-term accountability for Named Executive Officers.
Typically, stock options are granted to a Named Executive Officer of FirstService under the Option Plan shortly following the end of each year. Effective February 8, 2019, an aggregate of 260,000 options were issued to the Named Executive Officers (other than the Founder and Chairman) in respect of the year ended December 31, 2018. See Incentive Award Plans of FirstService FirstService Stock Option Plan and NEO Outstanding Option-Based Awards below. In determining the long-term incentive component of the Named Executive Officers compensation, the Compensation Committee will consider, among other factors, the recommendations of Management, FirstServices performance and relative shareholder return, the level of dilution to shareholders, the value of similar incentive awards to executive officers at comparable companies and awards given to the Named Executive Officers in past years.
Executive Benefit Plans and Other Elements of Compensation
All of the Named Executive Officers are eligible to participate in the benefit plans that are available to substantially all of the other employees of FirstService. These benefit programs include supplementary medical insurance, dental insurance, life insurance, long-term disability and long-term care plans. FirstService does not provide any additional perquisites or other benefits to the Named Executive Officers.
Furthermore, FirstService does not provide any post-retirement benefits to any Named Executive Officers or other employees.
Compensation Committee Report on Executive Compensation
The Compensation Committee has reviewed with senior management this Compensation Discussion and Analysis and, based on such review, has recommended to the Board that this Compensation Discussion and Analysis be included in this Circular.
Submitted by the Compensation Committee: Bernard I. Ghert, Brendan Calder and Michael Stein (Chair)
Compensation of Named Executive Officers
The following table provides a summary of total compensation earned during the twelve month periods ended December 31, 2018, 2017 and 2016, respectively, by FirstServices Chief Executive Officer and Chief Financial Officer, each of the three other most highly compensated executive officers of FirstService, including any of its subsidiaries, who were serving as such as at December 31, 2018 and whose total compensation was, individually, more than C$150,000 (the Other Executive Officers) and each other individual who would have been an Other Executive Officer but for the fact that such individual was neither serving as an executive officer, nor acting in a similar capacity, as at December 31, 2018 (collectively, the Named Executive Officers) for services rendered in all capacities during such periods.
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SUMMARY COMPENSATION TABLE | |||||||
Name and Principal Position
of Named Executive Officer |
Twelve
Months Ended Dec. 31(1) |
Salary
(US$) |
Option-
Based Awards (US$)(1) |
Non-Equity Incentive Plan Compensation
|
All Other
Compensation (US$) |
Total
Compensation (US$)(3) |
|
Annual
Incentive Plans (Performance- Based Bonus Plan) (US$)(2) |
Long-Term
Incentive Plans (US$) |
||||||
Jay S.
Hennick(4)
Founder and Chairman |
2018 2017 2016
|
602,500 573,200 561,300
|
Nil Nil Nil
|
1,310,400 1,074,800 1,473,300
|
Nil Nil Nil
|
Nil Nil Nil
|
1,912,900 1,648,000 2,034,600
|
D. Scott Patterson(5)
President and Chief Executive Officer |
2018 2017 2016
|
608,200 587,000 555,300
|
2,235,000 1,821,300 1,206,250
|
1,146,400 953,900 1,263,300
|
Nil Nil Nil
|
Nil Nil Nil
|
3,989,600 3,362,200 3,024,850
|
Jeremy Rakusin
Chief Financial Officer |
2018 2017 2016
|
359,500 347,000 302,000
|
1,072,800 874,200 482,500
|
469,200 368,700 449,200
|
Nil Nil Nil
|
Nil Nil Nil
|
1,901,500 1,589,900 1,233,700
|
Douglas G. Cooke
Vice President, Corporate Controller and Corp. Secretary |
2018 2017 2016
|
215,000 207,500 196,300
|
670,500 546,400 361,900
|
202,600 168,600 223,300
|
Nil Nil Nil
|
Nil Nil Nil
|
1,088,100 922,500 781,500
|
Alex Nguyen
Vice President, Strategy and Corporate Development |
2018 2017 2016
|
194,300 187,600 177,400
|
670,500 546,400 361,900
|
197,200 140,700 186,300
|
Nil Nil Nil
|
Nil Nil Nil
|
1,062,000 874,700 725,600
|
___________
Notes:
(1) | The amounts reported represent the grant date fair value of stock option awards granted to each of the Named Executive Officers, calculated in accordance with the Financial Accounting Standards Board Accounting Standards Codification 718, Compensation Stock Compensation. The assumptions used by FirstService in calculating these amounts are incorporated herein by reference to Note 12 to FirstServices audited consolidated financial statements for the year ended December 31, 2018. For a description of the material terms of the stock option plan of FirstService and each option grant, see Incentive Award Plans of FirstService FirstService Stock Option Plan and NEO Outstanding Option-Based Awards below. |
(2) | The only annual incentive plan of FirstService is FirstServices annual performance-based bonus plan. See Compensation Discussion and Analysis Annual Bonus Incentive above. Annual incentive awards are accrued and finalized and paid following year-end once reviewed and approved by the Compensation Committee, the Board or the CEO, as applicable. |
(3) | All Named Executive Officers base salary and annual bonus incentive amounts were paid in Canadian dollars (an average 2018 exchange rate of US$1.00 = C$1.2955 has been used in the table above). |
(4) | The compensation indicated for Mr. Hennick was payable to Jayset Mgt pursuant to a management services agreement (see Management Contract below). Mr. Hennick received no compensation in connection with being a member of the Board. |
(5) | Mr. Patterson received no compensation in connection with being a member of the Board. |
In 2018, the total cost of the compensation of all of the Named Executive Officers represented 5% of FirstServices adjusted earnings before interest, taxes, depreciation and amortization.
NEO Outstanding Option-Based Awards
The table below reflects all option-based awards for each Named Executive Officer outstanding as at December 31, 2018. FirstService does not have any other equity incentive plan other than its stock option plan.
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NEO OPTIONBASED AWARDS OUTSTANDING AS AT DECEMBER 31, 2018 | ||||
Name of Named Executive Officer(1) |
Number of Securities Underlying Unexercised Options(2) |
Option Exercise Price (US$/Security) |
Option Expiration Date(3) |
Value of Unexercised In-the-Money Options (US$)(4) |
D. Scott Patterson |
125,000
125,000
125,000
60,000
60,000
|
66.31
54.88
35.96
23.96
20.52
|
February 9, 2023
February 14, 2022
February 12, 2021
February 13, 2020
May 15, 2019
|
271,250
1,700,000
4,065,000
2,671,200
2,877,600
|
Jeremy Rakusin |
60,000
60,000
50,000
40,000
40,000
|
66.31
54.88 35.96
23.96
20.52
|
February 9, 2023
February 14, 2022
February 12, 2021
February 13, 2020
May 15, 2019
|
130,200
816,000
1,626,000
1,780,800
1,918,400
|
Douglas G. Cooke |
37,500
37,500
37,500
22,500
18,750
|
66.31
54.88
35.96
23.96
20.52
|
February 9, 2023
February 14, 2022
February 12, 2021
February 13, 2020
May 15, 2019
|
81,375
510,000
1,219,500
1,001,700
899,250
|
Alex Nguyen |
37,500
37,500
37,500
13,500
11,250
|
66.31
54.88
35.96
23.96
20.52
|
February 9, 2023
February 14, 2022
February 12, 2021
February 13, 2020
May 15, 2019
|
81,375
510,000
1,219,500
601,020
539,550
|
___________
Notes:
(1) | Under the terms of the Option Plan, the Founder and Chairman of FirstService, Jay S. Hennick, is not eligible to participate in the Option Plan or to receive grants of options thereunder. See Executive Compensation Management Contract. |
(2) | Each option entitles the holder to purchase one Subordinate Voting Share. Effective February 8, 2019, an aggregate of 438,000 options were granted under the Option Plan to directors and employees in respect of the year ended December 31, 2018, including to certain of the Named Executive Officers. See Incentive Award Plans of FirstService FirstService Stock Option Plan. |
(3) | The options vest 10% on the grant date, 15% on the first anniversary, 20% on the second anniversary, 25% on the third anniversary and 30% on the fourth anniversary of the grant date. The expiration date is the fifth anniversary of the grant date. |
(4) | Calculated using the closing price per Subordinate Voting Share on NASDAQ on December 31, 2018 of US$68.48 less the exercise price of the applicable stock options. |
During the year ended December 31, 2018, none of the Named Executive Officers exercised any options of FirstService or any of its subsidiaries other than: (i) D. Scott Patterson, who exercised options for a total of 60,000 Subordinate Voting Shares at an exercise price per share of US$12.85; and (ii) Alex Nguyen, who exercised options for a total of 5,500 Subordinate Voting Shares at an exercise price per share of US$12.85.
Incentive Award Plans of FirstService
The following table provides information concerning the incentive award plans of FirstService with respect to each Named Executive Officer during the year ended December 31, 2018. The only incentive award plans of FirstService during such period were its stock option plan, an annual performance-based bonus plan and, with respect to the Founder and Chairman, pursuant to an acquisition of control arrangement. See Annual Performance-Based Bonus Plan, FirstService Stock Option Plan and Management Contract below.
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INCENTIVE AWARD PLANS VALUE VESTED OR EARNED DURING THE YEAR ENDED DECEMBER 31, 2018 | ||
Name of Named Executive Officer(1) |
Option-Based Awards Value Vested During the Year Ended December 31, 2018 (US$)(2) |
Non-Equity Incentive Plan Compensation Value Earned During the Year Ended December 31, 2018 (US$) |
D. Scott Patterson | 2,682,800 | Nil |
Jeremy Rakusin | 1,517,500 | Nil |
Douglas G. Cooke | 989,300 | Nil |
Alex Nguyen | 725,800 | Nil |
___________
Notes:
(1) | Under the terms of the Option Plan, the Founder and Chairman of FirstService, Jay S. Hennick, is not eligible to participate in the Option Plan or to receive grants of options thereunder. See Executive Compensation Management Contract and Incentive Award Plans of FirstService FirstService Stock Option Plan. |
(2) | Calculated using the closing price per Subordinate Voting Share on NASDAQ on the applicable vesting date less the exercise price of the applicable stock options. |
Annual Performance-Based Bonus Plan
FirstService has an annual performance-based bonus plan pursuant to which an annual cash performance bonus is awarded to Management and employees based entirely on percentage growth in adjusted earnings per share over the prior year. If no such annual growth occurs in a given year, no bonus amounts would be payable to the Named Executive Officers under this annual performance-based bonus plan. For a further discussion of this annual performance-based bonus plan, see Compensation Discussion and Analysis Annual Performance-Based Bonus Plan above. The Compensation Committee may also recommend, and the Board may also approve, a non-annual discretionary bonus based on an individual or FirstService achieving certain designated objectives (other than adjusted earnings per share) and for superior or exceptional performance in relation to such objectives. For a further discussion of the calculation of adjusted earnings per share, please see the AIF.
FirstService Stock Option Plan
FirstService provides a long-term incentive by granting stock options to directors, officers and full-time employees of FirstService or its subsidiaries (other than Mr. Hennick) through the Option Plan. Shareholders adopted the Option Plan in 2015 and have subsequently approved amendments thereto.
Subject to the terms of the Option Plan, the Board has the authority to select those individuals to whom options will be granted and to fix the terms of such options which may not be for less than one year nor more than ten years from the date of grant (subject to an automatic 10 business day extension to the expiry date of an option which otherwise would expire within a blackout period). The Option Plan provides flexible vesting, completely at the discretion of the Board. Jay S. Hennick is not eligible to participate in the Option Plan or to receive grants of options thereunder. The Option Plan is administered solely by the Board and grants of options under the Option Plan are made as follows: all proposed option grants are submitted to the Compensation Committee for review and a recommendation is made to the Board; proposed option grants recommended by the Compensation Committee are then submitted to the Board for approval and, if approved, are granted on the date so approved by the Board. The Compensation Committee, in considering any grant of options, and the Board in approving any grant of options, take in account whether the amount of options proposed to be granted to each optionee is competitive, both in terms of past practice at FirstService as well as with respect to equity awards granted to officers, employees and directors of public company peers of FirstService, as well as the contribution of the optionee in the success of the business. Grants of options are approved subject to compliance with the Option Plan and all applicable laws and regulatory and stock exchange requirements.
The option price per Subordinate Voting Share with respect to any option granted under the Option Plan is determined by the Board at the time the option is granted, but such price shall not be less than the Minimum Price on the day on which the issuance of the option is authorized or approved by the Board. For the purposes of the Option Plan, Minimum Price means: (i) in the event that the Subordinate Voting Shares are then traded on the TSX and/or NASDAQ, the closing price of the Subordinate Voting Shares on the TSX or NASDAQ on the trading day prior to the day on which the issuance of the option is authorized or approved by the Board; (ii) in the event that the Subordinate Voting Shares are not then traded on the TSX and NASDAQ, the closing price of the Subordinate Voting Shares on such public market on which the Subordinate Voting Shares are then traded, as selected by the Board, in its sole discretion, on the trading day prior to the day on which the issuance of the option is authorized or approved by the Board; or (iii) in the event that the Subordinate Voting Shares are not then traded on any public market, the price of the Subordinate Voting Shares as determined by the Board, in its sole discretion, on the day on which the issuance of the option is authorized or approved by the Board.
- 25 - |
The maximum number of Subordinate Voting Shares subject to grants of options under the Option Plan at December 31, 2018 was limited to 3,913,500 (or 10.9% of the aggregate outstanding FirstService Shares on that date), of which options exercisable for 1,633,150 Subordinate Voting Shares (or 4.5% of the aggregate outstanding FirstService Shares) had been granted and were outstanding at December 31, 2018. At December 31, 2018 under the Option Plan, options which were exercisable for 1,152,850 Subordinate Voting Shares (or 3.2% of the aggregate outstanding FirstService Shares) had been exercised or expired and options exercisable for 54,750 Subordinate Voting Shares were cancelled and returned to the pool of options available to be granted. Accordingly, options exercisable for 1,127,500 Subordinate Voting Shares (or 3.1% of the aggregate outstanding FirstService Shares) were available for granting at that date. In the event of the death of an optionee while in the employment, or as an officer, of FirstService or a subsidiary prior to the end of the term of the option, the optionees legal representative may exercise the option for a period of one year following the death of the optionee or the expiry of the term of the option, whichever is earlier. In the event that an employee optionee resigns, is removed as an officer or is discharged for cause as an employee of FirstService or a subsidiary, the option will in all respects cease and terminate. In the event an optionees employment is otherwise terminated by FirstService or a subsidiary, such optionee may exercise the option for a period of 30 days following the effective date of termination or the expiry of the term of the option, whichever is earlier.
Set out below is information related to the applicable annual burn rate of options granted under the Option Plan. Annual burn rate is the number of stock options granted under the Option Plan during the applicable fiscal year divided by the weighted average number of FirstService Shares outstanding for the applicable fiscal year.
Year |
Number of Options Granted
under Option Plan |
Weighted Average Number of
FirstService Shares Outstanding for the Applicable Year |
Annual Burn Rate |
2018 | 430,500 | 35,952,211 | 1.2% |
2017 | 390,500 | 35,908,740 | 1.1% |
2016 | 328,500 | 35,965,797 | 0.9% |
The Option Plan provides that the aggregate number of Subordinate Voting Shares reserved for issuance pursuant to all options granted to any one optionee shall not exceed 5% of the number of Subordinate Voting Shares outstanding on a non-diluted basis at the time of such grant. In addition, the Option Plan provides that the aggregate number of securities of FirstService: (a) issued to insiders of FirstService, within any one year period; and (b) issuable to insiders of FirstService, at any time under the Option Plan, or when combined with all of FirstServices other share compensation arrangements, shall not exceed 10% of FirstServices total issued and outstanding securities. As at December 31, 2018, FirstService had outstanding options under the Option Plan to purchase an aggregate of 1,633,150 Subordinate Voting Shares (being 4.5% of the aggregate outstanding FirstService Shares on that date). These options are held by various directors, officers and employees of FirstService (or former FirstService Corporation, pre-spin-off) and its subsidiaries and are non-assignable.
Where there is a take-over bid to acquire the outstanding shares or FirstService enters into an agreement providing for the sale of all or substantially all of the assets of FirstService such that, following completion of such sale, FirstService will cease to carry on, directly or indirectly, an active business, the Board may advise optionees that all options will expire (subject to certain limitations) on the date determined by the Board and each optionee shall have the right to exercise their options in whole or in part, regardless of vesting.
The Option Plan provides that appropriate adjustments in the number of Subordinate Voting Shares and in the exercise price per Subordinate Voting Share, relating to options granted or to be granted, shall be made by the Board to give effect to adjustments in the number of Subordinate Voting Shares resulting from any subdivisions, consolidations or reclassifications of the Subordinate Voting Shares, the payment of stock dividends by FirstService or other relevant changes in the capital structure of FirstService. Any such adjustments shall be subject to the approval thereof by such stock exchanges on which the Subordinate Voting Shares are then listed for trading (including, if required by any such stock exchanges, approval of the shareholders).
- 26 - |
The Option Plan provides that, subject to regulatory approval, the approval of any stock exchange on which the Subordinate Voting Shares are then listed for trading and the limitations set out in the next two following paragraphs, the Board may, by resolution, amend, vary or discontinue the Option Plan, or any agreement or entitlement subject to the Option Plan, at any time without notice to or approval of the shareholders of FirstService, including, without limitation, for the purpose of: (i) changing the class of persons who will be eligible to be granted options pursuant to the Option Plan; (ii) ensuring continuing compliance with applicable laws and regulations and the requirements or policies of any governmental or regulatory authority, securities commission or stock exchange having authority over FirstService or the Option Plan; (iii) changes of a housekeeping, clerical, technical or stylistic nature; (iv) changing the method of determining the option price for options granted pursuant to the Option Plan, provided that the option price shall not in any case be lower than the market price of a Subordinate Voting Share, as that term (or any successor term) is interpreted and applied by the TSX; (v) changing the following terms governing options under the Option Plan: (A) vesting terms (including the acceleration of vesting); (B) exercise and payment method and frequency; (C) transferability or assignability; (D) to fairly or properly take into account a sale, arrangement or take-over bid; (E) adjustments required in the circumstances of a change in the structure of the capital of FirstService; and (F) the effect of termination (for whatever reason) of the optionees employment or service; (vi) determining that any of the provisions of the Option Plan or any agreement subject to the Option Plan concerning the effect of termination (for whatever reason) of the optionees employment, service or consulting agreement/arrangement or cessation of the optionees directorship or office, shall not apply for any reason acceptable to the Board; (vii) changing the terms and conditions of any financial assistance which may be provided by FirstService to the optionees to facilitate the purchase of Subordinate Voting Shares, or adding or removing any provisions providing for such financial assistance; (viii) adding or amending a cashless exercise feature, payable in cash or securities, provided the same includes a full deduction of the number of underlying Subordinate Voting Shares from the Option Plan reserved under the Option Plan; (ix) providing for the granting of non-equity based kinds of awards under the Option Plan; (x) adding or amending provisions necessary for options under the Option Plan to qualify for favourable tax treatment to optionees and/or FirstService under applicable tax laws; (xi) changing any terms relating to the administration of the Option Plan; and (xii) any other amendment, whether fundamental or otherwise, not requiring shareholder approval under applicable law (including, without limitation, the rules and policies of the TSX and of any other stock exchange or market having authority over FirstService or the Option Plan).
The Option Plan further provides that, subject to regulatory approval, the approval of any stock exchange on which the Subordinate Voting Shares are then listed for trading and the limitations set out later in this section, the Board may, by resolution, amend, vary or discontinue the Option Plan, or any agreement or entitlement subject to the Option Plan, at any time for the following purposes, provided that any such amendment, variance or discontinuance will not become effective unless and until approved by a majority of the votes cast by shareholders of FirstService, in person or by proxy, at a meeting of shareholders: (a) any increase in the maximum number of Subordinate Voting Shares issuable under the Option Plan or any change from a fixed maximum number of Subordinate Voting Shares issuable under the Plan to a fixed maximum percentage; (b) any reduction in the option price of an outstanding option except for the purpose of maintaining option value in connection with a change in the structure of the capital of FirstService (for this purpose, the cancellation or termination of an option of an optionee prior to expiry of the option term for the purpose of reissuing an option to the same optionee with a lower exercise price shall be treated as an amendment to reduce the option price of an option); (c) any extension of the option term or any amendment to permit the grant of an option with an expiry date of more than 10 years from the date the option is granted; (d) permitting any option granted under the Option Plan (or any other kind of award which may hereafter form part of the Option Plan) to be transferable or assignable other than for estate planning or normal estate settlement purposes; (e) providing for the granting of equity based kinds of awards under the Option Plan; and (f) any other amendment requiring shareholder approval under applicable law (including, without limitation, a reduction in the exercise price benefiting an insider of FirstService, any amendment to remove or to exceed the insider participation limit and amendments to the amending provision within the Option Plan, in addition to any other matters mandated under the rules and policies of the TSX and of any other stock exchange or market having authority over FirstService or the Option Plan). In the case of any amendment or variance referred to above, insiders of FirstService who directly benefit from such amendment or variance will not have the votes attaching to the Subordinate Voting Shares or other securities of FirstService held, directly or indirectly, by them counted in respect of the required approval of the shareholders of FirstService.
- 27 - |
Notwithstanding the two immediately preceding paragraphs, the Option Plan provides that no amendment, variance or discontinuance of the Option Plan, or any agreement or entitlement subject to the Option Plan, may be made, without the prior written consent of the optionee, if the Board determines that the effect thereof is to impair, derogate from or otherwise materially and adversely affect any option previously granted to such optionee under the Option Plan.
In addition, the Option Plan provides that FirstService shall have the right, in certain circumstances and in lieu of delivering Subordinate Voting Shares, to pay to an optionee the in the money amount of the stock options held by such optionee, at its election, in the event of a formal take-over bid for all of the shares of FirstService, a sale of all or substantially all of the assets of FirstService (under circumstances such that, following the completion of such sale, FirstService will cease to carry on an active business) or any merger, arrangement, amalgamation or other similar form of transaction involving FirstService under circumstances such that, following the completion of such transaction, there is a change in control of FirstService.
The objective of granting options is to encourage the executives to acquire an increased ownership interest in FirstService over a period of time, which acts as a financial incentive for the executives to consider the long-term interests of FirstService and its shareholders.
Effective February 8, 2019, an aggregate of 438,000 options (or 1.2% of the outstanding FirstService Shares on such date) were granted under the Option Plan (including 125,000 options to D. Scott Patterson, 60,000 options to Jeremy Rakusin, 37,500 options to Douglas G. Cooke and 37,500 options to Alex Nguyen), each having an exercise price of US$83.89, an expiration date of February 8, 2024 and vesting as follows: 10% on the grant date, 15% on the first anniversary of the grant date, 20% on the second anniversary of the grant date, 25% on the third anniversary of the grant date and 30% on the fourth anniversary of the grant date.
Stock Option Plan Value of Notional Gains Achieved by Named Executive Officers During 2018
During 2018, only two of the Named Executive Officers exercised options of FirstService and achieved notional gains as noted in the following table:
STOCK OPTIONS NOTIONAL GAINS ACHIEVED IN 2018 | |||
Name of Named Executive Officer(1) |
No. of Options Exercised
During 2018 |
Exercise Price of Options
Exercised (US$)(2) |
Notional Gains Achieved in
2018
(US$)(1) |
D. Scott Patterson | 60,000 | 12.85 | 3,115,500 |
Alex Nguyen | 5,500 | 12.85 | 285,600 |
___________
Note:
(1) | Notional gains achieved is calculated using the closing price per Subordinate Voting Share on NASDAQ on the applicable exercise date less the exercise price of the applicable stock options. Notional gains achieved does not take into account whether or not the Named Executive Officer sold the Subordinate Voting Shares received upon exercise of any options. In some cases, the Named Executive Officer has retained all or a portion of these Subordinate Voting Shares. Mr. Patterson has retained all of the Subordinate Voting Shares received by him from option exercises in 2018. |
- 28 - |
Equity Compensation Plan Information
The following table sets forth aggregated information as at December 31, 2018 with respect to compensation plans of FirstService under which equity securities of FirstService are authorized for issuance.
Plan Category(1) |
Number of Securities to be
Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted-Average Exercise
|
Number of Securities
Remaining
Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in the second column) |
Stock Option Plan | 1,633,150 (2) | $44.68 | 1,127,500 (2) |
___________
Notes:
(1) | The only equity compensation plan of FirstService is the Option Plan, which Option Plan has been approved by the shareholders. See Incentive Award Plans of FirstService FirstService Stock Option Plan above. |
(2) | Effective February 8, 2019, an aggregate of 438,000 options were granted under the Option Plan in respect of the year ended December 31, 2018. See Incentive Award Plans of FirstService FirstService Stock Option Plan above. |
Management Contract
In connection with the completion of the spin-off of former FirstService Corporation, the services under the original management services agreement that were applicable only to FirstService were documented in a restated management services agreement with FirstService, Jayset Mgt and Jay S. Hennick (as amended, the Management Services Agreement). The fees and base prices under the original management services agreement were allocated under the spin-off, and the portion applicable to FirstService is contained in the Management Services Agreement. Mr. Hennick is a director, an officer and the sole indirect shareholder of Jayset Mgt, the registered office of which is located at 1140 Bay Street, Suite 4000, Toronto, Ontario M5S 2B4. Under the terms of the Management Services Agreement, Mr. Hennick performs the services of Founder and Chairman of FirstService on behalf of Jayset Mgt. The amounts paid or payable to Jayset Mgt pursuant to the Management Services Agreement are included in the information provided for Mr. Hennick in the Summary Compensation Table above under Executive Compensation Compensation of Named Executive Officers. Jayset Mgt, in turn, transfers such amounts to Mr. Hennick at such times as Mr. Hennick determines. The Management Services Agreement had an initial term which ended on February 1, 2016, with successive one-year renewals at the option of Jayset Mgt. Jayset Mgt may voluntarily terminate the Management Services Agreement upon six-months prior written notice to FirstService. FirstService may elect to discontinue the use of Jayset Mgts services upon payment to Jayset Mgt of the following amounts:
(a) | 300% of the aggregate of: (i) the average base management fee and any other fees for the three years prior to the termination; and (ii) the average incentive fee for the three years prior to the termination; and |
(b) | US$74,569. |
In the event of a change of control of FirstService, a transfer of all or substantially all of the assets of FirstService to the shareholders of FirstService or if the Management Services Agreement is not renewed at the end of the initial term or any renewal term, then the Management Services Agreement will be deemed to be terminated and the payments described in (a) and (b) above will be payable to Jayset Mgt. For an estimated amount of such payment as at December 31, 2018, see Executive Compensation Termination and Change of Control Benefit.
The Management Services Agreement also contains an acquisition of control arrangement (the Long Term Arrangement) for Mr. Hennick, the Founder and Chairman of FirstService. The Long Term Arrangement is provided to Mr. Hennick in lieu of his participation in the Option Plan or receiving grants of options thereunder. Under the Long Term Arrangement, FirstService has agreed that it will make a payment to Jayset Mgt on (each of the following circumstances, an Event): (a) an arms length acquisition of control of FirstService; or (b) a special dividend or other distribution to the shareholders of FirstService or in the event of a transaction the effect of which results in a transfer of assets of FirstService to the shareholders of FirstService (either of which, a Partial Event). The Long Term Arrangement provides for Jayset Mgt to receive the following two payments. The first payment will be an amount equal to 5% of the product of: (i) the aggregate number of Subordinate Voting Shares and Multiple Voting Shares outstanding on a fully diluted basis at the time of the Event; and (ii) the per share consideration received or deemed to be received by the holders of Subordinate Voting Shares on or as a result of the applicable Event minus a base price of C$2.351. The second and additional payment will be an amount equal to 5% of the product of: (i) the aggregate number of Subordinate Voting Shares and Multiple Voting Shares outstanding on a fully diluted basis at the time of the Event; and (ii) the per share consideration received or deemed to be received by the holders of Subordinate Voting Shares on or as a result of the applicable Event minus a base price of C$4.578.
- 29 - |
Upon the occurrence of a Partial Event, each of base prices noted above will be adjusted by subtracting from each base price, respectively, an amount equal to the per share consideration received or to be received by the holders of the Subordinate Voting Shares of FirstService on or as a result of such Partial Event; in no event will either base price be permitted to fall below zero. The base prices are also appropriately adjusted to reflect stock splits and consolidations. The right to receive the two payments may be transferred, in whole or in part, to person(s) who are not at arms length to Jayset Mgt.
Assuming that an arms length acquisition of control of FirstService took place on December 31, 2018 at a price per share of C$93.69 (being the closing price per Subordinate Voting Share on the TSX on December 31, 2018), FirstService would have been required to make a payment to Jayset Mgt in the aggregate amount of US$248.8 million pursuant to the Long Term Arrangement (and taking into account the change of control payment to Jayset Mgt referred to under Termination and Change of Control Benefits below, the total amount payable in such circumstance would have been US$254.3 million).
At the Meeting, if the Transaction Resolution is approved and the matters therein implemented, the Management Services Agreement, including the Long Term Arrangement, will be terminated. See Business of the Meeting Approval of Transaction.
Executive Share Ownership Policy
FirstService has an executive share ownership policy (the ESO Policy) requiring that the CEO and the CFO of FirstService (collectively, the Designated Executives) to achieve and maintain, for the duration of their employment at FirstService, minimum ownership of shares of FirstService having a value, in the case of the CEO, of three times base salary and, in the case of the CFO, two times base salary. All Designated Executives are permitted five years from the effective date of the ESO Policy to achieve the required minimum ownership of shares. Any newly appointed, retained or promoted Designated Executives will be permitted two years from their appointment/retention/promotion date to achieve the required minimum ownership of shares. For the purposes of the ESO Policy, the base salary or management fee used will be fixed to such base salary or management fee in effect at the time the Designated Executive first becomes subject to the ESO Policy. Upon a Designated Executive achieving the minimum ownership of shares required under the ESO Policy, the Designated Executive will no longer be required to acquire further shares of FirstService, including as a result of any decrease in the market price of FirstServices shares. The minimum ownership of shares is not required to continue following the cessation of a Designated Executives employment with FirstService. Upon a Designated Executive achieving the minimum ownership of shares required under the ESO Policy, such Designated Executive will not be permitted to purchase financial instruments that are designed to hedge or offset the economic exposure of such Designated Executives ownership in shares of FirstService such that the effective economic exposure is less than the required minimum ownership threshold under the ESO Policy. The Board may grant exceptions to the ESO Policy where circumstances warrant, including, but not limited to, tax and estate planning considerations. As of the date hereof, all of the Designated Executives are in compliance with the ESO Policy.
Incentive Compensation Reimbursement Policy
In order to further align managements interests with the interests of shareholders and in support good governance practices, FirstService has an incentive compensation reimbursement policy (the ICR Policy). Under the ICR Policy, FirstService will require reimbursement, in all appropriate cases, of any incentive compensation awarded to any management personnel if, within one year of receiving such award: (a) the amount of the incentive compensation was calculated based upon the achievement of certain financial results of FirstService that were subsequently the subject of a financial restatement; and (b) the amount of the incentive compensation that would have been awarded had the financial results been properly reported would have been lower than the amount actually awarded. To do this, FirstService may pursue various ways to recover by: (i) seeking repayment; (ii) reducing the amount that would otherwise be payable under another incentive compensation award; (iii) withholding future equity grants, incentive awards or salary increases; or (iv) take any combination of these actions.
- 30 - |
Termination and Change of Control Benefits
As noted under Management Contract above, FirstService may elect to discontinue the use of Jayset Mgts services pursuant to the Management Services Agreement upon payment to Jayset Mgt of the following amounts: (a) 300% of the aggregate of: (i) the average base management fee and any other fees for the three years prior to the termination; and (ii) the average incentive fee for the three years prior to the termination; and (b) US$74,569. Furthermore, the Management Services Agreement provides that in the event of a change of control of FirstService, a transfer of all or substantially all of the assets of FirstService to the shareholders of FirstService or if the Management Services Agreement is not renewed at the end of the initial term or any renewal term, then the Management Services Agreement will be deemed to be terminated and the foregoing payments described in (a) and (b) will be payable to Jayset Mgt. Assuming that a change of control of FirstService or a discontinuance of Jayset Mgts services took place on December 31, 2018, FirstService would have been required to make a payment to Jayset Mgt in the aggregate amount of US$5.5 million pursuant to the Management Services Agreement (not taking into account the Long Term Arrangement). At the Meeting, if the Transaction Resolution is approved and the matters therein implemented, the Management Services Agreement, including the Long Term Arrangement, will be terminated without the requirement to make the termination payment referenced above. See Business of the Meeting Approval of Transaction.
Under the Long Term Arrangement, FirstService has agreed that it will make a payment to Jayset Mgt on the occurrence of an Event. See Management Contract above. Assuming that an arms length acquisition of control of FirstService took place on December 31, 2018 at a price per share of C$93.69 (being the closing price per Subordinate Voting Share on the TSX on December 31, 2018), FirstService would have been required to make a payment to Jayset Mgt in the aggregate amount of US$248.8 million pursuant to the Long Term Arrangement (and taking into account the change of control payment to Jayset Mgt referred to above, the total amount payable in such circumstance would have been US$254.3million). At the Meeting, if the Transaction Resolution is approved and the matters therein implemented, the Management Services Agreement, including the Long Term Arrangement, will be terminated, in consideration for a payment determined by applying the formula provided in the Management Services Agreement for the Long Term Arrangement as if an Event had occurred. See Business of the Meeting Approval of Transaction.
Pursuant to the terms of the Option Plan, where there is a take-over bid to acquire the outstanding shares or FirstService enters into an agreement providing for the sale of all or substantially all of the assets of FirstService such that, following completion of such sale, FirstService will cease to carry on, directly or indirectly, an active business, the Board may advise optionees (including any Named Executive Officers who are optionees at the time) that all options will expire (subject to certain limitations) on the date determined by the Board and each optionee shall have the right to exercise their options in whole or in part, regardless of vesting. In addition, the Option Plan provides that FirstService shall have the right, in certain circumstances and in lieu of delivering Subordinate Voting Shares, to pay to an optionee the in the money amount of the stock options held by such optionee, at its election, in the event of a formal take-over bid for all of the shares of FirstService, a sale of all or substantially all of the assets of FirstService (under circumstances such that, following the completion of such sale, FirstService will cease to carry on an active business) or any merger, arrangement, amalgamation or other similar form of transaction involving FirstService under circumstances such that, following the completion of such transaction, there is a change in control of FirstService. See Incentive Award Plans of FirstService FirstService Stock Option Plan above.
Compensation of Directors
In December 2015, upon the recommendation of the Compensation Committee (which received the advice and assistance of H. Wilkinson Consulting Group Inc. as its independent compensation consultant), the Board approved new director compensation arrangements. In 2018, each director of FirstService who was not a full time employee of, or providing management services to, FirstService or any of its subsidiaries received: (i) an annual retainer of US$75,000; and (ii) meeting fees equal to US$1,750 for each meeting of the Board or committee thereof attended by such director in person and US$1,000 for each meeting attended by telephone. The Lead Director of the Board received an annual retainer of US$10,000, the Chair of the Audit Committee received an annual retainer of US$20,000 and the Chair of the Compensation Committee received an annual retainer of US$5,000.
In addition to the above, it is anticipated that each director of FirstService who was not a full time employee of, or providing management services to, FirstService or any of its subsidiaries will receive an annual grant of Options exercisable for 8,000 Subordinate Voting Shares. Effective February 8, 2019, 8,000 Options were issued to each such director at an exercise price of US$83.89 per share. See Director Outstanding Option-Based Awards and the biographies of each director set out under Business of the Meeting Election of Directors for additional information on such option grants.
- 31 - |
Individual Director Compensation for 2018
The following table provides a summary of all amounts of compensation provided to the directors of FirstService during the year ended December 31, 2018. Jay S. Hennick and D. Scott Patterson do not receive any compensation in acting as directors of FirstService.
DIRECTOR COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2018 | |||||
Name |
Fee Earned
(US$) |
Option-Based Awards
(US$)(1) |
Non-Equity Incentive Plan Compensation (US$) |
All Other
Compensation (US$) |
Total
(US$) |
Brendan Calder | 88,000 | 143,000 | Nil | Nil | 231,000 |
Bernard I. Ghert | 117,000 | 143,000 | Nil | Nil | 260,000 |
Frederick F. Reichheld | 83,000 | 143,000 | Nil | Nil | 226,000 |
Joan Eloise Sproul | 66,250 | 143,000 | Nil | Nil | 227,250 |
Michael Stein | 90,000 | 143,000 | Nil | Nil | 233,000 |
Erin J. Wallace | 84,000 | 143,000 | Nil | Nil | 227,000 |
___________
Note:
(1) | The amounts reported represent the grant date fair value of stock option awards granted to each of the noted directors, calculated in accordance with the Financial Accounting Standards Board Accounting Standards Codification 718, Compensation Stock Compensation. The assumptions used by FirstService in calculating these amounts are incorporated herein by reference to Note 12 to FirstServices audited consolidated financial statements for the year ended December 31, 2018. For a description of the material terms of the Option Plan and each option grant, see Incentive Award Plans of FirstService FirstService Stock Option Plan above and Director Outstanding Option-Based Awards below. |
The following table summarizes the fees paid to individual directors during the year ended December 31, 2018. During such period, FirstService paid to such directors, in their capacity as such, aggregate fees equal to US$528,250.
Name |
Board & Lead
(US$) |
Committee &
Chair Annual
(US$) |
Total Board
(US$) |
Total
(US$) |
Total Fees
(US$) |
Total Fees
|
Brendan Calder | 75,000 | 5,000 | 7,000 | 1,000 | 88,000 | 88,000 |
Bernard I. Ghert | 75,000 | 30,000 | 4,375 | 7,625 | 117,000 | 117,000 |
Frederick F. Reichheld | 75,000 | | 7,000 | 1,000 | 83,000 | 83,000 |
Joan Eloise Sproul | 56,250 | | 4,375 | 5,625 | 66,250 | 66,250 |
Michael Stein | 75,000 | 5,000 | 5,250 | 4,750 | 90,000 | 90,000 |
Erin J. Wallace | 75,000 | | 6,125 | 2,875 | 84,000 | 84,000 |
Director Outstanding Option-Based Awards
The table below reflects all option-based awards for each director of FirstService outstanding as at December 31, 2018. FirstService does not have any other equity incentive plan other than the Option Plan.
- 32 - |
DIRECTOR OPTIONBASED AWARDS OUTSTANDING AS AT DECEMBER 31, 2018(1)(2) | ||||
Name of Director |
Number of
Securities Underlying
|
Option Exercise Price (US$/Security) |
Option Expiration Date |
Value of Unexercised In-the-Money Options (US$)(4) |
Brendan Calder |
8,000
6,000
1,650
2,750
|
66.31
54.88
35.96
39.29
|
February, 9, 2023
February 14, 2022
February 12, 2021
December 14, 2020
|
17,360
81,600
53,660
80,270
|
Bernard I. Ghert |
8,000
8,000
3,000
5,000
|
66.31
54.88
35.96
39.29
|
February, 9, 2023
February 14, 2022
February 12, 2021
December 14, 2020
|
17,360
108,800
97,560
145,950
|
Frederick F. Reichheld |
7,200
6,000
1,650
2,750
1,500
|
66.31
54.88
35.96
39.29
21.40
|
February, 9, 2023
February 14, 2022
February 12, 2021
December 14, 2020
November 17, 2019
|
15,620
81,600
53,660
80,270
70,620
|
Joan Eloise Sproul | 8,000 | 70.40 | May 15, 2023 | |
Michael Stein |
8,000
8,000
3,000
5,000
|
66.31
54.88
35.96
39.29
|
February, 9, 2023
February 14, 2022
February 12, 2021
December 14, 2020
|
17,360
108,800
97,560
145,950
|
Erin J. Wallace |
8,000
8,000
3,000
10,000
|
66.31
54.88
35.96
39.29
|
February, 9, 2023
February 14, 2022
February 12, 2021
December 14, 2020
|
17,360
108,800
97,560
291,900
|
___________
Notes:
(1) | The Options vest 10% on the grant date, 15% on the first anniversary, 20% on the second anniversary, 25% on the third anniversary and 30% on the fourth anniversary of the grant date. Notwithstanding the foregoing, the Option Plan provides that the vesting of the noted options held by each non-employee director is accelerated, such that they become immediately fully vested and exercisable, in the event that such director does not stand for re-election, resigns as a director or fails to be re-elected as a director, in each case, in circumstances where there is no willful and substantial breach of such directors fiduciary duties or other legal obligations to FirstService. The expiration date is the fifth anniversary of the grant date. |
(2) | Under the terms of the Option Plan, the Founder and Chairman of FirstService, Jay S. Hennick, is not eligible to participate in the Option Plan or to receive grants of options thereunder. See Executive Compensation Management Contract. See Executive Compensation NEO Outstanding Option-Based Awards for options granted to D. Scott Patterson which are outstanding as at December 31, 2018. Effective February 8, 2019, 8,000 options were granted under the Option Plan to each director of FirstService who was not a full time employee of, or providing management services to, FirstService or any of its subsidiaries. |
(3) | Each Option entitles the holder to purchase one Subordinate Voting Share. See Incentive Award Plans of FirstService FirstService Stock Option Plan. |
(4) | Calculated using the closing price per Subordinate Voting Share on NASDAQ on December 31, 2018 of US$68.48 less the exercise price of the applicable stock options. |
The following table provides information concerning the incentive award plans of FirstService with respect to each director of FirstService during the year ended December 31, 2018. The only incentive award plan of FirstService applicable to directors during 2018 was the Option Plan.
- 33 - |
INCENTIVE AWARD PLANS VALUE VESTED OR EARNED DURING THE YEAR ENDED DECEMBER 31, 2018(1) |
||
Name of Director |
Option-Based Awards Value Vested During 2018 (US$)(2) |
Non-Equity Incentive Plan Compensation Value Earned During 2018 (US$) |
Brendan Calder | 76,920 | Nil |
Bernard I. Ghert | 76,920 | Nil |
Frederick F. Reichheld | 154,760 | Nil |
Joan Eloise Sproul | 240 | Nil |
Michael Stein | 76,290 | Nil |
Erin J. Wallace | 116,000 | Nil |
___________
Notes:
(1) | Under the terms of the Option Plan, the Founder and Chairman of FirstService, Jay S. Hennick, is not eligible to participate in the Option Plan or to receive grants of options thereunder. See Executive Compensation Management Contract and Incentive Award Plans of FirstService FirstService Stock Option Plan. See Executive Compensation Incentive Award Plans of FirstService for vesting of options granted to D. Scott Patterson during the year ended December 31, 2018. |
(2) | Calculated using the closing price per Subordinate Voting Share on NASDAQ on the applicable vesting date less the exercise price of the applicable stock options. |
Performance Graph
The following graph compares the total cumulative shareholder return for C$100 invested in Subordinate Voting Shares (with any cash dividends reinvested into Subordinate Voting Shares)(1) on the TSX (symbol: FSV) with the S&P/TSX Composite Total Return Index(2) for the period commencing June 2, 2015 and ending December 31, 2018 (being the period during which the Subordinate Voting Shares have traded on the TSX). The Subordinate Voting Shares are also traded on NASDAQ (symbol: FSV).
- 34 - |
June 2,
2015 |
June 30,
2015 |
Dec 31,
2015 |
June 30,
2016 |
Dec 31,
2016 |
June 30,
2017 |
Dec 31,
2017 |
June 30,
2018 |
Dec 31,
2018 |
|
Subordinate Voting
Shares(1) |
100.0 | 103.6 | 167.9 | 178.4 | 193.4 | 253.6 | 269.0 | 307.0 | 288.6 |
S&P/TSX Composite
Total Return Index(2) |
100.0 | 96.6 | 87.8 | 96.4 | 106.3 | 107.1 | 116.0 | 118.2 | 105.6 |
___________
Notes:
(1) | The cumulative return of the Subordinate Voting Shares (in C$) is based on the closing prices of the Subordinate Voting Shares on the TSX on June 2, 2015, June 30, 2015, December 31, 2015, June 30, 2016, December 31, 2016, June 30, 2017, December 31, 2017, June 30, 2018 and December 31, 2018 or, if there was no trading on such date, the closing price on the last trading day prior to such date. Cash dividends on the shares have been treated as being reinvested into additional shares on the payment date of each dividend. The Subordinate Voting Shares commenced trading on the TSX on June 2, 2015. |
(2) | The S&P/TSX Composite Total Return Index is a total return index (in C$), the calculation of which includes dividends and distributions reinvested. |
As noted in the graph above, from June 2, 2015 until December 31, 2018, assuming reinvestment of all dividends, the cumulative total shareholder return on the Subordinate Voting Shares was 188.6% as compared to a cumulative total return of 5.6% on the S&P/TSX Composite Total Return Index over the same period. Due to the fact that FirstService became a stand-alone public company in mid-2015, it is difficult to meaningfully compare the trend of the aggregate compensation of the Named Executive Officers of FirstService relative to shareholder returns as measured by the equity trading price since June 2, 2015. However, during the post-spin-off period, the total cumulative shareholder return for C$100 invested in Subordinate Voting Shares significantly outpaced the S&P/TSX Composite Total Return Index. In 2018, the shareholder return reflected a 31% increase in FirstServices adjusted earnings per share for 2018 over the prior year (and 29% for the purposes of the annual performance-based bonus plan), and consequently, an annual performance bonus was earned by each Named Executive Officer in 2018. See Compensation Discussion and Analysis Base Salary and Annual Bonus Incentive above.
NORMAL COURSE ISSUER BID
Pursuant to a notice of intention to make a normal course issuer bid dated August 13, 2018, FirstService commenced a normal course issuer bid to purchase up to a maximum of 3,100,000 Subordinate Voting Shares, being approximately 10% of the public float of such class of shares as at August 13, 2018 (the NCIB). FirstService may purchase its Subordinate Voting Shares from time to time if it believes that the market price of its Subordinate Voting Shares is attractive and that the purchase would be an appropriate use of corporate funds and in the best interests of FirstService. FirstService may also purchase its Subordinate Voting Shares in order to mitigate the dilutive effect of stock options issued under the Option Plan. Purchases pursuant to the NCIB may occur on the TSX and NASDAQ between August 24, 2018 and August 23, 2019 at prices not exceeding the market price of the Subordinate Voting Shares at the time of acquisition. The actual number of Subordinate Voting Shares which may be purchased pursuant to the NCIB and the timing of any such purchases is determined by senior management of FirstService. Daily purchases under the NCIB are limited to 11,257 Subordinate Voting Shares, other than block purchases. During 2018, FirstService purchased a total of 130,436 Subordinate Voting Shares (at an average price of US$68.98 per share) on the TSX and NASDAQ under the NCIB.
The purchase price for Subordinate Voting Shares purchased by FirstService under the NCIB, if any, is paid in cash on delivery of the shares. FirstService intends to finance any purchase of Subordinate Voting Shares under the NCIB from its working capital. Subordinate Voting Shares purchased by FirstService under the NCIB are cancelled. Shareholders can obtain a copy of the Notice of Intention to Make a Normal Course Issuer Bid filed with regulators by FirstService in relation to the NCIB by requesting a copy in writing from FirstService at 1140 Bay Street, Suite 4000, Toronto, Ontario M5S 2B4.
Indebtedness of Directors AND
Executive Officers under Securities Purchase AND OTHER Programs
The following table sets out certain information regarding the aggregate indebtedness owing to FirstService or its subsidiaries which is outstanding as at December 31, 2018 by all executive officers, directors, employees and former executive officers directors and employees of FirstService and its subsidiaries:
- 35 - |
AGGREGATE INDEBTEDNESS (US$) | ||
Purpose | To FirstService or its Subsidiaries(1) | To Another Entity |
Share Purchases | Nil | |
Other(2) | $2,064,000 | |
___________
Notes:
(1) | All indebtedness noted is owing to subsidiaries of FirstService from directors and employees of subsidiaries of FirstService. Amounts noted relating to share purchases are in connection with acquisitions of shares of a subsidiary of FirstService. No individual who is, or at any time during the year ended December 31, 2018 was, a director or executive officer of FirstService, a proposed nominee for election as a director of FirstService or an associate of any such director, executive officer or proposed nominee is indebted to FirstService or any of its subsidiaries in respect of a security purchase program or otherwise. |
(2) | The amount noted represents advances to minority shareholders of FirstService subsidiaries for tax payments in connection the acquisition of such subsidiaries by FirstService. |
Other than as set out above, as at the date hereof, there was no other indebtedness owed to FirstService or any of its subsidiaries from executive officers, directors, employees and former executive officers, directors and employees of FirstService or any of its subsidiaries (or to another entity as a result of the indebtedness being subject to a guarantee, support agreement, letter of credit or other similar arrangement or understanding provided by FirstService or any of its subsidiaries).
The Board has adopted a policy that prohibits any loans to the directors or executive officers of FirstService.
BUSINESS OF THE MEETING
Receipt of Financial Statements
The audited consolidated financial statements of FirstService for the year ended December 31, 2018 and the report of the auditors thereon will be presented to the Meeting. No vote by the shareholders with respect thereto is required. If any shareholders have questions regarding such financial statements, the questions may be brought forward at the Meeting. The audited consolidated financial statements of FirstService for the year ended December 31, 2018 and Managements Report on the Internal Control over Financial Reporting, and the report of the auditors thereon and managements discussion and analysis relating thereto are included in the 2018 Annual Report of FirstService sent to shareholders.
Appointment of Auditors
PricewaterhouseCoopers LLP, Chartered Accountants and Licensed Public Accountants, are the independent auditors of FirstService and have served as its auditors since 2014. Management recommends that shareholders reappoint PricewaterhouseCoopers LLP as the auditors of FirstService to hold office until the close of the next annual meeting of the shareholders, and to authorize the Board to fix the remuneration of the auditors. It is intended that the persons named in the accompanying form of proxy (provided the same is duly executed in their favour and is duly deposited), unless their authority to do so has been withheld, will vote the FirstService shares represented thereby in favour of appointing PricewaterhouseCoopers LLP as the auditors of FirstService and authorizing the directors of FirstService to fix their remuneration.
From time to time, PricewaterhouseCoopers LLP also provides non-audit services to FirstService and its subsidiaries. The Audit Committee has considered whether the provision of non-audit services is compatible with maintaining PricewaterhouseCoopers LLPs independence and has concluded that it is. Total fees paid to PricewaterhouseCoopers LLP in 2018 were approximately US$939,000. Of such amount, US$726,000 related to audit fees (being fees billed by FirstServices external auditor for audit services, including subsidiary audits), US$45,000 related to audit-related fees (being fees billed for statutory audits or assurance and related services by FirstServices external auditor that are reasonably related to the performance of the audit or review of FirstServices financial statements and are not reported under audit fees), US$50,000 related to tax fees (being the fees billed for professional services rendered by FirstServices external auditor for tax compliance, tax advice and tax planning) and US$6,000 related to all other fees (being fees for licensing and subscriptions to accounting and tax research tools). In addition, US$112,000 in administration and out-of-pocket expenses were reimbursed during 2018 to PricewaterhouseCoopers LLP. For more information on the Audit Committee, consult the Annual Information Form of FirstService for the year ended December 31, 2018 available at www.sedar.com.
- 36 - |
Election of Directors
The Board currently consists of eight directors. Pursuant to the articles of FirstService, the number of directors to be elected by the shareholders shall be a minimum of one and a maximum of twenty. The Board proposes to nominate the following eight individuals for election by the shareholders at the Meeting as directors of FirstService: Brendan Calder, Bernard I. Ghert, Jay S. Hennick, D. Scott Patterson, Frederick F. Reichheld, Joan Eloise Sproul, Michael Stein and Erin J. Wallace. Each director elected will hold office until the close of the next annual meeting of FirstService, or until his or her successor is duly elected or appointed, unless: (i) his or her office is earlier vacated in accordance with the articles and by-laws of FirstService; or (ii) he or she becomes disqualified to act as a director. All of the nominees are currently directors of FirstService.
Unless provided to the contrary, the persons named in the accompanying form of proxy (if the same is duly executed in their favour and is duly deposited) will vote the FirstService shares represented thereby in favour of electing as directors the nominees named below. In case any of the following nominees should become unavailable for election for any reason, unless provided to the contrary, the persons named in the accompanying form of proxy will vote the FirstService shares represented thereby in favour of electing the remaining nominees and such other substitute nominees as a majority of the directors of FirstService may designate in such event.
FirstService has adopted a policy for non-contested meetings whereby shareholders vote separately for each director nominee and each director to be elected at a meeting of shareholders must be elected by a majority (50% + 1 vote) of the votes cast with respect to his or her election. Any director nominee must immediately tender his or her resignation to the Board if he or she is not elected by at least a majority (50% + 1 vote) of the votes cast with respect to his or her election even though duly elected as a matter of corporate law. Such director nominees resignation to the Board must be effective when accepted by the Board. The Board shall determine whether or not to accept a director nominees resignation tendered pursuant to the policy within 90 days after the date of the relevant shareholders meeting. The Board shall accept the resignation absent exceptional circumstances. FirstService will promptly issue a press release announcing the resignation of the director or explaining the reasons justifying its decision not to accept such resignation.
The following information is submitted with respect to the individuals proposed to be nominated for election as directors at the Meeting:
- 37 - |
- 38 - |
- 39 - |
Frederick F. Reichheld Massachusetts, USA Age: 67 |
Since 1977, Mr. Reichheld has been employed at Bain & Company, Inc., a global business consulting firm, and was elected to the partnership at Bain in 1982. Mr. Reichheld is the creator of the Net Promoter® system of management and founded Bains Loyalty practice, which helps clients achieve superior results through improvements in customer, employee, partner and investor loyalty and has also served in a variety of other roles, including as a member of Bain & Companys Worldwide Management, Nominating, and Compensation Committees. In January 1999, he was elected by the firm to become the first Bain Fellow. Mr. Reichheld is a frequent speaker to major business forums and groups of CEOs and senior executives worldwide and has authored several books, including The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Harvard Business School Press, 1996), The Loyalty Rules!: How Todays Leaders Build Lasting Relationships (Harvard Business School Press 2003), The Ultimate Question (Harvard Business School Press, 2006) and The Ultimate Question 2.0 (Harvard Business School Press 2011). Mr. Reichheld received his BA from Harvard College and his MBA from Harvard Business School. | ||||||||||
Director Since: June 1, 2015
Independent |
|||||||||||
Areas of Expertise: Consulting/Professional Services Competitive Strategy |
|||||||||||
Service Quality | Board & Committees | Attendance | Securities Owned, Controlled or Directed(1) | ||||||||
Customer and Employee Loyalty |
Board Governance |
4 of 4 1 of 1 |
100% 100% |
Subordinate Voting Shares
|
2,100 | ||||||
Total Value of Securities(5) Equity Ownership Policy(7) |
US$143,808 Met |
||||||||||
Options Held(6) | |||||||||||
Date Granted | Expiry Date | No. Granted | Exercise Price | Total Unexercised | Value | ||||||
Dec. 14, 2015 | Dec. 14, 2020 | 5,000 | US$39.29 | 1,500 | US$43,790 | ||||||
Feb. 12, 2016 | Feb. 12, 2021 | 3,000 | US$35.96 | 900 | US$29,270 | ||||||
Feb. 14, 2017 | Feb. 14, 2022 | 8,000 | US$54.88 | 4,400 | US$59,840 | ||||||
Feb. 9, 2018 | Feb. 9, 2023 | 8,000 | US$66.31 | 6,000 | US$13,020 | ||||||
Feb. 8, 2019 | Feb. 8, 2024 | 8,000 | US$83.89 | 8,000 | | ||||||
Public Board Memberships During the Last Five Years | |||||||||||
Rackspace Hosting, Inc. Colliers International Group Inc.
|
2008 2016 2014 2015 |
||||||||||
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Michael Stein Ontario, Canada Age: 67 |
Mr. Stein is the founder, Chairman and CEO of the MPI Group, a property development and investment group with a track record in incubating, investing in, and managing successful companies. Between 1978 and 1987, Mr. Stein held progressively senior positions with the Mortgage Insurance Company of Canada, ultimately holding the position of Executive Vice-President responsible for operations. Mr. Stein is a founder of CAPREIT, Canadas first TSX listed apartment REIT, where he continues to serve as chairman. He currently serves as a director of McEwen Mining Inc. (NYSE/TSX), chairman of Cliffside Capital Ltd. (TSX-V) and previously served as a director of Goldcorp Inc. Mr. Stein is a graduate engineer and has an MBA in finance and international business from Columbia University. | ||||||||||
Director Since: June 1, 2015
Independent |
|||||||||||
Areas of Expertise: | Board & Committees | Attendance | Securities Owned, Controlled or Directed(1) | ||||||||
Real Estate Management |
Board Audit |
4 of 4 5 of 5 |
100% 100% |
Subordinate Voting Shares Total Value of Securities(5) |
15,000 US$1,027,200 |
||||||
Human Resources | Compensation (Chair) | 2 of 2 | 100% | Equity Ownership Policy(7) | Met | ||||||
Governance | Options Held(6) | ||||||||||
Finance | Date Granted | Expiry Date | No. Granted | Exercise Price | Total Unexercised | Value | |||||
Capital Markets | Dec. 14, 2015 | Dec. 14, 2020 | 5,000 | US$39.29 | 5,000 | US$145,950 | |||||
Feb. 12, 2016 | Feb. 12, 2021 | 3,000 | US$35.96 | 3,000 | US$97,560 | ||||||
Feb. 14, 2017 | Feb. 14, 2022 | 8,000 | US$54.88 | 8,000 | US$108,800 | ||||||
Feb. 9, 2018 | Feb. 9, 2023 | 8,000 | US$66.31 | 8,000 | US$17,360 | ||||||
Feb. 8, 2019 | Feb. 8, 2024 | 8,000 | US$83.89 | 8,000 | | ||||||
Public Board Memberships During the Last Five Years | |||||||||||
Canadian Apartment Properties REIT (Chair) McEwan Mining Inc. Cliffside Capital Ltd. Colliers International Group Inc.
|
1997 Present 2012 Present 2014 Present 2013 2015 |
||||||||||
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___________
Notes:
(1) | Securities relates to Subordinate Voting Shares and Multiple Voting Shares held as at the date hereof. See Authorized Capital, Outstanding Shares and Principal Holders of Shares. The information contained herein as to securities beneficially owned, or controlled or directed, directly or indirectly is based upon information furnished to FirstService by the respective director nominees. |
(2) | All Subordinate Voting Shares are held in a registered retirement savings plan of which Mr. Calder is the annuitant. |
(3) | 1306159 Ontario Limited, a corporation which Mr. Ghert controls or directs, is the direct holder of 888 Subordinate Voting Shares. The B.I. Ghert Family Foundation, an entity which Mr. Ghert controls or directs, is the direct holder of 2,300 Subordinate Voting Shares. Mr. Ghert owns 777 Subordinate Voting Shares in a life income fund. The remainder of the shares listed are directly owned by Mr. Ghert. |
(4) | Beneficially owns, or controls or directs, directly or indirectly, Subordinate Voting Shares and Multiple Voting Shares as described under Authorized Capital, Outstanding Shares and Principal Holders of Shares. 1,522,526 Subordinate Voting Shares and 1,325,694 Multiple Voting Shares are held by Henset Capital Inc. and The Jay and Barbara Hennick Family Foundation, entities controlled by Mr. Hennick. Mr. Hennick also has rights under the Long Term Arrangement and is expected to be issued indirectly Subordinate Voting Shares in connection with the completion of the Transaction. See Executive Compensation Management Contract and Business of the Meeting Approval of Transaction. |
(5) | Determined using the closing price per Subordinate Voting Share on NASDAQ on December 31, 2018 of US$68.48. |
(6) | Information includes options held as at the date hereof. The options vest 10% on the grant date, 15% on the first anniversary, 20% on the second anniversary, 25% on the third anniversary and the balance on the fourth anniversary of the grant date. Notwithstanding the foregoing, the Option Plan provides that the vesting of the noted options held by each non-employee director is automatically accelerated, such that they become immediately fully vested and exercisable, in the event that such director does not stand for re-election, resigns as a director or fails to be re-elected as a director, in each case, in circumstances where there is no willful and substantial breach of such directors fiduciary duties or other legal obligations to FirstService. The expiration date is the fifth anniversary of the grant date. The value of the options was determined using the closing price of the Subordinate Voting Shares on NASDAQ on December 31, 2018 of US$68.48 less the exercise price of the applicable stock options. |
(7) | The Board has a board equity ownership policy which provides that each member of the Board is required to achieve and maintain, at all times during the period that he or she is a director of FirstService, minimum ownership of shares of FirstService having a value of at least US$100,000. Newly elected or appointed directors of FirstService are permitted two years within which to attain the foregoing minimum ownership amount. See Statement of Corporate Governance Practices Board Equity Ownership Policy. |
Following the Meeting, FirstService will issue a news release disclosing the detailed results of the vote for the election of directors in accordance with the rules of the TSX.
Corporate Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the best of the knowledge of FirstService and based upon information provided to it by the proposed directors for election to the Board, none of the proposed directors:
(a) | is, as at the date of this Circular, or has been, within 10 years before the date of this Circular, a director, chief executive officer or chief financial officer of any company (including FirstService) that: (i) was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, in each case, that was in effect for a period of more than 30 consecutive days (collectively, an Order) that was issued while the proposed director was acting in the capacity as director, chief executive officer or chief financial officer; or (ii) was subject to an Order that was issued after the proposed director 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; |
(b) | is, as at the date of this Circular, or has been, within 10 years before the date of this Circular, a director or executive officer of any company (including FirstService) 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 |
(c) | has, within the 10 years before the date of this Circular, 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 proposed director; |
except for Michael Stein, who served as a director of a privately held United Kingdom-registered company from February 2012 to January 2019 and, on March 21, 2019, the company voluntarily appointed an administrator under the United Kingdom insolvency act (Insolvency Act 1986).
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Advisory Resolution on Executive Compensation
FirstService believes that its compensation objectives and approach to executive compensation appropriately align the interests of Management with the long term interests of shareholders. Details of FirstServices approach to executive compensation is disclosed above. See Executive Compensation Compensation Discussion and Analysis.
The Board recently adopted a policy providing that shareholders shall have the opportunity to cast an advisory vote on FirstServices approach to executive compensation on an annual basis. This policy can be viewed on FirstServices website (www.firstservice.com). Shareholders will be asked at the Meeting to consider and, if deemed advisable, pass the following non-binding advisory resolution (the Say on Pay Resolution):
RESOLVED, on an advisory basis and without diminishing the role and responsibilities of the Board, that the shareholders of FirstService accept the approach to executive compensation disclosed in the management information circular delivered in advance of the annual and special meeting of shareholders held on May 3, 2019.
The Board recommends that shareholders vote for the Say on Pay Resolution. Unless provided to the contrary, the persons named in the accompanying form of proxy (if the same is duly executed in their favour and is duly deposited) will vote the FirstService shares represented thereby for the Say on Pay Resolution.
Because the Say on Pay Resolution is an advisory vote, the results are not binding upon the Board. However, the Board and the Compensation Committee will take the results of the vote into account when considering future compensation policies, procedures and decisions and in determining whether there is a need to change its engagement with FirstService shareholders on executive compensation and related matters. FirstService will disclose the results of the Say on Pay Resolution as a part of its report on voting results for the Meeting. The Board welcomes comments and questions on FirstServices executive compensation practices. Shareholders who wish to contact the Board can do so as noted below under Shareholder Engagement.
Approval of Transaction
General
On March 12, 2019, FirstService announced in a press release that it had entered into a binding term sheet (the Term Sheet) with Henset Capital Inc., Jayset Capital Corp., Jayset Mgt and Jay S. Hennick providing for the Transaction. The Term Sheet was approved unanimously by the Board (with Mr. Hennick recusing himself) upon the recommendation of the Compensation Committee. The Term Sheet contemplates that the parties will negotiate in good faith to conclude and execute a definitive agreement to govern the Transaction (the Transaction Agreement), incorporating the provisions of the Term Sheet and otherwise containing terms and conditions customary for transactions of this nature, including representations, warranties, covenants and conditions as appropriate taking into account the structure of the Transaction.
Subsequently, on April 2, 2019, FirstService, Henset Capital Inc., Jayset Capital Corp., FSV Shares LP, Jayset Mgt and Jay S. Hennick entered into the Transaction Agreement providing for the Transaction. A summary of certain material terms of the Transaction Agreement is included under Transaction Agreement below. A copy of the Transaction Agreement is available under FirstServices SEDAR profile at www.sedar.com.
Background to the Transaction
The terms of the Transaction are the result of arms length negotiations conducted between FirstService (acting through the Compensation Committee and its independent advisors) and Mr. Hennick and his advisors. The following is a summary of the background and principal events leading up to the Term Sheet, the finalization of the Transaction Agreement and the meetings, discussions and other actions between the parties that preceded the public announcement of the Transaction and the calling of the Meeting.
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The Management Services Agreement and Multiple Voting Shares
On June 1, 2015, former FirstService Corporation (Old FSV) completed a plan of arrangement (the Spin-off) which separated Old FSV into two independent publicly traded companies FirstService and Colliers International Group Inc. The Spin-off and related transactions were overwhelmingly approved by shareholders of Old FSV at a meeting called to consider the Spin-off.
FirstService, Jay S. Hennick and Jayset Mgt are parties to the Management Services Agreement pursuant to which Jayset Mgt, through Mr. Hennick, provides various management and other services to FirstService. See Executive Compensation Management Contract above. Among other things, the Management Services Agreement provides for a base fee (akin to a base salary), an incentive fee (akin to an annual bonus) and the Long Term Arrangement (in lieu of stock options) pursuant to which, in certain circumstances, FirstService will pay Jayset Mgt an amount determined based on a formula set out in the Management Services Agreement, as described in detail under Executive Compensation Management Contract above. Any termination of the Management Services Agreement in accordance with its terms will result in the payment by FirstService of a termination fee also described in detail under Executive Compensation Management Contract above.
The terms of the Management Services Agreement, including the Long Term Arrangement and the termination fee (and the respective amounts payable thereunder at December 31), have been disclosed in the management information circulars and annual financial statements of FirstService (and prior to the Spin-off, Old FSV) since 2004. The Long Term Arrangement was included in a management services agreement similar to the Management Services Agreement established in 2004 as part of Old FSV, and continued as part of the Management Services Agreement entered into in 2015 in connection with the Spin-off.
Mr. Hennick currently also has effective control of FirstService through his indirect ownership or control of all of the issued and outstanding Multiple Voting Shares. The dual class share structure was part of Old FSV when Old FSV first became a public company in 1993, and was maintained as part of FirstServices share structure in connection with the completion of the Spin-off. The Multiple Voting Shares carry 20 votes per share, representing approximately 43.3% of the votes attached to FirstServices outstanding voting securities, are transferable, directly or indirectly, among the Hennick Family and do not contain any sunset provision pursuant to which the Multiple Voting Shares would automatically terminate or convert into another class of shares as of a specified date. See Authorized Capital, Outstanding Shares and Principal Holders of Shares and Certain Rights of Holders of Subordinate Voting Shares above.
Through Mr. Hennicks control of the Multiple Voting Shares and the services performed by Mr. Hennick under the Management Services Agreement, Mr. Hennick developed and has been the custodian of FirstServices unique entrepreneurial corporate culture and guiding operating principles that have been critical to FirstServices long-term success. The terms of the Management Services Agreement (and its predecessor) were consistent with similar arrangements implemented at the time to motivate entrepreneurial founders/CEOs to create long-term value for shareholders. Since 2004, when the arrangements reflected in the Management Services Agreement were first implemented, FirstService has seen its market value increase by more than US$3 billion, representing an annualized return of over 24% for FirstService shareholders.
Initial Discussions
Given the growth of the FirstService business and the development of a seasoned management team, which has gradually taken on greater responsibility for the management and success of FirstService since the Spin-off, the Board began discussing with Mr. Hennick his longer term involvement in FirstService and the services being provided to FirstService under the Management Services Agreement. In May 2017, Mr. Hennick indicated to the Chair of the Audit Committee and FirstService senior management that he was open to receiving a proposal from FirstService to terminate the Management Services Agreement and unwind the dual class share structure of FirstService, thereby relinquishing control of FirstService to the shareholders, without a sale of FirstService.
As the matters being considered in 2017 would have been a related party transaction (within the meaning of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101)) between FirstService and its then largest shareholder, at a meeting on May 15, 2017, the Board established a special committee (the Special Committee) of independent directors to evaluate, make proposals with respect to, negotiate, consider the desirability, feasibility and fairness of, and report to the board on such matters, including as to whether such matters were in the best interests of FirstService. The Special Committee consisted of Bernard I. Ghert (Chair), Michael Stein and Brendan Calder, each of whom was an independent director. The Special Committee retained independent advisors (including independent legal counsel and an independent financial advisor) for the purposes of evaluating a potential transaction, and conducted a robust review of the merits of pursuing a potential transaction as compared to other alternatives available to FirstService (such as the status quo or a sale transaction), as well as the potential terms thereof. At all times, the Special Committee conducted its process independently and was given a broad mandate and the authority and opportunity to discharge its mandate without undue influence from Mr. Hennick or deference to the interests of Mr. Hennick. In the course of its deliberations during 2017, the Special Committee met formally more than fifteen times.
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From July 2017 to November 2017, the Special Committee, Mr. Hennick and their respective advisors pursued negotiations regarding such potential transaction. The substantive discussions and negotiations with respect to that potential transaction were undertaken by the Chair of the Special Committee directly with Mr. Hennick or his advisors or between the Special Committees and Mr. Hennicks advisors. The Special Committee evaluated that potential transaction on both a qualitative basis and an economic basis.
In early November, 2017, the parties agreed on a non-binding term sheet outlining a potential transaction. However, after a great deal of consideration and discussions between Mr. Hennick and the Special Committee, the parties elected not proceed with a potential transaction at that time and discussions terminated in December 2017.
Compensation Committee Process
Following the termination of discussions in 2017, the Board continued to consider ways to address the Management Services Agreement (including the Long Term Arrangement) and the dual class share structure, including the continued growth in the value of the Long Term Arrangement, which is uncapped and grows by both increases in the share price and increases in the number of outstanding shares. The following table shows the growth in the market capitalization of FirstService at various points of time over the past ten fiscal years, together with the corresponding growth in the notional value of the Long Term Arrangement:
Date | Estimated Value of Long Term Arrangement | FirstService Market Capitalization |
March 11, 2019 | US$314 million | US$3,132 million |
December 31, 2018 | US$249 million | US$2,464 million |
December 31, 2017 | US$251 million | US$2,511 million |
December 31, 2015 | US$141 million | US$1,453 million |
December 31, 2013 | US$55 million | US$583 million |
December 31, 2008 | US$7 million | US$161 million |
This renewed effort was focused in late 2018 through the Compensation Committee, which is comprised of the same directors as served on the Special Committee. The Compensation Committee approached Mr. Hennick towards the end of 2018, asking him to consider re-opening discussions. Mr. Hennick indicated a willingness to do so, provided that any proposal would have to be supported by the Board and subject to disinterested shareholder approval. The Compensation Committee then retained Hugessen Consulting, an independent compensation consultant, in January 2019 to review the current compensation arrangements between FirstService and Mr. Hennick. In February 2019, the scope of the retainer of Hugessen Consulting was expanded to consider a proposal for the possible termination of the Management Services Agreement (including the Long Term Arrangement) and the conversion of the Multiple Voting Shares.
In February 2019, the members of the Compensation Committee, comprised of Michael Stein (Chair), Bernard I. Ghert and Brendan Calder, each of whom is an independent director, were empowered by the FirstService board to evaluate and, if determined advisable, negotiate the Transaction. The Compensation Committee then continued the robust review undertaken when the same committee members were part of the former Special Committee. The Compensation Committee sought the advice of independent legal counsel (Miller Thomson LLP) and an independent compensation consultant (Hugessen Consulting), along with corporate counsel (Fogler, Rubinoff LLP) and the auditors and tax advisors of FirstService (PricewaterhouseCoopers LLP). In the course of its deliberations related to the Transaction, the Compensation Committee met formally four times. The substantive discussions and negotiations with respect to the Transaction were undertaken by the Chair of the Compensation Committee directly with Mr. Hennick or his advisors or between the Compensation Committees and Mr. Hennicks advisors.
- 45 - |
This process resulted in the Compensation Committee and its advisors negotiating the terms of the Transaction with Mr. Hennick and his advisors. On March 12, 2019, after confirming Mr. Hennicks willingness to accept the Transaction (subject to Board and shareholder approval thereof) and consulting with T. Rowe Price Associates Inc., the largest holder of Subordinate Voting Shares, who advised that, based on the information provided to it by FirstService, it was supportive of the Transaction, and after receiving an updated presentation from Hugessen Consulting, confirming its analysis of the Transaction as set out below under Opinion of Hugessen Consulting, the Compensation Committee unanimously recommended the Transaction to Board, who then unanimously (with Mr. Hennick recusing himself and abstaining from voting) approved the Transaction. The Board (with Mr. Hennick recusing himself and abstaining from voting) determined that the Transaction is in the best interests of FirstService and the holders of Subordinate Voting Shares.
Reasons for the Transaction
The Board and the Compensation Committee, acting with the advice and assistance of its advisors, carefully evaluated the Transaction, and the Board (with Mr. Hennick recusing himself) unanimously: (i) determined that the Transaction is in the best interests of FirstService and the holders of Subordinate Voting Shares; and (ii) recommends that holders of Subordinate Voting Shares vote FOR the Transaction Resolution.
In reaching these determinations, the Compensation Committee and the Board considered and relied upon a number of factors, including, among other things, the following:
| Fixes and Eliminates Payments Under the Management Services Agreement. |
| The Long Term Arrangement survives any termination of the Management Services Agreement and is payable in full on one of the triggering Events in the Management Services Agreement referred to under Executive Compensation Management Contract above, such as a change of control. The value of the Long Term Arrangement is not capped and increases as a result of both increases in the share price and increases in the number of outstanding shares. It has increased in value by over US$260 million in the last five years alone, and by US$63 million from the end of 2017, when the prior discussions concerning a potential transaction were terminated, to March 12, 2019, when the Transaction was agreed upon. The terms of the Transaction fix the value of the Long Term Arrangement, thereby stemming the continued growth in the value of the Long Term Arrangement and the resulting continued dilution to FirstService shareholders. |
| In addition to eliminating the significant continuing incremental dilution under the Long Term Arrangement, the Transaction also eliminates the annual management fee under the Management Services Agreement, which has been approximately US$2 million in recent years, and the termination fee under the Management Services Agreement (currently approximately US$5.5 million), which Mr. Hennick has agreed to waive. |
| Under the terms of the Management Services Agreement, Mr. Hennick is entitled to be paid the value of the Long Term Arrangement in cash. Under the terms of the Transaction, Mr. Hennick has agreed to accept 80% of the total consideration in Subordinate Voting Shares, thereby increasing his equity stake in the company and ensuring his continuing commitment to FirstService. |
| Under the Transaction, Mr. Hennick has agreed to forgo all other future fees and other entitlements to which he would otherwise be permitted under the Management Services Agreement. |
| Aligns with Current Management Structure of FirstService. |
| Mr. Hennick no longer serves as FirstServices Chief Executive Officer, which since the completion of the Spin-off on June 1, 2015, has been D. Scott Patterson. As a consequence, while Mr. Hennick continues to provide services under the Management Services Agreement, the incentive mechanism provided by the Long Term Arrangement may not continue to effectively serve the interests of FirstService and its shareholders. |
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| Mr. Hennick remains committed to the future direction of FirstService, and is expected to own or control approximately 14.8% of the outstanding shares of FirstService at the time of the completion of the Transaction. He has also agreed to continue to serve as non-executive Chairman of the Board. |
| Elimination of Dual Class Structure. There is no sunset provision under the terms of the Multiple Voting Shares providing for their automatic conversion, and as a result the existing dual class share structure cannot be eliminated without the consent of Mr. Hennick and can be passed on to designated family members of Mr. Hennick. The Transaction will result in the elimination of FirstServices dual class voting structure without the payment of a premium, the result of which: |
| provides all shareholders with the same vote in proportion to their relative equity stake in FirstService, better aligning the economic and voting interests of shareholders; |
| allows investors who may not wish to invest, or whose investment policies prevent them from investing in, shares of companies with dual class share structures to purchase common shares, thereby potentially enhancing liquidity for the benefit of all shareholders; and |
| allows shareholders and the Board to consider a broad range of corporate decisions and strategic alternatives without a possible veto by Mr. Hennick. |
| Releases Control of FirstService to the Market. The degree of voting power attached to the outstanding Multiple Voting Shares provides Mr. Hennick with substantial control over FirstService. This existing control will, upon completion of the Transaction, be released to the general shareholder body of FirstService. |
| Facilitates Transition. The existence of the control position imbedded in the Multiple Voting Shares has the potential to create uncertainty for FirstService, management and the Board, as well as its other shareholders. The Transaction is expected to facilitate an orderly transition of effective control by FirstServices founder to its shareholders, the Board and its management team. |
| Additional Capital Raising. The Transaction allows FirstService to use the common shares for purposes of raising additional capital, or effecting an acquisition or merger transaction, without further potential dilution from the Management Services Agreement and the Long Term Arrangement. The value of the Long Term Arrangement otherwise increases as a result of increases in the number of outstanding shares, resulting in continuing dilution to shareholders from equity issuances and increasing the effective cost of equity to FirstService. Likewise, the removal of the preference shares as part of FirstServices authorized capital eliminates potential dilution and perceived anti-takeover measures previously faced by holders of Subordinate Voting Shares. |
| Disinterested Shareholder Approval. The Transaction is conditional upon, among other things, disinterested FirstService shareholder approval. T. Rowe Price Associates, Inc., the largest holder of Subordinate Voting Shares, has advised FirstService that, based on the information provided to it by FirstService, it is supportive of the Transaction. |
| Alternative Transactions. If the Transaction is not pursued, there is no assurance that any further proposal to eliminate the dual class share structure of FirstService or to otherwise address the terms of the Management Services Agreement would be forthcoming. |
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The Compensation Committee and the Board also considered risks and potential detriments concerning the Transaction, including the following:
| the Long Term Arrangement is being paid out in circumstances where FirstService shareholders will not be participating in a change of control transaction; |
| FirstService shareholders will experience dilution, which could affect the trading price of the Subordinate Voting Shares in the short term; and |
| FirstService will use a portion of its existing revolving credit facility to satisfy the cash consideration required to be paid by it under the terms of the Transaction. |
The foregoing are the material factors considered by the Board and the Compensation Committee in its consideration of the Transaction, but this discussion is not intended to be exhaustive. In view of the wide variety of factors considered by the Board and the Compensation Committee, and the complexity of these matters, the Board and the Compensation Committee did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. The Board and the Compensation Committee concluded that the risks and potential detriments associated with the Transaction were outweighed by the benefits that the Board and Compensation Committee expect FirstService and its shareholders to realize as a result of the Transaction.
Recommendation of the Board
The Board (with Mr. Hennick recusing himself) has unanimously determined that the Transaction is in the best interests of FirstService and the holders of Subordinate Voting Shares. The Board (with Mr. Hennick recusing himself) unanimously recommends that you vote FOR the Transaction Resolution.
Opinion of Hugessen Consulting
In connection with the evaluation of the Transaction by the Board and the Compensation Committee, the Board and the Compensation Committee considered, among other things, an opinion from Hugessen Consulting, an independent compensation consultant, in respect of the appropriateness, from a compensation perspective, of terminating the Management Services Agreement. Hugessen Consulting advised the Board and the Compensation Committee that it believed that the Transaction was desirable from a compensation perspective as it would stem the ongoing dilutive effective of the Long Term Arrangement, and better suit the current stage in FirstServices development and Mr. Hennicks current role. Hugessen Consulting believed that it was reasonable and appropriate that disinterested shareholders of FirstService be given the opportunity to vote on the Transaction. FirstService will pay fees to Hugessen Consulting in connection with its services, none of which are contingent upon the completion of the Transaction.
Details of the Transaction
As part of the Transaction:
| Henset Capital Inc., a corporation controlled by Mr. Hennick, will convert 1,325,694 Multiple Voting Shares of FirstService (being 100% of the outstanding Multiple Voting Shares) into Subordinate Voting Shares on a one-for-one basis and for no consideration, thereby eliminating FirstServices dual class share structure. The foregoing conversion will result in the issuance of 1,325,694 Subordinate Voting Shares to Henset Capital Inc., and the cancellation of all outstanding Multiple Voting Shares. The conversion will be effected using the existing terms of the Multiple Voting Shares contained in the articles of FirstService which allow for the conversion of the Multiple Voting Shares into Subordinate Voting Shares on a one-for-one basis; |
| FirstService will acquire, directly or indirectly, all of the shares of Jayset Mgt, the recipient of all fees and other entitlements under the Management Services Agreement, for a purchase price determined with reference to the Long Term Arrangement formula provided in the Management Services Agreement which would have applied on a change of control transaction, and thereafter FirstService will terminate the Management Services Agreement thereby eliminating the Long Term Arrangement and all future fees and other entitlements owing thereafter; |
| Mr. Hennick will retain his role as Chairman of FirstService, at the discretion of the Board, with compensation commensurate with that of a Non-Executive Chairman of a public company of similar size to FirstService; and |
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| FirstService will pay US$62.9 million (C$84.3 million) in cash (less an adjustment to account for certain tax liabilities) and issue a total of 2,918,860 Subordinate Voting Shares to the relevant entity or entities controlled by Mr. Hennick. The cash portion will be funded via FirstServices revolving credit facility. The total purchase price was determined by applying the formula provided in the Management Services Agreement for the Long Term Arrangement as if an Event had occurred, with the per share consideration being C$115.58 (which is the 20-trading day volume-weighted average price of the Subordinate Voting Shares on the TSX determined on March 11, 2019, the day prior to the announcement of the Transaction) and the the aggregate number of Subordinate Voting Shares and Multiple Voting Shares outstanding on a fully diluted basis at the time of the Event being 37,613,197 (which is the number of FirstService Shares and FirstService options (less the options most recently granted on February 8, 2019) issued and outstanding at the close of business on March 11, 2019). |
In addition, subject to and following completion of the Transaction, FirstService proposes to amend its articles to eliminate the Multiple Voting Shares and preference shares as part of the authorized capital of FirstService and to re-designate its Subordinate Voting Shares as common shares. See Approval of Amendment to the Articles below.
Following completion of the Transaction and the amendment to FirstServices articles, FirstService would have a single class of voting equity securities (being common shares), each having one vote per share, and Mr. Hennick would indirectly own or control approximately 14.8% of such outstanding shares.
Transaction Agreement
The following is a summary of certain terms of the Transaction Agreement and is qualified in its entirety by reference to the full text of the Transaction Agreement, a copy of which is available under FirstServices SEDAR profile at www.sedar.com. Holders of Subordinate Voting Shares are urged to, and should, read the Transaction Agreement in its entirety.
FirstService, Henset Capital Inc., Jayset Capital Corp., FSV Shares LP, Jayset Mgt and Jay S. Hennick have entered into the Transaction Agreement providing for, among other things, the terms of the Transaction, customary representations, warranties and covenants of the parties, and typical conditions precedent to completion of the Transaction.
Under the Transaction Agreement, Mr. Hennick and his related entities have, following closing, jointly and severally agreed to indemnify FirstService and the entities being acquired by FirstService under the Transaction Agreement (i.e., Jayset Mgt and any holding companies thereof) from certain liabilities (including tax liabilities) as a result of or in any way relating to: (a) any of the representations and warranties of Mr. Hennick or certain of his related entities contained in the Transaction Agreement having been untrue or inaccurate; (b) any non-compliance by Mr. Hennick or certain of his related entities with any of such persons covenants and agreements contained in the Transaction Agreement; and (c) the reorganization to be carried out by Mr. Hennick and his related entities in contemplation of the completion of the Transaction and any and all taxes arising therefrom, and any and all other liabilities of an entity being acquired by FirstService under the Transaction Agreement in existence as at the closing time (in each case, other than as accounted for in an adjustment to the purchase price under the Transaction Agreement). The maximum aggregate liability of Mr. Hennick and his related entities for their indemnification obligations under the Transaction Agreement is the aggregate purchase price paid by the FirstService.
The Transaction Agreement may be terminated and the Transaction may be abandoned at any time prior to the closing of the Transaction (notwithstanding any approval and authorization of the Transaction Agreement or the Transaction Resolution by shareholders):
| by the mutual written consent of the parties to the Transaction Agreement; |
| by either FirstService or Mr. Hennick/an entity related to Mr. Hennick if: (i) any governmental authority of competent jurisdiction shall have issued a judgment, order, injunction, rule or decree, or taken any other action restraining, enjoining or otherwise prohibiting the Transaction and such judgment, order, injunction, rule, decree or other action shall have become final and non-appealable; or (ii) the closing time of the Transaction shall not have occurred by 5:00 p.m. (Toronto, Ontario local time) on June 28, 2019 (the End Date); |
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| by Mr. Hennick or his related entities if there has been a breach of any representation, warranty, covenant or agreement made by FirstService in the Transaction Agreement, and such breach or failure is incapable of being cured or is not cured on or prior to the End Date; |
| by FirstService if there has been a breach of any representation, warranty, covenant or agreement made by Mr. Hennick or his related entities in the Transaction Agreement, and such breach or failure is incapable of being cured or is not cured on or prior to the End Date; or |
| by any party to the Transaction Agreement if the Transaction Resolution is not approved by the requisite number of votes cast by the holders of Subordinate Voting Shares at the Meeting as contemplated by the Transaction Agreement. |
The Transaction Agreement may not be amended, superseded or cancelled except by a written instrument signed by all of the parties to the Transaction Agreement.
Timing
Subject to the receipt of the required approval of the holders of Subordinate Voting Shares, receipt of the required approvals of the TSX and NASDAQ and the satisfaction or waiver of the other conditions precedent set out in the Transaction Agreement, it is anticipated that the Transaction will be completed on or about May 10, 2019. However, completion of the Transaction is dependent on many factors and it is not possible at this time to determine precisely when the Transaction will be completed.
Shareholder Approval
At the Meeting, holders of Subordinate Voting Shares will be asked to approve the Transaction Resolution. In accordance with the Transaction Agreement and Section 604(a)(ii) of the TSX Company Manual, the approval of the Transaction Resolution will require the affirmative vote of not less than a majority of the votes cast at the Meeting by the holders of Subordinate Voting Shares, voting separately as a class (other than the votes attaching to Subordinate Voting Shares held by each seller under the Transaction Agreement, each related party (as such term is defined in MI 61-101) of each seller, each joint actor (as such term is described in MI 61-101) of each seller and its related parties and any other holder of Subordinate Voting Shares whose votes would be excluded if the Transaction Resolution was subject to minority approval as defined in MI 61-101) (the Minority Subordinate Voting Shareholders). See Canadian Securities Law Matters below.
The Minority Subordinate Voting Shareholders will include all holders of Subordinate Voting Shareholders other than Henset Capital Inc. and The Jay and Barbara Hennick Family Foundation, entities controlled by Jay S. Hennick. As at March 25, 2019, 1,522,526 Subordinate Voting Shares are held by Henset Capital Inc. and The Jay and Barbara Hennick Family Foundation, representing 4.4% of the Subordinate Voting Shares then outstanding. See Authorized Capital, Outstanding Shares and Principal Holders of Shares. Accordingly, as at March 25, 2019, in relation to the Transaction, minority approval means approval by a majority of the votes cast at the Meeting by the holders of Subordinate Voting Shares, voting separately as a class, other than by Henset Capital Inc. and The Jay and Barbara Hennick Family Foundation.
Notwithstanding the approval by the holders Subordinate Voting Shares of the Transaction Resolution in accordance with the foregoing, the Transaction Resolution authorizes the Board, at its discretion and without further notice to, or approval of, the holders of Subordinate Voting Shares: (i) to amend, modify or supplement the Transaction Agreement to the extent permitted thereby, as described under Transaction Agreement; and (ii) subject to the terms of the Transaction Agreement, not to proceed with the Transaction.
Canadian Securities Law Matters
MI 61-101 regulates certain types of related party transactions to ensure the protection and fair treatment of minority security holders. The purchase, directly or indirectly, of all of the shares of Jayset Mgt by FirstService pursuant to the Transaction is a related party transaction for the purposes of MI 61-101.
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MI 61-101 provides that in certain circumstances, unless exempted, an issuer proposing to carry out a related party transaction is required to obtain a formal valuation for the related party transaction from a qualified and independent valuator and to provide security holders with a summary of such valuation. FirstService is relying on an exemption from the formal valuation requirement contained in section 5.5 of MI 61-101 for a related party transaction which provides that a formal valuation is not required if neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, insofar as it involves interested parties, exceeds 25% of the issuers market capitalization (the market cap exemption).
MI 61-101 also requires that, in addition to any other security holder approval, unless exempted, a related party transaction must be approved by at least a simple majority of the votes cast by minority shareholders of each class of affected securities, voting separately as a class. In the circumstances of the Transaction, the minority shareholders of FirstService are the Minority Subordinate Voting Shareholders. The related party transaction is exempt from the requirement to obtain minority shareholder approval by application of the market cap exemption contained in section 5.7 of MI 61-101.
This minority shareholder approval being sought at the Meeting was adopted by the parties notwithstanding the availability under MI 61-101 of the market cap exemption in respect of the related party transaction, and although it is not a requirement under applicable corporate or securities law. Specifically, the Board, on the recommendation of the Compensation Committee, and Mr. Hennick as a pre-condition to his agreement to enter into the Transaction Agreement, have required that the Transaction be approved by a simple majority of the votes cast by the Minority Subordinate Voting Shareholders.
25% of FirstServices market capitalization (calculated in accordance with MI 61-101) is approximately C$1.03 billion. The aggregate purchase price payable by FirstService under the Transaction in consideration for, directly or indirectly, all of the shares of Jayset Mgt (being US$62.9 million (C$84.3 million) in cash and 2,918,860 Subordinate Voting Shares) is approximately C$421.7 million (based on the closing price of the Subordinate Voting Shares on the TSX on February 28, 2019 of C$114.25), which is less than 25% of FirstServices market capitalization (as calculated in accordance with MI 61-101).
Stock Exchange Matters
The outstanding Subordinate Voting Shares are listed for trading on the TSX and NASDAQ. It is a closing condition of the Transaction Agreement that the Subordinate Voting Shares issuable pursuant to the Transaction shall have been approved for listing on the TSX and the NASDAQ. FirstService has filed an application with the TSX and a notice with NASDAQ to approve the listing of an additional 2,918,860 Subordinate Voting Shares issuable in connection with the Transaction. FirstService has also filed substitutional listing applications/notices with the TSX and NASDAQ in connection with the proposed re-designation of the Subordinate Voting Shares as common shares. FirstService has also requested that the stock symbol assigned to its common shares on the TSX and NASDAQ remain as FSV. Holders of Subordinate Voting Shares do not need to take any action in order to receive the common shares to which they are entitled. Certificates representing Subordinate Voting Shares will continue to represent a like number of common shares following the re-classification until replaced against transfer.
The TSX has conditionally approved the listing of the additional 2,918,860 Subordinate Voting Shares issuable in connection with the Transaction, subject to satisfaction of customary requirements and approval of the Transaction by a simple majority of the votes cast by the Minority Subordinate Voting Shareholders.
Pro Forma Equity Capitalization Table
The following table indicates: (a) the current aggregate direct and indirect equity interests of the public shareholders and Mr. Hennick in FirstService and the percentage of total votes represented by their respective equity interests; and (b) the aggregate direct and indirect equity interests of the public shareholders and Mr. Hennick in FirstService and the percentage of total votes represented by their respective equity interests on a pro forma basis after giving effect to the completion of the Transaction.
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Current | Pro Forma | ||||
Subordinate
Voting Shares |
Multiple Voting
Shares |
% Votes | Common Shares (1) | % Votes | |
Public Shareholders | 33,262,727 | | 54.3 | 33,262,727 | 85.2 |
Jay S. Hennick (2) | 1,522,526 | 1,325,694 | 45.7 | 5,767,080 | 14.8 |
Total: | 34,785,253 | 1,325,694 | 100.0 | 39,029,807 | 100.0 |
___________
Notes:
(1) | Pursuant to the Transaction, the Multiple Voting Shares and preference shares will be removed from the authorized capital of FirstService and the Subordinate Voting Shares will be re-designated as common shares. |
(2) | Pre-Transaction, 1,522,526 Subordinate Voting Shares and 1,325,694 Multiple Voting Shares are held by Henset Capital Inc. and The Jay and Barbara Hennick Family Foundation, entities controlled by Mr. Hennick. See Business of the Meeting Approval of Transaction for additional Subordinate Voting Shares to be issued indirectly by Mr. Hennick in connection with the completion of the Transaction. |
Trading Price and Volume
The outstanding Subordinate Voting Shares are listed for trading on the TSX and NASDAQ, in each case, under the symbol FSV. The Multiple Voting Shares are not listed and do not trade on any public market or quotation system.
The following table sets forth the reported high and low trading prices and the aggregate volume of trading of the Subordinate Voting Shares on NASDAQ (in United States dollars) and on the TSX (in Canadian dollars) for each month in the twelve-month period preceding the date of this Circular.
NASDAQ | TSX | |||||
Month |
High Price (US$) |
Low Price (US$) |
Volume Traded |
High Price (C$) |
Low Price (C$) |
Volume Traded |
March 2018 | 73.51 | 68.30 | 554,098 | 94.64 | 88.13 | 789,561 |
April 2018 | 73.63 | 69.23 | 534,192 | 94.55 | 87.56 | 1,206,405 |
May 2018 | 71.92 | 69.29 | 486,085 | 93.29 | 88.63 | 833,682 |
June 2018 | 76.3199 | 70.05 | 330,291 | 101.00 | 90.86 | 783,060 |
July 2018 | 86.05 | 75.00 | 698,276 | 112.60 | 99.32 | 764,075 |
August 2018 | 90.205 | 80.82 | 557,482 | 114.13 | 105.72 | 910,597 |
September 2018 | 87.565 | 82.64 | 385,499 | 115.17 | 107.25 | 727,575 |
October 2018 | 86.08 | 70.75 | 836,513 | 109.66 | 92.30 | 1,342,438 |
November 2018 | 75.85 | 71.91 | 1,329,362 | 100.82 | 94.47 | 1,331,806 |
December 2018 | 78.28 | 64.87 | 796,929 | 103.35 | 88.45 | 1,012,243 |
January 2019 | 81.95 | 65.55 | 809,624 | 108.11 | 88.42 | 1,037,007 |
February 2019 | 89.17 | 80.98 | 741,012 | 117.855 | 105.94 | 1,139,645 |
March 1 to 25, 2019 | 88.07 | 83.22 | 588,651 | 117.52 | 111.19 | 810,798 |
On March 12, 2019, the last full trading day prior to the public announcement of the Transaction, the closing sale price per Subordinate Voting Share as reported on the TSX was $115.68 and the closing sale price per Subordinate Voting Share, as reported on NASDAQ, was US$86.65. On March 25, 2019, the date of this Circular, the closing sale price per Subordinate Voting Share, as reported on the TSX, was $113.91, and the closing sale price per Subordinate Voting Share, as reported on NASDAQ, was US$85.22. Shareholders are urged to obtain current market quotations for their Subordinate Voting Shares. Historical trading prices are not indicative of future trading prices.
Effects on FirstService if the Transaction is Not Completed
If the Transaction is not approved by the holders of Subordinate Voting Shares, or if the Transaction is not completed for any other reason, the Transaction will not be implemented with the result that FirstServices dual class share structure will remain in place, Mr. Hennick will continue to effectively control FirstService through his indirect ownership or control of all the issued and outstanding Multiple Voting Shares and the Management Services Agreement (including the Long Term Arrangement) will remain in place. In addition, the amendment to the articles of FirstService contemplated by the Articles Resolution will not be implemented. In these circumstances, the Board will continue to supervise and oversee the business and affairs of FirstService with a view to the best interests of FirstService and having regard for its unique entrepreneurial culture and operating principles.
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Risk Factors
The following risk factors should be carefully considered by holders of Subordinate Voting Shares in deciding how to vote on the Transaction Resolution. Shareholders should also consider the risks set out under Risk factors in the AIF, which is incorporated by reference herein.
| Completion of the Transaction may be delayed or may not occur at all: The completion of the Transaction is subject to a number of conditions precedent, certain of which are outside the control of the parties to the Transaction Agreement, including obtaining the requisite approval from the Minority Subordinate Voting Shareholders. A substantial delay in obtaining approvals could delay the completion of the Transaction or could result in the Transaction not completing due to one or more conditions precedent not being satisfied. There is no certainty, nor can FirstService provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied. In addition, each of FirstService and Mr. Hennick has the right to terminate the Transaction Agreement in certain circumstances. Accordingly, there is no certainty, nor can FirstService provide any assurance, that the Transaction will not be terminated before its completion. |
| If the Transaction is completed, there will be dilution to the holders of Subordinate Voting Shares: Currently, the Mr. Hennick indirectly owns or controls 1,522,526 Subordinate Voting Shares and all of the outstanding 1,325,694 Multiple Voting Shares, representing approximately 45.7% of the total votes attached to all of FirstServices outstanding voting securities and 7.9% of the equity interest in FirstService. Under the terms of the Transaction, Mr. Hennick will receive, indirectly, 2,918,860 Subordinate Voting Shares. After giving effect to the Transaction, Mr. Hennick is expected to, indirectly, own or control approximately 14.8% of the anticipated 39,026,207 issued and outstanding shares of FirstService. |
| If the Transaction is completed, FirstService will no longer be controlled by Mr. Hennick and will become widely-held with the result that it may become more vulnerable to a take-over or tender offer: The consummation of the Transaction will eliminate FirstServices dual class share structure. As a result, voting power would be spread out amongst a wide shareholder base without a controlling shareholder, and the inherent protection from an unsolicited take-over bid afforded by a dual-class share structure will no longer exist. Accordingly, FirstService may become more vulnerable to a take-over bid or a tender offer. |
Intention of Directors and Executive Officers
Each of the directors and executive officers of FirstService (excluding Mr. Hennick and his related entities) has indicated an intention to vote FOR the Transaction Resolution and the Articles Resolution. As at March 25, 2019, such directors and executive officers beneficially own, directly or indirectly, or exercise control or direction over, an aggregate of 1,254,370 Subordinate Voting Shares, representing approximately 3.6% of the issued and outstanding Subordinate Voting Shares.
Expenses of the Transaction
Each of FirstService and Mr. Hennick (and his related entities) will bear and pay its own costs, expenses and fees incurred by it in connection with the transactions contemplated by the Transaction Agreement. FirstService estimates that the expenses to be borne by it in connection with the Transaction, including, without limitation, legal and accounting fees, printing and mailing costs, proxy solicitation fees, compensation consultant fees, and stock exchange and regulatory filing fees, will be less than US$400,000.
Source of Funds for the Transaction
Under the terms of the Transaction Agreement, FirstService is required to pay US$62.9 million (C$84.3 million) in cash (less an adjustment to account for certain tax liabilities) to the relevant entity or entities related to Mr. Hennick. FirstService intends to make such payment from cash available under its revolving credit facility. On March 26, 2019, FirstService completed the exercise of the accordion feature contained in its revolving credit facility and increased its borrowing capacity thereunder by US$100 million, to a total US$350 million. As of March 25, 2019, FirstService had an aggregate of approximately US$230 million of indebtedness under its revolving credit facility.
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Notice to Shareholders
THE TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY ANY CANADIAN SECURITIES REGULATORY AUTHORITY, THE SECURITIES AND EXCHANGE COMMISSION OR ANY U.S. STATE SECURITIES COMMISSION, NOR HAS ANY CANADIAN SECURITIES REGULATORY AUTHORITY, THE SECURITIES AND EXCHANGE COMMISSION OR ANY U.S. STATE SECURITIES COMMISSION EXPRESSED AN OPINION ABOUT, OR PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTION OR THE ACCURACY, ADEQUACY OR COMPLETENESS OF THE INFORMATION CONTAINED IN THIS CIRCULAR AND ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND MAY BE A CRIMINAL OFFENCE.
Approval of Amendment to the Articles
If the Transaction Resolution is approved and the Transaction subsequently completed, all of the Multiple Voting Shares will be converted into Subordinate Voting Shares, on a one-for-one basis. Accordingly, at such time, FirstService will no longer have any outstanding Multiple Voting Shares and FirstService will not issue any new Multiple Voting Shares.
As a result, the Subordinate Voting Shares will be the only class of voting and equity securities of FirstService. To reflect this fact, FirstService proposes to, subject to and following completion of the Transaction, amend its articles to remove references to what will then be defunct Multiple Voting Shares as well as references to preference shares, and to re-designate the Subordinate Voting Shares as common shares of FirstService.
The proposed amendment to the articles of FirstService in relation to the Subordinate Voting Shares is of a housekeeping nature, and will not modify in any way the rights and privileges attached to the Subordinate Voting Shares. The re-designation of the Subordinate Voting Shares as common shares will clarify that, following completion of the Transaction, there will no longer exist other shares of FirstService with different voting rights. The elimination of the blank cheque preference shares as authorized capital has been done in line with market best practices, reflecting concerns of common shareholders that such preference shares can be excessively dilutive or used in anti-takeover circumstances, while also reflecting a confidence by FirstService that, despite these preference shares being a flexible financing source, FirstService believes that any required capital can be raised, should the need arise, by issuing common shares.
The proposed amendment to the articles of FirstService requires the approval of holders of Subordinate Voting Shares by way of a special resolution, meaning the positive vote of at least two-thirds of the Subordinate Voting Shares voted at the Meeting in respect of the Articles Resolution. Henset Capital Inc., the holder of all of the Multiple Voting Shares, has approved the proposed amendment to the articles of FirstService.
The full text of the Articles Resolution approving the amendment of the articles of FirstService is set out in Appendix B to this Circular.
FirstService has filed substitutional listing applications with the TSX and Nasdaq in connection with the proposed re-classification of the Subordinate Voting Shares as common shares. FirstService has also requested that the stock symbol assigned to its common shares on the TSX and Nasdaq remain as FSV. The TSX has conditionally approved the re-classification of the Subordinate Voting Shares into common shares and the continued use of the FSV stock symbol for the common shares, subject to satisfaction of customary requirements and approval of the Transaction by a simple majority of the votes cast by the Minority Subordinate Voting Shareholders.
Unless provided to the contrary, the persons named in the accompanying form of proxy (if the same is duly executed in their favour and is duly deposited) will vote the Subordinate Voting Shares represented thereby in favour of the Articles Resolution. The Board (with Mr. Hennick recusing himself) unanimously recommends that you vote FOR the Articles Resolution.
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INTEREST OF CERTAIN PERSONS OR COMPANIES IN MATTERS TO BE ACTED UPON
Except as otherwise indicated in this Circular, no person who has been a director or executive officer of FirstService at any time since the beginning of FirstServices last financial year, no proposed nominee for election as a director of FirstService, and no associate or affiliate of any of the foregoing has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the Meeting other than the election of directors or the appointment of auditors.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
To the knowledge of FirstService, other than as disclosed elsewhere in this Circular, no informed person of FirstService, any proposed director of FirstService or any associate or affiliate of any informed person or proposed director of FirstService has had any material interest, direct or indirect, in any transaction since the commencement of FirstServices most recently completed financial year or in any proposed transaction which has materially affected or would materially affect FirstService or any of its subsidiaries. An informed person means a director or executive officer of FirstService, a director or executive officer of a person or company that is itself an informed person or subsidiary of FirstService, or any person or company who beneficially owns, or controls or directs, directly or indirectly, voting securities of FirstService or a combination of both carrying more than 10% of the voting rights attached to all outstanding voting securities of FirstService.
INSURANCE
FirstService holds a directors and officers liability insurance policy (the Policy) which is designed to protect FirstService and its directors and officers against any legal action which may arise as a result of wrongful acts on the part of directors and/or officers of FirstService. The Policy is written for limits of US$85,000,000 subject to a corporate deductible of US$750,000 on securities claims and US$250,000 on all other claims. In respect of the year ended December 31, 2018, the cost to FirstService in maintaining the Policy was US$469,400.
PROXY SOLICITATION
Kingsdale Advisors is acting as FirstServices strategic shareholder advisor and proxy solicitation agent in connection with the Meeting.
LEGAL MATTERS
Certain legal matters in connection with the Transaction will be passed upon by Fogler, Rubinoff LLP on behalf of FirstService and by Miller Thomson LLP on behalf of the Compensation Committee.
ADDITIONAL INFORMATION
Additional information relating to FirstService is available on SEDAR at www.sedar.com. Financial information is being provided in FirstServices comparative financial statements for the year ended December 31, 2018 and the related managements discussion and analysis. A copy of the following documents may be obtained, without charge, upon request to the Chief Financial Officer of FirstService at 1140 Bay Street, Suite 4000, Toronto, Ontario M5S 2B4, Phone 416-960-9500, Fax: 647-258-0008: (a) the latest Annual Information Form of FirstService together with any document, or the pertinent pages of any document, incorporated by reference therein; (b) the comparative financial statements of FirstService for the year ended December 31, 2018 together with the accompanying report of the auditors thereon, any interim financial statements of FirstService for periods subsequent to December 31, 2018 and the related managements discussion and analysis therefor; and (c) this Circular.
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FORWARD-LOOKING STATEMENTS
This Circular contains statements that constitute forward-looking statements within the meaning of applicable securities legislation, including, but not limited to, statements relating to the results and the potential benefits expected to be achieved from the completion of the Transaction, including the increased marketability and improved liquidity of the Subordinate Voting Shares. The forward-looking information in this Circular is presented for the purpose of providing information about FirstServices current expectations having regard for the plans and proposals relating to the Transaction and such information may not be appropriate for other purposes. Forward-looking statements may also include statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing, and other statements that are not recitations of historical fact. We use words such as may, would, could, should, will, likely, expect, anticipate, believe, intend, plan, forecast, outlook, project, estimate and similar expressions suggesting future outcomes or events to identify forward-looking statements. Any such forward-looking statements are based on information currently available to us, and are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties, many of which are beyond our control, and the effects of which can be difficult to predict, including, without limitation, risks, assumptions and uncertainties related to: the consummation of the Transaction, including, shareholder approval, the satisfaction or waiver of the conditions to complete the Transaction, and the termination of the transaction agreements; the market value and trading price of the Subordinate Voting Shares; and other factors set out in this Circular and in the AIF filed with securities commissions in Canada and our Annual Report on Form 40-F filed with the SEC, and subsequent filings. In evaluating any forward-looking statements in this Circular, we caution readers not to place undue reliance on any forward-looking statements. Readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by our forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements contained in this Circular to reflect subsequent information, events, results or circumstances or otherwise.
SHAREHOLDER ENGAGEMENT
Shareholders, employees and other interested parties may communicate directly with the Board through the Lead Director of the Board by writing to:
Lead Director of the Board | ||
FirstService Corporation | ||
1140 Bay Street, Suite 4000 | ||
Toronto, Ontario, Canada | ||
M5S 2B4 |
GENERAL
Management knows of no matters to come before the Meeting other than the matters referred to in the Notice of Meeting. However, if matters not now known to management should come before the Meeting, FirstService shares represented by proxies solicited by Management will be voted on each such matter in accordance with the best judgement of the nominees voting same. The contents and the sending of the Notice of Meeting and this Circular have been approved by the Board.
By Order of the Board | ||
|
||
DOUGLAS G. COOKE | ||
March 25, 2019 | Vice President, Corporate Controller and Corporate | |
Secretary |
APPENDIX A
TRANSACTION RESOLUTION
BE IT RESOLVED THAT:
1. | the transaction (the Transaction) involving FirstService Corporation (FirstService), as more particularly described and set forth in the Management Information Circular of FirstService dated March 25, 2019 (as the Transaction is contemplated by, and may be, or may have been, amended, modified or supplemented in accordance with the terms of, the transaction agreement dated April 2, 2019 among FirstService, Henset Capital Inc., Jayset Capital Corp., FSV Shares LP, Jayset Management FSV Inc. and Jay S. Hennick (the Transaction Agreement)), is authorized, approved and adopted; |
2. | the Transaction Agreement, and all the matters contemplated therein, together with the actions of the directors of FirstService in approving the Transaction and the actions of the directors and officers of FirstService in executing and delivering the Transaction Agreement, together with any amendments, modifications or supplements thereto, are hereby ratified and approved; |
3. | any one or more directors or officers of FirstService are authorized, for and on behalf and in the name of FirstService, to execute, whether under the corporate seal of FirstService or otherwise, and deliver all such agreements, forms, waivers, notices, certificates, confirmations and other documents and instruments and to do or cause to be done all such other acts and things as such director(s) or officer(s) may determine to be necessary, desirable or useful for the purpose of giving effect to these resolutions, the completion of the Transaction and the Transaction Agreement, such determination to be conclusively evidenced by the execution and delivery by such director(s) or officer(s) of any such agreement, form, waiver, notice, certificate, confirmation or other document and instrument or the doing of any such act or thing; and |
4. | notwithstanding that these resolutions have been passed (and the Transaction approved) by the holders of Subordinate Voting Shares of FirstService, the directors of FirstService are hereby authorized and empowered, at their discretion and without further notice to, or approval of, the shareholders of FirstService: (a) to amend, modify or supplement the Transaction Agreement to the extent permitted by the Transaction Agreement; and (b) subject to the terms of the Transaction Agreement, not to proceed with the Transaction and/or any related transactions. |
APPENDIX B
ARTICLES RESOLUTION
BE IT RESOLVED, AS A SPECIAL RESOLUTION, THAT:
1. | subject to and following completion of the Transaction, the articles of FirstService be amended to: |
(a) | remove the Multiple Voting Shares and preference shares of FirstService from the authorized capital of FirstService and delete the provisions setting out the rights, privileges, restrictions and conditions attaching to the Multiple Voting Shares and preference shares; |
(b) | rename the Subordinate Voting Shares as common shares, wherever that term appears therein; |
(c) | provide that the authorized capital of FirstService consists of an unlimited number of common shares; |
(d) | make non-substantive amendments to the rights, privileges, restrictions and conditions attaching to the Subordinate Voting Shares (common shares) to reflect the elimination of the Multiple Voting Shares and preference shares from FirstServices share capital structure; and |
(e) | make such conforming amendments to the articles of FirstService as may be required to reflect the foregoing resolutions; |
2. | any one officer or director of FirstService, alone, is authorized and empowered, acting for, in the name of and on behalf of FirstService, to do all things and execute all instruments necessary or desirable to give effect to this special resolution including, without limitation, to execute (under the corporate seal of FirstService or otherwise) and deliver Articles of Amendment of FirstService, in duplicate, to the Director under the OBCA; and |
3. | notwithstanding that this special resolution has been duly passed by the shareholders of FirstService, the directors of FirstService are authorized and empowered to revoke this special resolution at any time prior to the issuance of a Certificate of Amendment giving effect to the amendment to the Articles of the Corporation and to determine not to proceed with the amendment, in each case, without further approval of the shareholders of FirstService. |
APPENDIX C
BOARD MANDATE
The purpose of this mandate (Mandate) of the board of directors (the Board) of FirstService Corporation (the Company) is to provide guidance to Board members as to their duties and responsibilities. The power and authority of the Board is subject to the provisions of applicable law.
Purpose of the Board
The Board is responsible for the stewardship of the Company. This requires the Board to oversee the conduct of the business and affairs of the Company. The Board discharges some of its responsibilities directly and discharges others through committees of the Board. The Board is not responsible for the day-to-day management and operation of the Companys business, as this responsibility has been delegated to management. The Board is, however, responsible for supervising management in carrying out this responsibility.
Membership
The Board consists of directors elected by the shareholders as provided for in the Companys constating documents and in accordance with applicable law and any policies adopted from time to time by the Board. From time to time, the Nominating and Corporate Governance Committee shall review the size of the Board to ensure that its size facilitates effective decision-making by the Board in the fulfillment of its responsibilities.
Each member of the Board must act honestly and in good faith with a view to the best interests of the Company, and must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. A director is responsible for the matters under Role and Responsibilities of the Board below as well as for other duties as they arise in the directors role.
All members of the Board shall have suitable experience and skills given the nature of the Company and its businesses and have a proven record of sound judgment. Directors are to possess characteristics and traits that reflect:
| high ethical standards and integrity in their personal and professional dealings; |
| the ability to provide thoughtful and experienced counsel on a broad range of issues and to develop a depth of knowledge of the businesses of the Company in order to understand and assess the assumptions on which the Companys strategic and business plans are based and to form an independent judgment with respect to the appropriateness and probability of achieving such plans; |
| the ability to monitor and evaluate the financial performance of the Company; |
| an appreciation of the value of Board and team performance over individual performance and a respect for others; and |
| an openness for the opinions of others and the willingness to listen, as well as the ability to communicate effectively and to raise tough questions in a manner that encourages open and frank discussion. |
Directors are expected to commit the time and resources necessary to properly carry out their duties. Among other matters, directors are expected to adequately prepare for and attend all regularly scheduled Board meetings. New directors are expected to understand fully the role of the Board, the role of the committees of the Board and the contribution individual directors are expected to make.
Ethics
Members of the Board shall carry out their responsibilities objectively, honestly and in good faith with a view to the best interests of the Company. Directors of the Company are expected to conduct themselves according to the highest standards of personal and professional integrity. Directors are also expected to set the standard for Company-wide ethical conduct and ensure ethical behaviour and compliance with laws and regulations. If an actual or potential conflict of interest arises, a director shall promptly inform the Chairman or Lead Director and shall refrain from voting or participating in discussion of the matter in respect of which he has an actual or potential conflict of interest. If it is determined that a significant conflict of interest exists and cannot be resolved, the director should resign.
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Directors are expected to act in accordance with applicable law, the Companys constating documents, the Companys Code of Ethics and Conduct and other policies applicable to directors as are adopted from time to time.
Meetings
The Board shall meet in accordance with a schedule established each year by the Board, and at such other times as the Board may determine. Meeting agendas shall be developed in consultation with the Chairman or Lead Director. Board members may propose agenda items though communication with the Chairman or Lead Director. The Chairman is responsible for ensuring that a suitably comprehensive information package is sent to each director in advance of each meeting. At the discretion of the Board, members of management and others may attend Board meetings, except for separate meetings of the independent directors of the Board.
Directors are expected to be fully prepared for each Board meeting, which requires them, at a minimum, to have read the material provided to them prior to the meeting. At Board meetings, each director is expected to take an active role in discussion and decision-making. To facilitate this, the Chairman is responsible for fostering an atmosphere conducive to open discussion and debate.
Independent directors shall have the opportunity to meet at appropriate times without management present at all Board meetings. The Lead Director shall be responsible for presiding over meetings of the independent directors. Independent directors may propose agenda items for meetings of independent directors members through communication with the Chairman or Lead Director.
Role and Responsibilities of the Board
The Board is responsible for approving the Companys goals, objectives and strategies. The Board is also responsible for overseeing the implementation of appropriate risk assessment systems to identify and manage principal risks of the Companys business.
In addition to the other matters provided in this Mandate, including the matters delegated to Board committees as set out below, the Board is also responsible for the following specific matters:
| review and approve managements strategic plans; |
| review and approve the Companys financial objectives, business plans and budgets, including material capital expenditures; |
| monitor corporate performance against the strategic plans and business, operating and capital budgets; |
| management succession planning, including appointing and monitoring, the Chief Executive Officer of the Company; |
| assess its own effectiveness in fulfilling its responsibilities, including monitoring the effectiveness of individual directors; |
| ensure the integrity of the Companys internal control system and management information systems; |
| developing the Companys approach to corporate governance, including developing a set of corporate governance principles and guidelines; and |
-C 3 - |
| satisfy itself that appropriate policies and procedures are in place regarding public disclosure and restricted trading by insiders, including the review and approval of the Companys corporate disclosure policy and confirmation that a process is in place to disclose all material information in compliance with the Companys timely disclosure obligations and to prevent selective disclosure of material information to analysts, institutional investors, market professionals and others. |
A director has an important and positive role as a representative of the Company. A director is also expected to participate in outside activities that enhance the Companys image to investors, employees, customers and the public.
Procedures to Ensure Effective and Independent Operation
The Board recognizes the importance of having procedures in place to ensure the effective and independent operation of the Board. In addition to the policies and procedures provided elsewhere in this Mandate and in the position descriptions of the Chairman of the Board and the Lead Director of the Board, the Board has adopted the following procedures:
| the Board has complete access to the Companys management; |
| the Board requires timely and accurate reporting from management and shall regularly review the quality of managements reports; |
| subject to the approval of the Board, individual directors may engage an external adviser at the expense of the Company in appropriate circumstances; |
| the Chairman of the Board shall monitor the nature and timeliness of the information requested by and provided by management to the Board to determine if the Board can be more effective in identifying problems and opportunities for the Company; and |
| the Chairman, together with the Chief Executive Officer, shall develop a position description for the Chief Executive Officer. This position description shall be approved by the Board. |
Board Committees
Subject to limits on delegation contained in corporate law applicable to the Company, the Board has the authority to establish and carry out its duties through committees and to appoint directors to be members of these committees. The Board assesses the matters to be delegated to committees of the Board and the constitution of such committees annually or more frequently, as circumstances require. From time to time the Board may create ad hoc committees to examine specific issues on behalf of the Board.
The Board has established the following committees: (1) Audit Committee; (2) Executive Compensation Committee; and (3) Nominating and Corporate Governance Committee. The respective responsibilities of each of the foregoing committees is set forth in the applicable committee mandate.
Exhibit 4.5
FIRSTSERVICE CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Third Quarter
September 30, 2019
Page 2 of 16 |
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands of US dollars, except per share amounts) - in accordance with accounting principles generally accepted in the
United States of America
Three months | Nine months | |||||||||||||||
ended September 30 | ended September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | $ | 672,253 | $ | 506,356 | $ | 1,731,816 | $ | 1,428,160 | ||||||||
Cost of revenues | 451,671 | 343,026 | 1,181,025 | 972,995 | ||||||||||||
Selling, general and administrative expenses | 145,210 | 105,137 | 385,848 | 317,754 | ||||||||||||
Depreciation | 11,152 | 7,934 | 28,798 | 23,970 | ||||||||||||
Amortization of intangible assets | 13,029 | 4,343 | 22,235 | 12,993 | ||||||||||||
Settlement of long-term incentive arrangement (note 14) | - | - | 314,379 | - | ||||||||||||
Acquisition-related items | 1,493 | 618 | 5,373 | 1,727 | ||||||||||||
Operating earnings (loss) | 49,698 | 45,298 | (205,842 | ) | 98,721 | |||||||||||
Interest expense, net | 12,719 | 3,101 | 21,060 | 9,185 | ||||||||||||
Other (income) expense, net (note 7) | (229 | ) | 25 | (6,353 | ) | (78 | ) | |||||||||
Earnings (loss) before income tax | 37,208 | 42,172 | (220,549 | ) | 89,614 | |||||||||||
Income tax (note 8) | 10,872 | 10,508 | 20,650 | 19,121 | ||||||||||||
Net earnings (loss) | 26,336 | 31,664 | (241,199 | ) | 70,493 | |||||||||||
Non-controlling interest share of earnings (note 11) | 2,057 | 3,653 | 6,262 | 8,888 | ||||||||||||
Non-controlling interest redemption increment (note 11) | 4,419 | 2,172 | 9,386 | 7,077 | ||||||||||||
Net earnings (loss) attributable to Company | $ | 19,860 | $ | 25,839 | $ | (256,847 | ) | $ | 54,528 | |||||||
Net earnings (loss) per common share (note 12) | ||||||||||||||||
Basic | $ | 0.51 | $ | 0.72 | $ | (6.93 | ) | $ | 1.52 | |||||||
Diluted | $ | 0.50 | $ | 0.70 | $ | (6.93 | ) | $ | 1.49 |
The accompanying notes are an integral part of these financial statements.
Page 3 of 16 |
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
(in thousands of US dollars) - in accordance with accounting principles generally accepted in the United States of America
Three months | Nine months | |||||||||||||||
ended September 30 | ended September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net earnings (loss) | $ | 26,336 | $ | 31,664 | $ | (241,199 | ) | $ | 70,493 | |||||||
Foreign currency translation gain (loss) | (277 | ) | 476 | 1,129 | (967 | ) | ||||||||||
Comprehensive earnings | 26,059 | 32,140 | (240,070 | ) | 69,526 | |||||||||||
Less: Comprehensive earnings attributable to non-controlling | ||||||||||||||||
interests | 6,476 | 5,825 | 15,648 | 15,965 | ||||||||||||
Comprehensive earnings (loss) attributable to Company | $ | 19,583 | $ | 26,315 | $ | (255,718 | ) | $ | 53,561 |
The accompanying notes are an integral part of these financial statements.
Page 4 of 16 |
FIRSTSERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of US dollars) - in accordance with accounting principles generally accepted in the United States of America
September 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 106,276 | $ | 66,340 | ||||
Restricted cash | 16,126 | 13,504 | ||||||
Accounts receivable, net of allowance of $10,719 (December 31, 2018 - | ||||||||
$9,177) | 384,465 | 239,925 | ||||||
Income tax recoverable | 15,768 | 9,337 | ||||||
Inventories | 81,109 | 48,227 | ||||||
Prepaid expenses and other current assets | 39,763 | 37,739 | ||||||
643,507 | 415,072 | |||||||
Other receivables | 4,026 | 4,212 | ||||||
Other assets | 5,073 | 6,135 | ||||||
Fixed assets | 127,742 | 98,102 | ||||||
Operating lease right-of-use assets (note 6) | 113,437 | - | ||||||
Intangible assets | 374,870 | 148,798 | ||||||
Goodwill | 623,209 | 335,155 | ||||||
1,248,357 | 592,402 | |||||||
$ | 1,891,864 | $ | 1,007,474 | |||||
Liabilities and shareholders' equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 72,716 | $ | 41,709 | ||||
Accrued liabilities | 159,268 | 132,572 | ||||||
Unearned revenues | 63,135 | 36,746 | ||||||
Operating lease liabilities - current (note 6) | 29,114 | - | ||||||
Long-term debt - current (note 9) | 6,130 | 3,915 | ||||||
Contingent acquisition consideration - current (note 10) | 6,637 | 12,005 | ||||||
337,000 | 226,947 | |||||||
Long-term debt - non-current (note 9) | 943,610 | 330,608 | ||||||
Operating lease liabilities - non-current (note 6) | 93,334 | - | ||||||
Contingent acquisition consideration (note 10) | 4,841 | 1,281 | ||||||
Unearned revenues | 13,097 | 13,453 | ||||||
Other liabilities | 43,637 | 40,797 | ||||||
Deferred income tax | 69,236 | 6,577 | ||||||
1,167,755 | 392,716 | |||||||
Redeemable non-controlling interests (note 11) | 157,321 | 151,585 | ||||||
Shareholders' equity | 229,788 | 236,226 | ||||||
$ | 1,891,864 | $ | 1,007,474 |
The accompanying notes are an integral part of these financial statements.
Page 5 of 16 |
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands of US dollars, except share information)
Common shares | Accumulated | |||||||||||||||||||||||
Issued and | other | |||||||||||||||||||||||
outstanding | Contributed | comprehensive | ||||||||||||||||||||||
shares | Amount | surplus | Deficit | loss | Total | |||||||||||||||||||
Balance, December 31, 2018 | 35,980,047 | $ | 148,707 | $ | 45,097 | $ | 45,537 | $ | (3,115 | ) | $ | 236,226 | ||||||||||||
Net earnings | - | - | - | 2,329 | - | 2,329 | ||||||||||||||||||
Other comprehensive earnings | - | - | - | - | 328 | 328 | ||||||||||||||||||
Impact of ASC 842 - Leases | - | - | - | (338 | ) | - | (338 | ) | ||||||||||||||||
Subsidiaries equity transactions | - | - | (19 | ) | - | - | (19 | ) | ||||||||||||||||
Common Shares: | ||||||||||||||||||||||||
Stock option expense | - | - | 2,855 | - | - | 2,855 | ||||||||||||||||||
Stock options exercised | 134,650 | 5,342 | (1,338 | ) | - | - | 4,004 | |||||||||||||||||
Dividends | - | - | - | (5,418 | ) | - | (5,418 | ) | ||||||||||||||||
Balance, March 31, 2019 | 36,114,697 | $ | 154,049 | $ | 46,595 | $ | 42,110 | $ | (2,787 | ) | $ | 239,967 | ||||||||||||
Net earnings (loss) | - | - | - | (279,036 | ) | - | (279,036 | ) | ||||||||||||||||
Other comprehensive earnings | - | - | - | - | 1,078 | 1,078 | ||||||||||||||||||
Impact of ASC 842 - Leases | - | - | - | (52 | ) | - | (52 | ) | ||||||||||||||||
Subsidiaries equity transactions | - | - | 39 | - | - | 39 | ||||||||||||||||||
Common Shares: | ||||||||||||||||||||||||
Stock option expense | - | - | 1,755 | - | - | 1,755 | ||||||||||||||||||
Stock options exercised | 188,400 | 5,401 | (959 | ) | - | - | 4,442 | |||||||||||||||||
Dividends | - | - | - | (5,883 | ) | - | (5,883 | ) | ||||||||||||||||
Issued (note 14) | 2,918,860 | 251,503 | - | - | - | 251,503 | ||||||||||||||||||
Balance, June 30, 2019 | 39,221,957 | $ | 410,953 | $ | 47,430 | $ | (242,861 | ) | $ | (1,709 | ) | $ | 213,813 | |||||||||||
Net earnings | - | - | - | 19,860 | - | 19,860 | ||||||||||||||||||
Other comprehensive earnings | - | - | - | - | (277 | ) | (277 | ) | ||||||||||||||||
Subsidiaries equity transactions | - | - | (33 | ) | - | - | (33 | ) | ||||||||||||||||
Common Shares: | ||||||||||||||||||||||||
Stock option expense | - | - | 1,772 | - | - | 1,772 | ||||||||||||||||||
Stock options exercised | 22,500 | 539 | - | - | - | 539 | ||||||||||||||||||
Dividends | - | - | - | (5,886 | ) | - | (5,886 | ) | ||||||||||||||||
Balance, September 30, 2019 | 39,244,457 | $ | 411,492 | $ | 49,169 | $ | (228,887 | ) | $ | (1,986 | ) | $ | 229,788 |
Page 6 of 16 |
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(Unaudited)
(in thousands of US dollars, except share information)
Common shares | Accumulated | |||||||||||||||||||||||
Issued and | other | |||||||||||||||||||||||
outstanding | Contributed | Retained | comprehensive | |||||||||||||||||||||
shares | Amount | surplus | earnings | loss | Total | |||||||||||||||||||
Balance, December 31, 2017 | 35,916,383 | $ | 143,770 | $ | 41,463 | $ | 9,027 | $ | (492 | ) | $ | 193,768 | ||||||||||||
Net earnings | - | - | - | 6,083 | - | 6,083 | ||||||||||||||||||
Other comprehensive earnings | - | - | - | - | (860 | ) | (860 | ) | ||||||||||||||||
Common Shares: | ||||||||||||||||||||||||
Stock option expense | - | - | 1,997 | - | - | 1,997 | ||||||||||||||||||
Stock options exercised | 88,200 | 2,453 | (1,300 | ) | - | - | 1,153 | |||||||||||||||||
Dividends | - | - | (4,850 | ) | - | (4,850 | ) | |||||||||||||||||
Purchased for cancellation | (85,408 | ) | (355 | ) | - | (5,586 | ) | - | (5,941 | ) | ||||||||||||||
Balance, March 31, 2018 | 35,919,175 | $ | 145,868 | $ | 42,160 | $ | 4,674 | $ | (1,352 | ) | $ | 191,350 | ||||||||||||
Net earnings | - | - | - | 22,606 | - | 22,606 | ||||||||||||||||||
Other comprehensive earnings | - | - | - | - | (583 | ) | (583 | ) | ||||||||||||||||
Stock option expense | - | - | 1,317 | - | - | 1,317 | ||||||||||||||||||
Stock options exercised | 37,100 | 1,103 | (210 | ) | - | - | 893 | |||||||||||||||||
Dividends | - | - | - | (4,853 | ) | - | (4,853 | ) | ||||||||||||||||
Balance, June 30, 2018 | 35,956,275 | $ | 146,971 | $ | 43,267 | $ | 22,427 | $ | (1,935 | ) | $ | 210,730 | ||||||||||||
Net earnings | - | - | - | 25,839 | - | 25,839 | ||||||||||||||||||
Other comprehensive earnings | - | - | - | - | 477 | 477 | ||||||||||||||||||
Common Shares: | ||||||||||||||||||||||||
Stock option expense | - | - | 1,233 | - | - | 1,233 | ||||||||||||||||||
Stock options exercised | 16,400 | 762 | (185 | ) | - | - | 577 | |||||||||||||||||
Dividends | - | - | - | (4,856 | ) | - | (4,856 | ) | ||||||||||||||||
Balance, September 30, 2018 | 35,972,675 | $ | 147,733 | $ | 44,315 | $ | 43,410 | $ | (1,458 | ) | $ | 234,000 |
The accompanying notes are an integral part of these financial statements.
Page 7 of 16 |
FIRSTSERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of US dollars) - in accordance with accounting principles generally accepted in the United States of America
Three months ended | Nine months ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cash provided by (used in) | ||||||||||||||||
Operating activities | ||||||||||||||||
Net earnings (loss) | $ | 26,336 | 31,664 | $ | (241,199 | ) | $ | 70,493 | ||||||||
Items not affecting cash: | ||||||||||||||||
Depreciation and amortization | 24,182 | 12,277 | 51,033 | 36,963 | ||||||||||||
Non-cash settlement of long-term incentive arrangement (note 14) | - | - | 289,721 | - | ||||||||||||
Deferred income tax | (22 | ) | 40 | 1,443 | 386 | |||||||||||
Other | 2,058 | 1,509 | 1,000 | 5,540 | ||||||||||||
Changes in non-cash working capital: | ||||||||||||||||
Accounts receivable | 3,010 | (10,932 | ) | (16,218 | ) | (23,113 | ) | |||||||||
Inventories | 2,090 | 633 | 3,298 | (5,735 | ) | |||||||||||
Prepaid expenses and other current assets | (8 | ) | 1,949 | 798 | (1,249 | ) | ||||||||||
Payables and accruals | (37,878 | ) | 4,417 | (42,800 | ) | (8,087 | ) | |||||||||
Unearned revenues | (6,262 | ) | (11,912 | ) | 8,438 | 532 | ||||||||||
Other liabilities | 6,729 | 4,451 | 10,069 | 6,598 | ||||||||||||
Contingent acquisition consideration | - | (281 | ) | (962 | ) | (939 | ) | |||||||||
Net cash provided by operating activities | 20,235 | 33,815 | 64,621 | 81,389 | ||||||||||||
Investing activities | ||||||||||||||||
Acquisitions of businesses, net of cash acquired (note 5) | (9,585 | ) | (9,349 | ) | (555,116 | ) | (52,528 | ) | ||||||||
Disposal of business, net of cash disposed (note 7) | - | - | 13,030 | - | ||||||||||||
Purchases of fixed assets | (11,821 | ) | (10,113 | ) | (34,108 | ) | (29,733 | ) | ||||||||
Other investing activities | (724 | ) | (2,996 | ) | 135 | (4,980 | ) | |||||||||
Net cash used in investing activities | (22,130 | ) | (22,458 | ) | (576,059 | ) | (87,241 | ) | ||||||||
Financing activities | ||||||||||||||||
Increase in long-term debt | 30,117 | 17,995 | 620,867 | 82,699 | ||||||||||||
Repayment of long-term debt | (6,531 | ) | (2,000 | ) | (8,402 | ) | (24,618 | ) | ||||||||
Sale (purchases) of non-controlling interests, net | (199 | ) | 200 | (33,409 | ) | (1,932 | ) | |||||||||
Contingent acquisition consideration | - | (2,705 | ) | (8,035 | ) | (4,947 | ) | |||||||||
Proceeds received on exercise of options | 539 | 577 | 8,985 | 2,623 | ||||||||||||
Financing fees paid | (167 | ) | - | (3,863 | ) | (575 | ) | |||||||||
Dividends paid to common shareholders | (5,883 | ) | (4,675 | ) | (16,158 | ) | (13,924 | ) | ||||||||
Distributions paid to non-controlling interests | (1,995 | ) | (1,466 | ) | (6,264 | ) | (5,808 | ) | ||||||||
Repurchases of Common Shares | - | - | - | (5,941 | ) | |||||||||||
Net cash provided by financing activities | 15,881 | 7,926 | 553,721 | 27,577 | ||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 586 | 89 | 275 | (254 | ) | |||||||||||
Increase in cash, cash equivalents and restricted cash | 14,572 | 19,372 | 42,558 | 21,471 | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 107,830 | 68,993 | 79,844 | 66,894 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 122,402 | 88,365 | $ | 122,402 | $ | 88,365 |
The accompanying notes are an integral part of these financial statements.
Page 8 of 16 |
FIRSTSERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
(in thousands of US dollars, except per share amounts)
1. DESCRIPTION OF THE BUSINESS FirstService Corporation (the Company) is a North American provider of residential property management and other essential property services to residential and commercial customers. The Companys operations are conducted in two segments: FirstService Residential and FirstService Brands. The segments are grouped with reference to the nature of services provided and the types of clients that use those services.
FirstService Residential is a full-service property manager and in many markets provides a full range of ancillary services primarily in the following areas: on-site staffing, including building engineering and maintenance, full-service amenity management, security, concierge and front desk personnel; proprietary banking and insurance products; and energy conservation and management solutions.
FirstService Brands provides a range of essential property services to residential and commercial customers in North America through franchise networks and company-owned locations. The principal brands in this division include Paul Davis Restoration, Global Restoration, California Closets, Century Fire Protection, Certa Pro Painters, Pillar to Post Home Inspectors, Floor Coverings International, and College Pro Painters.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These condensed consolidated financial statements have been prepared by the Company in accordance with the disclosure requirements for the presentation of interim financial information pursuant to applicable Canadian securities law. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America have been condensed or omitted in accordance with such disclosure requirements, although the Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2018.
These interim financial statements follow the same accounting policies as the most recent audited consolidated financial statements, with the exception of the change described below. In the opinion of management, the condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as at September 30, 2019 and the results of operations and its cash flows for the three and nine month periods ended September 30, 2019 and 2018. All such adjustments are of a normal recurring nature. The results of operations for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
Leases
The Company adopted ASU 842, Leases, as of January 1, 2019, using the modified retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification.
The Company has lease agreements with lease and non-lease components, and has elected to account for each lease component (e.g., fixed rent payments) separately from the non-lease components (e.g., common-area maintenance costs). The Company has also elected not to recognize the right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less. Leases are recognized on the balance sheet when the lease term commences, and the associated lease payments are recognized as an expense on a straight-line basis over the lease term.
The standard had a material impact on the Companys consolidated balance sheet, the primary impact being the recognition of right-of-use (ROU) assets and lease liabilities for operating leases, while its accounting for finance leases remained substantially unchanged.
Page 9 of 16 |
3. REVENUE RECOGNITION STANDARD On January 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (new revenue standard) to all open contracts using the full retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to retained earnings on January 1, 2017.
Within the FirstService Brands segment, franchise fee revenue recognized during the nine months ended September 30, 2019 that was included in deferred revenue at the beginning of the period was $4,271 (2018 - $2,544). These fees are recognized over the life of the underlying franchise agreement, usually between 5 - 10 years.
External broker costs and employee sales commissions in obtaining new franchisees are capitalized in accordance with the new revenue standard and are amortized over the life of the underlying franchise agreement. Costs amortized during the nine months ended September 30, 2019 were $1,435 (2018 - $915). The closing amount of the capitalized costs to obtain contracts on the balance sheet as at September 30, 2019 was $6,392 (December 31, 2018 - $7,032). There were no impairment losses recognized related to those assets in the quarter.
The Companys backlog represents remaining performance obligations and is defined as contracted work yet to be performed. As at September 30, 2019, the aggregate amount of backlog was $310,629. The Company expects to recognize revenue on the remaining backlog over the next 12 months.
Disaggregated revenues are as follows:
Three months | Nine months | |||||||||||||||
ended September 30 | ended September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
FirstService Residential | $ | 375,196 | $ | 331,712 | $ | 1,064,911 | $ | 942,839 | ||||||||
FirstService Brands company-owned | 254,308 | 136,027 | 552,871 | 382,985 | ||||||||||||
FirstService Brands franchisor | 41,531 | 37,667 | 110,754 | 99,098 | ||||||||||||
FirstService Brands franchise fee | 1,218 | 950 | 3,280 | 3,238 |
The Company disaggregates revenue by segment, and within the FirstService Brands segment, further disaggregates its company-owned operations revenue; these businesses primarily recognize revenue over time as they perform because of continuous transfer of control to the customer. As such, revenue is recognized based on the extent of progress towards completion of the performance obligation. The Company generally uses the cost-to-cost measure of progress method. The extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.
We believe this disaggregation best depicts how the nature, amount, timing and uncertainty of the Companys revenue and cash flows are affected by economic factors.
4. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED In June 2016, FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In November 2018, FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments Credit Losses, which amends the scope and transition requirements of ASU 2016-13. The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard will become effective for the Company beginning January 1, 2020 and will require a cumulative-effect adjustment to accumulated retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Page 10 of 16 |
5. ACQUISITIONS During the nine months ended September 30, 2019, the Company completed thirteen acquisitions, including three in the FirstService Residential segment and ten in the FirstService Brands segment. In the FirstService Residential segment, the Company acquired controlling interests in regional firms operating in Chicago and western Canada.
In the FirstService Brands segment, the Company acquired Global Restoration, a leading commercial and large loss firm headquartered in Colorado and with operations across the U.S. and Canada. Also within the FirstService Brands segment, the Company acquired three independent restoration companies, operating in Ohio, California and Quebec, as well as a Paul Davis Restoration franchise located in the mid-western U.S. The Company also acquired three California Closets franchises operating in Maryland, New Jersey, and Arizona and two fire protection operations based in Houston and Atlanta.
The acquisition date fair value of consideration transferred for these transactions were as follows: cash of $555,116 (net of cash acquired of $10,082), and contingent consideration of $6,775 (2018 - cash of $52,528, and contingent consideration of $4,200). The purchase price allocations are not yet complete, pending final determination of the fair value of assets and liabilities acquired. These acquisitions were accounted for by the purchase method of accounting for business combinations and accordingly, the consolidated statements of earnings do not include any revenues or expenses related to these acquisitions prior to their respective closing dates.
Below is a preliminary estimate of the fair values of assets acquired and liabilities assumed for the Companys significant Global Restoration acquisition, which closed in June 2019.
Global | ||||||
Restoration | ||||||
Current assets | $ | 153,595 | ||||
Long-term assets | 40,140 | |||||
Current liabilities | (65,610 | ) | ||||
Long-term liabilities | (17,398 | ) | ||||
Deferred Tax Liabilities | (57,754 | ) | ||||
Redeemable non-controlling interest | (25,433 | ) | ||||
$ | 27,540 | |||||
Cash consideration, net of cash acquired of $6,518 | $ | (506,680 | ) | |||
Acquired intangible assets | $ | 222,130 | ||||
Goodwill | $ | 257,010 |
Certain vendors, at the time of acquisition, are entitled to receive a contingent consideration payment if the acquired businesses achieve specified earnings levels during the one- to two-year periods following the dates of acquisition. The ultimate amount of payment is determined based on a formula, the key inputs to which are (i) a contractually agreed maximum payment; (ii) a contractually specified revenue or earnings level; and (iii) the actual revenue or earnings for the contingency period. If the acquired business does not achieve the specified revenue or earnings level, the maximum payment is reduced for any shortfall, potentially to nil.
Contingent consideration is recorded at fair value each reporting period. The fair value recorded on the consolidated balance sheet as at September 30, 2019 was $11,478 (see note 10). The estimated range of outcomes (undiscounted) for these contingent consideration arrangements is $11,280 to a maximum of $13,269. The contingencies will expire during the period extending to September 2023. During the nine months ended September 30, 2019, $8,997 was paid with reference to such contingent consideration (2018 - $5,886).
Page 11 of 16 |
6. LEASES The Company has operating leases for corporate offices, copiers, and certain equipment. Its leases have remaining lease terms of 1 year to 10 years, some of which may include options to extend the leases for up to 8 years, and some of which may include options to terminate the leases within 1 year. The Company evaluates renewal terms on a lease by lease basis to determine if the renewal is reasonably certain. The amount of operating lease expense recorded in the statement of earnings for the nine months ended September 30, 2019 was $23,190 (2018 - $19,757).
Other information related to leases was as follows (in thousands, except lease term and discount rate):
Supplemental Cash Flows Information, nine months ended September 30 | 2019 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 23,388 | |||
Right-of-use assets obtained in exchange for operating lease obligation | $ | 33,893 | |||
Weighted Average Remaining Operating Lease Term | 5 years | ||||
Weighted Average Discount Rate | 4.2 | % |
Future minimum operating lease payments under non-cancellable leases as of September 30, 2019 were as follows:
2019 (excluding the nine months ended September 30, 2019) | $ | 8,785 | ||||
2020 | 32,743 | |||||
2021 | 28,430 | |||||
2022 | 20,619 | |||||
2023 | 14,625 | |||||
Thereafter | 31,295 | |||||
Total future minimum lease payments | 136,497 | |||||
Less imputed interest | (14,049 | ) | ||||
Total | 122,448 |
Future minimum operating lease payments under non-cancellable leases as of December 31, 2018 were as follows:
2019 | $ | 24,505 | ||||
2020 | 23,124 | |||||
2021 | 19,643 | |||||
2022 | 15,384 | |||||
2023 | 11,946 | |||||
Thereafter | 21,446 | |||||
Total future minimum lease payments | 116,048 |
7. OTHER INCOME - Other income is comprised of the following:
Three months ended | Nine months ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Gain on disposal of business | $ | - | $ | - | $ | (6,082 | ) | $ | - | |||||||
Other (income) expense | (229 | ) | 25 | (271 | ) | (78 | ) | |||||||||
$ | (229 | ) | $ | 25 | $ | (6,353 | ) | $ | (78 | ) |
Page 12 of 16 |
During the second quarter, the Company completed the divestiture of two non-core businesses. The Company sold its national accounts commercial painting operations for cash consideration of $3,386 and notes receivable of $2,800. The pre-tax gain on disposal was $1,406. The Company also completed the sale of its Florida and Arizona-based landscaping operations for cash consideration of $9,644 (net of cash disposed of $600). The pre-tax gain on disposal was $4,676.
8. INCOME TAX The provision for income tax for the nine months ended September 30, 2019 reflected a negative effective tax rate of 9% (2018 - 21%) relative to the statutory rate of approximately 27% (2018 - 27%). The difference between the effective rate and the statutory rate relates primarily to the impact of the settlement of long-term incentive arrangement, which is not deductible for tax purposes.
9. LONG-TERM DEBT The Company has $150,000 of senior secured notes (the Senior Notes) bearing interest at a rate of 4.84%. The Senior Notes are due on January 16, 2025, with five annual equal repayments beginning on January 16, 2021.
The Company has entered into an amended and restated credit agreement (the Credit Agreement) with a syndicate of lenders. The Credit Agreement is comprised of a committed multi-currency revolving credit facility of $450,000 (the Facility) and a term loan (drawn in a single advance) in the aggregate amount of $440,000 (the Term Loan). The Facility portion of the Credit Agreement has a term ending on January 17, 2023 and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios. The Term Loan portion of the Credit Agreement has a term ending on June 21, 2024, with repayments of 5% per annum, paid quarterly, beginning in September 2020, with the balance payable at maturity, and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios. The Credit Agreement requires a commitment fee of 0.25% to 0.50% of the unused portion, depending on certain leverage ratios. The Company may repay amounts owing under the Credit Agreement at any time without penalty. The Facility is available to fund working capital requirements (including acquisitions and any associated contingent purchase consideration) and other general corporate purposes. The Term Loan was implemented in order to substantially finance the purchase price for Global Restoration (aka Bellwether FOS Holdco, Inc.).
The indebtedness under the Credit Agreement and the Senior Notes rank equally in terms of seniority. The Company has granted the lenders under the Credit Agreement and the holders of the Senior Notes various security, including an interest in all of our assets. The Company is prohibited under the Credit Agreement and the Senior Notes from undertaking certain acquisitions and dispositions, and incurring certain indebtedness and encumbrances, without prior approval of the lenders under the Credit Agreement and the holders of the Senior Notes.
10. FAIR VALUE MEASUREMENTS The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2019:
Fair value measurements at September 30, 2019 | ||||||||||||||||
Carrying value at | ||||||||||||||||
September 30, 2019 | Level 1 | Level 2 | Level 3 | |||||||||||||
Contingent consideration liability | $ | 11,478 | $ | - | $ | - | $ | 11,478 |
The inputs to the measurement of the fair value of contingent consideration related to acquisitions are Level 3 inputs. The fair value measurements were made using a discounted cash flow model; significant model inputs were expected future operating cash flows (determined with reference to each specific acquired business) and discount rates (which range from 8% to 10%). The range of discount rates is attributable to level of risk related to economic growth factors combined with the length of the contingent payment periods; and the dispersion was driven by unique characteristics of the businesses acquired and the respective terms for these contingent payments. Within the range of discount rates, there is a data point concentration at 9%. A 2% increase in the weighted average discount rate would not have a significant impact on the fair value of the contingent consideration balance.
Page 13 of 16 |
Changes in the fair value of the contingent consideration liability are comprised of the following:
2019 | |||||
Balance, January 1 | $ | 13,286 | |||
Amounts recognized on acquisitions | 6,775 | ||||
Fair value adjustments | 221 | ||||
Resolved and settled in cash | (8,997 | ) | |||
Other | 193 | ||||
Balance, September 30 | $ | 11,478 | |||
Less: Current portion | 6,637 | ||||
Non-current portion | $ | 4,841 |
The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair values due to the short maturity of these instruments, unless otherwise indicated. The inputs to the measurement of the fair value of long term debt are Level 3 inputs. The fair value measurements were made using a net present value approach; significant model inputs were expected future cash outflows and discount rates (which range from 1.5% to 2.0%).
September 30, 2019 | December 31, 2018 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
amount | value | amount | value | |||||||||||||
Other receivables | $ | 4,026 | $ | 4,026 | $ | 4,212 | $ | 4,212 | ||||||||
Long-term debt | 949,740 | 960,998 | 334,523 | 344,198 |
11. REDEEMABLE NON-CONTROLLING INTERESTS The minority equity positions in the Companys subsidiaries are referred to as redeemable non-controlling interests (RNCI). The RNCI are considered to be redeemable securities. Accordingly, the RNCI is recorded at the greater of: (i) the redemption amount; or (ii) the amount initially recorded as RNCI at the date of inception of the minority equity position. This amount is recorded in the mezzanine section of the balance sheet, outside of shareholders equity. Changes in the RNCI amount are recognized immediately as they occur. The following table provides a reconciliation of the beginning and ending RNCI amounts:
2019 | |||||
Balance, January 1 | $ | 151,585 | |||
RNCI share of earnings | 6,262 | ||||
RNCI redemption increment | 9,386 | ||||
Distributions paid to RNCI | (6,264 | ) | |||
Purchases of interests from RNCI, net | (33,409 | ) | |||
RNCI recognized on business acquisitions | 29,651 | ||||
Other | 110 | ||||
Balance, September 30 | $ | 157,321 |
Page 14 of 16 |
The Company has shareholders agreements in place at each of its non-wholly owned subsidiaries. These agreements allow the Company to call the non-controlling interest at a price determined with the use of a formula price, which is usually equal to a fixed multiple of trailing two-year average earnings before income taxes, interest, depreciation, and amortization, less debt. The agreements also have redemption features which allow the owners of the RNCI to put their equity to the Company at the same price subject to certain limitations. The formula price is referred to as the redemption amount and may be paid in cash or in the Companys Common Shares. The redemption amount as of September 30, 2019 was $153,761. The redemption amount is lower than that recorded on the balance sheet as the formula prices of certain RNCI are lower than the amount initially recorded at the inception of the minority equity position. If all put or call options were settled with Common Shares as at September 30, 2019, approximately 1,500,000 such shares would be issued; this would be accretive to net earnings per common share.
Increases or decreases to the formula price of the underlying shares are recognized in the statement of earnings as the NCI redemption increment.
12. NET EARNINGS PER COMMON SHARE Earnings per share calculations cannot be anti-dilutive, therefore diluted shares are not used in the denominator when the numerator is in a loss position. The following table reconciles the basic and diluted common shares outstanding:
Three months ended | Nine months ended | |||||||||||||||
(in thousands) | September 30 | September 30 | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Basic shares | 39,224 | 35,961 | 37,087 | 35,940 | ||||||||||||
Assumed exercise of Company stock options | 467 | 700 | 455 | 626 | ||||||||||||
Diluted shares | 39,691 | 36,661 | 37,542 | 36,566 |
13. STOCK-BASED COMPENSATION
Company stock option plan
The Company has a stock option plan for certain directors, officers and full-time employees of the Company and its subsidiaries, other than its Founder and Chairman. The stock option plan came into existence on June 1, 2015. Options are granted at the market price for the underlying shares on the date of grant. Each option vests over a four-year term, expires five years from the date granted and allows for the purchase of one Common Share. All Common Shares issued are new shares. Grants under the Companys stock option plan are equity-classified awards. As at September 30, 2019, there were 689,500 options available for future grants.
Grants under the Companys stock option plan are equity-classified awards. There were no stock options granted during the three months ended September 30, 2019 (2018 - nil). Stock option activity for the nine months ended September 30, 2019 was as follows:
Weighted average | ||||||||||||||||
Weighted | remaining | |||||||||||||||
Number of | average | contractual life | Aggregate | |||||||||||||
options | exercise price | (years) | intrinsic value | |||||||||||||
Shares issuable under options - | ||||||||||||||||
Beginning of period | 1,633,150 | $ | 44.68 | |||||||||||||
Granted | 438,000 | 83.89 | ||||||||||||||
Exercised | (345,550 | ) | 25.64 | |||||||||||||
Shares issuable under options - | ||||||||||||||||
End of period | 1,725,600 | $ | 58.44 | 2.73 | $ | 76,145 | ||||||||||
Options exercisable - End of period | 685,702 | $ | 44.66 | 1.82 | $ | 39,708 |
Page 15 of 16 |
The amount of compensation expense recorded in the statement of earnings for the nine months ended September 30, 2019 was $6,382 (2018 - $4,547). As of September 30, 2019, there was $10,825 of unrecognized compensation cost related to non-vested awards which is expected to be recognized over the next 5 years. During the nine month period ended September 30, 2019, the fair value of options vested was $4,591 (2018 - $11,279).
14. CONTINGENCIES In the normal course of operations, the Company is subject to routine claims and litigation incidental to its business. Litigation currently pending or threatened against the Company includes disputes with former employees and commercial liability claims related to services provided by the Company. The Company believes resolution of such proceedings, combined with amounts set aside, will not have a material impact on the Companys financial condition or the results of operations.
In May 2019, the Company settled the restated management services agreement (MSA), including the long-term incentive arrangement (the LTIA), between the Company and Jay S. Hennick, the Companys Founder and Chairman. As part of the settlement, the Multiple Voting Shares of the Company were converted into Subordinate Voting Shares on a one-for-one basis for no consideration, thereby eliminating the Companys dual class share structure. For consideration of $314,379, which is the purchase price determined with reference to the LTIA formula provided in the restated MSA, FirstService acquired all of the shares in the company which indirectly held the MSA. The Company, under the terms of the transaction: (a) paid $62,900 (approximately C$84,300) in cash; and issued a total of 2,918,860 Subordinate Voting Shares. Subsequent to the completion of the transaction, the MSA was terminated, thereby eliminating the LTIA and all future fees and other entitlements owing thereafter, and the Company filed an amendment to its articles that re-classified its Subordinate Voting Shares as common shares.
15. SEGMENTED INFORMATION The Company has two reportable operating segments. The segments are grouped with reference to the nature of services provided and the types of clients that use those services. The Company assesses each segments performance based on operating earnings or operating earnings before depreciation and amortization. FirstService Residential provides property management and related property services to residential communities in North America. FirstService Brands provides franchised and company-owned essential property services to residential and commercial customers in North America. Corporate includes the costs of operating the Companys corporate head office.
OPERATING SEGMENTS
FirstService | FirstService | |||||||||||||||
Residential | Brands | Corporate | Consolidated | |||||||||||||
Three months ended September 30 | ||||||||||||||||
2019 | ||||||||||||||||
Revenues | $ | 375,196 | $ | 297,057 | $ | - | $ | 672,253 | ||||||||
Depreciation and amortization | 6,859 | 17,311 | 11 | 24,181 | ||||||||||||
Operating earnings | 33,036 | 22,062 | (5,400 | ) | 49,698 | |||||||||||
2018 | ||||||||||||||||
Revenues | $ | 331,712 | $ | 174,644 | $ | - | $ | 506,356 | ||||||||
Depreciation and amortization | 5,631 | 6,634 | 12 | 12,277 | ||||||||||||
Operating earnings | 29,945 | 19,749 | (4,396 | ) | 45,298 | |||||||||||
FirstService | FirstService | |||||||||||||||
Residential | Brands | Corporate | Consolidated | |||||||||||||
Nine months ended September 30 | ||||||||||||||||
2019 | ||||||||||||||||
Revenues | $ | 1,064,911 | $ | 666,905 | $ | - | $ | 1,731,816 | ||||||||
Depreciation and amortization | 19,521 | 31,479 | 33 | 51,033 | ||||||||||||
Operating earnings | 81,397 | 46,659 | (333,898 | ) | (205,842 | ) | ||||||||||
2018 | ||||||||||||||||
Revenues | $ | 942,839 | $ | 485,321 | $ | - | $ | 1,428,160 | ||||||||
Depreciation and amortization | 17,212 | 19,720 | 31 | 36,963 | ||||||||||||
Operating earnings | 68,809 | 43,969 | (14,057 | ) | 98,721 |
Page 16 of 16 |
GEOGRAPHIC INFORMATION
United States | Canada | Consolidated | ||||||||||
Three months ended September 30 | ||||||||||||
2019 | ||||||||||||
Revenues | $ | 598,311 | $ | 73,942 | $ | 672,253 | ||||||
Total long-lived assets | 988,030 | 251,228 | 1,239,258 | |||||||||
2018 | ||||||||||||
Revenues | $ | 478,961 | $ | 27,395 | $ | 506,356 | ||||||
Total long-lived assets | 537,211 | 42,326 | 579,537 | |||||||||
United States | Canada | Consolidated | ||||||||||
Nine months ended September 30 | ||||||||||||
2019 | ||||||||||||
Revenues | $ | 1,587,789 | $ | 144,027 | $ | 1,731,816 | ||||||
2018 | ||||||||||||
Revenues | $ | 1,349,005 | $ | 79,155 | $ | 1,428,160 |
Exhibit 4.6
FIRSTSERVICE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS
FOR THE nine MONTH PERIOD ENDED September 30, 2019
(in US dollars)
November 8, 2019
The following Managements Discussion and Analysis (MD&A) should be read together with the unaudited interim consolidated financial statements of FirstService Corporation (the Company or FirstService) for the three and nine month periods ended September 30, 2019 and the Companys audited consolidated financial statements, and MD&A, for the year ended December 31, 2018. The interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). All financial information herein is presented in United States dollars.
The Company has prepared this MD&A with reference to National Instrument 51-102 Continuous Disclosure Obligations of the Canadian Securities Administrators (the "CSA"). Under the U.S./Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the disclosure requirements of Canada, which requirements are different from those of the United States. This MD&A provides information for the three and nine month periods ended September 30, 2019 and up to and including November 8, 2019.
Additional information about the Company, including the Companys Annual Information Form, which is included in FirstServices Annual Report on Form 40-F, can be found on SEDAR at www.sedar.com and on the US Securities and Exchange Commission website at www.sec.gov.
Consolidated review
We reported strong operating results for the third quarter ended September 30, 2019. Consolidated revenue growth was 33% relative to the same quarter in the prior year. The top-line performance included approximately 8% organic growth, with the balance from recent acquisitions, and resulted in growth in adjusted EBITDA, operating earnings and adjusted earnings per share. GAAP earnings per share were down versus the prior year period primarily as a result of accelerated backlog amortization in connection with our recent Global Restoration Holdings acquisition.
During the first three quarters of 2019, we acquired controlling interests in thirteen businesses, three in the FirstService Residential segment, and ten in the FirstService Brands segment, including the recent completion of our significant acquisition of Global Restoration Holdings. The total initial cash consideration for these acquisitions was $555.1 million. During the past year, we also completed several other acquisitions in our two divisions, which provided additional revenue growth for the third quarter of 2019. These tuck-under acquisitions increase the geographic footprint and our service offering at FirstService Residential. The acquisitions also support the execution of our company-owned strategy at FirstService Brands to acquire California Closets and Paul Davis Restoration franchises in selected key markets and expand our operations and broaden our service capabilities at Century Fire Protection. Our acquisition of Global Restoration Holdings provides us with a market leader in large loss and commercial property restoration and a platform for future growth both organically and through tuck-under acquisitions to expand its geographic footprint and increase its national client account coverage.
Results of operations - three months ended September 30, 2019
Revenues for our third quarter were $672.3 million, 33% higher than the comparable prior year quarter. On an organic basis, revenues were up 8% with the balance coming from recent acquisitions.
Adjusted EBITDA (see Reconciliation of non-GAAP measures below) for the third quarter was $77.1 million versus $59.4 million reported in the prior year quarter. Our Adjusted EBITDA margin was 11.5% of revenues versus 11.7% of revenues in the prior year quarter. Operating earnings for the third quarter were $49.7 million, up from $45.3 million of operating earnings in the prior year quarter.
Page 2 of 10 |
Depreciation and amortization expense totalled $24.2 million for the quarter relative to $12.3 million for the prior year quarter, with the increase primarily related to our significant Global Restoration acquisition in the FirstService Brands segment.
Net interest expense was $12.7 million, versus $3.1 million recorded in the prior year quarter, with the difference primarily attributable to an increase in our average outstanding debt to finance the large Global Restoration acquisition.
The consolidated income tax rate for the quarter was 29%, compared to 25% of earnings before income tax in the prior year quarter, and relative to the statutory rate of 27% in both periods. The current periods tax rate was impacted by certain permanent non-deductible items in the quarter.
Net earnings for the quarter was $26.3 million, versus $31.7 million in the prior year quarter. The increase was attributable to the growth in operating earnings in both the FirstService Residential and FirstService Brands segments, offset by higher amortization and interest expense, as noted above.
The non-controlling interest (NCI) share of earnings was $2.1 million for the third quarter, relative to $3.7 million in the prior period, with the decrease primarily due to the significant purchases of NCI in the current year. The NCI redemption increment for the third quarter was $4.4 million, versus $2.2 million in the prior period, and was attributable to changes in the trailing two-year average of earnings of non-wholly owned subsidiaries.
The FirstService Residential segment reported revenues of $375.2 million for the third quarter, up 13% versus the prior year quarter. The revenue increase included strong 8% organic growth, driven by new contract wins resulting from an active sales effort in recent periods. Adjusted EBITDA was $39.8 million, versus $35.9 million in the prior year quarter. Operating earnings for the third quarter were $33.0 million, versus $29.9 million for the third quarter of last year.
Third quarter revenues at our FirstService Brands segment were $297.1 million, up 70% relative to the prior year period. Organic growth within the division was 8%, with the balance of the significant revenue increase driven by acquisition activity, including contribution from the large Global Restoration transaction which closed late in the second quarter of this year. Organic growth was strong within our home improvement-driven brands, including California Closets, CertaPro Painters, and Floor Coverings International, as well as our Century Fire Protection operations. Adjusted EBITDA for the quarter was $40.8 million, or 13.7% of revenues, versus $26.6 million, or 15.2% of revenues, in the prior year period. Margin decline was principally driven by the addition of Global Restoration, which has lower margins than the overall division, as well as the impact of lower weather-related activity levels within our overall restoration platform, which includes both Global Restoration and Paul Davis Restoration. Operating earnings for the third quarter were $22.1 million, or 7.4% of revenues, versus $19.7 million, or 11.3% of revenues, in the prior year quarter.
Corporate costs, as presented in Adjusted EBITDA, were $3.5 million for the quarter, relative to $3.2 million in the prior year period. On a GAAP basis, corporate costs for the quarter were $5.4 million, versus $4.4 million in the prior year period, with the increase primarily attributable to stock-based compensation.
Results of operations - nine months ended September 30, 2019
Revenues for the nine months ended September 30, 2019 were $1.73 billion, 21% higher than the comparable prior year. Revenues on an organic basis were up 7% with the balance of growth coming from acquisitions.
Year-to-date Adjusted EBITDA (see Reconciliation of non-GAAP measures below) was $171.3 million versus $142.0 million reported in the comparable prior year period. The operating loss for the period was $205.8 million, down from $98.7 million of operating earnings in the prior year period, with the decrease attributable to the settlement of the long-term incentive arrangement (LTIA) with our Founder and Chairman in the amount of $314.4 million.
Page 3 of 10 |
We recorded depreciation and amortization expense of $51.0 million for the nine month period relative to $37.0 million for the prior year period, with the increase primarily related to recently acquired company-owned operations in our FirstService Brands segment, including our significant Global Restoration acquisition.
Net interest expense for the nine month period was $21.1 million, up from $9.2 million recorded in the prior year period. The increase was driven primarily by the increase in our average outstanding debt versus the prior year to finance the Global Restoration acquisition.
Other income of $6.4 million was primarily due to the gain on sale from two small, non-core divestitures: (i) our Arizona and Florida-based landscaping operations; and (ii) our national accounts commercial painting operations, both occurring in the second quarter of the current year.
Our consolidated income tax rate for the nine month period was negative 9%, compared to 21% of earnings before income tax in the prior year-to-date period, and relative to the statutory rate of 27% in both periods. The current periods tax rate was affected by the settlement of the LTIA, which is not deductible for tax purposes.
Net loss for the nine month period was $241.2 million, versus net earnings of $70.5 million in the prior year period. The decrease was attributable to the settlement of the LTIA.
The non-controlling interest (NCI) share of earnings was $6.3 million for the nine month period, relative to $8.9 million in the prior year period, with the decrease primarily attributable to the significant purchases of NCI in the current year. The NCI redemption increment for the third quarter was $9.4 million, versus $7.1 million in the prior period, and was attributable to changes in the trailing two-year average of earnings of non-wholly owned subsidiaries.
Our FirstService Residential segment reported revenues of $1.06 billion for the nine month period, up 13% over the prior year period. Organic revenue growth was 7%, primarily driven by new contract wins and was broad-based across most markets. Adjusted EBITDA was $100.8 million relative to $86.8 million in the prior year period. Operating earnings were $81.4 million for the nine month period, relative to $68.8 million in the prior year period.
Year-to-date revenues at FirstService Brands were $666.9 million, an increase of 37% relative to the prior year period. Organic growth was 7%, while acquisitions contributed the remaining balance. Organic revenue growth resulted primarily from strong performance at our California Closets and Century Fire Protection company-owned operations, as well as from higher system-wide sales at several of our home improvement-driven franchised brands. Adjusted EBITDA for the period was $80.3 million, or 12.0% of revenues, versus $64.5 million, or 13.3% of revenues, for the prior year period. Operating earnings were $46.7 million, or 7.0% of revenues, versus $44.0 million, or 9.1% of revenues, in the prior year period. The margins were negatively impacted by our recently acquired Global Restoration operation, which has lower margins than the overall division. The decline in margins was also due to weaker performance at our Paul Davis Restoration company-owned operations, which experienced lower weather-related activity levels and job volumes. Our operating earnings margin was also impacted by increased intangible amortization from the Global Restoration acquisition.
Corporate costs, as presented in Adjusted EBITDA, for the nine month period were $9.8 million, relative to $9.3 million in the prior year period. On a GAAP basis, corporate costs were $333.9 million versus $14.1 million in the prior year period, with the increase primarily attributable to the settlement of the LTIA.
Page 4 of 10 |
Summary of quarterly results (unaudited)
The following table sets forth FirstServices unaudited quarterly consolidated results of operations data for each of the eleven most recent quarters. The information in the table below has been derived from FirstServices unaudited interim consolidated financial statements that, in managements opinion, have been prepared on a consistent basis and include all adjustments necessary for a fair presentation of information. The information below is not necessarily indicative of results for any future quarter.
Quarter | Q1 | Q2 | Q3 | Q4 | ||||||||||||
(in thousands of US$, except per share amounts) | ||||||||||||||||
YEAR ENDING DECEMBER 31, 2019 | ||||||||||||||||
Revenues | $ | 485,655 | $ | 573,908 | $ | 672,253 | ||||||||||
Operating earnings | 12,930 | (268,470 | ) | 49,698 | ||||||||||||
Net earnings per share | ||||||||||||||||
Basic | 0.06 | (7.48 | ) | 0.51 | ||||||||||||
Diluted | 0.06 | (7.48 | ) | 0.50 | ||||||||||||
YEAR ENDED DECEMBER 31, 2018 | ||||||||||||||||
Revenues | $ | 426,456 | $ | 495,348 | $ | 506,356 | $ | 503,313 | ||||||||
Operating earnings | 11,073 | 42,350 | 45,298 | 28,847 | ||||||||||||
Net earnings per share | ||||||||||||||||
Basic | 0.17 | 0.63 | 0.72 | 0.32 | ||||||||||||
Diluted | 0.17 | 0.62 | 0.70 | 0.31 | ||||||||||||
YEAR ENDED DECEMBER 31, 2017 | ||||||||||||||||
Revenues | $ | 380,349 | $ | 441,666 | $ | 463,379 | $ | 443,637 | ||||||||
Operating earnings | 8,971 | 35,266 | 34,019 | 26,706 | ||||||||||||
Net earnings per share | ||||||||||||||||
Basic | 0.12 | 0.50 | 0.42 | 0.39 | ||||||||||||
Diluted | 0.12 | 0.49 | 0.41 | 0.38 | ||||||||||||
OTHER DATA | ||||||||||||||||
Adjusted EBITDA - 2019 | $ | 29,150 | $ | 65,031 | $ | 77,144 | ||||||||||
Adjusted EBITDA - 2018 | 25,414 | 57,118 | 59,426 | $ | 48,653 | |||||||||||
Adjusted EBITDA - 2017 | 20,127 | 47,076 | 52,624 | 39,485 | ||||||||||||
Adjusted EPS - 2019 | 0.30 | 1.12 | 0.92 | |||||||||||||
Adjusted EPS - 2018 | 0.25 | 0.86 | 0.89 | 0.62 | ||||||||||||
Adjusted EPS - 2017 | 0.16 | 0.60 | 0.73 | 0.49 |
Seasonality and quarterly fluctuations
Certain segments of the operations of FirstService are subject to seasonal variations. The seasonality of the service lines results in variations in quarterly revenues and operating margins. Variations can also be caused by acquisitions or dispositions, which alter the combined service mix.
The FirstService Residential segment generates peak revenues and earnings in the third quarter, as seasonal ancillary swimming pool management revenues are earned.
The FirstService Brands segment includes outdoor painting and other franchised operations, which generate the majority of their revenues during the second and third quarters.
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Reconciliation of non-GAAP measures
In this MD&A, we make reference to adjusted EBITDA and adjusted earnings per share, which are financial measures that are not calculated in accordance with GAAP.
Adjusted EBITDA is defined as net earnings, adjusted to exclude: (i) income tax; (ii) other expense (income); (iii) interest expense; (iv) depreciation and amortization; (v) acquisition-related items; (vi) stock-based compensation expense; and (vii) settlement of the LTIA. We use adjusted EBITDA to evaluate our own operating performance and our ability to service debt, as well as an integral part of our planning and reporting systems. Additionally, we use this measure in conjunction with discounted cash flow models to determine the Companys overall enterprise valuation and to evaluate acquisition targets. We present adjusted EBITDA as a supplemental measure because we believe such measure is useful to investors as a reasonable indicator of operating performance because of the low capital intensity of the Companys service operations. We believe this measure is a financial metric used by many investors to compare companies, especially in the services industry. This measure is not a recognized measure of financial performance under GAAP in the United States, and should not be considered as a substitute for operating earnings, net earnings or cash flow from operating activities, as determined in accordance with GAAP. Our method of calculating adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. A reconciliation of net earnings to adjusted EBITDA appears below.
Three months ended | Nine months ended | |||||||||||||||
(in thousands of US$) | September 30 | September 30 | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net earnings (loss) | $ | 26,336 | $ | 31,664 | $ | (241,199 | ) | $ | 70,493 | |||||||
Income tax | 10,872 | 10,508 | 20,650 | 19,121 | ||||||||||||
Other income, net | (229 | ) | 25 | (6,353 | ) | (78 | ) | |||||||||
Interest expense, net | 12,719 | 3,101 | 21,060 | 9,185 | ||||||||||||
Operating earnings (loss) | 49,698 | 45,298 | (205,842 | ) | 98,721 | |||||||||||
Depreciation and amortization | 24,181 | 12,277 | 51,033 | 36,963 | ||||||||||||
Settlement of long-term incentive arrangement | - | - | 314,379 | - | ||||||||||||
Acquisition-related items | 1,493 | 618 | 5,373 | 1,727 | ||||||||||||
Stock-based compensation expense | 1,772 | 1,233 | 6,382 | 4,547 | ||||||||||||
Adjusted EBITDA | $ | 77,144 | $ | 59,426 | $ | 171,325 | $ | 141,958 |
Adjusted earnings per share is defined as diluted net earnings per share, adjusted for the effect, after income tax, of: (i) the non-controlling interest redemption increment; (ii) acquisition-related items; (iii) amortization expense related to intangible assets recognized in connection with acquisitions; (iv) stock-based compensation expense; (v) a stock-based compensation tax adjustment related to a US GAAP change; and (vi) settlement of the LTIA. We believe this measure is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company and enhances the comparability of operating results from period to period. Adjusted earnings per share is not a recognized measure of financial performance under GAAP, and should not be considered as a substitute for diluted net earnings per share, as determined in accordance with GAAP. Our method of calculating this non-GAAP measure may differ from other issuers and, accordingly, this measure may not be comparable to measures used by other issuers. A reconciliation of net earnings to adjusted net earnings and of diluted net earnings per share to adjusted earnings per share appears below.
Page 6 of 10 |
Three months ended | Nine months ended | |||||||||||||||
(in thousands of US$) | September 30 | September 30 | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net earnings (loss) | $ | 26,336 | $ | 31,664 | $ | (241,199 | ) | $ | 70,493 | |||||||
Non-controlling interest share of earnings | (2,057 | ) | (3,653 | ) | (6,262 | ) | (8,888 | ) | ||||||||
Settlement of long-term incentive arrangement | - | - | 314,379 | - | ||||||||||||
Acquisition-related items | 1,493 | 618 | 5,373 | 1,727 | ||||||||||||
Amortization of intangible assets | 13,029 | 4,343 | 22,235 | 12,993 | ||||||||||||
Stock-based compensation expense | 1,772 | 1,233 | 6,382 | 4,547 | ||||||||||||
Stock-based compensation tax adjustment for US GAAP change | - | (87 | ) | (2,854 | ) | (3,124 | ) | |||||||||
Income tax on adjustments | (3,848 | ) | (1,450 | ) | (8,149 | ) | (4,560 | ) | ||||||||
Non-controlling interest on adjustments | (374 | ) | (132 | ) | (542 | ) | (388 | ) | ||||||||
Adjusted net earnings | $ | 36,351 | $ | 32,536 | $ | 89,363 | $ | 72,800 |
Three months ended | Nine months ended | |||||||||||||||
(in US$) | September 30 | September 30 | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Diluted net earnings (loss) per share | $ | 0.50 | $ | 0.70 | $ | (6.84 | ) | $ | 1.49 | |||||||
Non-controlling interest redemption increment | 0.11 | 0.06 | 0.25 | 0.19 | ||||||||||||
Settlement of long-term incentive arrangement | - | - | 8.37 | - | ||||||||||||
Acquisition-related items | 0.04 | 0.02 | 0.12 | 0.05 | ||||||||||||
Amortization of intangible assets, net of tax | 0.24 | 0.08 | 0.43 | 0.26 | ||||||||||||
Stock-based compensation expense, net of tax | 0.03 | 0.03 | 0.13 | 0.09 | ||||||||||||
Stock-based compensation tax adjustment for US GAAP change | - | - | (0.08 | ) | (0.09 | ) | ||||||||||
Adjusted earnings per share | $ | 0.92 | $ | 0.89 | $ | 2.38 | $ | 1.99 |
We believe that the presentation of adjusted EBITDA and adjusted earnings per share, which are non-GAAP financial measures, provides important supplemental information to management and investors regarding financial and business trends relating to the Companys financial condition and results of operations. We use these non-GAAP financial measures when evaluating operating performance because we believe that the inclusion or exclusion of the items described above, for which the amounts are non-cash or non-recurring in nature, provides a supplemental measure of our operating results that facilitates comparability of our operating performance from period to period, against our business model objectives, and against other companies in our industry. We have chosen to provide this information to investors so they can analyze our operating results in the same way that management does and use this information in their assessment of our core business and the valuation of the Company. Adjusted EBITDA and adjusted earnings per share are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Non-GAAP financial measures have limitations in that they do not reflect all of the costs or benefits associated with the operations of our business as determined in accordance with GAAP. As a result, investors should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP.
Liquidity and capital resources
Net cash provided by operating activities for the nine month period ended September 30, 2019 was $64.6 million, versus $81.4 million in the prior year period. The decrease in operating cash flow was primarily attributable to the cash payment in connection with the settlement of the LTIA. We believe that cash from operations and other existing resources will continue to be adequate to satisfy the ongoing working capital needs of the Company.
For the nine months ended September 30, 2019, capital expenditures were $34.1 million, versus $29.7 million for the prior year period. Significant capital purchases this year include service vehicles in the FirstService Brands segment, as well as information technology system and hardware investments in both segments. Based on our current operations, maintenance capital expenditures for the year ending December 31, 2019 are expected to be around $50 million.
Page 7 of 10 |
In October 2019, we paid a quarterly dividend of $0.15 per share on the Common Shares in respect of the quarter ended September 30, 2019.
Net indebtedness as at September 30, 2019 was $843.5 million, versus $268.2 million at December 31, 2018. Net indebtedness is calculated as the current and non-current portion of long-term debt less cash and cash equivalents. We are in compliance with the covenants contained in our financing agreements as at September 30, 2019 and, based on our outlook for the balance of the year, we expect to remain in compliance with these covenants. We had $93.6 million of available un-drawn credit as of September 30, 2019.
In June 2019, in connection with the acquisition of Global Restoration, we entered into a $890 million amended and restated credit facility, consisting of our existing $450 million revolving credit facility and a new $440 million term loan. The maturity date of the revolving credit facility remains January 2023, and the maturity date of the term loan is June 2024.
In relation to acquisitions completed during the past two years, we have outstanding contingent consideration totalling $11.5 million as at September 30, 2019 ($13.3 million as at December 31, 2018) assuming all contingencies are satisfied and payment is due in full. Such payments, if any, are due during the period extending to July 2022. The contingent consideration liability is recognized at fair value upon acquisition and is updated to fair value each quarter, unless it contains an element of compensation, in which case such element is treated as compensation expense over the contingency period. The contingent consideration is based on achieving specified earnings levels, and is paid or payable at the end of the contingency period. We estimate that, based on current operating results, approximately 85% of the contingent consideration outstanding as of September 30, 2019 will ultimately be paid.
The following table summarizes our contractual obligations as at September 30, 2019:
Contractual obligations | Payments due by period | |||||||||||||||||||
(in thousands of US$) | Less than | After | ||||||||||||||||||
Total | 1 year | 1-3 years | 4-5 years | 5 years | ||||||||||||||||
Long-term debt | $ | 940,103 | $ | 2,584 | $ | 105,190 | $ | 802,329 | $ | 30,000 | ||||||||||
Interest on long-term debt | 177,124 | 45,013 | 80,410 | 49,523 | 2,178 | |||||||||||||||
Capital lease obligations | 9,637 | 3,683 | 4,438 | 1,516 | - | |||||||||||||||
Contingent acquisition consideration | 11,478 | 6,637 | 4,841 | - | - | |||||||||||||||
Operating leases | 136,497 | 8,785 | 61,173 | 35,244 | 31,295 | |||||||||||||||
Total contractual obligations | $ | 1,274,839 | $ | 66,702 | $ | 256,052 | $ | 888,612 | $ | 63,473 |
At September 30, 2019, we had commercial commitments totaling $6.1 million comprised of letters of credit outstanding due to expire within one year. We are required to make semi-annual payments of interest on our senior secured notes at an interest rate of 4.8%.
Redeemable non-controlling interests
In most operations where managers or employees are also minority owners, the Company is party to shareholders agreements. These agreements allow us to call the minority position at a value determined with the use of a formula price, which is in most cases equal to a multiple of trailing two-year average earnings, less debt. Minority owners may also put their interest to the Company at the same price, with certain limitations including: (i) the inability to put more than one-third to one-half of their holdings in any twelve-month period; and (ii) the inability to put any holdings for at least one year after the date of our initial acquisition of the business or the date the minority shareholder acquired the stock, as the case may be. The total value of the minority shareholders interests (the redemption amount), as calculated in accordance with shareholders agreements, was as follows.
Page 8 of 10 |
September 30 | December 31 | |||||||
(in thousands of US$) | 2019 | 2018 | ||||||
FirstService Residential | $ | 59,897 | $ | 80,631 | ||||
FirstService Brands | 93,864 | 68,501 | ||||||
$ | 153,761 | $ | 149,132 |
The amount recorded on our balance sheet under the caption Redeemable non-controlling interests (RNCI) is the greater of: (i) the redemption amount (as above); and (ii) the amount initially recorded as RNCI at the date of inception of the minority equity position. As at September 30, 2019, the RNCI recorded on the balance sheet was $157.3 million. The purchase prices of the RNCI may be satisfied in cash or in Common Shares of FirstService. If all RNCI were redeemed with cash on hand and borrowings under our Facility, the pro forma estimated accretion to diluted net earnings per share for the nine months ended September 30, 2019 would be $0.31 and the accretion to adjusted EPS would be $0.06.
Off-balance sheet arrangements
We do not have any material off-balance sheet arrangements other than those disclosed in notes 11 and 17 to the December 31, 2018 audited consolidated financial statements.
Critical accounting policies and estimates
The preparation of consolidated financial statements requires management to make estimates and assumptions with respect to the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. These estimates and assumptions are based upon managements historical experience and are believed by management to be reasonable under the circumstances. Such estimates and assumptions are evaluated on an ongoing basis and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from these estimates. Our critical accounting policies and estimates have been reviewed and discussed with our Audit Committee. There have been no material changes to our critical accounting policies and estimates from those disclosed in the Companys MD&A for the year ended December 31, 2018, except as noted below.
On January 1, 2019, FirstService adopted ASU 842, Leases, using the modified retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.
We have lease agreements with lease and non-lease components, and have elected to account for each lease component (e.g., fixed rent payments) separately from the non-lease components (e.g., common-area maintenance costs). We have also elected not to recognize the right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less. Leases are recognized on the balance sheet when the lease term commences, and the associated lease payments are recognized as an expense on a straight-line basis over the lease term.
The standard had a material impact on our consolidated balance sheet, the primary impact being the recognition of right-of-use (ROU) assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. The standard did not impact our consolidated net earnings and had no impact on cash flows.
Impact of recently issued accounting standards
In June 2016, FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In November 2018, FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments Credit Losses, which amends the scope and transition requirements of ASU 2016-13. The standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard will become effective beginning January 1, 2020 and will require a cumulative-effect adjustment to accumulated retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). We are currently evaluating the impact of this guidance on our consolidated financial statements.
Page 9 of 10 |
Financial instruments
We use financial instruments as part of our strategy to manage the risk associated with interest rates and currency exchange rates from time to time. We do not use financial instruments for trading or speculative purposes. As of the date of this MD&A, we have no such financial instruments in place.
Transactions with related parties
The Company has entered into office space rental arrangements and property management contracts with senior managers of certain subsidiaries. These senior managers are usually also minority shareholders of the subsidiaries. The business purpose of the transactions is to rent office space for the Company and to generate property management revenues for the Company. The recorded amount of the rent expense for the nine months ended September 30, 2019 was $0.8 million (2018 - $0.7 million).
As at September 30, 2019, the Company had $2.6 million of loans receivable from minority shareholders (December 31, 2018 - $2.1 million). The business purpose of the loans receivable was to finance the sale of non-controlling interests in subsidiaries to senior managers. The loan amounts are measured based on the formula price of the underlying non-controlling interests, and interest rates are determined based on the Companys cost of borrowing plus a spread. The loans generally have terms of 5 to 10 years, but are open for repayment without penalty at any time.
Outstanding share data
The authorized capital of the Company consists of an unlimited number of Common Shares. The holders of Common Shares are entitled to one vote in respect of each Common Share held at all meetings of the shareholders of the Company.
As of the date hereof, the Company has outstanding 39,330,957 Common Shares. In addition, as at the date hereof, 1,639,100 Common Shares are issuable upon exercise of options granted under the Companys stock option plan.
Canadian tax treatment of dividends
For the purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends (and deemed dividends) paid by us to Canadian residents on our Common Shares are designated as eligible dividends. Unless stated otherwise, all dividends (and deemed dividends) paid by us hereafter are designated as eligible dividends for the purposes of such rules.
Changes in internal controls over financial reporting
There have been no changes in our internal controls over financial reporting during the three and nine month periods ended September 30, 2019 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
Page 10 of 10 |
Forward-looking statements
This MD&A contains forward-looking statements with respect to expected financial performance, strategy and business conditions. The words believe, anticipate, estimate, plan, expect, intend, may, project, will, would, and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risk and uncertainties. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Factors which may cause such differences include, but are not limited to those set out below and those set out in detail in the Risk Factors section of the Companys Annual Information Form, which is included in the Companys Annual Report on Form 40-F:
• | Economic conditions, especially as they relate to commercial and consumer credit conditions and consumer spending. |
• | Commercial real estate property values, vacancy rates and general conditions of financial liquidity for real estate transactions. |
• | Residential real estate property values, resale rates and general conditions of financial liquidity for real estate transactions. |
• | Extreme weather conditions impacting demand for our services or our ability to perform those services. |
• | Competition in the markets served by the Company. |
• | Labour shortages or increases in wage and benefit costs. |
• | The effects of changes in interest rates on our cost of borrowing. |
• | Unexpected increases in operating costs, such as insurance, workers compensation, health care and fuel prices. |
• | Changes in the frequency or severity of insurance incidents relative to our historical experience. |
• | The effects of changes in foreign exchange rates in relation to the US dollar on the Companys Canadian dollar denominated revenues and expenses. |
• | Our ability to make acquisitions at reasonable prices and successfully integrate acquired operations. |
• | Political conditions, including any outbreak or escalation of terrorism or hostilities and the impact thereof on our business. |
• | Changes in government policies at the federal, state/provincial or local level that may adversely impact our businesses. |
We caution that the foregoing list is not exhaustive of all possible factors, as other factors could adversely affect our results, performance or achievements. The reader is cautioned against undue reliance on these forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking statements should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. We note that past performance in operations and share price are not necessarily predictive of future performance. We disclaim any intention and assume no obligation to update or revise any forward-looking statement even if new information becomes available, as a result of future events except as required by securities law.
Additional information
Additional information regarding the Company, including our Annual Information Form, is available on SEDAR at www.sedar.com.
Exhibit 4.7
FIRSTSERVICE CORPORATION
MATERIAL CHANGE REPORT
(Form 51-102F3)
1. | Name and Address of Company |
FirstService Corporation (FirstService or the Company)
1140 Bay Street, Suite 4000
Toronto, Ontario M5S 2B4
2. | Date of Material Change |
March 12, 2019.
3. | News Release |
The news release was disseminated on March 12, 2019 through GlobeNewswire.
4. | Summary of Material Change |
On March 12, 2019, FirstService announced that it had entered into an agreement with Jay S. Hennick, the Companys Founder, Chairman and largest voting shareholder, pursuant to which disinterested holders of FirstServices Subordinate Voting Shares will be given an opportunity to approve a transaction to settle the Restated Management Services Agreement, including the long-term incentive arrangement, entered into on February 1, 2004, between the Company, Mr. Hennick and Jayset Management FSV Inc., a corporation controlled by Mr. Hennick and to eliminate the dual class voting structure of FirstService.
5. | Full Description of Material Change |
On March 12, 2019 FirstService announced that it had entered into an agreement with Jay S. Hennick, the Companys Founder, Chairman and largest voting shareholder, pursuant to which disinterested holders of FirstServices Subordinate Voting Shares will be given an opportunity to approve a transaction (the Transaction) to settle the Restated Management Services Agreement (the MSA), including the long-term incentive arrangement (the LTIA), entered into on February 1, 2004, between the Company, Mr. Hennick and Jayset Management FSV Inc. (HennickCo), a corporation controlled by Mr. Hennick and to eliminate the dual class voting structure of FirstService.
Over the past several years, the FirstService Board of Directors has been considering the financial implications of the MSA as the Company continues to grow. The LTIA included in the MSA was established in 2004 in lieu of stock options and other compensation entitlements and was consistent with similar arrangements implemented at the time to motivate entrepreneurial founders/CEOs to create long-term value for shareholders. The arrangement achieved the desired result as the market value of FirstService increased by more than US$3 billion since 2004, representing an annualized return of over 24%. Given the growth of the FirstService business and the seasoned management team in place, which took on responsibility for the management and success of FirstService since the completion of the spin-off transaction in June 2015, Mr. Hennick indicated that he was prepared to receive a proposal from FirstService to terminate the MSA and unwind the dual class share structure, thereby relinquishing his effective control of the Company. In February 2019, the Board of Directors empowered the Executive Compensation Committee (the Compensation Committee), consisting of independent directors, Michael Stein (Chair), Bernard I. Ghert and Brendan Calder to, among other things, evaluate, make proposals, negotiate and consider the desirability, feasibility and fairness of, and report to the Board of Directors on, a potential transaction, including as to whether a potential transaction was in the best interests of the Company.
- 2 - |
As part of the Transaction:
• | Henset Capital Inc., a corporation controlled by Mr. Hennick, will convert 1,325,694 Multiple Voting Shares of the Company (being 100% of the outstanding Multiple Voting Shares) into Subordinate Voting Shares on a one-for-one basis and for no consideration, thereby eliminating FirstServices dual class share structure; |
• | FirstService will acquire, directly or indirectly, all of the shares of HennickCo, the recipient of all fees and other entitlements under the MSA, for a purchase price determined with reference to the LTIA formula provided in the MSA which would have applied on a change of control transaction, and thereafter FirstService will terminate the MSA thereby eliminating the LTIA and all future fees and other entitlements owing thereafter; |
• | Mr. Hennick will retain his role as Chairman of FirstService, at the discretion of the Board, with compensation commensurate with that of a Non-Executive Chairman of a public company of similar size to FirstService; and |
• | FirstService will: (a) pay US$62.9 million in cash; and (b) issue a total of 2,918,860 Subordinate Voting Shares at a price of Cdn$115.58 per share (which is the 20-trading day VWAP of the Subordinate Voting Shares on the TSX determined on March 11, 2019, the day prior to the announcement of the Transaction). |
The Transaction is subject to, among other conditions, the approval of a majority of the disinterested holders of FirstServices Subordinate Voting Shares at an Annual and Special Meeting of Shareholders to be held on May 3, 2019 at 2:00 p.m. in Toronto, Ontario at The Design Exchange, 234 Bay Street, Toronto-Dominion Centre (the Meeting). The Board (with Mr. Hennick recusing himself) believes the Transaction is in the best interests of FirstService and the holders of Subordinate Voting Shares. All FirstService directors have advised FirstService that they will vote for the Transaction at the Meeting. The Board recommends that FirstService shareholders approve the Transaction.
- 3 - |
The Company and Mr. Hennick have executed a binding term sheet dated March 12, 2019 and will negotiate in good faith to conclude and execute a definitive agreement contemplated by the binding term sheet no later than April 2, 2019. If the parties fail to agree and execute a definitive agreement prior to April 2, 2019, the binding term sheet will terminate and be of no further force or effect.
The Transaction will create alignment among all FirstService shareholders, each of whom will own the same class of voting shares. In addition, the Transaction will facilitate an orderly transition by providing shareholders and the Board of Directors with greater flexibility to determine the future direction of the Company. The Transaction was structured to ensure an appropriate mix of cash and share consideration to maintain the Companys conservative balance sheet, and Mr. Hennicks continued commitment to FirstService.
T. Rowe Price Associates, Inc., the largest holder of Subordinate Voting Shares, has advised FirstService that, based on the information provided by the Company, it supports the Transaction. T. Rowe Price Associates, Inc., on behalf of accounts over which it exercises discretionary investment authority, owns or controls approximately 17.6% of the outstanding Subordinate Voting Shares and is considered a disinterested holder of Subordinate Voting Shares for purposes of the Transaction. T. Rowe Price Associates, Inc.s beneficial ownership could change between the date hereof and the date of the Meeting.
Immediately following the completion of the Transaction, Mr. Hennick is expected to have control and direction over 5,767,080 Subordinate Voting Shares, representing 14.8% of the then expected outstanding shares. FirstService anticipates having 39,026,207 Subordinate Voting Shares outstanding immediately following completion of the Transaction.
I am delighted to see FirstService, the company I founded 30 years ago, mature to the point where I feel comfortable taking a more hands-off role with respect to the operations of the business, said Jay S. Hennick. Agreeing to give up effective voting control and ongoing contractual entitlements under the MSA, which has been in place for 15 years, was a difficult decision. I have great confidence in Scott Patterson and the rest of the leadership team, and am very excited about the Companys prospects for the future. Retaining a significant equity investment in the Company going forward was a pre-condition and retaining strategic oversight as Chairman of the Company has always been a privilege.
- 4 - |
Working closely with Jay for more than 24 years has been rewarding, said D. Scott Patterson, President and Chief Executive Officer of FirstService. His vision and the culture he created were critical to our success and in delivering substantial returns for shareholders over many years. This transition of control demonstrates Jays confidence in our management team and his desire to remain our founding shareholder and Chairman shows his commitment to our Companys future.
At the Meeting, the Company also intends to seek approval to eliminate the Multiple Voting Shares as part of the authorized capital of the Company and to re-designate its Subordinate Voting Shares as Common Shares.
The cash payment under the Transaction is expected to be funded via the Companys revolving credit facility. After giving effect to the Transaction, FirstServices leverage is expected to increase by 0.3x Net Debt to Trailing 12 Months EBITDA.
In February 2019, the Compensation Committee and its advisors proceeded to engage in negotiations with Mr. Hennick and his advisors culminating in the Transaction. Following a rigorous independent review process, including receipt of advice from the Compensation Committees independent legal and compensation consultant advisors, the Compensation Committee unanimously recommended the Transaction to the Board of Directors, who then unanimously (with Mr. Hennick recusing himself) approved it. In support of its recommendation in favour of approving the Transaction, the Compensation Committee received a written opinion from its independent compensation consultant, Hugessen Consulting, that the Transaction is desirable from a compensation perspective as it would stem the ongoing dilutive effect of the LTIA, as well as better suit the current stage of the Companys development and Mr. Hennicks current role. Mr. Hennick and the Company believe that it was reasonable and appropriate that disinterested shareholders be given the opportunity to vote on the Transaction. The Compensation Committee also received independent legal advice from Miller Thomson LLP. The Transaction remains subject to customary closing conditions, including disinterested shareholder approval, lender approval and receipt of all other third party and regulatory consents and approvals, including from the Toronto Stock Exchange and NASDAQ.
- 5 - |
The Compensation Committee and the Board of Directors of the Company identified, among others, the following material considerations which it took into account with respect to, and material benefits expected to be achieved on completion of, the Transaction:
• | the Transaction will result in the elimination of FirstServices dual class voting structure for no consideration, the result of which: |
| Allows shareholders and the Board of Directors to consider a broad range of corporate decisions and strategic alternatives without a possible veto by Mr. Hennick |
| Provides all shareholders with the same vote in proportion to their relative equity stake in the Company |
| Allows investors who may not wish to invest, or whose investment policies prevent them from investing in shares of companies with dual class share structures to purchase Subordinate Voting Shares, thereby potentially enhancing liquidity, and |
| Allows the Company to use the Subordinate Voting Shares for purposes of raising additional capital, effecting an acquisition or merger transaction or issuing additional equity without further dilution resulting from the MSA. |
• | the Transaction will facilitate an orderly transition of effective control by FirstServices Founder to its shareholders, the Board of Directors and its professional management team and provides shareholders with greater flexibility to determine the future direction of the Company; |
• | Mr. Hennick agreed to forgo all future fees and other entitlements to which he would otherwise be permitted under the MSA, and is accepting a substantial portion of the consideration under the Transaction in Subordinate Voting Shares; and |
• | Mr. Hennick remains committed to the future direction of FirstService, and is expected to own or control 5,767,080 Subordinate Voting Shares representing 14.8% of the outstanding shares of the Company at the time of the completion of the Transaction. He will also continue to serve as non-executive Chairman of the Board of Directors. |
The required information for FirstService shareholders to consider in relation to their vote on the resolution to approve the Transaction will be contained in the management information circular to be mailed to shareholders in respect of the Meeting. This management information circular will also be available at that time on SEDAR (www.sedar.com) and on the Companys website at www.firstservice.com. A copy of the definitive transaction agreement will also be filed on SEDAR and accessible at www.sedar.com.
- 6 - |
Forward-looking Statements
This report contains statements that constitute forward-looking statements within the meaning of applicable securities legislation, including, but not limited to, statements relating to the potential benefits expected to be achieved on the completion of the Transaction, the expected continued commitment of Mr. Hennick to FirstService, the expected voting at the Meeting to approve the Transaction by FirstService directors, contemplated changes to the articles and option plan of FirstService and future filings to be made under securities laws. Much of this information can be identified by words such as expect to, expected, will, estimated or similar expressions suggesting future outcomes or events. FirstService believes the expectations reflected in such forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Forward-looking statements are based on current information and expectations that involve a number of risks and uncertainties, which could cause actual results or events to differ materially from those anticipated. These risks include, but are not limited to, risks associated with the ability to satisfy shareholder, regulatory, third party and stock exchange approvals and conditions to consummate the Transaction or for any related changes to the articles and option plan of FirstService, the market value and trading price of the Subordinate Voting Shares of FirstService and other risks related to FirstServices business, including those identified in FirstServices annual information form for the year ended December 31, 2018 under the heading Risk factors (a copy of which may be obtained at www.sedar.com) and Annual Report on Form 40-F filed with the United States Securities and Exchange Commission (a copy of which may be obtained at www.sec.gov), and subsequent filings. Forward-looking statements contained in this report are made as of the date hereof and are subject to change. All forward-looking statements in this report are qualified by these cautionary statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements contained in this report to reflect subsequent information, events, results or circumstances or otherwise.
6. | Reliance on subsection 7.1(2) of National Instrument 51-102 |
This report is not being filed on a confidential basis.
7. | Omitted Information |
No significant fact remains confidential in, and no information has been omitted from, this report.
- 7 - |
8. | Executive Officer |
If further information is required, please contact Jeremy Rakusin, Chief Financial Officer, at 416-960-9500
9. | Date of Report |
Dated at Toronto, Ontario, this 13th day of March 2019.
FIRSTSERVICE CORPORATION
MATERIAL CHANGE REPORT
(Form 51-102F3)
1. | Name and Address of Company |
FirstService Corporation (FirstService)
1140 Bay Street, Suite 4000
Toronto, Ontario M5S 2B4
2. | Date of Material Change |
May 10, 2019
3. | News Release |
A news release was disseminated on May 10, 2019 through GlobeNewswire.
4. | Summary of Material Change |
On May 10, 2019, FirstService announced that it had completed the settlement of the Restated Management Services Agreement, including the long-term incentive arrangement, between FirstService, Jay S. Hennick and Jayset Management FSV Inc. and eliminated FirstServices dual class share structure. FirstService also effected an amendment to its articles that eliminated the Multiple Voting Shares and the blank cheque preference shares as part of the authorized capital of FirstService and re-classified its Subordinate Voting Shares as common shares. FirstServices common shares will commence trading under the symbol FSV on the Toronto Stock Exchange and The NASDAQ Global Select Market at the start of trading on May 14, 2019.
5. | Full Description of Material Change |
The news release annexed hereto as Schedule A provides a full description of the material change.
6. | Reliance on Subsection 7.1(2) of National Instrument 51-102 |
This report is not being filed on a confidential basis.
7. | Omitted Information |
No significant facts remain confidential in, and no information has been omitted from, this report.
8. | Executive Officer |
If further information is required, please contact Jeremy Rakusin, Chief Financial Officer, at 416-960-9500.
9. | Date of Report |
DATED at Toronto, Ontario this 10th day of May, 2019.
SCHEDULE A
|
||
COMPANY CONTACTS: | ||
D. Scott Patterson | ||
President & CEO | ||
(416) 960-9500 | ||
Jeremy Rakusin | ||
Chief Financial Officer | ||
(416) 960-9500 |
FOR IMMEDIATE RELEASE
FIRSTSERVICE COMPLETES TRANSACTION TO SETTLE LONG-TERM INCENTIVE ARRANGEMENT AND ELIMINATE DUAL CLASS VOTING STRUCTURE
Jay S. Hennick Remains as Chairman and a Significant Shareholder
TORONTO, Canada, May 10, 2019 FirstService Corporation (TSX: FSV; NASDAQ: FSV) (FirstService) announced that it has completed the settlement of the Restated Management Services Agreement, including the long-term incentive arrangement, between FirstService, Jay S. Hennick and Jayset Management FSV Inc. and eliminated FirstServices dual class share structure. FirstService has also effected an amendment to its articles that eliminated the Multiple Voting Shares and the blank cheque preference shares as part of the authorized capital of FirstService and re-classified its Subordinate Voting Shares as common shares. FirstServices common shares will commence trading under the symbol FSV on the Toronto Stock Exchange and The NASDAQ Global Select Market at the start of trading on May 14, 2019.
Mr. Hennick remains as a director and the Chairman of FirstService, and has control and direction over 5,767,080 common shares of FirstService, representing 14.8% of the outstanding common shares of FirstService.
-A2-
About FirstService Corporation
FirstService Corporation is a North American leader in the property services sector, serving its customers through two industry-leading service platforms: FirstService Residential, North Americas largest manager of residential communities; and FirstService Brands, one of North Americas largest providers of essential property services delivered through individually branded franchise systems and company-owned operations.
FirstService generates approximately US$2 billion in annual revenues and has more than 20,000 employees across North America. With significant insider ownership and an experienced management team, FirstService has a long-term track record of creating value and superior returns for shareholders. The common shares of FirstService trade on NASDAQ and the Toronto Stock Exchange under the symbol FSV.
For the latest news from FirstService Corporation, visit www.firstservice.com.
Exhibit 4.8
FIRSTSERVICE CORPORATION
MATERIAL CHANGE REPORT
(Form 51-102F3)
1. | Name and Address of Company |
FirstService Corporation (FirstService)
1140 Bay Street, Suite 4000
Toronto, Ontario M5S 2B4
2. | Date of Material Change |
April 11, 2019
3. | News Release |
A news release was disseminated on April 11, 2019 through GlobeNewswire.
4. | Summary of Material Change |
On April 11, 2019, FirstService announced that it had expanded its revolving credit facility (the Facility) by US$100 million, to a total borrowing capacity of US$450 million. The amended Facility superseded the prior Facility, effected in January 2018 and which had a borrowing capacity which totaled US$350 million (comprised of an original US$250 million plus a US$100 million accordion feature which was recently exercised in full). The maturity date of the Facility remains January 2023. The Facility will continue to be utilized for working capital and general corporate purposes and to fund our tuck-under acquisition program.
5. | Full Description of Material Change |
The news release annexed hereto as Schedule A provides a full description of the material change.
6. | Reliance on Subsection 7.1(2) of National Instrument 51-102 |
This report is not being filed on a confidential basis.
7. | Omitted Information |
No significant facts remain confidential in, and no information has been omitted from, this report.
8. | Executive Officer |
If further information is required, please contact Jeremy Rakusin, Chief Financial Officer, at 416-960-9500.
9. | Date of Report |
DATED at Toronto, Ontario this 12th day of April, 2019.
- 1 - |
SCHEDULE A
COMPANY CONTACTS: | |
D. Scott Patterson | |
President & CEO | |
(416) 960-9500 | |
Jeremy Rakusin | |
Chief Financial Officer | |
(416) 960-9500 |
FOR IMMEDIATE RELEASE
FIRSTSERVICE INCREASES CREDIT FACILITY TO US$450 MILLION
TORONTO, Canada, April 11, 2019 FirstService Corporation (TSX: FSV; NASDAQ: FSV) ("FirstService") announced today that it has expanded its revolving credit facility (the Facility) by US$100 million, to a total borrowing capacity of US$450 million. The amended Facility supersedes the prior Facility, effected in January 2018 and which had a borrowing capacity which totaled US$350 million (comprised of an original US$250 million plus a US$100 million accordion feature which was recently exercised in full). The maturity date of the Facility remains January 2023. The Facility will continue to be utilized for working capital and general corporate purposes and to fund our tuck-under acquisition program.
The increased commitments under the Facility were substantially oversubscribed by a syndicate of 10 banks, led by The Toronto-Dominion Bank and including JP Morgan Chase Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, HSBC Bank, The Bank of Nova Scotia, U.S. Bank, Bank of America, National Bank of Canada and MUFG Union Bank.
We appreciate the continued support and confidence of our bank group in completing this transaction, said Jeremy Rakusin, Chief Financial Officer. The increased Facility maintains our flexibility and capacity to fund FirstServices operations and growth. Our investment-grade balance sheet remains very strong and well-balanced with the Facility and our existing US$150 million of privately-held long-term senior notes, he concluded.
This additional financing enables us to seamlessly continue to fund our tuck-under acquisition program, said D. Scott Patterson, Chief Executive Officer. The transaction is also another endorsement of FirstServices long-standing track record of strong financial performance.
-A 2 - |
About FirstService Corporation
FirstService Corporation is a North American leader in the property services sector, serving its customers through two industry-leading service platforms: FirstService Residential, North America's largest manager of residential communities; and FirstService Brands, one of North America's largest providers of essential property services delivered through individually branded franchise systems and company-owned operations.
FirstService generates more than $1.9 billion in annual revenues and has more than 20,000 employees across North America. With significant insider ownership and an experienced management team, FirstService has a long-term track record of creating value and superior returns for shareholders. The Subordinate Voting Shares of FirstService trade on the NASDAQ and the Toronto Stock Exchange under the symbol "FSV".
For the latest news from FirstService Corporation, visit www.firstservice.com
Forward-looking Statements
This press release includes or may include forward-looking statements. Much of this information can be identified by words such as expect to, expected, will, estimated or similar expressions suggesting future outcomes or events. FirstService believes the expectations reflected in such forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Such factors include: (i) general economic and business conditions, which will, among other things, impact demand for FirstServices services and the cost of providing services; (ii) the ability of FirstService to implement its business strategy, including FirstServices ability to acquire suitable acquisition candidates on acceptable terms and successfully integrate newly acquired businesses with its existing businesses; (iii) changes in or the failure to comply with government regulations; and (iv) other factors which are described in FirstServices annual information form for the year ended December 31, 2018 under the heading Risk factors (a copy of which may be obtained at www.sedar.com) and Annual Report on Form 40-F filed with the United States Securities and Exchange Commission (a copy of which may be obtained at www.sec.gov), and subsequent filings (which factors are adopted herein). Forward-looking statements contained in this press release are made as of the date hereof and are subject to change. All forward-looking statements in this press release are qualified by these cautionary statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements contained in this press release to reflect subsequent information, events, results or circumstances or otherwise.
Exhibit 4.9
FIRSTSERVICE CORPORATION
MATERIAL CHANGE REPORT
(Form 51-102F3)
1. | Name and Address of Company |
FirstService Corporation (FirstService)
1140 Bay Street, Suite 4000
Toronto, Ontario M5S 2B4
2. | Date of Material Change |
May 23, 2019
3. | News Release |
A news release was disseminated on May 23, 2019 through GlobeNewswire.
4. | Summary of Material Change |
On May 23, 2019, FirstService announced that it had entered into a definitive agreement to acquire Global Restoration Holdings, LLC (Global Restoration or the Company), the second largest commercial and large loss property restoration firm in North America. The acquisition will expand FirstServices scale and capabilities in the property restoration sector and complement its existing Paul Davis Restoration franchised and company-owned operations, which collectively are already a leading player in the residential segment of the industry. The transaction is subject to customary closing conditions, including regulatory approvals, and expected closing is mid-year.
Headquartered in Denver, Colorado and founded in 1998, Global Restoration provides integrated end-to-end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance companies. The Company operates under two highly recognized brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs approximately 1,400 staff operating out of 58 regional offices throughout North America. For the fiscal year ended December 31, 2018, Global Restoration generated revenues of $436 million and operating income of $40 million.
Under the terms of the transaction, FirstService will acquire 95% of the Company for a purchase price of $505 million. Global Restorations senior management team, including Jeff Johnson, Stacy Mazur and Dave Demos, will continue to lead day-to-day operations and will retain the balance of the equity. The purchase price will be funded through a combination of cash on hand and fully committed debt financing.
5. | Full Description of Material Change |
The news release annexed hereto as Schedule A provides a full description of the material change.
- 2 -
6. | Reliance on Subsection 7.1(2) of National Instrument 51-102 |
This report is not being filed on a confidential basis.
7. | Omitted Information |
No significant facts remain confidential in, and no information has been omitted from, this report.
8. | Executive Officer |
If further information is required, please contact Jeremy Rakusin, Chief Financial Officer, at 416-960-9500.
9. | Date of Report |
DATED at Toronto, Ontario this 27th day of May, 2019.
SCHEDULE A
|
|
COMPANY CONTACTS: | |
D. Scott Patterson |
|
President & CEO | |
FirstService Corporation | |
(416) 960-9500 | |
Jeremy Rakusin | |
CFO | |
FirstService Corporation | |
(416) 960-9500 |
FOR IMMEDIATE RELEASE
FIRSTSERVICE TO ACQUIRE GLOBAL RESTORATION HOLDINGS
Addition of Leading Commercial and Large Loss Firm Accelerates Growth of Property Restoration Platform
TORONTO, Ontario, May 23, 2019 - FirstService Corporation (TSX and NASDAQ: FSV) (FirstService) announced today that it has entered into a definitive agreement to acquire Global Restoration Holdings, LLC (Global Restoration or the Company), the second largest commercial and large loss property restoration firm in North America. The acquisition will expand FirstServices scale and capabilities in the property restoration sector and complement its existing Paul Davis Restoration franchised and company-owned operations, which collectively are already a leading player in the residential segment of the industry. The transaction is subject to customary closing conditions, including regulatory approvals, and expected closing is mid-year.
Headquartered in Denver, Colorado and founded in 1998, Global Restoration provides integrated end-to-end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance companies. The Company operates under two highly recognized brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs approximately 1,400 staff operating out of 58 regional offices throughout North America. For the fiscal year ended December 31, 2018, Global Restoration generated revenues of $436 million and operating income of $40 million.
Under the terms of the transaction, FirstService will acquire 95% of the Company for a purchase price of $505 million. Global Restorations senior management team, including Jeff Johnson, Stacy Mazur and Dave Demos, will continue to lead day-to-day operations and will retain the balance of the equity. The purchase price will be funded through a combination of cash on hand and fully committed debt financing.
-A 2 -
We are delighted to be partnering with FirstService, said Jeff Johnson, Executive Chairman of Global Restoration. The cultural fit, attractiveness of the FirstService partnership model, and opportunity to continue building our company over the long-term were differentiating factors for us. With the backing and credibility of a highly-regarded, large public company, we are now well-positioned to accelerate our growth for many years to come.
Global Restoration has delivered an exceptional track record of growth over the past 20 years, said Stacy Mazur, CEO of the Company. We look forward to further building upon the operational expertise we have established within the large loss and commercial restoration services segment and capitalizing on future growth opportunities with FirstService.
FirstOnSite Chief Executive Officer, Dave Demos, cited that FirstService will be an ideal partner in the Companys next chapter. We share values and vision, taking us one step closer to our goal of global leadership in our industry.
Global Restoration is a significant transaction for FirstService, providing an excellent strategic fit and strong cultural alignment, said Scott Patterson, CEO of FirstService. With its scale, leading market position and operational excellence, the Company offers a unique opportunity to accelerate our growth in the massive property restoration industry. Global Restorations expertise is highly complementary to our Paul Davis franchise system, enhancing our ability to deliver seamless, full-service capabilities to every customer segment in the industry. On behalf of our entire organization, I would like to welcome Jeff, Stacy, Dave and the rest of their strong team into the FirstService family, he concluded.
Global Restoration is being sold by Delos Capital, a lower middle market private equity firm. Houlihan Lokey is acting as financial advisor and Goodwin Proctor as legal counsel to Global Restoration. Fogler, Rubinoff LLP and Ferrante & Associates acted as legal counsel to FirstService.
About FirstService Corporation
FirstService Corporation is a North American leader in the essential outsourced property services sector, serving its customers through two industry-leading service platforms: FirstService Residential, North Americas largest manager of residential communities; and FirstService Brands, one of North Americas largest providers of essential property services delivered through individually branded franchise systems and company-owned operations.
FirstService generates approximately $2 billion in annual revenues and has more than 20,000 employees across North America. With significant insider ownership and an experienced management team, FirstService has a long-term track record of creating value and superior returns for shareholders. The Common Shares of FirstService trade on the NASDAQ and the Toronto Stock Exchange under the symbol FSV.
For the latest news from FirstService Corporation, visit www.firstservice.com.
About Delos Capital
Delos Capital, founded in 2013, is a lower middle market private equity firm specializing in management buyouts, recapitalizations, and growth investments. For more information, visit www.deloscap.com.
-A 3 -
FORWARD-LOOKING STATEMENTS
This press release contains statements that constitute forward-looking statements within the meaning of applicable securities legislation, including, but not limited to, the expected closing of the proposed transaction, the impact of the proposed transaction on FirstServices business and future financial and operating results and the scope of the expected financing for the proposed transaction. Much of this information can be identified by words such as expect to, expected, will, estimated or similar expressions suggesting future outcomes or events. FirstService believes the expectations reflected in such forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Forward-looking statements are based on current information and expectations that involve a number of risks and uncertainties, which could cause actual results or events to differ materially from those anticipated. These risks include, but are not limited to, risks that: a condition to the closing of the proposed acquisition may not be satisfied; a regulatory approval that may be required for the proposed acquisition is delayed, is not obtained or is obtained subject to conditions that are not anticipated; FirstService is unable to promptly and effectively integrate Global Restorations businesses; managements time and attention is diverted on transaction-related issues; FirstService or Global Restoration is unable to retain key personnel; and other risks related to FirstServices business, including those identified in FirstServices annual information form for the year ended December 31, 2018 under the heading Risk factors (a copy of which may be obtained at www.sedar.com) and Annual Report on Form 40-F filed with the United States Securities and Exchange Commission (a copy of which may be obtained at www.sec.gov), and subsequent filings. Forward-looking statements contained in this press release are made as of the date hereof and are subject to change. All forward-looking statements in this press release are qualified by these cautionary statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements contained in this press release to reflect subsequent information, events, results or circumstances or otherwise.
FIRSTSERVICE CORPORATION
MATERIAL CHANGE REPORT
(Form 51-102F3)
1. | Name and Address of Company |
FirstService Corporation (FirstService)
1140 Bay Street, Suite 4000
Toronto, Ontario M5S 2B4
2. | Date of Material Change |
June 21, 2019
3. | News Release |
A news release was disseminated on June 21, 2019 through GlobeNewswire.
4. | Summary of Material Change |
On June 21, 2019, FirstService announced that it had completed its previously announced acquisition of approximately 95% of Global Restoration Holdings, LLC (Global Restoration), the second largest commercial and large loss property restoration firm in North America, for a purchase price of approximately $505 million. Global Restorations senior management team, including Jeff Johnson, Stacy Mazur and Dave Demos, continue to lead Global Restorations day-to-day operations and have retained the balance of the equity.
In connection with the completion of the acquisition, FirstService entered into an $890 million amended and restated credit facility (the New Credit Agreement), consisting of its existing $450 million revolving credit facility and a new $440 million term loan. The maturity date of the revolving credit facility under the New Credit Agreement remains January 2023, and the maturity date of the term loan under the New Credit Agreement is June 2024. Repayment of the term loan is to be made in installments of 5% per annum, paid quarterly, commencing in September 2020, with the balance payable at maturity. The Global Restoration acquisition was funded through a combination of the new term loan, additional funds drawn under the revolving credit facility and available cash on hand. The revolving credit facility under the New Credit Agreement will continue to be utilized for working capital and general corporate purposes and to fund FirstServices tuck-under acquisition program.
5. | Full Description of Material Change |
The news release annexed hereto as Schedule A provides a full description of the material change.
6. | Reliance on Subsection 7.1(2) of National Instrument 51-102 |
This report is not being filed on a confidential basis.
7. | Omitted Information |
No significant facts remain confidential in, and no information has been omitted from, this report.
8. | Executive Officer |
If further information is required, please contact Jeremy Rakusin, Chief Financial Officer, at 416-960-9500.
9. | Date of Report |
DATED at Toronto, Ontario this 21st day of June, 2019.
SCHEDULE A
|
||
COMPANY CONTACTS:
D. Scott Patterson President & CEO FirstService Corporation (416) 960-9500
Jeremy Rakusin CFO FirstService Corporation (416) 960-9500 |
FOR IMMEDIATE RELEASE
FIRSTSERVICE COMPLETES ACQUISITION OF GLOBAL RESTORATION HOLDINGS
Leading Commercial and Large Loss Firm to Accelerate Growth of Property Restoration Platform
TORONTO, Ontario, June 21, 2019 - FirstService Corporation (TSX and NASDAQ: FSV) (FirstService) announced today that it has completed its previously announced acquisition of approximately 95% of Global Restoration Holdings, LLC (Global Restoration), the second largest commercial and large loss property restoration firm in North America, for a purchase price of approximately $505 million. Global Restorations senior management team, including Jeff Johnson, Stacy Mazur and Dave Demos, continue to lead Global Restorations day-to-day operations and have retained the balance of the equity.
Headquartered in Denver, Colorado and founded in 1998, Global Restoration provides integrated end-to-end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance companies. Global Restoration operates under two highly recognized brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs approximately 1,400 staff operating out of 58 regional offices throughout North America. For the fiscal year ended December 31, 2018, Global Restoration generated revenues of $436 million and operating earnings of $40 million.
In connection with the completion of the acquisition, FirstService has entered into an $890 million amended and restated credit facility (the New Credit Agreement), consisting of its existing $450 million revolving credit facility and a new $440 million term loan. The maturity date of the revolving credit facility under the New Credit Agreement remains January 2023, and the maturity date of the term loan under the New Credit Agreement is June 2024. Repayment of the term loan is to be made in installments of 5% per annum, paid quarterly, commencing in September 2020, with the balance payable at maturity. The new term loan commitments under the New Credit Agreement were substantially oversubscribed by a syndicate of 12 banks, led by The Toronto-Dominion Bank and including Bank of Montreal, Canadian Imperial Bank of Commerce, HSBC Bank, The Bank of Nova Scotia, JP Morgan Chase Bank, U.S. Bank, Bank of America, MUFG Union Bank, National Bank, Raymond James Bank and Wells Fargo Bank.
-A 2 -
The Global Restoration acquisition was funded through a combination of the new term loan, additional funds drawn under the revolving credit facility and available cash on hand. The revolving credit facility under the New Credit Agreement will continue to be utilized for working capital and general corporate purposes and to fund FirstServices tuck-under acquisition program.
We appreciate the strong endorsement and confidence of our bank group in providing us with the necessary financing to complete this significant acquisition, said Jeremy Rakusin, Chief Financial Officer. At the same time, we will continue to ensure we maintain financial flexibility to drive all growth initiatives across FirstServices business lines, he added.
With the successful closing of the transaction, I am delighted to formally welcome the entire Global Restoration team into the FirstService family, said Scott Patterson, Chief Executive Officer. We are excited about the complementary fit between Global Restoration and our Paul Davis franchise system and look forward to working closely with both teams to accelerate growth in the property restoration industry, he concluded.
About FirstService Corporation
FirstService Corporation is a North American leader in the essential outsourced property services sector, serving its customers through two industry-leading service platforms: FirstService Residential, North Americas largest manager of residential communities; and FirstService Brands, one of North Americas largest providers of essential property services delivered through individually branded franchise systems and company-owned operations.
FirstService generates more than $2 billion in annual revenues and has approximately 22,000 employees across North America. With significant insider ownership and an experienced management team, FirstService has a long-term track record of creating value and superior returns for shareholders. The Common Shares of FirstService trade on the NASDAQ and the Toronto Stock Exchange under the symbol FSV.
For the latest news from FirstService Corporation, visit www.firstservice.com.
-A 3 -
FORWARD-LOOKING STATEMENTS
This press release contains statements that constitute forward-looking statements within the meaning of applicable securities legislation, including, but not limited to, the expected continuation of Global Restorations senior management team and the impact of the acquisition on FirstServices business, growth and future financial and operating results. Much of this information can be identified by words such as expect to, expected, will, estimated or similar expressions suggesting future outcomes or events. FirstService believes the expectations reflected in such forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Forward-looking statements are based on current information and expectations that involve a number of risks and uncertainties, which could cause actual results or events to differ materially from those anticipated. These risks include, but are not limited to, risks that: FirstService is unable to promptly and effectively integrate Global Restorations businesses; managements time and attention is diverted on integration-related issues; FirstService or Global Restoration is unable to retain key personnel; and other risks related to FirstServices business, including those identified in FirstServices annual information form for the year ended December 31, 2018 under the heading Risk factors (a copy of which may be obtained at www.sedar.com) and Annual Report on Form 40-F filed with the United States Securities and Exchange Commission (a copy of which may be obtained at www.sec.gov), and subsequent filings. Forward-looking statements contained in this press release are made as of the date hereof and are subject to change. All forward-looking statements in this press release are qualified by these cautionary statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements contained in this press release to reflect subsequent information, events, results or circumstances or otherwise.
Exhibit 4.10
FORM 51-102F4
BUSINESS ACQUISITION REPORT
Item 1 Identity of Company
1.1 | Name and Address of Company |
FirstService Corporation (FirstService)
1140 Bay Street, Suite 4000
Toronto, Ontario
M5S 2B4
1.2 | Executive Officer |
The following senior officer of FirstService is knowledgeable about the significant acquisition and this business acquisition report:
Jeremy Rakusin, Chief Financial Officer
(416) 960-9500
Certain statements in this business acquisition report constitute forward-looking statements. Readers should refer to the cautionary statement regarding forward-looking statements that appears at the end of this business acquisition report.
Item 2 Details of Acquisition
2.1 | Nature of Business Acquired |
FirstService acquired 95% of the shares in the capital of Bellwether FOS Holdco, Inc. (Global Restoration), a commercial and large loss property restoration firm, pursuant to the terms of a stock purchase agreement by and among FirstService Restoration, Inc., Global Restoration and Global Restoration Holdings, LLC (the Global Acquisition). Headquartered in Denver, Colorado and founded in 1998, Global Restoration provides integrated end-to-end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance companies. Global Restoration operates under two brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs approximately 1,400 staff operating out of 58 regional offices throughout North America.
2.2 | Acquisition Date |
The Global Acquisition was completed on June 21, 2019.
2.3 | Consideration (all figures in US$) |
Total consideration for the Global Acquisition was approximately $505 million, paid in cash at closing. The Global Acquisition was financed through a combination of cash-on-hand, funds borrowed under FirstServices existing $450 million revolving credit facility which matures in January 2023 and funds borrowed pursuant to a new term loan (implemented and drawn concurrent with the closing of the Global Acquisition) in the aggregate amount of $440 million which matures in June 2024 and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios.
2.4 | Effect on Financial Position |
There are no plans or proposals for any material changes in the respective business affairs of FirstService or Global Restoration, other than plans to repay a portion of the funds borrowed to complete the Global Acquisition under FirstServices revolving credit facility and/or term loan through the proceeds of any potential securities offerings.
Included in this business acquisition report are unaudited pro forma consolidated statements of earnings for FirstService (the Pro Forma Statements of Earnings) for the year ended December 31, 2018 and the quarter ended March 31, 2019, which are based upon the historical financial statements of FirstService and Global Restoration. The Pro Forma Statements of Earnings are provided for illustrative purposes only and are not intended to represent, or be indicative of, the consolidated earnings of FirstService that would have been reported had the acquisition of Global Restoration been completed as of the date presented. Accordingly, the Pro Forma Statements of Earnings should not be taken as representative of the future earnings of FirstService.
The unaudited pro forma adjustments are made solely for the purposes of preparing the Pro Forma Statements of Earnings. Changes are expected as the preliminary purchase price allocation based on valuations of assets acquired and liabilities assumed are completed and as additional information becomes available. Accordingly, the pro forma income statement effect of possible changes in fair value determinations may differ from those set forth in the Pro Forma Statements of Earnings, and such adjustments may be material. The Pro Forma Statements do not reflect the impact of any potential operational efficiencies, cost savings or economies of scale that FirstService may achieve with respect to the combined operations of FirstService and Global Restoration.
The Pro Forma Statements of Earnings should be read in conjunction with FirstServices audited consolidated financial statements for the year ended December 31, 2018 and the unaudited consolidated financial statements for the quarter ended March 31, 2019 and the quarter ended June 30, 2019, which are available at www.sedar.com, as well as in conjunction with the audited consolidated financial statements of FirstOnSite USA Holdings Inc. (the operating holding company held by Global Restoration) for the year ended December 31, 2018 and unaudited consolidated financial statements of FirstOnSite USA Holdings Inc. for the quarter ended March 31, 2019 included herein.
For further information relating to the expected effect of the Global Acquisition on FirstServices financial statements, please refer to the Pro Forma Statements of Earnings appended hereto.
2.5 | Prior Valuations |
Not applicable.
2.6 | Parties to Transaction |
The Global Acquisition was not with an informed person (as such term is defined in Section 1.1 of National Instrument 51-102 Continuous Disclosure Obligations), associate or affiliate of FirstService.
2.7 | Date of Report |
August 23, 2019.
Item 3 Financial Statements and Other Information
The following financial statements and related notes thereto are included as part of this Business Acquisition Report (historical financial statements are prepared in accordance with United States generally accepted accounting principles (US GAAP)):
a) | Audited combined consolidated financial statements of FirstOnSite USA Holdings Inc. (the operating holding company held by Global Restoration) as of and for the year ended December 31, 2018, together with the notes thereto. |
b) | Unaudited combined consolidated financial statements of the predecessor entities of FirstOnSite USA Holdings Inc., Bellwether International Group LLC and Delos MBHE FOS LLP, as of and for the year ended December 31, 2017. |
c) | Unaudited interim condensed combined consolidated financial statements of FirstOnSite USA Holdings Inc. as of and for the three months ended March 31, 2019 (with unaudited comparatives for three months ended March 31, 2018). |
d) | Unaudited pro forma consolidated statement of earnings for FirstService for the year ended December 31, 2018, which gives pro forma effect to the Global Acquisition as if it occurred on January 1, 2018. |
e) | Unaudited pro forma consolidated statement of earnings for FirstService for the three months ended March 31, 2019, which gives pro forma effect to the Global Acquisition as if it had occurred on January 1, 2018. |
Forward-looking Statements
Certain statements in this business acquisition report may include forward-looking statements which are typically identified by words such as believe, expect, anticipate, intend, estimate, plan, will, should, may, could and other similar expressions. Forward- looking statements include FirstServices financial performance outlook and statements regarding goals, beliefs, strategies, objectives, plans or current expectations. Specifically, such forward- looking statements in this business acquisition report include, but are not limited to, statements with respect to the following: the implementation and success of FirstServices strategy for Global Restoration; that FirstService has no plans for any material changes in the business affairs of FirstService or Global Restoration, other than plans to repay a portion of the funds borrowed for the Global Acquisition; and the expectation that a portion of the funds borrowed for the Global Acquisition could be repaid through potential securities offerings. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Such factors include: economic conditions, especially as they relate to credit conditions and consumer spending; residential real estate property values, resale rates and general conditions of financial liquidity for real estate transactions; extreme weather conditions impact in the demand for FirstServices services or FirstServices ability to perform those services; economic deterioration impacts FirstServices ability to recover goodwill and other intangible assets; ability to generate cash from our businesses to fund future acquisitions and meet our debt obligations; the effects of changes in foreign exchange rates in relation to the U.S. dollar on Canadian dollar denominated revenues and expenses; competition in the markets served by FirstService; labour shortages or increases in wage and benefit costs; the effects of changes in interest rates on the cost of borrowing; continued compliance with the financial covenants under debt agreements, or the ability to negotiate a waiver of certain covenants with lenders; unexpected increases in operating costs; changes in the frequency or severity of insurance incidents relative to historical experience; the ability to make acquisitions at reasonable prices and successfully integrate acquired operations; changing laws and regulations; liability for employee acts or omissions, or installation/system failure, in FirstServices fire protection businesses; risks arising from any regulatory review and litigation; intellectual property and other proprietary rights that are material to FirstServices business; disruptions or security failures in our information technology systems; political conditions, including any outbreak or escalation of terrorism or hostilities; and changes in government policies. The foregoing list is not exhaustive.
Additional factors and explanatory information are identified in FirstServices Annual Information Form for the year ended December 31, 2018 under the heading Risk factors (which factors are adopted herein and a copy of which can be obtained at www.sedar.com) and Annual Report on Form 40-F filed with the United States Securities and Exchange Commission (which factors are adopted herein and a copy of which can be obtained at www.sec.gov), and other periodic filings with Canadian and US securities regulators. Forward looking statements contained in this business acquisition report are made as of the date hereof and are subject to change. All forward-looking statements in this business acquisition report are qualified by these cautionary statements. Unless otherwise required by applicable laws, FirstService does not intend, nor does FirstService undertake any obligation, to update or revise any forward-looking statements contained in this business acquisition report to reflect subsequent information, events, results or circumstances or otherwise.
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FirstOnSite USA Holdings Inc. and Subsidiaries | ||
Combined Consolidated Financial Statements | ||
Year Ended December 31, 2018 | ||
|
FirstOnSite USA Holdings Inc. and Subsidiaries
Contents
Independent Auditors Report | 1 | |||
Combined Consolidated Balance Sheet | 2 3 | |||
Combined Consolidated Statement of Income and Comprehensive Income | 4 | |||
Combined Consolidated Statement of Changes in Stockholders Equity | 5 | |||
Combined Consolidated Statement of Cash Flows | 6 7 | |||
Summary of Significant Accounting Policies | 8 15 | |||
Notes to Combined Consolidated Financial Statements | 16 27 | |||
Supplementary Information: | ||||
Independent Auditors Report on Supplementary Information | 28 | |||
Combining Consolidating Balance Sheet | 29 30 | |||
Combining Consolidating Statement of Income and Comprehensive Income | 31 |
|
Tel: 817-738-2400 Fax: 817-738-1995 www.bdo.com |
Bank of America Tower 301 Commerce Street, Suite 2000 Fort Worth, TX 76102 |
Independent Auditors Report
Board of Directors and Stockholder
FirstOnSite USA Holdings Inc. and Subsidiaries
Fort Worth, Texas
We have audited the accompanying combined consolidated financial statements of FirstOnSite USA Holdings Inc. and Subsidiaries (the Company), which comprise the combined consolidated balance sheet as of December 31, 2018, and the related combined consolidated statements of income and comprehensive income, changes in stockholders equity, and cash flows for the year then ended, and the related notes to the combined consolidated financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these combined consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these combined consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the combined consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstOnSite USA Holdings Inc. and Subsidiaries at December 31, 2018, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
May 14, 2019
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
December 31, | 2018 | |||
Assets | ||||
Current: | ||||
Cash and cash equivalents | $ | 264,056 | ||
Accounts receivable: | ||||
Trade, net of allowance | 118,765,681 | |||
Unbilled | 45,155,381 | |||
Inventory and supplies | 2,360,762 | |||
Prepaid and other | 3,169,174 | |||
Total current assets | 169,715,054 | |||
Property and equipment, net | 13,966,703 | |||
Other assets: | ||||
Advances to Parent |
57,163,731 | |||
Intangible assets, net | 42,326,760 | |||
Goodwill | 19,842,212 | |||
Deferred tax assets | 3,082,071 | |||
Deposits | 198,813 | |||
Total other assets | 122,613,587 | |||
Total assets | $ | 306,295,344 | ||
Continued. |
2
FirstOnSite USA Holdings Inc. and Subsidiaries
Combined Consolidated Balance Sheet
December 31, | 2018 | |||
Liabilities and Stockholder's Equity | ||||
Liabilities | ||||
Current: | ||||
Checks drawn against future deposits | $ | 6,320,570 | ||
Accounts payable - trade | 33,161,817 | |||
Accrued expenses | 8,980,687 | |||
Accrued compensation | 17,094,259 | |||
Income taxes payable | 1,607,202 | |||
Deferred revenue - billings in excess of costs | 15,476,101 | |||
Current maturities of long-term debt | 5,500,000 | |||
Current maturities of capital leases | 1,289,995 | |||
Total current liabilities | 89,430,631 | |||
Long-term liabilities: | ||||
Line of credit, net of debt issuance costs |
41,240,284 | |||
Long-term debt, less current maturities, net of debt issuance costs | 13,773,688 | |||
Capital leases, less current maturities | 3,409,530 | |||
Deferred rent | 31,430 | |||
Total long-term liabilities | 58,454,932 | |||
Total liabilities | 147,885,563 | |||
Commitments and contingencies | ||||
Stockholder's equity: | ||||
Common stock, no par value, 1,000 shares authorized, 1,000 shares issued and outstanding |
70,058,395 | |||
Retained earnings | 88,179,322 | |||
Accumulated comprehensive loss | (1,708,869 | ) | ||
Noncontrolling interest | 1,880,933 | |||
Total stockholder's equity | 158,409,781 | |||
Total liabilities and stockholder's equity | $ | 306,295,344 |
See summary of significant accounting policies and
notes to combined consolidated financial statements.
3
FirstOnSite USA Holdings Inc. and Subsidiaries
Combined Consolidated Statement of Income and Comprehensive Income
Year Ended December 31, | 2018 | |||
Net revenues | $ | 435,627,290 | ||
Cost of revenues, including depreciation of $2,732,535 | 281,416,782 | |||
Gross profit |
154,210,508 | |||
Operating expenses: | ||||
Selling, general and administrative |
105,416,790 | |||
Depreciation and amortization | 7,984,233 | |||
Transaction costs | 1,331,442 | |||
Gain on disposal of property and equipment | (578,563 | ) | ||
Total operating expenses |
114,153,902 | |||
Income from operations |
40,056,606 | |||
Other income (expense): | ||||
Interest income |
2,686 | |||
Interest expense | (7,745,639 | ) | ||
Foreign currency loss | (30,181 | ) | ||
Other income | 663,212 | |||
Total other expense |
(7,109,922 | ) | ||
Income before tax expense | 32,946,684 | |||
Franchise tax expense | 1,489,122 | |||
Income tax expense | 6,383,419 | |||
Total tax expense | 7,872,541 | |||
Net income |
$ | 25,074,143 | ||
Less: Net income attributable to noncontrolling interest |
1,541,469 | |||
Net income attributable to FirstOnSite USA Holdings, Inc. | $ | 23,532,674 | ||
Other comprehensive loss: | ||||
Foreign currency translation |
(1,188,401 | ) | ||
Total other comprehensive income | $ | 22,344,273 |
See summary of significant accounting policies and
notes to combined consolidated financial statements.
4
FirstOnSite USA Holdings Inc. and Subsidiaries
Combined Consolidated Statement of Changes in Stockholders Equity
Number of
Shares |
Common Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total Stockholder's Equity | |||||||||||||||||||
Balance, January 1, 2018 | 1,000 | $ | 70,058,395 | $ | 64,646,648 | $ | (520,468 | ) | $ | 339,464 | $ | 134,524,039 | ||||||||||||
Foreign currency translation | - | - | - | (1,188,401 | ) | - | (1,188,401 | ) | ||||||||||||||||
Net income | - | - | 23,532,674 | - | 1,541,469 | 25,074,143 | ||||||||||||||||||
Balance, December 31, 2018 | 1,000 | $ | 70,058,395 | $ | 88,179,322 | $ | (1,708,869 | ) | $ | 1,880,933 | $ | 158,409,781 |
See summary of significant accounting policies and
notes to combined consolidated financial statements.
5
FirstOnSite USA Holdings Inc. and Subsidiaries
Combined Consolidated Statement of Cash Flows
Year Ended December 31, | 2018 | |||
Cash flows from operating activities: | ||||
Net income | $ | 25,074,143 | ||
Adjustments to reconcile net income to net cash from operating activities | ||||
Depreciation and amortization | 10,716,768 | |||
Amortization of deferred financing costs | 1,237,993 | |||
Change in accounts receivable allowances | (229,758 | ) | ||
Deferred income tax expense | 1,138,813 | |||
Gain on disposal of property and equipment | (578,563 | ) | ||
Goodwill adjustment | (47,822 | ) | ||
Profits interest compensation expense | (297,606 | ) | ||
Change in operating assets and liabilities: | ||||
Accounts receivable trade | 15,321,451 | |||
Accounts receivable unbilled (costs in excess) | 9,231,532 | |||
Inventory and supplies | (91,457 | ) | ||
Prepaid and other and deposits | 399,861 | |||
Deferred revenue - billings in excess of costs | (1,222,794 | ) | ||
Accounts payable-trade and accrued expenses | (18,084,861 | ) | ||
Deferred comp plan payable | 17,973 | |||
Income tax payable | 67,348 | |||
Deferred rent | (74,524 | ) | ||
Net cash provided by operating activities | 42,578,497 | |||
Cash flows from investing activities: | ||||
Proceeds from the sale of property and equipment | 631,698 | |||
Purchases of property and equipment | (3,388,814 | ) | ||
Net cash used in investing activities | (2,757,116 | ) | ||
Cash flows from financing activities: | ||||
Checks drawn against future deposits | 6,198,961 | |||
Borrowings (repayments) on line of credit, net | 8,221,598 | |||
Proceeds from long-term debt | 72,952,878 | |||
Payments on long-term debt | (81,493,679 | ) | ||
Payments on capital leases | (1,256,447 | ) | ||
Deferred financing costs | (5,497,847 | ) | ||
Distributions to Parent | (37,494,388 | ) | ||
Net cash used in financing activities | (38,368,924 | ) | ||
Effect of exchange rate changes on cash | (1,188,401 | ) | ||
Net change in cash and cash equivalents | 264,056 | |||
Cash and cash equivalents, beginning of year | - | |||
Cash and cash equivalents, end of year | $ | 264,056 |
Continued.
6
FirstOnSite USA Holdings Inc. and Subsidiaries
Combined Consolidated Statement of Cash Flows
Supplemental disclosure of cash flow information: | ||||
Cash paid for interest | $ | 6,576,138 | ||
Cash paid for income and franchise taxes | $ | 8,611,236 | ||
Non-cash activities: | ||||
Acquisition of equipment through capital lease |
$ | 1,908,984 |
See summary of significant accounting policies and
notes to combined consolidated financial statements.
7
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
Description of Business
FirstOnSite USA Holdings, Inc. and its Subsidiaries (the Company) are engaged in providing recovery and construction services. Such services include emergency pre-planning and response, drying, mold remediation, fire and water damage restoration, reconstruction, equipment and technology restoration and project management. The Company maintains offices in various locations in the United States and Canada, with headquarters in Fort Worth, Texas and Mississauga, Ontario Canada.
Basis of Presentation
The Company was formed in Delaware in January 2018 to combine the equity interests of Bellwether International Group LLC and Subsidiaries (Bellwether) and Delos MBHE FOS LP and Subsidiaries (Delos), who are defined as entities under common control.
In accordance with Accounting Standards Codification (ASC) 805, Business Combinations, recognized assets and liabilities of Bellwether and Delos were transferred to the Company at their carrying amounts on the date of transfer, February 2, 2018. These combined consolidated financial statements report the results of operations as though the transfer had occurred on January 1, 2018.
The accompanying combined consolidated financial statements include the activities of FirstOnSite USA Holdings Inc. and its wholly owned and majority owned subsidiaries: FirstOnSite Restoration, Inc. (comprised of FirstOnSite Canadian Holdings, Inc. and FirstOnSite Restoration Limited) (collectively FOS); Interstate Restoration LLC (comprised of Interstate Restoration Group, Inc., Colorado Fire and Flood, LLC, Mazur Holdings, Inc., Interstate Restoration California LP and Interstate Restoration de Mexico S de R.L. de C.V.) and Interstate Restoration Hawaii LLC (collectively IR LLC).
The Company is wholly-owned by Global Restoration Holdings LLC through its ownership of Bellwether FOS Holdco, Inc. (collectively, the Parent), whose activities are excluded from these combined consolidated financial statements.
Principles of Consolidation and Non-Controlling Interests
These combined consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The accompanying combined consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and other entities in which the Company has a controlling financial interest. In accordance with ASC 810, Consolidation, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests for subsidiaries is presented as net income applicable to noncontrolling interests on the accompanying combined consolidated statement of income and comprehensive income, and the portion of the stockholders equity of such subsidiaries is presented as noncontrolling interests on the accompanying combined consolidated balance sheet and accompanying combined consolidated statement of stockholders equity. All significant intercompany transactions and accounts have been eliminated.
8
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
Foreign Currency
Revenues and expenses incurred from operations in Canada are denominated in the local functional currency. Assets and liabilities are translated to U.S. dollars at the year-end exchange rate, and revenues and expenses are translated at average rates throughout the year. Translation adjustments are included in accumulated other comprehensive loss, a separate component of stockholders equity. Transaction gains and losses denominated in a currency other than the functional currency of the Canadian operations are included in other income (expense) on the combined consolidated statement of income and comprehensive income.
Operating Cycle
The Companys contract services are performed under fixed and variable price contracts. The length of the Companys contracts varies but generally do not exceed four months. Therefore, assets and liabilities expected to be used/settled within one year are classified as current.
Revenue and Cost Recognition
Revenue from emergency response, contents restoration and construction contracts is recognized under the percentage-of-completion method, measured by the percentage of total costs incurred to date to total estimated costs. Revenue from time-and-material contracts without stated contract amounts is recognized as costs are incurred. Revenue is generally calculated based on contractual billing rates for the services performed. This method is used because management considers expended costs to be the best available measure of progress on these contracts. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. Contract revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments to the extent it is probable they will result in revenue and can be measured reliably. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used could change in the near term.
For de minimis contracts with an expected completion time of 30 days or less, the Company recognizes revenue under the completed contract method, which is not materially different from the percentage-of-completion method. The Company considers a contract complete when it has completed the work for a phase, the customer is obligated to pay for the services and the Company has no future obligation to complete further work for that particular phase. Revenues and costs are not recorded until a contract or phase is complete. As revenues are not recorded until the contract is complete, when the Company invoices for progress billings, these billings are recorded as deferred revenue - billings in excess of costs on the combined consolidated balance sheet.
9
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
The Company may have, from time-to-time, billing disputes with some of its customers or the customers insurance providers. These disputes arise in the ordinary course of business in the recovery and construction industry, and their impact on the Companys accounts receivable and revenues can be reasonably estimated based on historical experience. In addition, certain revenues are subject to the insurance provider of the customer on insurance claims based on the insurance providers approved rates. Accordingly, the Company maintains allowances, through charges against revenues, based on the Companys estimates of: (i) the ultimate resolution of the disputes and (ii) insurance and other pricing adjustments. See Note 2 - Trade Accounts Receivable.
From time to time, contracts receivable include claims arising from contractual disputes. In accordance with ASC 605-35-25, Revenue Recognition: ConstructionType and ProductionType Contracts, revenues from claims are recognized only to the extent that contract costs relating to the claim have been incurred.
Contract costs include all direct materials, subcontract costs, labor costs and those indirect costs related to contract performance, such as indirect labor, depreciation, supplies and tool costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses, if any, are made in their entirety in the year such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Unbilled receivables represent costs and estimated earnings in excess of amounts billed. Deferred revenue-billings in excess of cost represent billings in excess of costs and estimated earnings on uncompleted contracts.
Restoration work relating to natural disasters, such as floods and hurricanes, is seasonal and characterized by the peak activity beginning in June through the fall months. Because the Companys operating results can be significantly impacted by sales derived from these events during its peak season, the quarterly and annual results of operations may fluctuate significantly depending on the number of hurricanes and floods on a national or regional basis.
Concentration of Credit Risk
The Companys financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable - trade. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
Receivables are recorded when earned, are typically unsecured and are derived from transactions with customers located primarily in the United States and Canada. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. Receivables are written off to the allowance when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Companys historical losses, the existing economic conditions in the construction industry, and the financial stability of its customers. The Company files statutory liens on construction projects where collection problems are anticipated. Significant past due balances over 120 days and other higher risk amounts are reviewed individually for collectability. Based on current customer credit information and the opinions of the Companys collection attorneys, management believes the allowance for doubtful accounts is adequate. However, actual write-offs may exceed the recorded allowance.
10
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
Foreign exchange risk
In the normal course of business, the Company is exposed to foreign exchange transactions and translation risk. The Company does not use derivative financial instruments in relation to this risk.
Interest rate risk
The Company is exposed to interest rate risk arising from fluctuations in interest rates on its credit facilities.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. There are uncertainties related to the Companys operations that include, but are not limited to, unusual weather trends, volume of sales and customer acceptances of project completion. These uncertainties could impact the Companys financial results and timing of cash resources. Therefore, the Companys objective is to maintain sufficient capacity on its credit facilities and to maintain sufficient levels of working capital to settle financial liabilities when they are contractually due. The Company manages its liquidity risk to ensure it complies with its debt covenants.
Cash and Cash Equivalents
For purposes of the combined consolidated statement of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.
Inventory
Inventory is stated at the lower of cost or net realizable value (first in, first out) and consists primarily of supplies used in restoration services.
Property and Equipment
Property and equipment purchased are recorded at cost, less accumulated depreciation and include improvements that significantly add to productive capacity or extend the useful life of the related asset. Property and equipment from acquisitions are recorded at estimated fair value. Costs related to ordinary maintenance and repairs are charged to expense or to contract costs in the period in which they are incurred. When assets are retired or disposed, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the accompanying combined consolidated statement of income and comprehensive income for the period. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvement lives are estimated as the lesser of the useful life of the asset or the lease term.
11
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
Advances to Parent
Advances are reflective of activities with the Parent, including a $32 million distribution financed by the Companys term loan agreement in conjunction with the combination of the entities on February 2, 2018.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected undiscounted future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the assets fair value. No impairment was recorded at December 31, 2018.
Goodwill and Intangible Assets
Goodwill represents the excess of costs over the fair value of identifiable net assets of businesses acquired. Goodwill and intangible assets acquired in a business combination determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Intangible assets with finite useful lives are amortized over their respective estimated useful lives: finite-lived trademarks and trade names and non-compete agreements are amortized on a straight- line basis and customer relationships are amortized on an accelerated basis over the expected period of benefit.
Intangible assets are reviewed for impairment in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets. When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the asset carrying value using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value.
Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. In these tests, the fair values of each reporting unit, or segment, is compared to the carrying amount of that reporting unit, in order to determine if impairment is indicated. If so, the implied fair value of the reporting units goodwill is compared to its carrying amount, and the impairment loss is measured by the excess of the carrying value over fair value. No impairment was recorded at December 31, 2018.
Debt Financing Costs
Costs relating to obtaining credit facilities are capitalized and amortized using the effective interest method over the term of the related debt. Total amortization of debt financing costs of approximately $1.2 million were recognized as a component of interest expense during the year ended December 31, 2018.
12
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
Income Taxes
The Company pays U.S. federal and state income taxes and foreign income taxes on the taxable income of its C corporations within the combined consolidated group. The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying combined consolidated balance sheet, and for operating loss and tax credit carry forwards and carry backs. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. Valuation allowances are provided against deferred tax assets when it is determined that it is more likely than not that such assets will not be recovered.
The Company follows ASC 740-10, Income Taxes, to account for any uncertainty in income taxes with respect to the accounting for all tax positions taken (or expected to be taken) on any income tax return. This guidance applies to all open tax periods in all tax jurisdictions in which the Company is required to file an income tax return. Under GAAP, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Company has determined that no uncertain tax positions have been taken or are expected to be taken that could have a material effect on the Companys income tax assets or liabilities.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to an audit in these jurisdictions, as well as by the Internal Revenue Service and Canadian taxation authorities.
The limited liability companies in the group are treated for tax purposes as flow-through entities and are not subject to U.S. federal or state income taxes. U.S. federal and state income is reported and paid by the members on their respective individual U.S. personal income tax returns.
Warranties
Most warranties sold by the Company are provided by the manufacturer or subcontractors to the Company. There are certain residential customers that are given a warranty and the historical cost for this has been minimal.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash and cash equivalents, accounts receivable - trade, and debt. The carrying value of cash and cash equivalents and accounts receivable - trade approximate their fair values due to their short maturities. The fair value of the Companys debt approximates its carrying value due to the terms available to the Company for similar financial instruments. Stock compensation related to profits interests are measured at fair value in the accompanying combined consolidated statement of income and comprehensive income.
13
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
Fair Value Measurements
The Company follows methods of fair value measurement described under ASC 820, Fair Value Measurements and Disclosures (ASC 820), which establishes a common definition of fair value to be applied with existing GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability, rather than an entity-specific measure. Therefore, when market assumptions are not readily available, the Companys own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys estimates about the assumptions market participants would use in pricing the asset developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
• | Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; |
• | Level 2: Defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; |
• | Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
Advertising
The Company expenses advertising costs at the time the costs are incurred. Advertising expense during the year ended December 31, 2018 was insignificant.
Use of Estimates
The preparation of the combined consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material.
14
FirstOnSite USA Holdings Inc. and Subsidiaries
Summary of Significant Accounting Policies
Change in Accounting Estimate
Revisions to estimated contract profits, including approved change orders, are made in the year in which circumstances requiring the revision become known. The effect of changes in estimates of contract profits and change orders was to increase net income for the year ended December 31, 2018 by approximately $5.1 million from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in the preceding year. Such changes in estimates include the financial impact of change orders issued in the current year whose impact on the revised estimates is not considered to have a material effect on the overall change in contract profits.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 (Topic 606), Revenue from Contracts with Customers (ASU 2014-09). The new revenue recognition standard supersedes all existing revenue recognition guidance. Under ASU 2014-09, an entity must recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition will include qualitative and quantitative information about contracts with customers, significant judgments and changed judgments, and assets recognized from costs to obtain or fulfill a contract. The new revenue recognition standard is effective for annual periods beginning after December 15, 2018. Management is currently evaluating the potential impact of this new standard on the Companys combined consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Leases (ASU 2016-2) which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are recorded on the balance sheet represents a significant change from previous GAAP guidance in Topic 840. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating leases. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2019, and early adoption is permitted. Management is currently evaluating the potential impact of this new standard on the Companys combined consolidated financial statements.
15
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
1. CONTRACT BILLING STATUS | |
Cost and estimated earnings on uncompleted contracts were as follows: |
December 31, | 2018 | |||
Costs incurred on uncompleted contracts | $ | 166,935,486 | ||
Estimated earnings on uncompleted contracts | 75,624,112 | |||
242,559,598 | ||||
Less: billings to date | (212,880,318 | ) | ||
$ | 29,679,280 |
These amounts are included in the accompanying combined consolidated balance sheet under the following captions:
December 31, | 2018 | |||
Unbilled accounts receivable | $ | 45,155,381 | ||
Deferred revenue billings in excess of costs | (15,476,101 | ) | ||
$ | 29,679,280 |
2. TRADE ACCOUNTS RECEIVABLE |
|
Trade accounts receivable consisted of the following: |
December 31, | 2018 | |||
Contracts receivable | $ | 124,456,165 | ||
Allowance for revenue adjustments | (918,000 | ) | ||
Allowance for claims | (700,000 | ) | ||
Allowance for bad debts | (4,072,484 | ) | ||
Total allowances | (5,690,484 | ) | ||
Trade accounts receivable, net | $ | 118,765,681 |
As of December 31, 2018, the Company had approximately $16 million of accounts receivable balances due primarily from five customers originating during 2015 - 2018. The Company, through its collection attorneys, continues to work with the customers insurance carriers to obtain full payment plus any interest due under the terms of the contracts. The Company has a successful history of collecting significant past due balances, particularly related to customer insurance claims. Management believes the customers and insurance companies have the ability and intent to pay amounts owed. However, if the financial condition of the Companys customers or their insurance companies were to deteriorate, adversely affecting their ability to make payments, additional allowances and or write-offs would be required.
16
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
The Companys contract receivable allowance accounts were as follows: |
Year Ended December 31, | 2018 | |||
Allowance for revenue adjustments: | ||||
Balance at January 1 | $ | 949,000 | ||
Provision (reduction) | (31,000 | ) | ||
Balance at December 31 | $ | 918,000 | ||
Claims arising from contractual disputes: | ||||
Balance at January 1 | $ | - | ||
Provision | 700,000 | |||
Balance at December 31 | $ | 700,000 | ||
Allowance for bad debts: | ||||
Balance at January 1 | $ | 4,971,242 | ||
Provision | 1,588,885 | |||
Write-offs | (2,487,643 | ) | ||
Balance at December 31 | $ | 4,072,484 |
3. PROPERTY AND EQUIPMENT, NET |
|
Property and equipment consisted of the following: |
December 31, | 2018 | |||
Furniture, fixtures and equipment | $ | 9,042,906 | ||
Field equipment | 23,352,621 | |||
Vehicles | 12,422,739 | |||
Software licensing | 2,142,381 | |||
Other assets | 14,400 | |||
Leasehold improvements | 6,986,096 | |||
53,961,143 | ||||
Less: accumulated depreciation and amortization | (39,994,440 | ) | ||
Total property and equipment, net | $ | 13,966,703 |
Depreciation expense was approximately $5.9 million during the year ended December 31, 2018.
17
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
4. | INTANGIBLE ASSETS |
Intangible assets, excluding goodwill, consisted of the following:
December 31, 2018 | Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
Amortized intangible assets: | ||||||||||||||||
Trademarks and trade names | 5-14 years | $ | 4,806,583 | $ | 2,749,436 | $ | 2,057,147 | |||||||||
Non-compete agreements | 5 years | 228,890 | 96,674 | 132,216 | ||||||||||||
Customer relationships | 5-14 years | 45,568,600 | 9,033,203 | 36,535,397 | ||||||||||||
Non-amortizing intangible assets: | ||||||||||||||||
Trade names | Indefinite | 3,602,000 | - | 3,602,000 | ||||||||||||
Total | $ | 54,206,073 | $ | 11,879,313 | $ | 42,326,760 |
Amortization expense for the year ended December 31, 2018 on intangible assets was approximately $4.8 million.
Assuming no future impairments, expected amortization expense related to amortizing intangible assets is as follows:
Year Ending December 31, | Total |
2019 | $4,687,693 |
2020 | 3,916,515 |
2021 | 3,425,307 |
2022 | 2,952,796 |
2023 | 2,759,899 |
Thereafter | 20,982,550 |
$38,724,760 |
The Company has goodwill recorded from acquisitions as follows:
FOS | IR LLC | Total | ||||||||||
January 1, 2018 | $ | 1,422,997 | $ | 18,371,393 | $ | 19,794,390 | ||||||
Adjustments | - | 47,822 | 47,822 | |||||||||
December 31, 2018 | $ | 1,422,997 | $ | 18,419,215 | $ | 19,842,212 |
18
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
5. | DEBT |
Debt consisted of the following:
December 31, 2018 | Term Loan |
Revolving Line of Credit - U.S.
Operations |
Revolving Line of Credit - Canadian Operations | Total | ||||||||||||
Balance on borrowing | $ | 22,750,000 | $ | 23,336,158 | $ | 19,393,974 | $ | 65,480,132 | ||||||||
Less: debt issuance costs, net | (3,476,312 | ) | (768,872 | ) | (720,976 | ) | (4,966,160 | ) | ||||||||
Less: current portion | (5,500,000 | ) | - | - | (5,500,000 | ) | ||||||||||
$ | 13,773,688 | $ | 22,567,286 | $ | 18,672,998 | $ | 55,013,972 |
Term Loan
On February 2, 2018, the Company obtained a term loan in the amount of $60 million maturing on February 2, 2023, with quarterly payments of $750,000 and variable interest at LIBOR plus a margin, as defined (10.84% at December 31, 2018). During 2018, the Company paid down the term loan in the amount of $37.25 million. The term loan requires an annual excess cash flow payment, as defined, toward the balance of the borrowing no later than June 30 of the following year. The credit facility is collateralized by substantially all assets and equity interests of the Company. The term loan is subordinated to the revolving line of credit facilities under an inter- creditor agreement between the lenders. Further, the Companys subsidiaries serve as co- borrowers and guarantors and the Parent additionally serves as guarantor.
In February 2019, the Companys term loan agreement was amended to obtain an additional $50 million under the existing terms and original maturity date, with payments amended to $1,375,000 per quarter.
Revolving Line of Credit U.S. Operations
On February 2, 2018, the Company obtained a revolving line of credit initially funded at $37.5 million, which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on $20 million (4.73% at December 31, 2018) and variable interest at U.S. prime rate plus a margin as defined on approximately $3.3 million (6.75% at December 31, 2018). Availability on the line of credit is limited to a defined borrowing base on IR LLCs billed and unbilled accounts receivable with maximum borrowings of $47 million.
19
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
Revolving Line of Credit Canadian Operations
On February 2, 2018, the Company amended an existing FOS line of credit which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on approximately $9.5 million (5.31% at December 31, 2018) and variable interest at the Canadian prime rate plus a margin as defined on approximately $10 million (4.81% at December 31, 2018). Availability on the line of credit is limited to a defined borrowing base on FOSs billed and unbilled accounts receivable with maximum borrowings of $34 million Canadian dollars through October 17, 2018, increased to $45 million Canadian dollars.
The credit facilities are collateralized by substantially all assets and equity interests of the Company. The Companys subsidiaries serve as co-borrowers and guarantors and the Parent additionally serves as guarantor.
Bellwethers existing revolving line of credit and term loans in the amount of approximately $49 million were refinanced with the Companys credit facilities described above.
Deloss existing revolving line of credit and term loan in the amount of approximately $29 million were refinanced with the Companys term loan and revolving line of credit described above.
The Companys credit facilities have certain financial covenants including fixed charge coverage and leverage ratios; capital expenditures limits; along with restrictions on member distributions, additional indebtedness and cash used for future acquisitions. The Company was in compliance with such financial covenants at December 31, 2018.
At December 31, 2018, the minimum annual principal payments for borrowings, including the February 2019 term loan amendment and including the lines of credit, are as follows:
Year Ending December 31, | Total | ||
2019 | $ | 5,500,000 | |
2020 | 5,500,000 | ||
2021 | 5,500,000 | ||
2022 | 5,500,000 | ||
2023 | 43,480,132 | ||
Total long-term debt | $ | 65,480,132 |
20
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
6. CAPITAL LEASES | |
Capital leases consisted of the following at December 31, 2018: |
Capital leases payable to financial institutions with interest rates ranging from 7% to 8% and maturities through December, 2023. Monthly payments are approximately $116,000. Obligations secured by vehicles. | $ | 5,249,006 | ||
Less interest cost | (549,481 | ) | ||
4,699,525 | ||||
Less current portion | (1,289,995 | ) | ||
$ | 3,409,530 |
Future maturities of capital leases are as follows:
Year Ending December 31, | Total | |||
2019 | $ | 1,712,868 | ||
2020 | 1,468,102 | |||
2021 | 1,135,795 | |||
2022 | 644,453 | |||
2023 | 287,788 | |||
$ | 5,249,006 |
Assets under capital lease approximate $10.5 million and related accumulated depreciation approximates $6.0 million as of December 31, 2018.
7. STOCK COMPENSATION ARRANGEMENTS |
Certain of the Bellwether contributed companies issued equity-based compensation arrangements who subsequently became employees of IR LLC. Awards were fully vested as of the date of grant, which permitted the employees to participate in future appreciation of the respective members equity. The profits interests will be paid in the form of cash or a promissory note at the Companys discretion, or upon a terminating event, as defined within the profits interest agreement (the Agreement). Certain terminating events, as defined by the Agreement, require the employee to forfeit the profits interest without compensation.
In accordance with provisions of ASC 718, Compensation Stock Compensation (ASC 718) and related guidance, these profits interest awards have characteristics that determine the classification as a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. On February 2, 2018 the profits interests were exchanged for profits interests in the Parent and the liability was transferred to the Parent through an equity contribution. Compensation expense continues to be recorded by IR LLC associated with the change in fair value of this profits interest liability at each reporting date. Approximately $306,000 compensation expense has been recognized in selling, general and administrative expenses in the accompanying combined consolidated statement of income and comprehensive income for the year ended December 31, 2018, with a corresponding equity contribution to the Parent.
21
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
IR LLC granted 3% profits interest to a key employee, which was issued upon reaching target revenues and fully vested in 2013. In accordance with provisions of ASC 718 and related guidance, this profits interest award has characteristics that determine the classification as a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense (recovery). On February 2, 2018 the profits interest in IR LLC was exchanged for a profits interest in the Parent and the liability was transferred to the Parent through an equity contribution. Compensation expense continues to be recorded by IR LLC associated with the change in fair value of the profits interest liability at each reporting date. Approximately $(604,000) compensation recovery has been recognized in selling, general and administrative expenses in the accompanying combined consolidated statement of income and comprehensive income for the year ended December 31, 2018 with a corresponding equity contribution to the Parent.
The profits interest liabilities issued by the Parent to IR LLCs employees approximated $4.8 million at December 31, 2018.
Parent Value A Units
The Companys Parent issued approximately 14 million Value A units to key employees in 2018 with a fair value of $498,700. The units vest at 25% annually over a four-year period and are contingent on continued employment with the Company or any of its subsidiaries. Certain events allow the Parent the right, but not the obligation, to repurchase the units as specified in the agreement. In accordance with applicable accounting guidance, the awards were classified as equity by the Parent and recorded at fair value. Compensation expense will be recorded by the Company as the requisite service is rendered, with an offsetting equity contribution to the Parent.
22
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
8. INCOME TAXES | |
The components of income tax expense consisted of the following: |
Year Ended December 31, | 2018 | ||||
Current: | |||||
Federal | $ | 4,237,781 | |||
State | 886,118 | ||||
Foreign | 1,609,829 | ||||
6,733,728 | |||||
Deferred: | |||||
Federal | (1,097,217 | ) | |||
State | (131,365 | ) | |||
Foreign | 2,367,395 | ||||
1,138,813 | |||||
Income tax expense | $ | 7,872,541 |
The Companys effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income before income taxes primarily because of certain expenses deductible for financial reporting purposes that are not deductible for tax purposes, including operating loss carryforwards. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
23
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
The types of temporary differences between the tax basis of assets and liabilities that give rise to a significant portion of the deferred tax assets and liabilities and their approximate tax effects are as follows:
December 31, | 2018 | |||
Components of net long-term deferred tax assets (liabilities): | ||||
Basis difference in intangibles | $ | 133,443 | ||
Federal and state net operating losses | 490,916 | |||
Allowances | 11,590 | |||
Accrued expenses | 2,018,758 | |||
Interest limitation | 24,571 | |||
Effect of passthrough entities | 929,315 | |||
Basis difference in property and equipment | (319,277 | ) | ||
Other | (207,245 | ) | ||
Total net deferred tax assets | $ | 3,082,071 |
At December 31, 2018, the Company has approximately $2.4 million available in U.S. federal unused net operating losses that may be applied against future U.S. taxable income, limited to 80%. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, management believes it is more likely than not that the Company will realize its net deferred tax assets.
9. | COMMITMENTS AND CONTINGENCIES |
Operating Lease Commitments
The Company leases land, buildings, equipment, and vehicles under various operating leases through October 2024, certain of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with GAAP, the Company records monthly rent expense on a straight-line basis and reflects a deferred rent liability for the difference between straight-line rent and actual rent payments.
24
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
Minimum lease payments, for each of the succeeding five years and thereafter, under operating leases with initial terms in excess of one year are, as follows:
Years Ending December 31, | ||||
2019 | $ | 6,499,890 | ||
2020 | 5,249,564 | |||
2021 | 3,775,931 | |||
2022 | 2,031,438 | |||
2023 | 891,911 | |||
Thereafter | 323,238 | |||
$ | 18,771,972 |
Rent expense was approximately $7.0 million during the year ended December 31, 2018.
Letters of Credit
FOS has outstanding letters of credit of approximately $230,000 at December 31, 2018, which currently will expire April 2019.
Surety Bonds
The Company, as a condition for entering into certain construction contracts, had outstanding surety bonds totaling approximately $23 million related to U.S. operations at December 31, 2018. There are de minimis surety bonds related to Canadian operations at December 31, 2018.
Section 401(k) Retirement Plan
IR LLC has a Section 401(k) retirement plan (the Plan) covering certain employees. Employees are generally eligible to participate after reaching 21 years of age and attaining six months of employment. Eligible employees can contribute up to eighty percent of their considered elective deferrals, subject to IRS limitations. In addition, the Plan allows for catch-up contributions for those participants aged 50 or older. The Company match is a discretionary percentage of considered earnings and vests over a five-year period. The Company match for the year ended December 31, 2018 was not significant.
Canadian Retirement Plan
FirstOnSite Restoration Ltd. has a Registered Retirement Savings Plan (RRSP) and Deferred Profit Sharing Plan (DPSP) group retirement plan (the Plan) covering certain employees. Employees are generally eligible to participate after reaching 18 years of age and attaining six months of employment. Eligible employees can contribute one point five percent (1.5%) of their pensionable earnings (excluding overtime and bonuses) to the RRSP and receive an employer match of one point five percent (1.5%) to the DPSP. DPSP Vesting is after two years of plan membership. In addition, the Plan allows for extra voluntary contributions.
25
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
Litigation
The Company is subject to various claims and legal matters in the ordinary course of business. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
Indemnification of Directors and Officers
Under the terms of the Companys operating agreements, the directors and officers of the Company have been indemnified for any action or any failure to act on behalf of the Company within the authority as directors and officers, unless the act or omission was performed or omitted fraudulently, as defined.
Employment Agreements
The Company has entered into employment agreements with certain key employees that stipulate salary, bonus and termination provisions.
10. | STOCKHOLDERS EQUITY |
The Company issued 1,000 shares to its Parent on January 30, 2018. For purposes of presentation of combination and consolidation of entities under common control, the issuance date is reflected on the first day of the year. As of December 31, 2018, 1,000 common shares are issued, authorized and outstanding.
Under the terms of the Companys operating agreement, additional capital contributions are discretionary. In addition, distributions are discretionary and may be limited by provisions in existing credit facility agreements. No distributions were paid by the Company during 2018. See summary of significant accounting policies, Advances to Parent, which discusses the cash contribution made to the Parent during 2018.
Non-Controlling Interest
At its formation, Interstate Restoration Hawaii LLC (IR Hawaii) issued 2,500 units to a member representing 25% ownership interest. Upon sale of the Company, the member has the option to put the 2,500 units back to IR Hawaii and IR Hawaii has the option to redeem the units. The redemption of the units is contingent upon a future sale of the Company and the exercise of the put or call option, which is not certain. In accordance with ASC 480, Distinguishing Liabilities from Equity, should a sale event occur, and the redemption be exercised by the member or the Company, the then fair value of the units will be reclassified from equity to a liability, payable as defined in the agreement.
11. | RELATED PARTY TRANSACTIONS |
The Company receives administrative support from members of the Parent. Amounts paid for administrative support for the year ended December 31, 2018 were $300,000.
26
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Combined Consolidated Financial Statements
The Company rents office space from related parties. Rents paid for these facilities for the year ended December 31, 2018 totaled approximately $495,000.
12. | BACKLOG (UNAUDITED) |
The following schedule shows a reconciliation of backlog representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at December 31, 2018 and from contractual agreements on which work has not yet begun.
(Unaudited) | |||||
Balance, January 1, 2018 | $ | 105,219,624 | |||
New contracts | 400,786,076 | ||||
Less: Contract revenue earned | (435,432,720 | ) | |||
Balance, December 31, 2018 | $ | 70,572,980 |
13. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through May 14, 2019 which is the date the combined consolidated financial statements were available to be issued. There are no material subsequent events that required recognition or additional disclosure in these combined consolidated financial statements other than as described below:
As described in Note 5, in February 2019 the Companys term loan agreement was amended to obtain an additional $50 million under the existing terms and original maturity date. As allowed by the term loan agreement, a $50 million distribution was made to the Parent.
27
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Tel: 817-738-2400 Fax: 817-738-1995 www.bdo.com |
Bank of America Tower 301 Commerce Street, Suite 2000 Fort Worth, TX 76102 |
Independent Auditors Report on Supplementary Information
Board of Directors and Stockholder
FirstOnSite USA Holdings Inc. and Subsidiaries
Fort Worth, TX
Our audit of the combined consolidated financial statements included in the preceding section of this report was conducted for the purpose of forming an opinion on those statements taken as a whole. The supplementary information presented in the following section of this report is presented for purposes of additional analysis and is not a required part of the combined consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the combined consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the combined consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the combined consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the combined consolidated financial statements as a whole.
May 14, 2019
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
December 31, 2018 |
|
FirstOnSite USA Holdings, Inc. |
|
FirstOnSite Restoration, Inc. |
Interstate
Restoration,
|
Total | ||||||||||
Assets | ||||||||||||||||
Cash | $ | - | $ | 264,056 | $ | - | $ | 264,056 | ||||||||
Accounts receivable: | ||||||||||||||||
Trade, net of allowance | - | 53,920,491 | 64,845,190 | 118,765,681 | ||||||||||||
Unbilled | - | 9,849,033 | 35,306,348 | 45,155,381 | ||||||||||||
Intercompany receivables (payables) | (44,933,019 | ) | (185,939 | ) | 45,118,958 | - | ||||||||||
Investment in subsidiaries | 26,775,111 | (6,775,111 | ) | (20,000,000 | ) | - | ||||||||||
Inventory and supplies | - | 690,105 | 1,670,657 | 2,360,762 | ||||||||||||
Prepaid and other | - | 1,789,865 | 1,379,309 | 3,169,174 | ||||||||||||
Total current assets |
(18,157,908 | ) | 59,552,500 | 128,320,462 | 169,715,054 | |||||||||||
Property and equipment, net |
- | 8,113,411 | 5,853,292 | 13,966,703 | ||||||||||||
Other assets: | ||||||||||||||||
Advances to Parent | 26,869,195 | - | 30,294,536 | 57,163,731 | ||||||||||||
Intangible assets, net | - | 3,927,820 | 38,398,940 | 42,326,760 | ||||||||||||
Goodwill | - | 1,422,997 | 18,419,215 | 19,842,212 | ||||||||||||
Deferred tax assets | 1,214,007 | 1,868,064 | - | 3,082,071 | ||||||||||||
Deposits | - | - | 198,813 | 198,813 | ||||||||||||
Total other assets |
28,083,202 | 7,218,881 | 87,311,504 | 122,613,587 | ||||||||||||
Total assets |
$ | 9,925,294 | $ | 74,884,792 | $ | 221,485,258 | $ | 306,295,344 |
Continued
29
FirstOnSite USA Holdings Inc. and Subsidiaries
Combining Consolidating Balance Sheet
FirstOnSite USA Holdings, |
FirstOnSite Restoration, |
Interstate Restoration, |
||||||||||||||
December 31, 2018 | Inc. | Inc. | LLC | Total | ||||||||||||
Liabilities and Stockholder's (Deficit) Equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Current: | ||||||||||||||||
Checks drawn against future deposits | $ | - | $ | - | $ | 6,320,570 | $ | 6,320,570 | ||||||||
Accounts payable - trade | - | 12,424,143 | 20,737,674 | 33,161,817 | ||||||||||||
Accrued expenses | - | 7,227,592 | 1,753,095 | 8,980,687 | ||||||||||||
Accrued compensation | - | 5,754,447 | 11,339,812 | 17,094,259 | ||||||||||||
Taxes (receivable) payable | 177,627 | 1,429,575 | - | 1,607,202 | ||||||||||||
Deferred revenue - billings in excess of cost | - | 4,368,404 | 11,107,697 | 15,476,101 | ||||||||||||
Current maturities of long-term debt | 5,500,000 | - | - | 5,500,000 | ||||||||||||
Current maturities of capital leases | 1,289,995 | - | 1,289,995 | |||||||||||||
Total current liabilities | 5,677,627 | 32,494,156 | 51,258,848 | 89,430,631 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Line of credit, net of debt issuance costs of approximately $1.5 million | - | 18,672,998 | 22,567,286 | 41,240,284 | ||||||||||||
Long-term debt, less current maturities, net of debt issuance costs of approximately $3.5 million | 13,773,688 | - | - | 13,773,688 | ||||||||||||
Capital leases, less current maturities | 3,409,530 | 3,409,530 | ||||||||||||||
Deferred rent | - | - | 31,430 | 31,430 | ||||||||||||
Total long-term liabilities | 13,773,688 | 22,082,528 | 22,598,716 | 58,454,932 | ||||||||||||
Total liabilities | 19,451,315 | 54,576,684 | 73,857,564 | 147,885,563 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholder's (deficit) equity: | ||||||||||||||||
Common stock, no par value, 1,000 shares authorized, 1,000 shares issued and outstanding | - | 15,831,063 | 54,227,332 | 70,058,395 | ||||||||||||
Retained (deficit) earnings | (9,526,021 | ) | 6,185,914 | 91,519,429 | 88,179,322 | |||||||||||
Accumulated comprehensive loss | - | (1,708,869 | ) | - | (1,708,869 | ) | ||||||||||
Noncontrolling interest | - | - | 1,880,933 | 1,880,933 | ||||||||||||
Total stockholder's (deficit) equity | (9,526,021 | ) | 20,308,108 | 147,627,694 | 158,409,781 | |||||||||||
Total liabilities and stockholder's equity | $ | 9,925,294 | $ | 74,884,792 | $ | 221,485,258 | $ | 306,295,344 |
See accompanying independent auditors report on supplementary information.
30
FirstOnSite USA Holdings Inc. and Subsidiaries
Combining Consolidating Statement of Income and Comprehensive Income
Year Ended December 31, 2018 |
FirstOnSite USA Holdings, Inc. |
FirstOnSite Restoration, Inc. |
Interstate Restoration, LLC |
Total | ||||||||||||
Net revenues | $ | - | $ | 170,516,864 | $ | 265,110,426 | $ | 435,627,290 | ||||||||
Cost of revenues, including depreciation of $2,732,535 | - | 110,211,193 | 171,205,589 | 281,416,782 | ||||||||||||
Gross profit |
- | 60,305,671 | 93,904,837 | 154,210,508 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative | - | 46,905,124 | 58,511,666 | 105,416,790 | ||||||||||||
Depreciation and amortization | - | 2,322,895 | 5,661,338 | 7,984,233 | ||||||||||||
Transaction costs | 1,331,442 | - | - | 1,331,442 | ||||||||||||
Gain on disposal of property and equipment | - | (271,953 | ) | (306,610 | ) | (578,563 | ) | |||||||||
Total operating expenses |
1,331,442 | 48,956,066 | 63,866,394 | 114,153,902 | ||||||||||||
Income (loss) from operations |
(1,331,442 | ) | 11,349,605 | 30,038,443 | 40,056,606 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest income | - | - | 2,686 | 2,686 | ||||||||||||
Interest expense | (3,796,031 | ) | (1,787,704 | ) | (2,161,904 | ) | (7,745,639 | ) | ||||||||
Foreign currency loss | (30,181 | ) | (30,181 | ) | ||||||||||||
Other income | - | - | 663,212 | 663,212 | ||||||||||||
Total other expense |
(3,796,031 | ) | (1,817,885 | ) | (1,496,006 | ) | (7,109,922 | ) | ||||||||
Income (loss) before tax expense |
(5,127,473 | ) | 9,531,720 | 28,542,437 | 32,946,684 | |||||||||||
Franchise tax expense |
1,367,915 | - | 121,207 | 1,489,122 | ||||||||||||
Income tax expense | 3,030,633 | 3,270,786 | 82,000 | 6,383,419 | ||||||||||||
Total tax expense | 4,398,548 | 3,270,786 | 203,207 | 7,872,541 | ||||||||||||
Net (loss) income |
(9,526,021 | ) | 6,260,934 | 28,339,230 | 25,074,143 | |||||||||||
Less: Net income attributable to noncontrolling interest | - | - | 1,541,469 | 1,541,469 | ||||||||||||
Net (loss) income attributable to FirstOnSite USA Holdings, Inc. | $ | (9,526,021 | ) | $ | 6,260,934 | $ | 26,797,761 | $ | 23,532,674 | |||||||
Other comprehensive loss: |
||||||||||||||||
Foreign currency translation | - | (1,188,401 | ) | - | (1,188,401 | ) | ||||||||||
Total other comprehensive income | $ | 22,344,273 |
See accompanying independent auditors report on supplementary information.
31
|
||
Bellwether International Group LLC and Subsidiaries and Delos MBHE FOS LP and Subsidiaries | ||
Combined Consolidated Unaudited Financial Statements | ||
Year Ended December 31, 2017 | ||
|
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Contents
Combined Consolidated Unaudited Balance Sheet | 1 | |
Combined Consolidated Unaudited Statement of Income and Comprehensive Income | 3 | |
Combined Consolidated Unaudited Statement of Changes in Members Equity/Partners Equity | 4 | |
Combined Consolidated Unaudited Statement of Cash Flows | 5 | |
Summary of Significant Accounting Policies | 7 | |
Notes to Combined Consolidated Unaudited Financial Statements | 15 |
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Combined Consolidated Unaudited Balance Sheet
December 31, | 2017 | |||
Assets | ||||
Current: | ||||
Accounts receivable: | ||||
Trade, net of allowance |
$ | 133,857,374 | ||
Unbilled | 54,386,912 | |||
Inventory and supplies | 2,269,305 | |||
Prepaid and other | 2,921,993 | |||
Total current assets | 193,435,584 | |||
Property and equipment, net | 14,593,498 | |||
Other assets: | ||||
Investments held for deferred comp plan | 170,625 | |||
Intangible assets, net | 47,172,068 | |||
Goodwill | 19,794,390 | |||
Deferred tax assets, net | 2,233,332 | |||
Deposits | 845,857 | |||
Total other assets | 70,216,272 | |||
Total assets | $ | 278,245,354 |
See summary of significant accounting policies and
notes to combined consolidated unaudited financial statements.
1
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Combined Consolidated Unaudited Balance Sheet
December 31, | 2017 | |||
Liabilities and Members' Equity/Partners' Equity | ||||
Liabilities | ||||
Current: | ||||
Checks drawn against future deposits | $ | 121,609 | ||
Accounts payable - trade | 53,238,733 | |||
Accrued expenses | 10,010,700 | |||
Accrued compensation | 14,267,853 | |||
Income taxes payable | 1,539,854 | |||
Deferred revenue - billings in excess of costs | 16,698,895 | |||
Current maturities of long-term debt | 2,250,000 | |||
Current maturities of capital leases | 1,419,070 | |||
Total current liabilities | 99,546,714 | |||
Long-term liabilities: | ||||
Deferred compensation plan payable | 152,652 | |||
Profits interests payable | 5,060,857 | |||
Long-term debt, less current maturities, net of debt issuance costs | 62,843,029 | |||
Capital leases, less current maturities | 2,627,918 | |||
Deferred rent | 105,954 | |||
Total long-term liabilities | 70,790,410 | |||
Total liabilities | 170,337,124 | |||
Commitments and contingencies | ||||
Members' equity | 87,691,127 | |||
Partners' equity | 14,160,679 | |||
Accumulated other comprehensive income | 1,074,896 | |||
Noncontrolling interest | 4,981,528 | |||
Total members' equity/partner's equity | 107,908,230 | |||
Total liabilities and members' equity/partners' equity | $ | 278,245,354 |
See summary of significant accounting policies and
notes to combined consolidated unaudited financial statements.
2
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Combined Consolidated Unaudited Statement of Income and Comprehensive Income
Year Ended December 31, | 2017 | |||
Net revenues | $ | 393,357,718 | ||
Cost of revenues, including depreciation of $2,171,502 | 246,176,981 | |||
Gross profit | 147,180,737 | |||
Operating expenses: | ||||
Selling, general and administrative | 105,186,735 | |||
Depreciation and amortization | 8,345,469 | |||
Gain on disposal of property and equipment | (148,800 | ) | ||
Total operating expenses | 113,383,404 | |||
Income from operations | 33,797,333 | |||
Other income (expense): | ||||
Interest income | 4,694 | |||
Interest expense | (4,766,439 | ) | ||
Other income | 324,266 | |||
Total other expense | (4,437,479 | ) | ||
Income before tax benefit, discontinued operations and noncontrolling interest | 29,359,854 | |||
Franchise tax expense | 219,738 | |||
Income tax benefit | (291,087 | ) | ||
Total tax benefit | (71,349 | ) | ||
Income from continuing operations | 29,431,203 | |||
Loss from discontinued operations | (12,159,730 | ) | ||
Net income | $ | 17,271,473 | ||
Less: Net income attributable to noncontrolling interest | 2,035,171 | |||
Net income attributable to the Entities | $ | 15,236,302 | ||
Other comprehensive income: | ||||
Foreign currency translation | 1,074,896 | |||
Total other comprehensive income | $ | 16,311,198 |
See summary of significant accounting policies and
notes to combined consolidated unaudited financial statements.
3
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Combined Consolidated Unaudited Statement of Changes in Members Equity/Partners Equity
Year Ended December 31, 2017 | Member Units | Members' Equity | Partners' Equity |
Accumulated Other Comprehensive Income |
Noncontrolling Interest | Total Members'/Partners' Equity | ||||||||||||||||||
Balance, January 1, 2017 | 32,770 | $ | 74,096,182 | $ | 12,702,718 | $ | - | $ | 2,946,357 | $ | 89,745,257 | |||||||||||||
Foreign currency translation | - | - | - | 1,074,896 | - | 1,074,896 | ||||||||||||||||||
Distributions | - | (183,396 | ) | - | - | - | (183,396 | ) | ||||||||||||||||
Net income | - | 13,778,341 | 1,457,961 | - | 2,035,171 | 17,271,473 | ||||||||||||||||||
Balance, December 31, 2017 | 32,770 | $ | 87,691,127 | $ | 14,160,679 | $ | 1,074,896 | $ | 4,981,528 | $ | 107,908,230 |
See summary of significant accounting policies and
notes to combined consolidated unaudited financial statements.
4
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Combined Consolidated Unaudited Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents | ||||
Year Ended December 31, | 2017 | |||
Cash flows from operating activities: | ||||
Net income | $ | 17,271,473 | ||
Adjustments to reconcile net income to net cash provided by operating activities | ||||
Depreciation and amortization | 10,516,971 | |||
Amortization of deferred financing costs | 895,323 | |||
Accrued interest on subordinated debt | 308,214 | |||
Change in accounts receivable allowances | 262,179 | |||
Deferred income taxes | (3,283,159 | ) | ||
Gain on disposal of property and equipment | (148,800 | ) | ||
Bargain purchase gain on acquisition | (129,483 | ) | ||
Goodwill adjustment | (71,763 | ) | ||
Profits interest compensation expense | 3,046,969 | |||
Loss on disposal of discontinued operations | 9,202,488 | |||
Change in operating assets and liabilities: | ||||
Accounts receivable - trade | (33,068,263 | ) | ||
Accounts receivable - unbilled | (40,764,629 | ) | ||
Inventory and supplies | (26,442 | ) | ||
Prepaid and other and deposits | (1,302,411 | ) | ||
Deferred revenue - billings in excess of costs | 10,037,609 | |||
Accounts payable-trade and accrued expenses | 35,752,882 | |||
Other long term payables | (27,724 | ) | ||
Income tax payable | 988,204 | |||
Deferred rent | (68,305 | ) | ||
Net cash provided by operating activities | 9,391,333 | |||
Cash flows from investing activities: | ||||
Proceeds from the sale of property and equipment | 183,463 | |||
Purchases of property and equipment | (4,352,036 | ) | ||
Cash paid for business acquisitions | (445,000 | ) | ||
Proceeds from sale of assets from discontinued operations | 3,971,898 | |||
Net cash used in investing activities | (641,675 | ) |
See summary of significant accounting policies and
notes to combined consolidated unaudited financial statements.
5
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Combined Consolidated Unaudited Statement of Cash Flows
Year Ended December 31, | 2017 | |||
Cash flows from financing activities: | ||||
Checks drawn against future deposits | (1,298,082 | ) | ||
Borrowings (repayments) on line of credit, net | (5,089,724 | ) | ||
Payments on long-term debt | (8,155,560 | ) | ||
Payments on capital leases | (1,274,742 | ) | ||
Proceeds from member convertible notes | 6,000,000 | |||
Distributions to members | (183,396 | ) | ||
Net cash used in financing activities | (10,001,504 | ) | ||
Effect of exchange rate changes on cash | 1,251,846 | |||
Net change in cash and cash equivalents | - | |||
Cash and cash equivalents, beginning and end of year | $ | - | ||
Supplemental disclosure of cash flow information: | ||||
Cash paid for interest | $ | 3,370,908 | ||
Cash paid for income and franchise taxes | $ | 1,529,515 | ||
Non-cash activities: | ||||
Acquisition of equipment through capital lease |
$ | 1,841,578 |
See summary of significant accounting policies and
notes to combined consolidated unaudited financial statements.
6
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
Description of Business
Bellwether International Group LLC and Subsidiaries (Bellwether) and Delos MBHE FOS LP and Subsidiaries (Delos) (collectively, the Entities) are engaged in providing recovery and construction services. Such services include emergency pre-planning and response, drying, mold remediation, fire and water damage restoration, reconstruction, equipment and technology restoration and project management. The Entities maintain offices in various locations in the United States and Canada, with headquarters in Fort Worth, Texas and Mississauga, Ontario Canada. Bellwether was formed in 2007 as a Colorado Limited Liability Company and Delos was formed under the laws of the Cayman Islands in 2016.
Basis of Presentation
These combined consolidated unaudited financial statements present the combined activities of Bellwether and Delos, who are defined as entities under common control as of October 7, 2016 in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. The Entities are being presented on a combined basis in the accompanying consolidated financial statements as of January 1, 2017. The Entities were subsequently merged into a newly-formed entity, Global Restoration Holdings, LLC (merged entity), on February 2, 2018.
The accompanying combined consolidated unaudited financial statements include the activities of the Entities and their wholly owned and majority owned subsidiaries: Delos MBHE FOS LP; FirstOnSite Restoration, Inc. (comprised of FirstOnSite Canadian Holdings, Inc. and FirstOnSite Restoration Limited (collectively FOS); Bellwether International Group LLC; Interstate Restoration LLC (comprised of Interstate Restoration Group, Inc., Colorado Fire and Flood, LLC, Mazur Holdings, Inc., Interstate Restoration California LP and Interstate Restoration de Mexico S de R.L. de C.V.) and Interstate Restoration Hawaii LLC (collectively IR LLC); and Ally Equipment, LLC (Ally) through its discontinuance of operations in October 2017.
As discussed in Note 1 - Acquisitions, business acquisitions completed during 2017 are included in the accompanying combined consolidated unaudited financial statements from the respective acquisition dates in accordance with FASB Accounting Standards Codification (ASC 810), Consolidation.
As discussed in Note 2 Discontinued Operations, Bellwether discontinued the operations of Ally during 2017. Accordingly, Allys activities have been classified and presented as discontinued operations as of and for the year ended December 31, 2017.
Principles of Consolidation and Non-Controlling Interests
These combined consolidated unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of the Entities, their wholly owned subsidiaries, and other entities in which the Entities have a controlling financial interest. In accordance with ASC 810, Consolidation, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests of subsidiaries is presented as net income applicable to noncontrolling interests on the accompanying combined consolidated unaudited statement of income and comprehensive income, and the portion of the equity of such subsidiaries is presented as noncontrolling interest on the accompanying combined consolidated unaudited balance sheet and accompanying combined consolidated unaudited statement of members equity/partners equity. All significant intercompany transactions and accounts have been eliminated.
7
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
Foreign Currency
Revenues and expenses incurred from operations in Canada are denominated in the local functional currency. Assets and liabilities are translated to U.S. dollars at the year-end exchange rate, and revenues and expenses are translated at average rates throughout the year. Translation adjustments are included in accumulated other comprehensive income (loss), a separate component of equity. Transaction gains and losses denominated in a currency other than the functional currency of the Canadian operations are included in other income (expense) on the combined consolidated unaudited statement of income and comprehensive income.
Operating Cycle
The Entities contract services are performed under fixed and variable price contracts. The length of the Entities contracts varies but generally do not exceed four months. Therefore, assets and liabilities expected to be used/settled within one year are classified as current.
Revenue and Cost Recognition
Revenue from emergency response, contents restoration and construction contracts is recognized under the percentage-of-completion method, measured by the percentage of total costs incurred to date to total estimated costs. Revenue from time-and-material contracts without stated contract amounts is recognized as costs are incurred. Revenue is generally calculated based on contractual billing rates for the services performed. This method is used because management considers expended costs to be the best available measure of progress on these contracts. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. Contract revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments to the extent it is probable they will result in revenue and can be measured reliably. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used could change in the near term.
For de minimis contracts with an expected completion time of 30 days or less, the Entities recognize revenue under the completed contract method, which is not materially different from the percentage-of-completion method. The Entities consider a contract complete when they have completed the work for a phase, the customer is obligated to pay for the services and the Entities have no future obligation to complete further work for that particular phase. Revenues and costs are not recorded until a contract or phase is complete. As revenues are not recorded until the contract is complete, when the Entities invoice for progress billings, these billings are recorded as deferred revenue - billings in excess of costs on the combined consolidated unaudited balance sheet.
8
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
The Entities may have, from time-to-time, billing disputes with some of their customers or the customers insurance providers. These disputes arise in the ordinary course of business in the recovery and construction industry, and their impact on the Entities accounts receivable and revenues can be reasonably estimated based on historical experience. In addition, certain revenues are subject to the insurance provider of the customer on insurance claims based on the insurance providers approved rates. Accordingly, the Entities maintain allowances, through charges against revenues, based on their estimates of: (i) the ultimate resolution of the disputes and (ii) insurance and other pricing adjustments. See Note 4 - Trade Accounts Receivable.
From time to time, contracts receivable include claims arising from contractual disputes. In accordance with ASC 605-35-25, Revenue Recognition: ConstructionType and ProductionType Contracts, revenues from claims are recognized only to the extent that contract costs relating to the claim have been incurred.
Contract costs include all direct materials, subcontract costs, labor costs and those indirect costs related to contract performance, such as indirect labor, depreciation, supplies and tool costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses, if any, are made in their entirety in the year such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Unbilled receivables represent costs and estimated earnings in excess of amounts billed. Deferred revenue-billings in excess of cost represent billings in excess of costs and estimated earnings on uncompleted contracts.
Restoration work relating to natural disasters, such as floods and hurricanes, is seasonal and characterized by the peak activity beginning in June through the fall months. Because the Entities operating results can be significantly impacted by sales derived from these events during its peak season, the quarterly and annual results of operations may fluctuate significantly depending on the number of hurricanes and floods on a national or regional basis.
Concentrations of Credit Risk
The Entities financial instruments exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable - trade. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Entities have never experienced any losses related to these balances.
Receivables are recorded when earned, are typically unsecured and are derived from transactions with customers located primarily in the United States and Canada. The Entities perform ongoing credit evaluations of their customers and maintain allowances for potential credit losses. Receivables are written off to the allowance when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Entities historical losses, the existing economic conditions in the construction industry, and the financial stability of their customers. The Entities file statutory liens on construction projects where collection problems are anticipated. Significant past due balances over 120 days and other higher risk amounts are unaudited individually for collectability. Based on current customer credit information and the opinions of the Entities collection attorneys, management believes the allowances for doubtful accounts are adequate. However, actual write-offs may exceed the recorded allowances.
9
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
Foreign Exchange Risk
In the normal course of business, the Entities are exposed to foreign exchange transactions and translation risk. The Entities do not use derivative financial instruments in relation to this risk.
Interest Rate Risk
The Entities are exposed to interest rate risk arising from fluctuations in interest rates on their credit facilities.
Cash and Cash Equivalents
For purposes of the combined consolidated unaudited statement of cash flows, the Entities consider all highly liquid instruments with original maturities of three months or less to be cash and cash equivalents.
Inventory
Inventory is stated at the lower of cost or net realizable value (first in, first out) and consists primarily of supplies used in restoration services.
Property and Equipment
Property and equipment purchased are recorded at cost, less accumulated depreciation and include improvements that significantly add to productive capacity or extend the useful life of the related asset. Property and equipment from acquisitions are recorded at estimated fair value. Costs related to ordinary maintenance and repairs are charged to expense or to contract costs in the period in which they are incurred. When assets are retired or disposed, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the accompanying combined consolidated unaudited statement of income and comprehensive income for the period. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvement lives are estimated as the lesser of the useful life of the asset or the lease term.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected undiscounted future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the assets fair value. No impairment was recorded by the Entities at December 31, 2017.
10
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition price over the fair value of identifiable net assets of businesses acquired. Goodwill and intangible assets acquired in a business combination determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Intangible assets with finite useful lives are amortized over their respective estimated useful lives as follows: finite-lived trademarks and trade names and non-compete agreements are amortized on a straight-line basis and customer relationships are amortized on an accelerated basis over the expected period of benefit.
Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. In these tests, the fair values of each reporting unit is compared to the carrying amount of that reporting unit, in order to determine if impairment is indicated. If so, the implied fair value of the reporting units goodwill is compared to its carrying amount, and the impairment loss is measured by the excess of the carrying value over fair value. No impairment was recorded by the Entities at December 31, 2017.
Intangible assets are evaluated for impairment in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets. When facts and circumstances indicate potential impairment of amortizable intangible assets, the Entities evaluate the recoverability of the assets carrying value using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value. No impairment was recorded by the Entities at December 31, 2017.
Debt Financing Costs
Costs relating to obtaining credit facilities are capitalized and amortized using the effective interest method over the term of the related debt. The Entities recognized amortization of debt financing costs of $895,323 as a component of interest expense during the year ended December 31, 2017. Remaining net debt financing costs were $706,306 as of December 31, 2017 and are included as a component of debt.
Income Taxes
The Entities pay U.S. federal and state income taxes and foreign income taxes on the taxable income of their C corporations within the combined consolidated group. The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying combined consolidated unaudited balance sheet, and for operating loss and tax credit carry forwards and carry backs. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. Valuation allowances are provided against deferred tax assets when it is determined that it is more likely than not that such assets will not be recovered.
11
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
The limited liability companies in the combined consolidated group are treated for tax purposes as flow-through entities and are not subject to U.S. federal or state income taxes. U.S. federal and state income is reported and paid by the members/partners on their respective individual U.S. personal income tax returns.
The Entities follow ASC 740-10, Income Taxes, to account for any uncertainty in income taxes with respect to the accounting for all tax positions taken (or expected to be taken) on any income tax return. This guidance applies to all open tax periods in all tax jurisdictions in which the Entities are required to file an income tax return. Under GAAP, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Entities have determined that no uncertain tax positions have been taken or are expected to be taken that could have a material effect on their income tax assets or liabilities.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Entities operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions, as well as by the Internal Revenue Service and Canadian taxation authorities.
Warranties
Most warranties provided by the Entities are the obligations of the manufacturer or subcontractors to the Entities. There are certain residential customers that are given a warranty and the historical cost for this has been minimal.
Fair Value of Financial Instruments
The Entities financial instruments consist of cash and cash equivalents, accounts receivable - trade, debt, profits interests payable and deferred compensation plan payable. The carrying value of cash and cash equivalents and accounts receivable - trade approximate their fair values due to their short maturities. The fair values of the Entities debt approximate their carrying values due to the terms available to the Entities for similar financial instruments. Profits interests and the investments held for deferred compensation plan are measured at fair value in the accompanying combined consolidated unaudited statement of income and comprehensive income.
Fair Value Measurements
The Entities follow methods of fair value measurement described under ASC 820, Fair Value Measurements and Disclosures (ASC 820), which establishes a common definition of fair value to be applied with existing GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements.
12
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability, rather than an entity-specific measure. Therefore, when market assumptions are not readily available, the Entities own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset developed based on market data obtained from sources independent of the Entities. Unobservable inputs are inputs that reflect the Entities estimates about the assumptions market participants would use in pricing the asset developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
• | Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; |
• | Level 2: Defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; |
• | Level 3: Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
Advertising
The Entities expense advertising costs at the time the costs are incurred. Advertising expense during the year ended December 31, 2017 was insignificant.
Use of Estimates
The preparation of the combined consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material.
Change in Accounting Estimate
Revisions to estimated contract profits, including approved change orders, are made in the year in which circumstances requiring the revision become known. The effect of changes in estimates of contract profits and change orders was to increase the Entities combined net income for the year ended December 31, 2017 by approximately $6.6 million from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in the preceding year. Such changes in estimates include the financial impact of change orders issued in the current year whose impact on the revised estimates is not considered to have a material effect on the overall change in contract profits.
13
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Summary of Significant Accounting Policies
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 (Topic 606), Revenue from Contracts with Customers (ASU 2014-09). The new revenue recognition standard supersedes all existing revenue recognition guidance. Under ASU 2014-09, an entity must recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition will include qualitative and quantitative information about contracts with customers, significant judgments and changed judgments, and assets recognized from costs to obtain or fulfill a contract. The new revenue recognition standard is effective for annual periods beginning after December 15, 2018. Management is currently evaluating the potential impact of this new standard on the Entities combined consolidated unaudited financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Leases (ASU 2016-2) which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are recorded on the balance sheet represents a significant change from previous GAAP guidance in Topic 840. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating leases. ASU 2016-02 was originally effective for fiscal periods beginning after December 15, 2019, but has been delayed for private companies for one additional year. Management is currently evaluating the potential impact of this new standard on the Entities combined consolidated unaudited financial statements.
14
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
1. | ACQUISITIONS |
Restoration Alliance Asset Purchase
During 2017, IR LLC purchased equipment and customer list from Restoration Alliance for approximately $275,000 in order to expand its presence in Florida. The purchase price was allocated among the assets purchased.
American Builders Business Combination
During 2017, IR LLC purchased substantially all assets and certain liabilities of American Builders for approximately $250,000, in order to expand its presence in Ohio.
The Entities account for acquisitions under ASC 805, Business Combinations (ASC 805). Under ASC 805, an acquiring entity is required to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, measured at their fair values as of the acquisition date, with limited exceptions. The determination of fair values involves the use of estimates and assumptions, along with the application of various valuation techniques. These estimates include projections of future cash flows related to specific assets and the assessment of future lives based on the expected future period of benefit of the asset. A bargain purchase gain was recorded as the fair value of identifiable assets acquired less liabilities assumed was greater than the purchase price. Related acquisition costs were expensed as incurred.
The following table summarizes the amounts of the assets acquired and liabilities assumed which IR LLC recognized at the acquisition date:
Accounts receivable | $ | 257,372 | ||
Inventory | 20,333 | |||
Property and equipment | 233,172 | |||
Trade names and trademarks | 39,200 | |||
Non-compete agreement | 20,850 | |||
Backlog | 59,400 | |||
Accrued liabilities | (250,844 | ) | ||
Total identifiable net assets | 379,483 | |||
Bargain purchase gain |
$ | (129,483 | ) | |
Total consideration |
$ | 250,000 |
15
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
2. | DISCONTINUED OPERATIONS |
Ally Equipment LLC
Due to the downturn of the oil and gas industry nationwide, Ally suffered a decline in sales and operations and operations were discontinued in October 2017. Prior to discontinuance of operations, Allys remaining oilfield service assets and equipment were sold for approximately $2.93 million and the remaining business activities were sold for approximately $1.05 million. In conjunction with the discontinuance of operations, the activities of Ally are presented in the accompanying combined consolidated unaudited financial statements as discontinued operations as of and for the year ended December 31, 2017 in accordance with GAAP.
For the year ended December 31, 2017 revenues and expenses of Ally are presented separately under the caption loss from discontinued operations in the consolidated statement of income and comprehensive income and consisted of the following:
Year Ended December 31, | 2017 | |||
Revenues | $ | 7,188,516 | ||
Cost of revenues, including depreciation of $841,883 | (5,572,997 | ) | ||
Operating expenses, including depreciation of $136,450 | (4,572,761 | ) | ||
(2,957,242 | ) | |||
Loss on disposal of discontinued operations | (9,202,488 | ) | ||
Net loss from discontinued operations | $ | (12,159,730 | ) |
Summarized cash flow information of Allys activities are as follows:
Year Ended December 31, | 2017 | |||
Cash flows used in operating activities | $ | (4,122,209 | ) | |
Cash flows provided by investing activities | $ | 2,925,898 |
3. | CONTRACT BILLING STATUS |
Cost and estimated earnings on uncompleted contracts were as follows:
December 31, | 2017 | |||
Costs incurred on uncompleted contracts | $ | 157,881,749 | ||
Estimated earnings on uncompleted contracts | 80,741,051 | |||
238,622,800 | ||||
Less: billings to date | (200,934,783 | ) | ||
$ | 37,688,017 |
16
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
These amounts are included in the accompanying combined consolidated unaudited balance sheet under the following captions:
December 31, | 2017 | |||
Unbilled accounts receivable | $ | 54,386,912 | ||
Deferred revenue billings in excess of costs | (16,698,895 | ) | ||
$ | 37,688,017 |
4. | TRADE ACCOUNTS RECEIVABLE |
Trade accounts receivable consisted of the following:
December 31, | 2017 | |||
Contracts receivable | $ | 139,777,616 | ||
Allowance for revenue adjustments | (949,000 | ) | ||
Allowance for bad debts | (4,971,242 | ) | ||
Total allowances | (5,920,242 | ) | ||
Trade accounts receivable, net | $ | 133,857,374 |
As of December 31, 2017, IR LLC had approximately $10.2 million of accounts receivable balances due primarily from three customers originating during 2014 - 2017. IR LLC, through its collection attorneys, continues to work with the customers insurance carriers to obtain full payment plus any interest due under the terms of the contracts. IR LLC has a successful history of collecting significant past due balances, particularly related to customer insurance claims. Other than a specific allowance of $503,000 recorded related to one of these customers, IR LLC management believes the customers and insurance companies have the ability and intent to pay amounts owed. At the date these financial statements were available to be issued, approximately $1.0 million has been collected on these balances.
If the financial condition of the Entities customers or their insurance companies were to deteriorate, adversely affecting their ability to make payments, additional allowances and or write-offs would be required.
17
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
5. | PROPERTY AND EQUIPMENT, NET |
Property and equipment consisted of the following:
December 31, | 2017 | |||
Furniture, fixtures and equipment | $ | 8,706,434 | ||
Field equipment | 23,076,186 | |||
Vehicles | 12,064,355 | |||
Software licensing | 1,841,581 | |||
Other assets | 428,521 | |||
Leasehold improvements | 6,960,174 | |||
53,077,251 | ||||
Less: accumulated depreciation and amortization | (38,483,753 | ) | ||
Total property and equipment, net | $ | 14,593,498 |
Depreciation expense was approximately $5.4 million during the year ended December 31, 2017.
6. | INTANGIBLE ASSETS |
Intangible assets, excluding goodwill, consisted of the following:
December 31, 2017 | Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
Amortized intangible assets: | ||||||||||||||||
Trademarks and trade names | 5-14 years | $ | 4,806,583 | $ | 2,004,251 | $ | 2,802,332 | |||||||||
Non-compete agreements | 5 years | 228,890 | 49,853 | 179,037 | ||||||||||||
Favorable lease asset | 18 months | 36,000 | 30,000 | 6,000 | ||||||||||||
Customer relationships | 5-14 years | 45,638,238 | 5,055,539 | 40,582,699 | ||||||||||||
50,709,711 | 7,139,643 | 43,570,068 | ||||||||||||||
Non-amortizing intangible assets: | ||||||||||||||||
Trade names | Indefinite | 3,602,000 | - | 3,602,000 | ||||||||||||
Total | $ | 54,311,711 | $ | 7,139,643 | $ | 47,172,068 |
Amortization expense for the year ended December 31, 2017 on intangible assets was approximately $5.1 million.
18
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
Assuming no future impairments, expected amortization expense related to amortizing intangible assets is as follows:
Year Ending December 31, | Total | |||
2018 | $ | 4,551,543 | ||
2019 | 4,723,054 | |||
2020 | 3,943,988 | |||
2021 | 3,447,146 | |||
2022 | 2,974,635 | |||
Thereafter | 23,929,702 | |||
$ | 43,570,069 |
The Entities have goodwill recorded from acquisitions as follows:
FOS | IR LLC | Total | ||||||||||
January 1, 2017 | $ | 1,422,997 | $ | 18,299,630 | $ | 19,722,627 | ||||||
Adjustments | - | 71,763 | 71,763 | |||||||||
December 31, 2017 | $ | 1,422,997 | $ | 18,371,393 | $ | 19,794,390 |
7. | INVESTMENT HELD FOR DEFERRED COMPENSATION PLAN |
In November 2011, IR LLC established a nonqualified deferred compensation plan (the DC Plan) covering certain employees. Participants may defer between 90% and 100% of specific types of compensation as defined in the plan document. IR LLC may also make contributions to the DC Plan. Participants are 100% vested in their deferrals. IR LLC contributions vest 20% each year in years two through six from the contribution date. Under terms of the DC Plan, the obligation is equal to the fair market value of the designated investments and is included in deferred compensation plan payable in the accompanying combined consolidated unaudited balance sheet. Gains or losses on the DC Plans investments are recognized as increases or decreases in the Plans obligations. Investments designated for retirement of the Plans obligations are stated at fair value. These funds are managed by an outside investment advisor. The investments under this plan consisted of only Level 1 investments in marketable securities as established by ASC 820 as of December 31, 2017. There were no participant or employer contributions during 2017 as the DC Plan was terminated in early 2017 and all obligations are expected to be paid out one year after termination.
19
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
8. | DEBT |
Debt consisted of the following:
December 31, | 2017 | |||
Bellwether revolving line of credit, secured by substantially all assets of the entity. Borrowing base limit of $23 million or the sum of 85% of eligible accounts receivable and other criteria stated in the loan document, less the amount outstanding on the bridge loan and on outstanding letters of credit (maximum $3 million). Interest payable monthly at LIBOR index rate plus margin as defined (5.28% at December 31, 2017). Matured on November 5, 2017 and was extended to February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023. | $ | 17,000,000 | ||
Bellwether revolving bridge loan with maximum borrowing of $5 million, subject to existing line of credit provisions with interest payable monthly at LIBOR index rate plus margin as defined (6.28% at December 31, 2017). The bridge loan matured on November 5, 2017 and was extended through February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023. | 140,394 | |||
Bellwether term loan with quarterly payments of $675,000 beginning March 31, 2015 and interest payable monthly at LIBOR plus margin as defined (6.28% at December 31, 2017). The loan matured on November 5, 2017 and was extended through February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023. | 10,580,761 | |||
Bellwether equipment term loan with maximum borrowing of $7 million with interest payable monthly at fixed rate of 7.5% at December 31, 2016.
Quarterly payments of $103,013 beginning June 30, 2016. The loan matured on November 5, 2017 and was extended through February 2, 2018. Refinanced with new lender with maturity date of February 2, 2023. |
3,628,591 |
20
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
December 31, | 2017 | |||
Bellwether subordinated member note payable in the amount of $6 million with interest from 6% - 10% per annum with quarterly principal payments of $375,000 beginning March 2015 and maturing on November 30, 2018. Paid in full with February 2, 2018 refinance. | 3,000,000 | |||
IR Hawaii subordinated member note payable in the amount of $725,000 with interest at 6% per annum and quarterly principal payments of $60,417 through maturity on January 1, 2019. Paid in full with February 2, 2018 refinance. | 302,084 | |||
IR LLC subordinated LLC note payable in the amount of $800,000 with interest at 6% per annum, no stated payments, all unpaid principal and accrued but unpaid interest due at maturity on December 9, 2020. Paid in full with February 2, 2018 refinance. | 800,000 | |||
Bellwether subordinated convertible member notes payable in the amount of $6,000,000 with interest at 22% per annum, all unpaid principal and accrued but unpaid interest due at maturity on February 5, 2018. Paid in full with February 2, 2018 refinance. | 6,000,000 | |||
Bellwether sub-total | 41,451,830 |
21
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
December 31, | 2017 | |||
Delos revolving loan agreement which matures on June 1, 2021, with variable interest at LIBOR plus 2.5% on a borrowing base, as defined in the agreement. Refinanced with new lender with maturity date of February 2, 2023. | 5,570,311 | |||
Delos revolving loan agreement which matures on June 1, 2021, with variable interest at the Canadian prime rate plus 2.5% on a borrowing base, as defined in the agreement. Refinanced with new lender with maturity date of February 2, 2023. | 11,938,223 | |||
Delos term loan in the amount of $2 million (Canadian) which matures on August 1, 2018 and requires 24 monthly principal payments of approximately $64,000 plus variable interest at Canadian prime rate plus 4% per annum. Refinanced with new lender with maturity date of February 2, 2023. | 464,784 | |||
Delos unsecured subordinated promissory note in the amount of $8 million (Canadian) with interest at 8% per annum and no stated repayment terms. Convertible to equity in FOS entities. Original maturity date of July 5, 2017. Paid in full with February 2, 2018 refinance. | 6,374,187 | |||
Delos sub-total | 24,347,505 | |||
Total long term debt | 65,799,335 | |||
Less: current portion | (2,250,000 | ) | ||
Less: debt issuance costs | (706,306 | ) | ||
Long term debt, net | $ | 62,843,029 |
In connection with the February 2, 2018 merger, the entities obtained new senior lines of credit and a term loan which mature on February 2, 2023, both with variable rates plus margin, as defined totaling 5.75% and 9.82%, respectively at the loan date. The term loan requires quarterly principal payments of $750,000 until the amendment in February 2019 which increased the term loan by $50 million and the quarterly payments increased to $1,375,000.
In accordance with applicable accounting guidance, the future maturities have been reflected in the accompanying combined consolidated unaudited financial statements in accordance with the new credit facilities and any respective amendments through the date these financial statements were available to be issued.
The prior and new credit facilities require annual excess cash flow payments, as defined, toward the balance of the borrowings no later than June 30 of the following year. The credit facilities have certain financial covenants including fixed charge coverage and leverage ratios; capital expenditures limits; along with restrictions on member distributions, additional indebtedness and cash used for future acquisitions, with which the Entities were in compliance on December 31, 2017.
22
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
The credit facilities are collateralized by substantially all assets and equity interests of the Entities. Certain subsidiaries serve as co-borrowers and guarantors.
All member notes payable are subordinated to the current senior credit facilities and subordinated note payments may be restricted under the terms of the current senior credit facilities.
As further described in Note 16 Subsequent Events, all term loans and lines of credit were extinguished on June 21, 2019.
At December 31, 2017, the minimum annual principal payments for consolidated debt, reflective of new senior credit facilities, are as follows:
Year Ending December 31, | Total | |||
2018 | $ | 2,250,000 | ||
2019 | 5,500,000 | |||
2020 | 5,500,000 | |||
2021 | 5,500,000 | |||
2022 | 5,500,000 | |||
2023 | 41,549,335 | |||
Total long-term debt | $ | 65,799,335 |
9. | CAPITAL LEASES |
Capital leases consisted of the following at December 31, 2017:
23
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
Future maturities of capital leases are as follows:
Year Ending December 31, | Total | |||
2018 | $ | 1,236,712 | ||
2019 | 1,107,706 | |||
2020 | 875,971 | |||
2021 | 826,599 | |||
$ | 4,046,988 |
Assets under capital lease approximate $9.5 million and related accumulated depreciation approximates $5.7 million as of December 31, 2017.
10. | PROFITS INTERESTS PAYABLE |
Certain of the Bellwether contributed companies issued equity-based compensation arrangements to individuals who subsequently became employees of IR LLC. Awards were fully vested as of the date of grant, which permitted the employees to participate in future appreciation of the respective members equity. The profits interests will be paid in the form of cash or a promissory note at Bellwethers discretion, or upon a terminating event, as defined within the profits interest agreement (the Agreement). Certain terminating events, as defined by the Agreement, require the employee to forfeit the profits interest without compensation.
In accordance with provisions of ASC 718, Compensation Stock Compensation (ASC 718) and related guidance, these profits interest awards have characteristics that determine the classification as a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. Compensation expense associated with the change in fair value of these profits interests of $505,369 has been recognized in selling, general and administrative expenses in the accompanying combined consolidated unaudited statement of income and comprehensive income for the year ended December 31, 2017.
IR LLC granted 3% profits interest to a key employee, which was issued upon reaching target revenues and fully vested in 2013. In accordance with provisions of ASC 718 and related guidance, this profits interest award has characteristics that determine the classification as a liability and is re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. Compensation expense of $2,541,600 associated with the change in fair value of this profits interest has been recognized in selling, general and administrative expense in the accompanying combined consolidated unaudited statement of income and comprehensive income for the year ended December 31, 2017. Distributions paid totaling $63,936 on this profits interests grant were recognized in selling, general and administrative expense in the accompanying combined consolidated unaudited statement of income and comprehensive income for the year ended December 31, 2017.
24
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
December 31, | 2017 | |||
Balance at January 1 | $ | 2,013,888 | ||
Change in valuation | 3,046,969 | |||
Balance at December 31 | $ | 5,060,857 |
11. | INCOME TAXES |
On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted into law. This U.S. tax reform contains several key provisions including the reduction of the U.S. federal corporate income tax rate to 21% effective January 1, 2018, among a variety of other changes. As a result of the change in the corporate tax rate, the Entities remeasured their deferred tax assets and liabilities as of December 31, 2017 based on the rate at which they are expected to reverse in the future. This remeasurement and interpretation of the new law is provisional subject to clarifications of the provisions of the new legislation and final calculations.
The components of income tax (benefit) expense consisted of the following:
Year Ended December 31, | 2017 | |||
Current: | ||||
Federal | $ | 1,451,500 | ||
State | 444,438 | |||
Foreign | 1,315,872 | |||
3,211,810 | ||||
Deferred: | ||||
Federal | (365,847 | ) | ||
State | (36 | ) | ||
Foreign | (2,917,276 | ) | ||
(3,283,159 | ) | |||
Total tax benefit | $ | (71,349 | ) |
The Entities effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income before income taxes primarily because of certain expenses deductible for financial reporting purposes that are not deductible for tax purposes, including operating loss carryforwards. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
25
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
The types of temporary differences between the tax basis of assets and liabilities that give rise to a significant portion of the deferred tax assets and liabilities and their approximate tax effects are as follows:
December 31, | 2017 | |||
Components of net long-term deferred tax assets (liabilities): | ||||
Basis difference in intangibles | $ | (378,295 | ) | |
Federal and state net operating losses | 306,136 | |||
Allowances | 193,896 | |||
Accrued expenses | 569,944 | |||
Capital leases | 1,615,059 | |||
Basis difference in property and equipment | (396,811 | ) | ||
Other | 382,941 | |||
2,292,870 | ||||
Valuation allowance | (59,538 | ) | ||
Total net deferred tax assets | $ | 2,233,332 |
At December 31, 2017, Bellwether has approximately $59,000 available in federal and state unused net operating losses that may be applied against future taxable income and that expire December 31, 2028. Based on the available objective evidence regarding net operating losses of a taxable subsidiary that ceased operations, management believes it is more likely than not that the net operating losses associated with this entity will not be fully realizable. Accordingly, Bellwether provided for a valuation allowance of approximately $59,000 against these net operating losses at December 31, 2017.
At December 31, 2017, Delos has approximately $4.1 million in U.S. federal unused net operating losses that may be applied against future U.S. taxable income. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, Delos management believes it is more likely than not it will realize its net deferred tax assets and no valuation allowance has been established at December 31, 2017.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
26
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
12. | COMMITMENTS AND CONTINGENCIES |
Operating Lease Commitments
The Entities lease land, buildings, equipment, and vehicles under various operating leases through October 2023, certain of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with GAAP, the Entities record monthly rent expense on a straight-line basis and reflect a deferred rent liability for the difference between straight-line rent and actual rent payments.
Minimum lease payments, for each of the succeeding five years and thereafter, under operating leases with initial terms in excess of one year are, as follows:
Years Ending December 31, | ||||
2018 | $ | 5,958,764 | ||
2019 | 4,732,051 | |||
2020 | 3,321,936 | |||
2021 | 1,911,538 | |||
2022 | 740,237 | |||
Thereafter | 67,906 | |||
$ | 16,732,432 |
Rent expense was approximately $6.8 million during the year ended December 31, 2017.
Letters of Credit
FOS has outstanding letters of credit of approximately $251,000 at December 31, 2017, which currently will expire in September 2019 and January 2020.
Surety Bonds
IR LLC, as a condition for entering into certain construction contracts, had outstanding surety bonds totaling approximately $18 million related to U.S. operations at December 31, 2017. There are de minimis surety bonds related to Canadian operations at December 31, 2017.
27
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
Section 401(k) Retirement Plan
IR LLC has a Section 401(k) retirement plan (the Plan) covering certain employees. Employees are generally eligible to participate after reaching 21 years of age and attaining six months of employment. Eligible employees can contribute up to eighty percent of their considered elective deferrals, subject to IRS limitations. In addition, the Plan allows for catch-up contributions for those participants aged 50 or older. IR LLCs match is a discretionary percentage of considered earnings and vests over a five-year period. IR LLCs match for the year ended December 31, 2017 was approximately $520,000.
Litigation
The Entities are subject to various claims and legal matters in the ordinary course of business. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Entities.
Indemnification of Directors and Officers
Under the terms of the Entities operating agreements, the directors and officers have been indemnified for any action or any failure to act on behalf of the Entities within the authority as directors and officers, unless the act or omission was performed or omitted fraudulently, as defined.
Employment Agreements
The Entities have entered into employment agreements with certain key employees that stipulate salary, bonus and termination provisions.
13. | EQUITY |
Bellwether International Group LLC
Under the terms of the Bellwether operating agreement (the Bellwether Agreement) the entity has one class of members equity and the members capital account is increased for capital contributions and allocation of profits and decreased for distributions and allocation of losses.
Under the terms of the Bellwether Agreement, certain members will receive a preference amount upon certain liquidating events, as defined in the Agreement. The preference amount payable upon a liquidating event is as follows: (i) $10 million, if the aggregate net proceeds are less than or equal to $50 million; (ii) $8 million if the aggregate net proceeds are greater than $50 million but less than or equal to $75 million; (iii) $5 million if the aggregate net proceeds are greater than $75 million but less than or equal to $100 million; and (iv) none if the aggregate net proceeds are greater than $100 million.
28
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
No member units were issued or redeemed during 2017.
Bellwether Member Unit Subscription Agreement
As part of the Statewide acquisition, Bellwether issued 514 units to a key employee valued at $4 million. The unit subscription agreement provides that upon termination of employment, the member/employee has the option to put the 514 units back to Bellwether and Bellwether has the option to redeem the units. The redemption of the units is contingent upon a future termination event and the exercise of the put or call option, which is not certain. In accordance with ASC 480 Distinguishing Liabilities from Equity (ASC 480), should a termination event occur and the redemption be exercised by the employee/member or Bellwether, the then fair value of the units will be reclassified from equity to a liability, payable as defined in the agreement.
IR-Hawaii Non-Controlling Interest
At its formation, Interstate Restoration Hawaii LLC (IR Hawaii) issued 2,500 units to a member representing 25% ownership interest. Upon sale of IR Hawaii, the member has the option to put the 2,500 units back to IR Hawaii and IR Hawaii has the option to redeem the units. The redemption of the units is contingent upon a future sale of IR Hawaii and the exercise of the put or call option, which is not certain. In accordance with ASC 480, Distinguishing Liabilities from Equity, should a sale event occur, and the redemption be exercised by the member or IR Hawaii, the then fair value of the units will be reclassified from equity to a liability, payable as defined in the agreement.
Delos MBHE FOS LP
Partners capital accounts are increased for capital contributions and allocation of profits and decreased for distributions and allocation of losses.
14. | RELATED PARTY TRANSACTIONS |
Bellwether receives administrative support from a member. Amounts paid for administrative support for the year ended December 31, 2017 were $225,000.
The Entities rent office space from related parties. Rents paid for these facilities for the year ended December 31, 2017 totaled approximately $591,000.
29
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
15. | BACKLOG (UNAUDITED) |
The following schedule shows a reconciliation of backlog representing the amount of revenue the Entities expect to realize from work to be performed on uncompleted contracts in progress at December 31, 2017 and from contractual agreements on which work has not yet begun.
(Unaudited) | ||||
Balance, January 1, 2017 | $ | 53,281,556 | ||
New contracts | 443,477,372 | |||
Less: Contract revenue earned | (393,011,280 | ) | ||
Balance, December 31, 2017 | $ | 103,747,648 |
16. | SUBSEQUENT EVENTS |
The Entities have evaluated subsequent events through August 13, 2019 which is the date the combined consolidated unaudited financial statements were available to be issued. There are no material subsequent events that required recognition or additional disclosure in these combined consolidated unaudited financial statements other than as described below:
On February 2, 2018 the Entities were merged into a newly-formed corporation incorporated in Delaware. In accordance with ASC 805, the assets and liabilities were transferred to the new entity at carrying value and the Entities debt facilities were refinanced with new lenders. On that date, the Entities obtained new lines of credit and a term loan and refinanced approximately $49 million in existing debt. As allowed by the new senior credit facilities, a $32 million distribution was made to Global Restoration Holdings, LLC.
In February 2019 the term loan agreement was amended to obtain an additional $50 million under the existing terms and original maturity date. As allowed by the term loan agreement, a $50 million distribution was made to Global Restoration Holdings, LLC.
On June 21, 2019, FirstService Corporation acquired 95% of Global Restoration Holdings, LLC. The remaining 5% of equity ownership will be retained by the existing senior management team, who will stay on to continue to lead the day-to-day operations. In connection with the acquisition, approximately $115 million was paid to terminate the existing term loan and lines of credit.
On July 15, 2019, IR LLC entered into an asset purchase agreement to acquire substantially all the assets of ASR Construction, Inc., a California Corporation, for approximately $9 million, subject to working capital adjustments and contingent consideration, as defined in the asset purchase agreement. IR LLC paid cash and $2.5 million promissory note bearing interest at 5% per annum. Transaction costs were expensed as incurred.
30
Bellwether International Group LLC and Subsidiaries
and Delos MBHE FOS LP and Subsidiaries
Notes to Combined Consolidated Unaudited Financial Statements
On August 9, 2019, FOS entered into a purchase agreement to acquire substantially all the assets of JPL Disaster Recovery a Quebec Canada entity, for approximately $4.5 million. Closing is expected to occur in approximately four weeks.
31
FirstOnSite USA Holdings Inc. and Subsidiaries
Unaudited Condensed Combined Consolidated Financial Statements
Three Months Ended March 31, 2019 and 2018
FirstOnSite USA Holdings Inc. and Subsidiaries
Contents
Unaudited Condensed Combined Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 | 2 | |
Unaudited Condensed Combined Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 | 4 | |
Unaudited Condensed Combined Consolidated Statements of Changes in Stockholders Equity for the Three Months Ended March 31, 2019 and 2018 | 5 | |
Unaudited Condensed Combined Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 | 6 | |
Notes to Unaudited Condensed Combined Consolidated Financial Statements | 8 |
FirstOnSite USA Holdings Inc. and Subsidiaries
Unaudited Condensed Combined Consolidated Balance Sheets
March 31, 2019 |
December 31, 2018 |
|||||||
Assets | ||||||||
Current: | ||||||||
Cash and cash equivalents | $ | 152,266 | $ | 264,056 | ||||
Accounts receivable: | ||||||||
Trade, net of allowance | 127,220,851 | 118,765,681 | ||||||
Unbilled - costs in excess of billings | 31,341,401 | 45,155,381 | ||||||
Inventory and supplies | 2,428,054 | 2,360,762 | ||||||
Prepaid and other | 3,280,159 | 3,169,174 | ||||||
Total current assets | 164,422,731 | 169,715,054 | ||||||
Property and equipment, net | 14,397,868 | 13,966,703 | ||||||
Other assets: | ||||||||
Advances to Parent | 107,498,503 | 57,163,731 | ||||||
Intangible assets, net | 41,308,212 | 42,326,760 | ||||||
Goodwill | 19,842,212 | 19,842,212 | ||||||
Deferred tax assets, net | 2,914,095 | 3,082,071 | ||||||
Deposits | 231,367 | 198,813 | ||||||
Total other assets | 171,794,389 | 122,613,587 | ||||||
Total assets | $ | 350,614,988 | $ | 306,295,344 |
See accompanying notes to the unaudited condensed combined consolidated financial statements.
2
FirstOnSite USA Holdings Inc. and Subsidiaries
Unaudited Condensed Combined Consolidated Balance Sheets
March 31, 2019 |
December 31, 2018 |
|||||||
Liabilities and Stockholder's Equity | ||||||||
Liabilities | ||||||||
Current: | ||||||||
Checks drawn against future deposits | $ | 1,759,630 | $ | 6,320,570 | ||||
Accounts payable - trade | 26,510,756 | 33,161,817 | ||||||
Accrued expenses | 6,210,586 | 8,980,687 | ||||||
Accrued compensation | 9,545,316 | 17,094,259 | ||||||
Income taxes payable | 2,676,648 | 1,607,202 | ||||||
Deferred revenue - billings in excess of costs | 14,295,861 | 15,476,101 | ||||||
Current maturities of long-term debt | 5,500,000 | 5,500,000 | ||||||
Current maturities of capital leases | 1,596,862 | 1,289,995 | ||||||
Total current liabilities | 68,095,659 | 89,430,631 | ||||||
Long-term liabilities: | ||||||||
Line of credit, net of debt issuance costs | 51,082,017 | 41,240,284 | ||||||
Long-term debt, less current maturities, net of debt issuance costs | 65,056,168 | 13,773,688 | ||||||
Capital leases, less current maturities | 4,050,190 | 3,409,530 | ||||||
Deferred rent and other | 102,724 | 31,430 | ||||||
Total long-term liabilities | 120,291,099 | 58,454,932 | ||||||
Total liabilities | 188,386,758 | 147,885,563 | ||||||
Commitments and contingencies | ||||||||
Stockholder's equity: | ||||||||
Common stock, no par value, 1,000 shares authorized, 1,000 shares issued and outstanding | 69,988,773 | 70,058,395 | ||||||
Retained earnings | 91,637,901 | 88,179,322 | ||||||
Accumulated comprehensive loss | (1,314,482 | ) | (1,708,869 | ) | ||||
Noncontrolling interest | 1,916,038 | 1,880,933 | ||||||
Total stockholder's equity | 162,228,230 | 158,409,781 | ||||||
Total liabilities and stockholder's equity | $ | 350,614,988 | $ | 306,295,344 |
See accompanying notes to the unaudited condensed combined consolidated financial statements.
3
FirstOnSite USA Holdings Inc. and Subsidiaries
Unaudited Condensed Combined Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended March 31, | 2019 | 2018 | ||||||
Net revenues | $ | 101,239,418 | $ | 99,001,721 | ||||
Cost of revenues, including depreciation of $750,075 and $765,779 | 64,259,070 | 63,581,452 | ||||||
Gross profit | 36,980,348 | 35,420,269 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 27,133,069 | 25,420,412 | ||||||
Depreciation and amortization | 1,755,939 | 1,833,745 | ||||||
Gain on disposal of property and equipment | (5,885 | ) | (218,689 | ) | ||||
Total operating expenses | 28,883,123 | 27,035,468 | ||||||
Income from operations | 8,097,225 | 8,384,801 | ||||||
Other income (expense): | ||||||||
Interest income | 905 | 914 | ||||||
Interest expense | (2,113,600 | ) | (2,045,837 | ) | ||||
Foreign currency (loss) gain | (448,291 | ) | 238,470 | |||||
Other income | 53,223 | 37,412 | ||||||
Total other expense | (2,507,763 | ) | (1,769,041 | ) | ||||
Income before tax expense | 5,589,462 | 6,615,760 | ||||||
Income tax expense | 2,393,384 | 2,498,832 | ||||||
Net income | $ | 3,196,078 | $ | 4,116,928 | ||||
Less: Net income attributable to noncontrolling interest | 35,105 | 405,208 | ||||||
Net income attributable to FirstOnSite USA Holdings, Inc. | $ | 3,160,973 | $ | 3,711,720 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation | 394,387 | (490,429 | ) | |||||
Total other comprehensive income | $ | 3,555,360 | $ | 3,221,291 |
See accompanying notes to the unaudited condensed combined consolidated financial statements.
4
FirstOnSite USA Holdings Inc. and Subsidiaries
Unaudited Condensed Combined Consolidated Statements of Changes in Stockholders Equity
Three Months Ended March 31, 2018 | Number of Shares | Common Stock | Retained Earnings |
Accumulated Other Comprehensive Loss |
Noncontrolling Interest |
Total Stockholder's Equity |
||||||||||||||||||
Balance, January 1, 2018 | 1,000 | $ | 70,058,395 | $ | 64,944,254 | $ | (520,468 | ) | $ | 339,464 | $ | 134,821,645 | ||||||||||||
Foreign currency translation | - | - | - | (490,429 | ) | - | (490,429 | ) | ||||||||||||||||
Stock compensation (recovery) | - | (558,890 | ) | - | - | - | (558,890 | ) | ||||||||||||||||
Net income | - | - | 3,711,720 | - | 405,208 | 4,116,928 | ||||||||||||||||||
Balance, March 31, 2018 | 1,000 | $ | 69,499,505 | $ | 68,655,974 | $ | (1,010,897 | ) | $ | 744,672 | $ | 137,889,254 |
Three Months Ended March 31, 2019 | Number of Shares | Common Stock | Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Noncontrolling Interest | Total Stockholder's Equity | ||||||||||||||||||
Balance, January 1, 2019 | 1,000 | $ | 69,760,789 | $ | 88,476,928 | $ | (1,708,869 | ) | $ | 1,880,933 | $ | 158,409,781 | ||||||||||||
Foreign currency translation | - | - | - | 394,387 | - | 394,387 | ||||||||||||||||||
Stock compensation | - | 227,984 | - | - | - | 227,984 | ||||||||||||||||||
Net income | - | - | 3,160,973 | - | 35,105 | 3,196,078 | ||||||||||||||||||
Balance, March 31, 2019 | 1,000 | $ | 69,988,773 | $ | 91,637,901 | $ | (1,314,482 | ) | $ | 1,916,038 | $ | 162,228,230 |
See accompanying notes to the unaudited condensed combined consolidated financial statements.
5
FirstOnSite USA Holdings Inc. and Subsidiaries
Unaudited Condensed Combined Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents | ||||||||
For the Three Months Ended March 31, | 2019 | 2018 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,196,078 | $ | 4,116,928 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2,506,014 | 2,599,524 | ||||||
Amortization of deferred financing costs | 305,649 | 214,772 | ||||||
Change in accounts receivable allowances | 7,255 | (54,715 | ) | |||||
Deferred income tax expense | 167,976 | 395,405 | ||||||
Gain on disposal of property and equipment | (5,885 | ) | (218,689 | ) | ||||
Goodwill adjustment | - | (47,822 | ) | |||||
Profits interest compensation expense (recovery) | 227,984 | (558,890 | ) | |||||
Change in operating assets and liabilities: Accounts receivable trade | (8,462,425 | ) | 1,639,937 | |||||
Accounts receivable unbilled (costs in excess) | 13,813,980 | 16,376,684 | ||||||
Inventory and supplies | (67,292 | ) | (55,595 | ) | ||||
Prepaid and other and deposits | (143,539 | ) | (79,787 | ) | ||||
Deferred revenue - billings in excess of costs | (1,180,240 | ) | (1,413,673 | ) | ||||
Accounts payable-trade and accrued expenses | (16,970,105 | ) | (24,994,189 | ) | ||||
Deferred comp plan payable | - | (152,652 | ) | |||||
Income tax payable | 1,069,446 | 1,966,299 | ||||||
Net cash used in operating activities | (5,535,105 | ) | (266,463 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from the sale of property and equipment | 78,379 | 218,689 | ||||||
Purchases of property and equipment | (195,982 | ) | (647,629 | ) | ||||
Sale of investments for deferred comp plan | - | 170,625 | ||||||
Net cash used in investing activities | (117,603 | ) | (258,315 | ) | ||||
Cash flows from financing activities: | ||||||||
Checks drawn against future deposits | (4,560,940 | ) | (121,609 | ) | ||||
Borrowings on line of credit, net | 12,155,063 | 13,449,322 | ||||||
Proceeds from long-term debt | 50,000,000 | 60,000,000 | ||||||
Payments on long-term debt | - | (16,935,695 | ) | |||||
Payments on capital leases | (947,527 | ) | (377,852 | ) | ||||
Deferred financing costs | (1,336,500 | ) | (5,198,185 | ) | ||||
Distributions to Parent | (50,334,772 | ) | (50,857,042 | ) | ||||
Net cash provided by (used in) financing activities | 4,975,325 | (41,060 | ) | |||||
Effect of exchange rate changes on cash | 565,593 | 679,046 | ||||||
Net change in cash and cash equivalents | (111,790 | ) | 113,208 | |||||
Cash and cash equivalents, beginning of year | 264,056 | - | ||||||
Cash and cash equivalents, end of year | $ | 152,266 | $ | 113,208 |
See accompanying notes to the unaudited condensed combined consolidated financial statements.
6
FirstOnSite USA Holdings Inc. and Subsidiaries
Unaudited Condensed Combined Consolidated Statements of Cash Flows
For the Three Months Ended March 31, | 2019 | 2018 | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 773,713 | $ | 1,297,199 | ||||
Cash paid for income and franchise taxes | $ | 1,900,675 | $ | 303,750 | ||||
Non-cash investing activities: | ||||||||
Acquisition of equipment through capital lease | $ | 1,795,142 | $ | 759,850 |
See accompanying notes to the unaudited condensed combined consolidated financial statements.
7
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
NOTE 1 Description of Business and Basis of Presentation
Description of Business
FirstOnSite USA Holdings, Inc. and its Subsidiaries (the Company) are engaged in providing recovery and construction services. Such services include emergency pre-planning and response, drying, mold remediation, fire and water damage restoration, reconstruction, equipment and technology restoration and project management. The Company maintains offices in various locations in the United States and Canada, with headquarters in Fort Worth, Texas and Mississauga, Ontario Canada.
Basis of Presentation
The Company was formed in Delaware in January 2018 to combine the equity interests of Bellwether International Group LLC and Subsidiaries (Bellwether) and Delos MBHE FOS LP and Subsidiaries (Delos), who are defined as entities under common control.
In accordance with Accounting Standards Codification (ASC) 805, Business Combinations, recognized assets and liabilities of Bellwether and Delos were transferred to the Company at their carrying amounts on the date of transfer, February 2, 2018. These combined consolidated financial statements report the results of operations as though the transfer had occurred on January 1, 2018.
The accompanying combined consolidated financial statements include the activities of FirstOnSite USA Holdings Inc. and its wholly owned and majority owned subsidiaries: FirstOnSite Restoration, Inc. (comprised of FirstOnSite Canadian Holdings, Inc. and FirstOnSite Restoration Limited) (collectively FOS); Interstate Restoration LLC (comprised of Interstate Restoration Group, Inc., Colorado Fire and Flood, LLC, Mazur Holdings, Inc., Interstate Restoration California LP and Interstate Restoration de Mexico S de R.L. de C.V.) and Interstate Restoration Hawaii LLC (collectively IR LLC).
The Company is wholly-owned by Global Restoration Holdings LLC through its ownership of Bellwether FOS Holdco, Inc. (collectively, the Parent), whose activities are excluded from these unaudited condensed combined consolidated financial statements. Advances to Parent in the combined consolidated balance sheets are reflective of activities of the Company with its Parent.
As further described in Note 15 Subsequent Events, FirstService Corporation acquired 95% of Bellwether FOS Holdco, Inc which is the parent company of FirstOnSite USA Holdings, Inc.
Principles of Consolidation and Non-Controlling Interests
These unaudited condensed combined consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year.
8
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
The consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes required by GAAP. As such, this quarterly report should be read in conjunction with the financial statements and relates notes included in the Companys consolidated financial statements for the year ended December 31, 2018. The Company follows the same accounting policies for preparing quarterly and annual financial statements.
The accompanying unaudited condensed combined consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and other entities in which the Company has a controlling financial interest. In accordance with ASC 810, Consolidation, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The portion of net income attributable to noncontrolling interests for subsidiaries is presented as net income applicable to noncontrolling interests on the accompanying condensed combined consolidated statements of income and comprehensive income, and the portion of the stockholders equity of such subsidiaries is presented as noncontrolling interests on the accompanying condensed combined consolidated balance sheets and accompanying condensed combined consolidated statements of stockholders equity. All significant intercompany transactions and accounts have been eliminated.
NOTE 2 Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the combined consolidated financial statements.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 (Topic 606), Revenue from Contracts with Customers (ASU 2014-09). The new revenue recognition standard supersedes all existing revenue recognition guidance. Under ASU 2014-09, an entity must recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In order to meet this requirement, the entity must apply the following steps: (i) identify the contracts with the customers; (ii) identify performance obligations in the contracts; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations per the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, disclosures required for revenue recognition will include qualitative and quantitative information about contracts with customers, significant judgments and changed judgments, and assets recognized from costs to obtain or fulfill a contract. The new revenue recognition standard is effective for annual periods beginning after December 15, 2018. Management is currently evaluating the potential impact of this new standard on the Companys combined consolidated financial statements.
9
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), Leases (ASU 2016-2), which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are recorded on the balance sheet represents a significant change from previous GAAP guidance in Topic 840. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating leases. ASU 2016-02 was originally effective for fiscal periods beginning after December 15, 2019, but has been delayed for private companies for one additional year. Management is currently evaluating the potential impact of this new standard on the Companys consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 (Topic 326), Financial Instruments Credit Losses (ASU 2016-13), which requires entities to use a new forward-looking expected loss model that generally will result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for annual periods beginning after December 15, 2020, and early adoption is permitted. The adoption of ASU 2016-03 is not expected to have a material effect on the Companys consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 (Topic 350), Intangibles Goodwill and Other (ASU 2017-04), which eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting units fair value. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative step, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for the Companys annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-04 on its consolidated financial statements.
10
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
NOTE 3 CONTRACT BILLING STATUS
Cost and estimated earnings on uncompleted contracts were as follows:
March 31, 2019 |
December 31, 2018 |
|||||||
Costs incurred on uncompleted contracts | $ | 153,098,695 | $ | 166,935,486 | ||||
Estimated earnings on uncompleted contracts | 67,707,596 | 75,624,112 | ||||||
220,806,291 | 242,559,598 | |||||||
Less: billings to date | (203,760,752 | ) | (212,880,318 | ) | ||||
$ | 17,045,540 | $ | 29,679,280 |
These amounts are included in the accompanying unaudited combined consolidated balance sheets under the following captions:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Unbilled costs in excess of billings | $ | 31,341,401 | $ | 45,155,381 | ||||
Deferred revenue billings in excess of costs | (14,295,861 | ) | (15,476,101 | ) | ||||
$ | 17,045,540 | $ | 29,679,280 |
NOTE 4 TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consisted of the following:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Contracts receivable | $ | 132,956,158 | $ | 124,456,165 | ||||
Allowance for revenue adjustments | (918,000 | ) | (918,000 | ) | ||||
Allowance for claims | (700,000 | ) | (700,000 | ) | ||||
Allowance for bad debts | (4,117,307 | ) | (4,072,484 | ) | ||||
Total allowances | (5,735,307 | ) | (5,690,484 | ) | ||||
Trade accounts receivable, net | $ | 127,220,851 | $ | 118,765,681 |
As of March 31, 2019, the Company had approximately $16 million of accounts receivable balances due primarily from five customers originating during 2015 - 2018. The Company, through its collection attorneys, continues to work with the customers insurance carriers to obtain full payment plus any interest due under the terms of the contracts. The Company has a successful history of collecting significant past due balances, particularly related to customer insurance claims. Management believes the customers and insurance companies have the ability and intent to pay amounts owed. However, if the financial condition of the Companys customers or their insurance companies were to deteriorate, adversely affecting their ability to make payments, additional allowances and or write-offs would be required.
11
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
NOTE 5 PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
March 31, 2019 |
December 31, 2018 |
|||||||
Furniture, fixtures and equipment | $ | 9,268,155 | $ | 9,042,906 | ||||
Field equipment | 23,509,065 | 23,352,621 | ||||||
Vehicles | 13,725,126 | 12,422,739 | ||||||
Software licensing | 2,211,439 | 2,142,381 | ||||||
Other assets | 14,400 | 14,400 | ||||||
Leasehold improvements | 7,180,313 | 6,986,096 | ||||||
55,908,498 | 53,961,143 | |||||||
Less: accumulated depreciation and amortization | (41,510,630 | ) | (39,994,440 | ) | ||||
Total property and equipment, net | $ | 14,397,868 | $ | 13,966,703 |
Depreciation expense was approximately $1.4 million and $1.4 million during the three months ended March 31, 2019 and 2018, respectively.
12
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
NOTE 6 INTANGIBLE ASSETS
Intangible assets, excluding goodwill, consisted of the following:
March 31, 2019 | Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Amortized intangible assets: | ||||||||||||||
Trademarks and trade names | 5-14 years | $ | 3,206,366 | $ | 2,611,878 | $ | 594,488 | |||||||
Contractual backlog | 18 months | 1,600,217 | 304,803 | 1,295,414 | ||||||||||
Non-compete agreements | 5 years | 228,890 | 108,379 | 120,511 | ||||||||||
Customer relationships | 5-14 years | 45,638,842 | 9,943,043 | 35,695,799 | ||||||||||
50,674,315 | 12,968,103 | 37,706,212 | ||||||||||||
Non-amortizing intangible assets: | ||||||||||||||
Trade names | Indefinite | 3,602,000 | - | 3,602,000 | ||||||||||
Total | $ | 54,276,315 | $ | 12,968,103 | $ | 41,308,212 |
December 31, 2018 | Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Amortized intangible assets: | ||||||||||||||
Trademarks and trade names | 5-14 years | $ | 4,806,583 | $ | 2,749,436 | $ | 2,057,147 | |||||||
Non-compete agreements | 5 years | 228,890 | 96,674 | 132,216 | ||||||||||
Customer relationships | 5-14 years | 45,568,600 | 9,033,203 | 36,535,397 | ||||||||||
50,604,073 | 11,879,313 | 38,724,760 | ||||||||||||
Non-amortizing intangible assets: | ||||||||||||||
Trade names | Indefinite | 3,602,000 | - | 3,602,000 | ||||||||||
Total | $ | 54,206,073 | $ | 11,879,313 | $ | 42,326,760 |
Amortization expense for the three months ended March 31, 2019 and 2018 on intangible assets was approximately $1.1 million and $1.1 million, respectively.
13
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
Assuming no future impairments, expected amortization expense related to amortizing intangible assets as of March 31, 2019 is as follows:
Total | ||||
2019 | $ | 3,272,780 | ||
2020 | 4,009,042 | |||
2021 | 3,985,306 | |||
2022 | 3,725,485 | |||
2023 | 3,724,831 | |||
Thereafter | 18,988,768 | |||
$ | 37,706,212 |
NOTE 7 DEBT
Debt consisted of the following:
Balance as of | ||||||||
March 31, 2019 |
December 31, 2018 |
|||||||
Term loan | $ | 72,750,000 | $ | 22,750,000 | ||||
Revolving line of credit - U.S. operations | 32,400,701 | 23,336,158 | ||||||
Revolving line of credit - Canadian operations | 22,484,495 | 19,393,974 | ||||||
Total debt | 127,635,196 | 65,480,132 | ||||||
Debt issuance costs | (5,997,011 | ) | (4,966,160 | ) | ||||
Total debt, net | 121,638,185 | 60,513,972 | ||||||
Current maturities of long-term debt | (5,500,000 | ) | (5,500,000 | ) | ||||
Long-term debt, net of current portion and debt issuance costs | $ | 116,138,185 | $ | 55,013,972 |
Term Loan
On February 2, 2018, the Company obtained a term loan in the amount of $60 million maturing on February 2, 2023, with quarterly payments of $750,000 and variable interest at LIBOR plus a margin, as defined (10.76% at March 31, 2019). In February 2019, the Companys term loan agreement was amended to obtain an additional $50 million under the existing terms and original maturity date, with payments amended to $1,375,000 per quarter. The term loan requires an annual excess cash flow payment, as defined, toward the balance of the borrowing no later than June 30 of the following year. The credit facility is collateralized by substantially all assets and equity interests of the Company. The term loan is subordinated to the revolving line of credit facilities under an inter-creditor agreement between the lenders. Further, the Companys subsidiaries serve as co-borrowers and guarantors and the Parent additionally serves as guarantor.
14
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
As further described in Note 15 Subsequent Events, the remaining balance on the term loan was extinguished on June 21, 2019.
Revolving Line of Credit U.S. Operations
On February 2, 2018, the Company obtained a revolving line of credit initially funded at $37.5 million, which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on $20 million (4.54% at March 31, 2019) and variable interest at U.S. prime rate plus a margin as defined on approximately $3.3 million (6.5% at March 31, 2019). Availability on the line of credit is limited to a defined borrowing base on IR LLCs billed and unbilled accounts receivable with maximum borrowings of $47 million.
Revolving Line of Credit Canadian Operations
On February 2, 2018, the Company amended an existing FOS line of credit which matures on February 2, 2023, with variable interest at LIBOR plus a margin, as defined on approximately $5.3 million (5.1% at March 31, 2019) and variable interest at the Canadian prime rate plus a margin as defined on approximately $1.7 million (4.5% at March 31, 2019). Availability on the line of credit is limited to a defined borrowing base on FOSs billed and unbilled accounts receivable with maximum borrowings of $45 million Canadian dollars.
As further described in Note 15 Subsequent Events, the remaining balance on the lines of credit were extinguished on June 21, 2019.
The credit facilities are collateralized by substantially all assets and equity interests of the Company. The Companys subsidiaries serve as co-borrowers and guarantors and the Parent additionally serves as guarantor.
Bellwethers existing revolving line of credit and term loans in the amount of approximately $49 million were refinanced with the Companys credit facilities described above.
Deloss existing revolving line of credit and term loan in the amount of approximately $29 million were refinanced with the Companys term loan and revolving line of credit described above.
The Companys credit facilities have certain financial covenants including fixed charge coverage and leverage ratios; capital expenditures limits; along with restrictions on member distributions, additional indebtedness and cash used for future acquisitions. The Company was in compliance with such financial covenants at March 31, 2019 and December 31, 2018.
15
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
NOTE 8 CAPITAL LEASES
Capital leases consisted of the following:
March 31, 2019 |
December 31, 2018 |
|||||||
Capital leases payable to financial institutions with interest rates ranging from 7% to 8% and maturities through December, 2023. Monthly payments are approximately $139,000 and $115,000, respectively. Obligations secured by vehicles. | $ | 6,098,816 | $ | 5,249,006 | ||||
Less interest cost | (451,764 | ) | (549,481 | ) | ||||
5,647,052 | 4,699,525 | |||||||
Less current portion | (1,596,862 | ) | (1,289,995 | ) | ||||
$ | 4,050,190 | $ | 3,409,530 |
Future payments of capital leases as of March 31, 2019 are as follows:
Total | ||||
2019 | $ | 1,398,486 | ||
2020 | 1,670,138 | |||
2021 | 1,320,742 | |||
2022 | 1,243,288 | |||
2023 | 466,162 | |||
$ | 6,098,816 |
Assets under capital lease approximate $11.9 million and $10.5 million and related accumulated depreciation approximates $6.5 million and $6.0 million as of March 31, 2019 and December 31, 2018, respectively.
NOTE 9 STOCK COMPENSATION ARRANGEMENTS
Certain of the Bellwether contributed companies issued equity-based compensation arrangements who subsequently became employees of IR LLC. Awards were fully vested as of the date of grant, which permitted the employees to participate in future appreciation of the respective members equity. The profits interests will be paid in the form of cash or a promissory note at the Companys discretion, or upon a terminating event, as defined within the profits interest agreement (the Agreement). Certain terminating events, as defined by the Agreement, require the employee to forfeit the profits interest without compensation.
In accordance with provisions of ASC 718, Compensation Stock Compensation (ASC 718) and related guidance, these profits interest awards have characteristics that determine the classification as a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. On February 2, 2018 the profits interests were exchanged for profits interests in the Parent and the liability was transferred to the Parent.
16
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
IR LLC granted 3% profits interest to a key employee, which was issued upon reaching target revenues and fully vested in 2013. In accordance with provisions of ASC 718 and related guidance, this profits interest award has characteristics that determine the classification as a liability and are re-measured at estimated fair value at each subsequent reporting period with any adjustment being recorded as compensation expense. On February 2, 2018 the profits interest in IR LLC was exchanged for a profits interest in the Parent and the liability was transferred to the Parent.
Compensation expense continues to be recorded by IR LLC associated with the change in fair value of the profits interest liabilities at each reporting date. Approximately $228,000 and $(559,000) compensation expense (recovery) has been recognized in selling, general and administrative expenses in the accompanying condensed combined consolidated statements of income and comprehensive income for the three months ended March 31, 2019 and March 31, 2018, respectively.
The profits interest liabilities held by the Parent approximated $4.7 million and $4.8 million at March 31, 2019 and December 31, 2018, respectively.
See Note 15 Subsequent Events which discusses the sale that occurred on June 21, 2019.
Parent Value A Units
The Companys Parent issued approximately 14 million Value A units to key employees in 2018 with a fair value of $498,700. The units vest at 25% annually over a four-year period and are contingent on continued employment with the Company or any of its subsidiaries. Certain events allow the Parent the right, but not the obligation, to repurchase the units as specified in the agreement. In accordance with applicable accounting guidance, the awards were classified as equity by the Parent and recorded at fair value. Compensation expense is recorded by the Company as the requisite service is rendered. Compensation expense during the three months ended March 31, 2019 was insignificant.
17
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
NOTE 10 INCOME TAXES
The components of income tax expense consisted of the following:
Three Months ended March 31, | 2019 | 2018 | ||||||
Current: | ||||||||
Federal and state | $ | 1,849,547 | $ | 1,869,555 | ||||
Foreign | 375,861 | 233,872 | ||||||
2,225,408 | 2,103,427 | |||||||
Deferred: | ||||||||
Federal and state | (41,620 | ) | (1,009,636 | ) | ||||
Foreign | 209,596 | 1,405,041 | ||||||
167,976 | 395,405 | |||||||
Income tax expense | $ | 2,393,384 | $ | 2,498,832 |
The Companys effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income before income taxes primarily because of certain expenses deductible for financial reporting purposes that are not deductible for tax purposes, including operating loss carryforwards. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
18
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
The types of temporary differences between the tax basis of assets and liabilities that give rise to a significant portion of the deferred tax assets and liabilities and their approximate tax effects are as follows:
Three Months Ended March 31, 2019 |
Year Ended December 31, 2018 |
|||||||
Components of net long-term deferred tax assets | ||||||||
(liabilities): | ||||||||
Basis difference in intangibles | $ | 497,670 | $ | 133,443 | ||||
Federal and state net operating losses | 397,893 | 490,916 | ||||||
Allowances | 11,590 | 11,590 | ||||||
Accrued expenses | 1,101,056 | 2,018,758 | ||||||
Interest limitation | 24,571 | 24,571 | ||||||
Effect of passthrough entities | 1,202,037 | 929,315 | ||||||
Basis difference in property and equipment | (320,722 | ) | (319,277 | ) | ||||
Other | - | (207,245 | ) | |||||
Total net deferred tax assets, net | $ | 2,914,095 | $ | 3,082,071 |
At December 31, 2018, the Company has approximately $2.4 million available in U.S. federal unused net operating losses that may be applied against future U.S. taxable income, limited to 80%. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax assets are deductible, and the scheduled reversal of deferred tax liabilities, management believes it is more likely than not that the Company will realize its net deferred tax assets.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases land, buildings, equipment, and vehicles under various operating leases through October 2024, certain of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with GAAP, the Company records monthly rent expense on a straight-line basis and reflects a deferred rent liability for the difference between straight-line rent and actual rent payments.
19
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
Minimum lease payments, for each of the succeeding five years and thereafter, under operating leases with initial terms in excess of one year are, as follows as of March 31, 2019:
Years ending December 31, | ||||
2019 | $ | 5,683,798 | ||
2020 | 6,478,369 | |||
2021 | 4,539,734 | |||
2022 | 2,270,658 | |||
2023 | 1,095,480 | |||
Thereafter | 380,824 | |||
$ | 20,448,863 |
Rent expense was approximately $1.8 million during each of the three months ended March 31, 2019 and 2018.
Letters of Credit
FOS has outstanding letters of credit of approximately $230,000 at March 31, 2019 and December 31, 2018, respectively, which currently expire during periods through January 2020.
Surety Bonds
The Company, as a condition for entering into certain construction contracts, had outstanding surety bonds totaling approximately $20 million and $23 million related to U.S. operations at March 31, 2019 and December 31, 2018, respectively. There are de minimis surety bonds related to Canadian operations at March 31, 2019 and December 31, 2018.
Section 401(k) Retirement Plan
IR LLC has a Section 401(k) retirement plan (the Plan) covering certain employees. Employees are generally eligible to participate after reaching 21 years of age and attaining six months of employment. Eligible employees can contribute up to eighty percent of their considered elective deferrals, subject to IRS limitations. In addition, the Plan allows for catch-up contributions for those participants aged 50 or older. The Company match is a discretionary percentage of considered earnings and vests over a five-year period. The Company match for the three months ended March 31, 2019 and 2018 was not significant.
Canadian Retirement Plan
FirstOnSite Restoration Ltd. has a Registered Retirement Savings Plan (RRSP) and Deferred Profit Sharing Plan (DPSP) group retirement plan (the Plan) covering certain employees. Employees are generally eligible to participate after reaching 18 years of age and attaining six months of employment. Eligible employees can contribute one point five percent (1.5%) of their pensionable earnings (excluding overtime and bonuses) to the RRSP and receive an employer match of one point five percent (1.5%) to the DPSP. DPSP Vesting is after two years of plan membership. In addition, the Plan allows for extra voluntary contributions.
20
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
Litigation
The Company is subject to various claims and legal matters in the ordinary course of business. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
Indemnification of Directors and Officers
Under the terms of the Companys operating agreements, the directors and officers of the Company have been indemnified for any action or any failure to act on behalf of the Company within the authority as directors and officers, unless the act or omission was performed or omitted fraudulently, as defined.
Employment Agreements
The Company has entered into employment agreements with certain key employees that stipulate salary, bonus and termination provisions.
NOTE 12 STOCKHOLDERS EQUITY
The Company issued 1,000 shares to its Parent on January 30, 2018. For purposes of presentation of combination and consolidation of entities under common control, the issuance date is reflected on the first day of the year. As of March 31, 2019 and December 31, 2018, 1,000 common shares are issued, authorized and outstanding.
Under the terms of the Companys operating agreement, additional capital contributions are discretionary. In addition, distributions are discretionary and may be limited by provisions in existing credit facility agreements. No distributions were paid by the Company during the three months ended March 31, 2019 and 2018.
Non-Controlling Interest
At its formation, Interstate Restoration Hawaii LLC (IR Hawaii) issued 2,500 units to a member representing 25% ownership interest. Upon sale of the Company, the member has the option to put the 2,500 units back to IR Hawaii and IR Hawaii has the option to redeem the units. The redemption of the units is contingent upon a future sale of the Company and the exercise of the put or call option, which is not certain. In accordance with ASC 480, Distinguishing Liabilities from Equity, should a sale event occur, and the redemption be exercised by the member or the Company, the then fair value of the units will be reclassified from equity to a liability, payable as defined in the agreement.
See Note 15 Subsequent Events which discusses the sale that occurred on June 21, 2019.
21
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
NOTE 13 RELATED PARTY TRANSACTIONS
The Company receives administrative support from members of the Parent. Amounts paid for administrative support for the three months ended March 31, 2019 and 2018 totaled approximately $200,000 and $171,000, respectively.
The Company rents office space from related parties. Rents paid for these facilities for the three months ended March 31, 2019 and 2018 totaled approximately $160,000 and $123,000, respectively.
Advances were made to the Parent in the amount of approximately $50 million and $32 million during the three months ended March 31, 2019 and March 31, 2018, respectively and are included in Advances to Parent in the combined consolidated balance sheets.
NOTE 14 BACKLOG
The following schedule shows a reconciliation of backlog representing the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at March 31, 2019 and from contractual agreements on which work has not yet begun.
Balance, January 1, 2019 | $ | 70,572,980 | ||
New contracts | 114,840,263 | |||
Less: Contract revenue earned | (101,239,418 | ) | ||
Balance, March 31, 2019 | $ | 84,173,825 |
NOTE 15 SUBSEQUENT EVENTS
The Company has evaluated subsequent events through August 20, 2019 which is the date the combined consolidated financial statements were available to be issued. There are no material subsequent events that required recognition or additional disclosure in these combined consolidated financial statements other than as described below:
On June 21, 2019, FirstService Corporation acquired 95% of Bellwether FOS Holdco, Inc which is the parent company of FirstOnSite USA Holdings, Inc. The remaining 5% of equity ownership will be retained by the existing senior management team, who will stay on to continue to lead the day-to-day operations. In connection with the acquisition, approximately $115 million was paid to extinguish and terminate the existing term loan and lines of credit.
22
FirstOnSite USA Holdings Inc. and Subsidiaries
Notes to Unaudited Condensed Combined Consolidated Financial Statements
On July 15, 2019, IR LLC entered into a purchase agreement to acquire substantially all the assets of ASR Construction, Inc., a California Corporation, for approximately $9 million, subject to working capital adjustments and contingent consideration, as defined in the asset purchase agreement. IR LLC paid cash and $2.5 million promissory note bearing interest at 5% per annum. Transaction costs were expensed as incurred.
On August 9, 2019, FOS entered into a purchase agreement to acquire substantially all the assets of JPL Disaster Recovery a Quebec Canada entity, for approximately $4.5 million. Closing is expected to occur in approximately four weeks.
23
FIRSTSERVICE CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
FIRSTSERVICE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(in thousands of US dollars, except per share amounts)
Year ended December 31, 2018 | ||||||||||||||||||
FirstService |
Global
Restoration |
Add(deduct) pro forma
adjustments |
Note 3 |
FirstService
pro forma |
||||||||||||||
Revenues | $ | 1,931,473 | $ | 435,627 | $ | - | $ | 2,367,100 | ||||||||||
Cost of revenues | 1,320,252 | 281,417 | (2,733 | ) | c) | 1,598,936 | ||||||||||||
Selling, general and administrative expenses | 426,377 | 105,417 | - | 531,794 | ||||||||||||||
Depreciation | 35,257 | 2,605 | 2,733 | c) | 40,595 | |||||||||||||
Amortization of intangible assets | 17,515 | 4,800 | 22,283 | a) | 44,598 | |||||||||||||
Acquisition-related items | 4,504 | 1,331 | - | 5,835 | ||||||||||||||
Operating earnings | 127,568 | 40,057 | (22,283 | ) | 145,342 | |||||||||||||
Interest expense, net | 12,620 | 7,743 | 20,043 | b) | 40,406 | |||||||||||||
Other income, net | (254 | ) | (633 | ) | - | (887 | ) | |||||||||||
Earnings before income tax | 115,202 | 32,947 | (42,326 | ) | 105,823 | |||||||||||||
Income tax | 24,922 | 7,873 | (10,312 | ) | d) | 22,483 | ||||||||||||
Net earnings | 90,280 | 25,074 | (32,014 | ) | 83,340 | |||||||||||||
Non-controlling interest share of earnings | 11,180 | 1,541 | (167 | ) | e) | 12,554 | ||||||||||||
Non-controlling interest redemption increment | 13,235 | - | - | 13,235 | ||||||||||||||
Net earnings attributable to Company | $ | 65,865 | $ | 23,533 | $ | (31,847 | ) | $ | 57,551 | |||||||||
Net earnings per common share | ||||||||||||||||||
Basic | $ | 1.83 | $ | 1.60 | ||||||||||||||
Diluted | $ | 1.80 | $ | 1.57 | ||||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||
Basic | 35,952 | 35,952 | ||||||||||||||||
Diluted | 36,571 | 36,571 |
FIRSTSERVICE CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(in thousands of US dollars, except per share amounts)
Three months ended March 31, 2019 | ||||||||||||||||||
FirstService |
Global
Restoration |
Add(deduct) pro forma
adjustments |
Note 3 |
FirstService
pro forma |
||||||||||||||
Revenues | $ | 485,655 | $ | 101,239 | $ | - | $ | 586,894 | ||||||||||
Cost of revenues | 340,698 | 64,259 | (750 | ) | c) | 404,207 | ||||||||||||
Selling, general and administrative expenses | 118,662 | 27,133 | - | 145,795 | ||||||||||||||
Depreciation | 8,380 | 650 | 750 | c) | 9,780 | |||||||||||||
Amortization of intangible assets | 4,307 | 1,100 | 3,396 | a) | 8,803 | |||||||||||||
Acquisition-related items | 678 | - | - | 678 | ||||||||||||||
Operating earnings | 12,930 | 8,097 | (3,396 | ) | 17,631 | |||||||||||||
Interest expense, net | 3,569 | 2,113 | 4,903 | b) | 10,585 | |||||||||||||
Other income, net | 7 | 395 | - | 402 | ||||||||||||||
Earnings before income tax | 9,354 | 5,589 | (8,299 | ) | 6,644 | |||||||||||||
Income tax | 1,209 | 2,393 | (3,098 | ) | d) | 504 | ||||||||||||
Net earnings | 8,145 | 3,196 | (5,201 | ) | 6,140 | |||||||||||||
Non-controlling interest share of earnings | 1,796 | 35 | 157 | e) | 1,988 | |||||||||||||
Non-controlling interest redemption increment | 4,020 | - | - | 4,020 | ||||||||||||||
Net earnings attributable to Company | $ | 2,329 | $ | 3,161 | $ | (5,358 | ) | $ | 132 | |||||||||
Net earnings per common share | ||||||||||||||||||
Basic | $ | 0.06 | $ | - | ||||||||||||||
Diluted | $ | 0.06 | $ | - | ||||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||
Basic | 36,030 | 36,030 | ||||||||||||||||
Diluted | 36,497 | 36,497 |
FIRSTSERVICE CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands of US dollars)
1. | Background |
On June 21, 2019, FirstService Corporation (FirstService) acquired 95% of the shares in the capital of Bellwether FOS Holdco, Inc. (Global Restoration) a commercial and large loss property restoration firm, pursuant to the terms of a stock purchase agreement by and among FirstService Restoration, Inc., Global Restoration and Global Restoration Holdings, LLC (the Global Acquisition). The acquisition is being accounted for by the acquisition method of accounting for business combinations.
FirstService purchased Global Restoration for an initial purchase price of $504,567. The 5% equity interest not acquired by FirstService is held by the management team of Global Restoration and is being accounted for as redeemable non-controlling interest with an initial fair value of $25,433.
Headquartered in Denver, Colorado and founded in 1998, Global Restoration provides integrated end-to- end solutions encompassing mitigation, restoration and reconstruction services on behalf of blue chip, national clients which include large, multi-location commercial customers, property owners and insurance companies. Global Restoration operates under two brands, Interstate Restoration in the U.S. and FirstOnSite Restoration in Canada, and employs approximately 1,400 staff operating out of 58 regional offices throughout North America.
The Global Acquisition was financed through a combination of cash-on-hand, funds borrowed under FirstServices existing $450 million revolving credit facility which matures in January 2023 and funds borrowed pursuant to a new term loan (implemented and drawn concurrent with the closing of the Global Acquisition) in the aggregate amount of $440 million which matures in June 2024 and bears interest at 0.25% to 2.50% over floating preference rates, depending on certain leverage ratios.
2. | Basis of Presentation |
The pro forma consolidated statements of earnings for the year ended December 31, 2018 and quarter ended March 31, 2019 are derived from historical consolidated financial statements of FirstService and Global Restoration, which were prepared in accordance with generally accepted accounting principles (US GAAP) in the United States of America.
The Pro Forma Statements of Earnings give effect to the acquisition as if it has occurred as at:
| January 1, 2018 for the purposes of the pro forma consolidated statements of earnings for the year ended December 31, 2018 and for the quarter ended March 31, 2019, respectively. |
Note 3 outlines the pro forma assumptions and adjustments that have been made. The pro forma adjustments are based on available financial information and certain provisional estimates and assumptions. FirstService may record adjustments to the preliminary purchase price allocation related to the application of the acquisition method as disclosed in Note 2 to FirstServices unaudited interim consolidated financial statements for the quarter ended June 30, 2019. The measurement period adjustments could be material and, as such, may have a material impact on the Pro Forma Statements of Earnings.
The Pro Forma Statements of Earnings do not reflect the impact of any potential operational efficiencies, cost savings or economies of scale that FirstService may achieve with respect to the combined operations of FirstService and Global Restoration.
The Pro Forma Statements of Earnings should be read in conjunction with FirstServices audited consolidated financial statements for the year ended December 31, 2018 and the unaudited interim consolidated financial statements for the three months ended March 31, 2019 and the three and six months ended June 30, 2019, as filed on SEDAR, as well as in conjunction with the audited consolidated financial statements of Global Restoration for the year ended December 31, 2018 and unaudited consolidated financial statements for the quarter ended March 31, 2019 included herein.
In preparing the Pro Forma Statements of Earnings, management reviewed Global Restorations accounting policies and financial statement presentation to identify any differences between FirstServices and Global Restorations US GAAP accounting policies and financial statement presentation. Certain historical classifications have been reclassified to conform to FirstServices financial statement presentation and for purposes of the pro forma presentation. Additional accounting policy and financial statement presentation differences may be identified after the filing of this business acquisition report.
3. | Pro forma assumptions and adjustments |
a) | For the purposes of the Pro Forma Statements of Earnings, FirstService assumed intangible amortization as follows: |
Year ended December 31, 2018 | Three months ended March 31, 2019 | |||||||
Amortization of intangible assets | $ | 27,083 | $ | 4,496 |
The identifiable intangible assets acquired were assessed as per below:
Estimated life | ||||||||
Amount | in years | |||||||
Customer relationships | $ | 215,800 | 12 | |||||
Brand | 1,850 | 1 | ||||||
Backlog | 7,250 | 0.5 | ||||||
Total acquired | 224,900 |
b) | Interest expense |
To finance the acquisition, FirstService drew down on its existing $450,000 revolving credit facility as well as utilizing the funds borrowed pursuant to its new $440,000 term loan. The pro-forma adjustment calculates additional pro-forma interest expense as if those funds were drawn down as of January 1, 2018:
i) | Year ended December 31, 2018 | $27,786 | ||
ii) | Three months ended March 31, 2019 | $7,016 |
For the purposes of the pro forma Statements of Earnings, the interest rate assumed to be LIBOR of 2.4% plus an applicable margin of 2.5%, resulting in an estimated rate of 4.9%.
Interest expense for Global Restoration was reversed as any pre-acquisition debt would not have been transferred on the date of acquisition.
c) | Pro forma reclassification adjustments |
To conform with FirstServices financial statement presentation, the following elements have been reclassified:
Year ended
December 31, 2018 |
Three months ended March 31,2019 |
|||||||
To reclassify depreciation from cost of revenues to depreciation: | ||||||||
Increase depreciation | $ | 2,733 | $ | 750 | ||||
Reduce cost of revenues | $ | 2,733 | $ | 750 |
d) | Income tax |
Bellwether FOS Holdco, Inc., a Delaware Corporation, is subject to United States federal and state income tax. A combined rate of 26.0% was applied to record income tax applicable to FirstServices pro-forma share of the pre-tax earnings of Global Restoration, and the related tax effects of the pro forma adjustments.
e) | Non-controlling interest share of earnings |
A charge to non-controlling interest share of earnings was recorded to reflect the 5% of Global Restoration held by redeemable non-controlling interests.
Exhibit 5.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in this Registration Statement on Form F-10 of FirstService Corporation of our report dated February 20, 2019 relating to the financial statements and effectiveness of internal control over financial reporting, which is included as Exhibit 2 to FirstService Corporations Annual Report on Form 40-F for the years-ended December 31, 2018 and December 31, 2017.
We also consent to the reference to our firm under the heading Auditors, Transfer Agent and Registrar in the preliminary prospectus which forms part of such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 2, 2019
Exhibit 5.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus constituting a part of this Registration Statement on Form F-10 of our report dated May 14, 2019, relating to the combined consolidated financial statements of FirstOnSite USA Holdings Inc. and Subsidiaries, which is incorporated by reference in that Prospectus and filed as Exhibit 4.10 to such Registration Statement.
We also consent to the reference to us under the caption Auditors, Transfer Agent and Registrar in the Prospectus.
/s/ BDO USA, LLP
Fort Worth, Texas
December 2, 2019
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
Exhibit 5.3
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Fogler, Rubinoff LLP Lawyers
77 King Street West Suite 3000, PO Box 95 TD Centre Toronto, ON M5K | G8 t: 416.864.9700 | f: 416.941.8852 foglers.com |
December 2, 2019
TO: The Board of Directors of FirstService Corporation
We hereby consent to the references of our name in the Registration Statement on Form F-10 filed by FirstService Corporation on the date hereof and in the short form prospectus contained therein, as each may thereafter be amended or supplemented. In giving such consent we do not thereby admit that we are in the category of persons whose consent is required by the United States Securities Act 1933, as amended or the rules and regulations promulgated thereunder.
Sincerely,
/s/ Fogler, Rubinoff LLP
Exhibit 5.4
December 2, 2019
TO: The Board of Directors of FirstService Corporation
We hereby consent to the references of our name in the Registration Statement on Form F-10 filed by FirstService Corporation on the date hereof and in the short form prospectus contained therein, as each may thereafter be amended or supplemented. In giving such consent we do not thereby admit that we are in the category of persons whose consent is required by the United States Securities Act 1933, as amended or the rules and regulations promulgated thereunder.
Sincerely,
/s/ Stikeman Elliott LLP