Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Confidential Draft No. 2 as confidentially submitted to the Securities and Exchange Commission on February 6, 2019
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
APi Group Corporation
(Exact Name of Registrant as Specified in Its Charter)
| The British Virgin Islands* | 1700 | 98-1510303 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
c/o APi Group, Inc.
1100 Old Highway 8 NW
New Brighton, MN 55112
(651) 636-4320
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Thomas Lydon
APi Group, Inc.
1100 Old Highway 8 NW
New Brighton, MN 55112
(651) 636-4320
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Donn A. Beloff, Esq.
Flora R. Perez, Esq.
Greenberg Traurig, P.A.
401 East Las Olas Boulevard, Suite 2000
Fort Lauderdale, FL 33301
Phone: (954) 765-0500 / Fax: (954) 765-1477
Approximate date of commencement of proposed sale to the public: The domestication described herein will be effective on, or as soon as practicable after, the date that this registration statement is declared effective.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box ☐
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐
| * | This registration statement is being filed to effect a domestication under Section 388 of the General Corporation Law of the State of Delaware and a discontinuance under Section 184 of the BVI Business Companies Act, 2004 (as amended), pursuant to which the Registrant’s jurisdiction of incorporation will be changed from the British Virgin Islands to the State of Delaware, United States of America. |
Calculation of Registration Fee
| ||||||||
Title of each class of securities to be registered | Amount to be registered(1) | Proposed maximum offering price per unit | Proposed maximum aggregate offering price | Amount of registration fee | ||||
Common Stock, par value $0.0001 per share | [●](2) | $[●](3) | $[●](3) | $[●] | ||||
Warrants | [●] | $0.275(4) | $[●](4) | $[●] | ||||
Series A Preferred Stock | 4,000,000 | — (5) | — | $— | ||||
Total | $[●] | $[●] | ||||||
| ||||||||
| ||||||||
| (1) | Shortly after the effectiveness of this registration statement, APi Group Corporation (formerly known as J2 Acquisition Limited) (the “Registrant”) intends to effect a discontinuance under Section 184 of the BVI Business Companies Act, 2004 (as amended) and a domestication under Section 388 of the General Corporation Law of the State of Delaware, pursuant to which the Registrant’s jurisdiction of incorporation will be changed from the British Virgin Islands to the State of Delaware, United States of America. All securities being registered will be issued by the Registrant after such domestication, as the continuing entity following the domestication. |
| (2) | The shares to be registered include (1) [●] shares of common stock issuable upon the domestication in exchange for the Registrant’s outstanding ordinary shares, (2) 4,000,000 shares of common stock issuable upon conversion of the Registrant’s outstanding Series A Preferred Stock subsequent to the domestication, and (3) [●] shares of common stock issuable upon exercise or settlement of the Registrant’s outstanding warrants, options and restricted stock units subsequent to the domestication. In addition, pursuant to Rule 416, this registration statement also covers any additional shares of common stock that may be offered or issued in connection with any stock split, stock dividend or similar transaction paid on the common stock or Series A Preferred Stock. |
| (3) | Estimated solely for the purpose of calculating the registration fee, based on the average of the high and low prices for ordinary shares of the Registrant as reported on the OTC Market Group’s Pink marketplace on [●], 2020 ($[●] per share), in accordance with Rule 457(f)(1). |
| (4) | Estimated solely for the purpose of calculating the registration fee, based on the closing price of the warrants of the Registrant on the London Stock Exchange (the “LSE”) on September 3, 2019 ($0.275 per share), which is the date such warrants stopped trading on the LSE, in accordance with Rule 457(f)(1). |
| (5) | No additional fee due pursuant to Rule 457(i). |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the United States Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED February 6, 2020
PROSPECTUS
APi GROUP CORPORATION
Shares of Common Stock
Warrants
Series A Preferred Stock
DOMESTICATION IN DELAWARE
Our board of directors has unanimously approved a proposal to change our jurisdiction of incorporation by discontinuing from the British Virgin Islands and continuing and domesticating as a corporation incorporated under the laws of the State of Delaware (the “Domestication”). This prospectus relates to the shares of our common stock, warrants and Series A Preferred Stock into which our outstanding ordinary shares, warrants and Founder Preferred Shares will be converted in connection with the Domestication. APi Group Corporation is incorporated with limited liability under the laws of the British Virgin Islands under the BVI Business Companies Act, 2004, as amended (the “BVI Companies Act”). To effect the Domestication, we will, upon the final approval of our Board of Directors, file a notice of continuation out of the British Virgin Islands with the British Virgin Islands Registrar of Corporate Affairs (we refer to the British Virgin Islands entity prior to the domestication as “APG BVI”) and file a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which we will be domesticated and continue as a Delaware corporation (we refer to the domesticated Delaware entity as “APG Delaware”). APG Delaware will be deemed to be the same legal entity as APG BVI. On the effective date of the Domestication, each of our currently issued and outstanding (i) ordinary shares will automatically convert, on a one-for-one basis, into shares of APG Delaware common stock, par value $0.0001 per share (“APG Delaware common stock”), (ii) warrants will automatically convert, on a one-for-one basis, into warrants exercisable for shares of APG Delaware common stock and (iii) Founder Preferred Shares will automatically convert, on a one-for-one basis, into shares of Series A Preferred Stock. Under British Virgin Islands law and our current governing documents, we do not need shareholder approval of the Domestication, and our shareholders do not have statutory dissenters’ rights of appraisal as a result of the Domestication.
We are not asking you for a proxy and you are requested not to send us a proxy. No shareholder action is required to effect the Domestication. See “The Domestication—No Vote or Dissenters’ Rights of Appraisal in the Domestication.”
In connection with the Domestication, we intend to list our common stock on the New York Stock Exchange (the “NYSE”) under the ticker symbol “APG”.
Investing in our common stock involves risks. See “Risk Factors” beginning on page 8 of this prospectus.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
This prospectus will not be filed with the British Virgin Islands Registrar of Corporate Affairs. Neither the British Virgin Islands Financial Services Commission nor the British Virgin Islands Registrar of Corporate Affairs accepts any responsibility for APG Delaware’s financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.
Prospectus dated , 2020
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
No person has been authorized to give any information or make any representation concerning us or the Domestication (other than as contained in this prospectus) and, if any such other information or representation is given or made, you should not rely on it as having been authorized by us. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.
Terms Used in This Prospectus
Unless the context otherwise requires, in this prospectus, the term(s) (1) “the Company,” “APG,” “we,” “us” and “our” refer to APi Group Corporation (formerly known as J2 Acquisition Limited) and its consolidated subsidiaries as it currently exists under British Virgin Islands law and will continue under Delaware law after the Domestication, (2) “APG BVI” and “APG Delaware” refer to the Company prior to and after the Domestication, respectively, and (3) “APi Group” refers to APi Group, Inc. and its consolidated subsidiaries prior to its acquisition by the Company. All references in this prospectus to the “Predecessor” refer to APi Group for all periods prior to its acquisition by the Company on October 1, 2019 (the “APi Acquisition”) and all references to “Successor” refer to the Company for all periods. With regard to financial information included in this prospectus, all “Successor” information includes APi Group as a consolidated subsidiary from the date of the APi Acquisition.
Presentation of Financial and Other Information
In this prospectus, references to “$”, “US$” and “U.S. Dollars” are to the lawful currency of the United States of America.
Unaudited Pro Forma Financial Information
Following the APi Acquisition, which was consummated on October 1, 2019, APi Group is considered to be our Predecessor under applicable SEC rules and regulations. As a result, we have included in this prospectus unaudited pro forma financial information based on the historical financial statements of APG and APi Group, combined and adjusted to give effect to the APi Acquisition as if it had occurred as of January 1, 2019. The unaudited pro forma combined consolidated financial information has been prepared in accordance with the basis of preparation described in “Unaudited Pro Forma Financial Information—Notes to Unaudited Pro Forma Condensed Combined Financial Information.”
Trademarks and Trade Names
This prospectus contains some of our trademarks and trade names. All other trademarks or trade names of any other company appearing in this prospectus belong to their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
Industry and Market Data
This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Statements as to our ranking, market position and market estimates are based on independent industry publications, third-party forecasts, management’s estimates and assumptions about our markets and our internal research. Our internal estimates are based upon our understanding of industry and market conditions, and such information has not been verified by any independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. However, while we believe that such information and estimates are reasonable and reliable, neither we nor the underwriters have independently verified market and industry data from third-parties. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
discussed under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains “forward-looking statements”. These forward-looking statements are based on beliefs and assumptions as of the date such statements are made, and are subject to risks and uncertainties. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms including “expect,” “anticipate,” “project,” “will,” “should,” “believe,” “intend,” “plan,” “estimate,” “potential,” “target,” “would,” and similar expressions, although not all forward-looking statements contain these identifying terms.
These forward-looking statements are based on our current expectations and assumptions and on information currently available to management and include, among others, statements regarding, as of the date such statements are made:
| • | our beliefs and expectations regarding our business strategies and competitive strengths, and our ability to maintain and advance our market share and position, grow our business organically and through acquisitions, and capitalize on customer demand; |
| • | our beliefs regarding competition, our relative market positioning and the competitive factors in the industries we serve; |
| • | our beliefs regarding our regional, decentralized operating model and differentiated leadership culture; |
| • | our beliefs regarding our acquisition platform and ability to execute on and successfully integrate strategic acquisitions; |
| • | our beliefs regarding the recurring and repeat nature of our business; |
| • | our expectations regarding industry trends and their impact on our business, and our ability to capitalize on the opportunities presented in the markets we serve; |
| • | our intent to continue to grow our business, both organically and through acquisitions, and our beliefs regarding the impact of our business strategies on our growth; |
| • | our plans and beliefs with respect to our leadership development platform; |
| • | our beliefs regarding our customer relationships and plans to grow existing business and expand service offerings; |
| • | our beliefs regarding the sufficiency of our properties and facilities; |
| • | our expectations regarding labor matters; |
| • | our beliefs regarding the adequacy of our insurance coverage; |
| • | our expectations regarding the increased costs and burdens of being a public company; |
| • | our expectations regarding the cost of compliance with laws and regulations; |
| • | our expectations and beliefs regarding accounting and tax matters; |
| • | our beliefs regarding the sufficiency of our current sources of liquidity to fund our future liquidity requirements, our expectations regarding the types of future liquidity requirements and our expectations regarding the availability of future sources of liquidity; |
| • | our beliefs regarding the benefits of the Domestication; and |
| • | our intent to settle future dividends on Founder Preferred Shares in shares. |
These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the
iii
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that may materially affect the forward-looking statements include the following:
| • | economic conditions affecting the industries we serve, including the construction industry and the energy sector, as well as general economic conditions; |
| • | adverse developments in the credit markets that could adversely affect funding of construction projects; |
| • | the ability and willingness of customers to invest in infrastructure projects; |
| • | a decline in demand for our services or for the products and services of our customers; |
| • | the fact that our revenues are derived primarily from contracts with durations of less than six months and the risk that customers will not renew or enter into new contracts; |
| • | our ability to successfully acquire other businesses, successfully integrate acquired businesses into our operations and manage the risks and potential liabilities associated with those acquisitions; |
| • | the impact of our regional, decentralized business model on our ability to execute on our business strategies and operate our business successfully; |
| • | our ability to compete successfully in the industries and markets we serve; |
| • | our ability to properly manage and accurately estimate costs associated with specific customer projects, in particular for arrangements with fixed price terms; |
| • | increases in the cost, or reductions in the supply, of the materials we use in our business and for which we bear the risk of such increases; |
| • | our relationship with our employees, the majority of which are covered by collective bargaining arrangements, and our ability to effectively manage and utilize our workforce; |
| • | the inherently dangerous nature of the services we provide and the risks of potential liability; |
| • | the impact of customer consolidation; |
| • | the loss of the services of key senior management personnel and the availability of skilled personnel; |
| • | the seasonality of our business and the impact of weather conditions; |
| • | the variability of our operating results between periods and the resulting difficulty in forecasting future operating results; |
| • | litigation that results from our business, including costs related to any damages we may be required to pay as a result of product liability claims brought against our customers; |
| • | the impact of health, safety and environmental laws and regulations, and the costs associated with compliance with such laws and regulations; |
| • | our substantial level of indebtedness and the effect of restrictions on our operations set forth in the documents that govern such indebtedness; and |
| • | our compliance with certain financial maintenance covenants in our Credit Facilities and the effect on our liquidity of any failure to comply with such covenants. |
The factors identified above are believed to be important factors, but not necessarily all of the important factors, that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Other factors not discussed herein could also have a material adverse effect on us. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. These forward-looking statements speak only as of the date of this prospectus. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, except as required by applicable law.
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this prospectus and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.
v
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
This summary provides an overview of selected information regarding our business and operations on a consolidated basis, including the operations of APi Group that we acquired on October 1, 2019. Because this is only a summary, it may not contain all of the information that may be important to you in understanding the Domestication. You should carefully read this entire prospectus, including the section entitled “Risk Factors.”
Overview
We were incorporated on September 18, 2017 with limited liability under the laws of the British Virgin Islands under the BVI Companies Act under the name J2 Acquisition Limited (“J2”). J2 was created for the purpose of acquiring a target company or business. On October 10, 2017, J2 raised gross proceeds of approximately $1.25 billion in connection with its initial public offering in the United Kingdom and its ordinary shares and warrants were listed on the London Stock Exchange (the “LSE”).
On October 1, 2019, we completed our acquisition of APi Group, a market leading provider of commercial safety solutions, specialty services and industrial solutions, and we changed our name to APi Group Corporation.
The total consideration for the APi Acquisition was approximately $2.9 billion, consisting of approximately $2.05 billion in cash and the issuance of 28,373,000 ordinary shares to the sellers of APi Group (the “Sellers”). We funded the cash portion of the purchase price and related transaction expenses with a combination of cash on hand, a $1.2 billion term loan under a new term loan facility and approximately $207 million of proceeds from an early warrant exercise financing (the “Warrant Financing”). See “APi Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments” for more information regarding the APi Acquisition.
Our ordinary shares are listed for trading on the LSE under the symbol “JTWO” and our warrants are listed for trading on the LSE under the symbol “JTOW.” Our shares and warrants began trading on the LSE on October 10, 2017 and were suspended from trading on September 3, 2019 due to the announcement of the then-pending APi Acquisition. Our ordinary shares are currently quoted on the OTC Market Group’s Pink marketplace under the symbol “JJAQF.” In connection with the Domestication, we intend to list our common stock on the NYSE under the ticker symbol “APG”.
Our principal executive offices are located at 1100 Old Highway 8 NW, New Brighton, MN 55112 and our telephone number is (651) 636-4320.
Our Business
With over 90 years of history and more than 40 businesses operating from over 200 locations, we are a market leading provider of commercial safety solutions, specialty services and industrial solutions operating primarily in the United States, as well as in Canada and the United Kingdom with approximately $[•] in total consolidated net revenue in 2019. We provide a variety of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance, service and repair, and retrofitting and upgrading. We offer comprehensive and diverse solutions on a broad geographic scale. We have a strong base of diverse, long-standing customer relationships in each of the industries we serve. We also have an experienced management team and a strong leadership development culture.
We believe that our core strategies of driving organic growth and growth through accretive acquisitions, promoting sharing of best practices across all of our businesses and leveraging our scale and services offerings, place us in the position to capitalize on opportunities and trends in the industries we serve, grow our businesses and advance our position in each of our markets. We believe that our diverse customer base, regional approach to operating our businesses, specialty operations in niche markets, strong commitment to leadership development, long-standing customer relationships with a robust reputation in the industries we serve, and strong safety track record differentiates us from our competitors.
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
We have a disciplined acquisition platform which has historically provided strategic acquisitions that are integrated into our operations. Since 2005, we have completed more than 60 acquisitions. We target companies that align with our strategic priorities and demonstrate key value drivers such as culture, geography, end markets and client base, capabilities and leadership. Each of our businesses maintains its identity, reputation, customer relationships and culture following acquisition, and we invest heavily into cultivating leadership at each business. Our acquired businesses benefit from the resources of direct access to the APG network, which facilitates organizational sharing of knowledge and best practices, increases collaboration across our businesses and develops cross-brand solutions which foster enhanced experience, quality and efficiency.
We employ a regional operating model designed to improve speed and responsiveness to our customers across our businesses, empower leadership of our businesses to drive business performance and execute key decisions, and foster cross-functional sharing of best practices. This structure promotes a business-owner mindset among our individual business leaders and combines the personal attention of a small-to-medium sized company with the strength and support of an industry leader. It also allows each of our businesses to remain highly focused on best positioning itself within the categories in which it competes and reinforces strong accountability for operational and financial performance.
We operate our business under three primary operating segments which are also our reportable segments:
| • | Safety Solutions – A leading provider of safety solutions in North America, focusing on end-to-end integrated occupancy systems (fire protection solutions, HVAC and entry systems), including design, installation, inspection and service of these integrated systems. This segment also provides mission critical services, including life safety, emergency communication systems and specialized mechanical services. The work performed within this segment spans across industries and facilities and includes commercial, industrial, residential, medical and special-hazard settings. For the year ended December 31, 2019, the Safety Solutions segment generated total net revenue of $[●] and segment operating income of $[●]. |
| • | Specialty Services – A leading provider of diversified, single-source infrastructure and specialty contractor solutions, focusing on infrastructure services and specialized industrial plant solutions, including maintenance and repair of water, sewer and telecom infrastructure. The customers in this segment vary from public and private utility, communications, industrial plants and governmental agencies throughout the United States. For the year ended December 31, 2019, the Specialty Services segment generated total net revenue of $[●] and segment operating income of $[●]. |
| • | Industrial Solutions – A leading provider of a variety of specialty contracting services and solutions to the energy industry focused on transmission and distribution. This segment’s services include oil and gas pipeline infrastructure, access and road construction, supporting facilities, and performing ongoing integrity management and maintenance. For the year ended December 31, 2019, the Industrial Solutions segment generated total net revenue of $[●] and segment operating income of $[●]. |
The Domestication
We intend to change our jurisdiction of incorporation from the British Virgin Islands to the State of Delaware. We will affect the Domestication by filing with the Secretary of State of the State of Delaware a certificate of corporate domestication and a certificate of incorporation of APG Delaware, and by filing with the British Virgin Islands Registrar of Corporate Affairs a notice of continuation out of the British Virgin Islands and certified copies of the certificates filed in Delaware. APG Delaware will be deemed to be the same legal entity as APG BVI. The Domestication and the certificate of incorporation of APG Delaware were approved by our Board of Directors. No action of our shareholders is required to effect the Domestication. We anticipate that the Domestication will become effective shortly after the effectiveness of the registration statement of which this prospectus forms a part (we refer to this date as the “Effective Time”). See “Description of Capital Stock; Comparison of Rights—Effective Time.” APG BVI has not received, and is not required by British Virgin Islands law to receive, approval of a plan of arrangement in the British Virgin Islands, and no plan of arrangement is contemplated.
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Comparison of Shareholder Rights
The Domestication will change our jurisdiction of incorporation from the British Virgin Islands to the State of Delaware. While we are currently governed by the BVI Companies Act, upon Domestication, we will be governed by the General Corporation Law of the State of Delaware (the “DGCL”). There are differences between British Virgin Islands corporate law and Delaware corporate law. In addition, in connection with the Domestication, we will be governed by a newly adopted certificate of incorporation and bylaws, which are different from our current organizational documents. For a more detailed description of how the new organizational documents and Delaware law may differ from our current organizational documents and British Virgin Islands law, please see “Description of Capital Stock; Comparison of Rights—Comparison of Rights” below. Our business, assets and liabilities on a consolidated basis, as well as our executive officers, principal business locations and fiscal year, will not change as a result of the Domestication.
The most significant differences between our current organizational documents and British Virgin Islands law and the new organizational documents and Delaware law are as follows:
| • | Delaware law requires that all amendments to the certificate of incorporation of APG Delaware (other than a certificate of designation setting forth a copy of the resolution of the APG Delaware Board of Directors fixing the designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of the shares of one or more new series of preferred stock of APG Delaware or a change in APG Delaware’s name) must be approved by the Board of Directors and by the stockholders, while amendments to the Amended and Restated Memorandum and Articles of Association of APG BVI may be made solely by resolutions of the directors (in limited circumstances) or by the holders of ordinary shares; |
| • | Delaware law prohibits the repurchase of shares of APG Delaware when it is or would be rendered insolvent by such repurchase, while there are no such limitations in the BVI Companies Act; |
| • | The APG Delaware certificate of incorporation will prohibit the common stockholders of APG Delaware from acting by written consent, while the APG BVI Amended and Restated Memorandum and Articles of Association permit shareholder action by written consent; |
| • | The APG Delaware bylaws will not permit the stockholders of APG Delaware to call meetings of stockholders under any circumstances, while the shareholders holding 30% of the voting rights in respect of the matter for which the meeting is called may require the directors to call a meeting of shareholders of APG BVI; |
| • | Under Delaware law, only the stockholders may remove directors, while under British Virgin Islands law and the APG BVI Amended and Restated Memorandum and Articles of Association, a majority of the directors may remove a fellow director; |
| • | Under the APG Delaware certificate of incorporation and bylaws, subject to the rights of any series of preferred stock, vacancies and unfilled directorships will be filled solely by the remaining directors, while under the APG BVI Amended and Restated Memorandum and Articles of Association vacancies may be filled by either the directors or the shareholders; |
| • | Under Delaware law, directors may not act by proxy, while under British Virgin Islands law, directors may appoint another director or person to vote in his or her place, exercise his or her other rights as director, and perform his or her duties as director; |
| • | Under Delaware law, a sale of all or substantially all of the assets of APG Delaware requires stockholder approval, while the APG BVI Amended and Restated Memorandum and Articles of Association eliminate the shareholder vote otherwise required by the British Virgin Islands laws for a sale of more than 50% of the assets of APG BVI; and |
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| • | Under Delaware law, “business combinations” with “interested stockholders” are prohibited for a certain period of time absent certain requirements, while British Virgin Islands law provides no similar prohibition. |
Share Conversion
APG BVI is currently authorized to issue an unlimited number of no par value shares which may be either ordinary shares or preferred shares. As of November 30, 2019, there were 169,902,260 ordinary shares of APG BVI issued and outstanding, and 4,000,000 Founder Preferred Shares issued and outstanding, which are convertible into ordinary shares on a one-for-one basis. In addition, as of November 30, 2019, there were issued and outstanding (i) 64,546,077 warrants exercisable to purchase 21,515,359 APG ordinary shares (with each three warrants entitling the holder to subscribe for one ordinary share) at an exercise price of $11.50 per whole ordinary share, (ii) 162,500 options to purchase APG ordinary shares at an exercise price of $11.50 on a one-for-one basis, all of which are fully vested and (iii) 1,441,546 unvested restricted stock units which vest and settle into APG ordinary shares, on a one-for-one basis, based on the vesting schedule applicable to the restricted stock unit awards. See “Description of Capital Stock; Comparison of Rights—Shares Reserved for Future Issuances.”
In connection with the Domestication, each ordinary share of APG BVI that is issued and outstanding immediately prior to the Effective Time will automatically convert into one share of common stock of APG Delaware. Similarly, outstanding options, warrants, restricted stock units and other rights to acquire APG ordinary shares will become options, warrants, restricted stock units or rights to acquire shares of common stock of APG Delaware. It will not be necessary for shareholders of APG BVI who currently hold share certificates to exchange their existing share certificates for certificates of shares of common stock of APG Delaware in connection with the Domestication. See “The Domestication—Domestication Share Conversion” below.
In connection with the Domestication, each Founder Preferred Share that is issued and outstanding immediately prior to the Effective Time will be converted into one share of Series A Preferred Stock of APG Delaware. The Series A Preferred Stock will be convertible into shares of APG Delaware common stock on a one-for-one basis at any time at the option of the holder and will be automatically converted into shares of APG Delaware common stock on the last day of the seventh full financial year of APG Delaware following October 1, 2019 (or if such date is not a trading day, the first trading day immediately following such date). The Annual Dividend Amount required to be paid on the Series A Preferred Stock may be paid in cash or in shares of common stock of APG Delaware, at the option of APG Delaware. Accordingly, APG Delaware may issue additional shares of APG Delaware common stock as a dividend on the Series A Preferred Stock. See “Description of Capital Stock; Comparison of Rights—Series A Preferred Stock.”
Reasons for the Domestication
Our Board of Directors believes that there are significant advantages to us that will arise as a result of a change of our domicile to Delaware and that any direct benefit that the DGCL provides to a corporation also indirectly benefits its stockholders, who are the owners of the corporation. Our Board of Directors further believes that there are several reasons why the Domestication is in the best interests of Company and its shareholders, including (1) the prominence, predictability and flexibility afforded by Delaware law, (2) the well-established principles of corporate governance in Delaware judicial precedent and (3) our increased ability to attract and retain qualified directors. See “The Domestication— Background and Reasons for the Domestication” below for further detail.
Risk Factors
An investment in our common stock will involve risks and uncertainties. Please review the section entitled “Risk Factors” beginning on page 8 of this prospectus.
4
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Material U.S. Federal Income Tax Consequences
See “Material U.S. Federal Income Tax Consequences” for important information regarding U.S. federal income tax consequences relating to (1) the APi Acquisition and the Domestication and (2) the ownership and disposition of APG Delaware common stock.
No Vote or Dissenters Rights of Appraisal in the Domestication
Under British Virgin Islands law and the Amended and Restated Memorandum and Articles of Association of APG BVI, we do not need shareholder approval of the Domestication, and our shareholders do not have statutory dissenters’ rights of appraisal or any other appraisal rights as a result of the Domestication. See “The Domestication—No Vote or Dissenters’ Rights of Appraisal in the Domestication.”
5
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Summary Consolidated Financial Information
The following tables present summary historical consolidated financial data as of the dates and for each of the periods indicated.
The summary historical consolidated financial data for the Successor as of and for the year ended December 31, 2019 and for the Predecessor for the period from January 1, 2019 to September 30, 2019 was derived from the audited consolidated financial statements of the Company included in this prospectus.
The summary historical consolidated financial data included below is not necessarily indicative of future results and should be read in conjunction with “APG Management’s Discussion and Analysis of Financial Condition and Results of Operation”, “APi Group Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as APi Group’s consolidated financial statements and notes thereto contained in this prospectus.
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6
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| Successor | Predecessor | |||||
($ in millions except per share data) | As of and for the Year Ended December 31, 2019 | For the Period from January 1, 2019 to September 30, 2019 | ||||
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| (1) | Gross profit margin represents gross profit as a percentage of net revenues. |
7
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Any investment in our securities involves a number of risks and uncertainties, including the risks described below. If any of the following risks actually occur, our business, financial condition and results of operations could be materially affected. As a result, the trading price of our shares could decline, perhaps significantly, and you could lose all or part of your investment. The risks discussed below are not the only ones we face. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition or results of operations. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Business and Industry
Our businesses are dependent on levels of construction activity and an economic downturn in that industry could materially and adversely affect our business.
The demand for our services is substantially dependent upon the existence of construction projects across multiple markets including energy and infrastructure, commercial and industrial, and safety systems. Any period of economic recession affecting the volume or size of those projects is likely to adversely impact our business. Many of the construction projects that require our services involve long timelines from conception to completion, and many of the services that we offer are required later in the project’s lifecycle. Consequently, some of our businesses experience the results of economic trends later in an economic cycle.
The construction industry and individual markets within that industry have historically been vulnerable to macroeconomic downturns and we expect that will continue to be the case. The industry is traditionally cyclical in nature and economic downturns can adversely affect the willingness and ability of our customers to commit to capital expenditures. Such a decline would likely reduce the demand for certain of our services.
For example, the market for hydrocarbons has historically experienced significant volatility and has not fully recovered from the latest downturn, which began in 2015. To the extent that energy producers reduce exploration, development or refining activities in response to changes in their respective markets, the demand for our services would be adversely affected. In the past, reductions in new housing starts have also negatively affected the construction industry, including electrical utility transmission buildouts, and grid connections, and pipeline construction. Generally, when demand for our services is reduced, it leads to greater price competition and decreased revenue and profit, any of which could materially and adversely affect our results of operations and liquidity.
Adverse developments in the credit markets could adversely affect the funding of significant construction projects and therefore reduce demand for our services.
Adverse developments in the credit markets, including reduced liquidity or rising interest rates, could reduce the availability of funding for large capital projects, including construction projects that require our services. Volatility in the credit and equity markets could reduce the availability of debt or equity financing for significant construction projects, causing a reduction in capital spending, which, in the past has resulted, and in the future could result, in project pipeline constraints, project deferrals and project cancellations, any of which could materially and adversely affect our results of operations and liquidity.
Our long-term success depends, in part, on the quality and safety of the services we provide and systems we install. A deterioration in the quality or reputation of our businesses could have an adverse impact on our reputation, business, consolidated financial condition or results of operations.
The success of each of our businesses and our ability to attract and retain customers typically depends in large part on reputation. Such dependence makes our businesses susceptible to reputational damage and heightened competition from other companies. Changes in management practices, or acts or omissions that adversely affect our business, including any crime, scandal, litigation, negative publicity, catastrophic fires or similar events or accidents
8
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
and injuries can have a substantial negative impact on the operations of our businesses, and can cause a loss of customer and prospective customer confidence. We or any of our businesses could also face legal claims and adverse publicity from a variety of events or conditions, many of which are beyond our control. If the reputation or perceived quality of our businesses decline, then our business, consolidated financial condition or results of operations could be adversely affected.
Our business strategy includes acquiring companies and making investments that complement our existing businesses. These acquisitions and investments could be unsuccessful or consume significant resources, which could adversely affect our operating results.
We expect to continue to analyze and evaluate the acquisition of strategic businesses, product lines or technologies with the potential to strengthen our industry position or enhance our existing offerings. We cannot assure you that we will identify or successfully complete transactions with suitable acquisition candidates in the future. Nor can we assure you that completed acquisitions will be successful.
Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Acquisitions involve numerous other risks, including:
| • | diversion of management’s time and attention from daily operations; |
| • | difficulties integrating acquired businesses, technologies and personnel into our business; |
| • | inability to obtain required regulatory approvals and/or required financing on favorable terms; |
| • | potential loss of key employees, key contractual relationships, or key customers of acquired companies or from our existing businesses; and |
| • | assumption of the liabilities and exposure to unforeseen liabilities of acquired companies. |
Under certain circumstances, it may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently into our current business operations. Moreover, we may be unable to obtain strategic or operational benefits that are expected from our acquisitions. Any acquisitions or investments may ultimately harm our business or consolidated financial condition, as such acquisitions may not be successful and may ultimately result in impairment charges.
We are a decentralized company and place significant decision-making authority with our subsidiaries’ management, which presents certain risks.
We believe our practice of conferring significant authority upon the management of our subsidiaries has been important to our successful growth and has allowed us to be responsive to opportunities and to our customers’ needs. However, this practice presents certain risks, including the risk we would be slower to identify a misalignment between a subsidiary’s and our overall business strategy. Our decentralized organization also creates the possibility that our operating subsidiaries assume excessive risk without appropriate guidance from our centralized accounting, tax, treasury and insurance functions, or external legal counsel, as to the potential overall impact. If an operating subsidiary fails to follow our company policies, including those relating to compliance with applicable laws, we could be subjected to risks of noncompliance with applicable regulations, or made party to a contract, arrangement or situation that requires the assumption of disproportionate liabilities or contain other less desirable terms.
The construction industry is highly competitive and our failure to effectively compete could reduce our market share and harm our financial performance.
The construction industry is highly fragmented, and we compete with other companies in each of the markets in which we operate, ranging from small independent firms servicing local markets to larger firms servicing regional and national markets. We also compete with existing and prospective customers who perform some of the services we offer, which could reduce the amount of services we perform for our customers. There are relatively few barriers to entry for certain of the services we provide and, as a result, any organization that has adequate financial
9
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
resources and access to technical expertise and skilled personnel may become a competitor. Further, smaller competitors are more susceptible to consolidation. Consolidation of smaller entities could create larger national competitors which could adversely affect our business or profitability.
Most of our customers’ work is awarded through bid processes. Consequently, price is often a significant factor that determines whether we are awarded the project, especially on smaller, less complex projects. Smaller competitors may have an advantage against us based on price alone due to their lower costs and financial return requirements. Additionally, our bids for certain projects may depend on customer perception, including our perceived relative ability to perform the work as compared to our competitors or a customer’s perception of technological advantages held by our competitors as well as other factors. Our results of operations could be materially and adversely affected if we are unsuccessful in bidding for projects or renewing our master service agreements, or if our ability to be awarded such projects or agreements requires that we accept less desirable terms, including lower margins.
We may not accurately estimate the costs associated with services provided under fixed price contracts, which could impair our financial performance.
A portion of our agreements with customers contain fixed price terms. Under these contracts, we typically set the price of our services on a per unit or aggregate basis and assume the risk that costs associated with our performance may be greater than what we estimated. We also enter into contracts for specific projects or jobs that require the installation or construction of an entire infrastructure system or specified units within an infrastructure system, many of which are priced on a fixed price or per unit basis. Profitability for these contracts will be reduced if actual costs to complete a project exceed our original estimates. If estimated costs to complete the remaining work for a project exceed the expected revenue to be earned, the full amount of any expected loss is recognized in the period the loss is determined. Our profitability is therefore dependent upon our ability to accurately estimate the costs associated with our services and our ability to execute in accordance with our plans. A variety of factors could negatively affect these estimates, including changes in expected productivity levels, conditions at work sites differing materially from those anticipated at the time we bid on the contract and higher than expected costs of labor and/or materials. These variations, along with other risks inherent in performing fixed price contracts, could cause actual project results to differ materially from our original estimates, which could result in lower margins than anticipated, or losses, which could reduce our profitability, cash flows and liquidity.
Improperly managed projects or project delays may result in additional costs or claims against us, which could have a material adverse effect on our operating results, cash flows and liquidity.
The quality of our performance on any given project depends in large part upon the ability of the project manager(s) to manage relationships and the project itself and to timely deploy appropriate resources, including both third-party contractors and our own personnel. Our results of operations, cash flows and liquidity could be adversely affected if a project manager or our personnel miscalculate the resources or time needed to complete a project with capped or fixed fees, or the resources or time needed to meet contractual milestones. Additionally, delays on a particular project, including delays in designs, engineering information or materials provided to us by the customer or a third party, delays or difficulties in equipment and material delivery, schedule changes, delays from failure to timely obtain permits or rights-of-way or to meet other regulatory requirements, weather-related delays, governmental, industry, political and other factors, some of which are beyond our control, could result in cancellations or deferrals of project work, which could lead to a decline in revenue, or, for project deferrals, could cause us to incur costs for standby pay, and could lead to personnel shortages on other projects scheduled to commence at a later date.
We could also encounter project delays due to local opposition, including political and social activism, which could include injunctive actions or public protests related to the siting of oil, natural gas, or electric power transmission lines or for power generation or other facilities, and such delays could adversely affect our project margins. In addition, some of our agreements require that we share in cost overages or pay liquidated damages if we do not meet project deadlines; therefore, any failure to properly estimate or manage cost, or delays in the completion of projects, could subject us to penalties, which could adversely affect our results of operations, cash flows and liquidity. Further, any defects or errors, or failures to meet our customers’ expectations, could result in reputational harm and large damage claims against us. Due to the substantial cost of, and potentially long lead-times necessary to acquire certain of the materials and equipment used in our complex projects, damage claims could substantially exceed the amount we can charge for our associated services.
10
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
We maintain a workforce based upon current and anticipated workloads. We could incur significant costs and reduced profitability from underutilization of our workforce if we do not receive future contract awards, if contract awards are delayed, or if there is a significant reduction in the level of services we provide.
Our estimates of future performance and results of operations depend, among other factors, on whether and when we receive new contract awards, which affect the extent to which we are able to utilize our workforce. The rate at which we utilize our workforce is affected by a variety of factors, including our ability to forecast the need for our services, which allows us to maintain an appropriately sized workforce, our ability to transition employees from completed projects to new projects or between internal business groups, our ability to manage attrition, and our need to devote resources to non-chargeable activities such as training or business development. While our estimates are based upon our good faith judgment, professional knowledge and experience, these estimates may not be accurate and may frequently change based on newly available information. In the case of large-scale projects where timing is often uncertain, it is particularly difficult to predict whether and when we will receive a contract award. The uncertainty of contract award timing can present difficulties in matching our workforce size to our project needs. If an expected contract award is delayed or not received, we could incur costs resulting from underutilization of our workforce, redundancy of facilities, or from efforts to right-size our workforce and/or operations, which could reduce our profitability and cash flows.
To the extent our contracts require customers to pay at specific milestones or at the end of a project, our ability to collect accounts receivables will be dependent on our financial health at such time.
Slowing conditions in the industries we serve, customer difficulties in obtaining project financing, economic downturns or bankruptcies could also impair the financial condition of one or more of our customers and hinder their ability to pay us on a timely basis. To the extent that any of our contracts require customers to pay at specific milestones or at the end of a project, our ability to timely identify these difficulties and pare back our expenses and resources could be further impaired. In the past, we incurred significant losses after customers filed for bankruptcy or experienced financial difficulties following a general economic downturn, in which certain industry factors worsened the effect of the overall economic downturn on those customers. In difficult economic times, some of our clients may find it difficult to pay for our services on a timely basis, increasing the risk that our accounts receivable could become uncollectible and ultimately be written off. In certain cases, our clients are project-specific entities that do not have significant assets other than their interests in the project. From time to time, it may be difficult for us to collect payments owed to us by these clients. Delays in client payments may require us to make a working capital investment, which could negatively affect our cash flows and liquidity. If a client fails to pay us on a timely basis or defaults in making payments on a project for which we have devoted significant resources, it could materially and adversely affect our consolidated results of operations, cash flows and liquidity.
Our inability to recover on contract modifications against project owners or subcontractors for payment or performance could negatively affect our business.
We routinely present contract modifications to our clients and subcontractors for changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be contract modifications for which we seek, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. In some cases, settlement of contract modifications may not occur until after completion of work under the contract. A failure to promptly document and negotiate a recovery for multiple contract modifications could rise to the level of negatively impacting our cash flows, and reductions in our ability to recover contract modifications could have a negative impact on our consolidated financial condition, results of operations and cash flows.
11
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The nature of our business exposes us to potential liability for workmanship, design and other claims, which could materially and adversely affect our business and results of operations.
Under our contracts with customers, we may guarantee the work performed against, among other things, defects in workmanship, and we may agree to indemnify our customers for losses related to our services and materials. As much of the work we perform is inspected by our customers for any defects in construction prior to acceptance of the project, the claims that we have historically received have not been substantial. Additionally, materials used in construction are often provided by the customer or are warranted against defects by the supplier. If customer claims occur, we generally would be obligated to re-perform the services and/or repair or replace the item and any other facilities impacted thereby, at our sole expense, and we could also be responsible for other damages if we are not able to adequately satisfy customer claims. In addition, we may be required under contractual arrangements with our customers to honor any defects or failures in materials we provide. While we generally require the materials suppliers to provide us warranties or indemnification that are consistent with those we provide to our customers, if any of these suppliers default on their obligations to us, we may incur costs to repair or replace the defective materials. Costs incurred as a result of claims could adversely affect our business, consolidated financial condition, results of operations and cash flows.
Furthermore, our business involves professional judgments regarding the planning, design, development, construction, operations and management of electric power transmission, communications and pipeline infrastructure. Because our projects are often technically complex, our failure to make judgments and recommendations in accordance with applicable professional standards, including engineering standards, could result in damages. A significantly adverse or catastrophic event at a project site or completed project resulting from the services we performed could result in significant professional or product liability, personal injury (including claims for loss of life) or property damage claims or other claims against us, as well as reputational harm. These liabilities could exceed our insurance limits or could impact our ability to obtain third-party insurance in the future. In addition, customers, subcontractors or suppliers who have agreed to indemnify us against any such liabilities or losses might refuse or be unable to pay us. An uninsured claim, either in part or in whole, if successful and of a material magnitude, could have a substantial impact on our business, consolidated financial condition, results of operations and cash flows.
Many of our services are exposed to significant risks of liability for employee acts or omissions, or system failure.
Many of our businesses perform services at large projects and industrial facilities where accidents or system failures can be disastrous and costly. If a customer or third party believes that he or she has suffered harm to person or property due to an actual or alleged act or omission of one or more of our employees, faulty construction, or a failure of a system we installed, then they may pursue legal action against us. Any claim, regardless of its merit or eventual outcome, could result in substantial costs, divert management’s attention and create negative publicity, particularly for claims relating to environmental matters where the amount of the claim could be extremely large.
Because many of our services are intended to protect lives and real and personal property, we may have greater exposure to litigation risks than businesses that provide other services. For example, with respect to our safety services, we could face liability for failure to respond adequately to alarm activations, failure of our safety systems to operate as expected or losses caused by erroneous alarm activations. The nature of the services we provide exposes us to the risks that we may be held liable for employee acts or omissions, faulty construction or system failures. We work to include contractual provisions limiting our liability for our installation and monitoring services, and we typically maintain liability insurance to cover losses if our services fail to satisfy applicable requirements and standards. However, in the event of litigation, it is possible that contract limitations may be deemed inapplicable or unenforceable, that our insurance coverage is insufficient, or that insurance carriers deny coverage of our claims. As a result, such employee acts or omissions, faulty construction or system failures could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
Our businesses may be affected by difficult work sites and environments, which could cause delays, increase our costs and reduce profitability.
Our businesses perform services under a variety of conditions, including, but not limited to, challenging and hard to reach terrain and difficult site conditions. Performing services under such conditions can result in project
12
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
delays or cancellations, potentially causing us to incur unanticipated costs, reductions in revenue or the payment of liquidated damages. In addition, some of our contracts require that we assume the risk should actual site conditions vary from those expected. Some of our projects involve challenging engineering, procurement and construction phases, which may occur over extended time periods. We may encounter difficulties or delays in designs or materials provided by the customer or a third party, equipment and material delivery delays, schedule changes, delays from customer failure to timely obtain rights-of-way, weather-related delays, delays by subcontractors in completing their portion of the project and other factors, some of which are beyond our control, but that affect our ability to complete a project as originally scheduled. In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay. We may not be able to recover any of such costs. Any such delays, cancellations, errors or other failures to meet customer expectations could result in damage claims substantially in excess of the revenue associated with a project. Delays or cancellations could also negatively affect our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.
Our unionized workforce and related obligations could adversely affect our operations.
As of December 31, 2019, approximately [●]% of our employees were covered by collective bargaining agreements. Certain of our unionized employees have participated in strikes and work stoppages in the past, and we cannot be certain that strikes or work stoppages will not occur in the future. Strikes or work stoppages could adversely impact relationships with our customers and could cause us to lose business and experience a decline in revenues. Our ability to complete future acquisitions also could be adversely affected because of our union status for a variety of reasons. For instance, our union agreements may be incompatible with the union agreements of a business we want to acquire, and some businesses may not want to become affiliated with a union-based company. Additionally, we may be required to increase our exposure to withdrawal liabilities for underfunded multiemployer pension plans to which an acquired company historically contributed or presently contributes. Further, certain of our customers require or prefer a non-union workforce, and they may reduce the amount of work assigned to us if our non-union labor crews become unionized, which could negatively affect our business, consolidated financial condition, results of operations and cash flows.
We are and may become subject to periodic regulatory proceedings, including Fair Labor Standards Act (“FLSA”) and state wage and hour class action lawsuits, which may adversely affect our business and financial performance.
Pending and future wage and hour litigation, including claims relating to the Fair Labor Standards Act, analogous state laws, or other state wage and hour laws could result in significant attorney fees and settlement costs. Resolution of non-litigated alleged wage and hour violations could also negatively impact our performance. The potential settlement of, or awards of damages for, such claims also could materially impact our financial performance as could operational adjustments implemented in response to a settlement, court order or in an effort to mitigate future exposure. Additionally, an increased volume of alleged statutory violations or matters referred to an agency for potential resolution could result in significant attorney fees and settlement costs that could, in the aggregate, materially impact our financial performance.
We are and may become subject to periodic litigation which may adversely affect our business and financial performance.
We are subject to various lawsuits, administrative proceedings and claims that arise in the ordinary course of business. We could be party to class and collective actions, along with other complex legal disputes, that could materially impact our business by requiring, among other things, unanticipated management attention, significant attorney fees and settlement spend, or operational adjustments implemented in response to a settlement, court order or to mitigate future exposure.
We may have litigation in a variety of matters, some matters may be unpredictable or unanticipated, and the frequency and severity of litigation could increase. Because lawsuits are inherently unpredictable, assessing contingencies is highly subjective and requires judgements about future events. A judgement that is not covered by insurance or that is significantly in excess of our insurance coverage could materially adversely affect our consolidated financial condition or results of operations.
13
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
We serve customers who are involved in energy exploration, production and transportation, and adverse developments affecting activities in these industries, including sustained low or further reduced oil or natural gas prices, reduced demand for oil and natural gas products, or increased regulation of exploration and production, could have a material adverse effect on our results of operations.
Our energy and infrastructure businesses depend on energy industry participants’ willingness to make operating and capital expenditures to build pipelines to transport oil and natural gas and the development and production of oil and natural gas in the United States. A reduction in these activities generally results in decreased demand for our support services in that industry. Therefore, if these expenditures decline, our business is likely to be adversely affected.
The level of activity in the new construction of oil and natural gas pipelines, oil and natural gas exploration and production in the U.S. has been volatile. The prices of crude oil and related products dropped substantially in the fourth quarter of 2014 and have been negatively affected by a combination of factors, including weakening demand, increased worldwide production, the decision by the Organization of Petroleum Exporting Countries to keep production levels unchanged and a strengthening in the U.S. dollar relative to most other currencies. If crude oil prices do not rise, or take longer to recover than anticipated, energy and production companies, pipeline owners and operators and public utility or local distribution companies in the regions we conduct our business may reduce or delay capital spending to expand or maintain their pipelines or oil and natural gas production. Decreases in production related field activities could have an adverse effect on our consolidated financial position, results of operations, demand for services, and cash flows.
Our customers may further consolidate, which could materially adversely affect our revenues and margins.
Our customers may consolidate, especially in periods of significant industry downturns. We expect any customers that consolidate will take actions to harmonize pricing from their suppliers and rationalize their supply chain, which could adversely affect our business and results of operations. There can be no assurance that, following consolidation, our large customers will continue to buy from us across different service offerings or geographic regions, or at the same levels as prior to consolidation, which could adversely affect our business, consolidated financial condition, results of operations and cash flows.
Demand for our businesses can be materially affected by new or changed governmental regulation.
Our customers operate in regulated industries and are subject to regulations that can change frequently and without notice. The adoption of new laws or regulations, or changes to the enforcement or interpretation of existing laws or regulations, could cause our customers to reduce spending on the services we provide, which could adversely affect our revenues, results of operations, and liquidity. Delays in implementing anticipated regulations or reversals of previously adopted regulations could adversely affect demand for our services. For example, the anticipation by utilities that coal-fueled power plants may become uneconomical to operate because of potential environmental regulations has increased demand for gas pipeline construction for utility customers. If these environmental regulations are not implemented, this could reduce demand for our services.
A portion of our future growth is based on the ability and willingness of public and private entities to invest in infrastructure.
A portion of our current business and a portion of our future growth is expected to result from public and private investments in infrastructure. As a result, reduced or delayed spending, including the impact of government sequestration programs or other changes in budget priorities could result in the deferral, delay or disruption of our projects. These potential events could impact our ability to be timely paid for our current services, which could adversely affect our cash flows and margins.
14
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The industries we serve, including the construction industry, can be seasonal, cyclical and affected by weather conditions at project sites and other variations, the combined effects of which can potentially delay cash flows and adversely impact our results of operations.
Our revenue and results of operations can be subject to seasonal and other variations. These variations are influenced by various factors, including weather, customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects. In particular, many of the construction projects that demand our services include significant portions of outdoor work. As a result, seasonal changes and adverse weather conditions can adversely affect our business operations through declines in demand for our services and alterations and delays in applicable schedules. Adverse weather conditions such as extended rainy and cold weather in the spring and fall can reduce demand for our products and reduce sales or render our contracting operations less efficient resulting in under-utilization of crews and equipment and lower contract profitability. Although our businesses serve customers across the United States, Canada and the United Kingdom, major weather events such as hurricanes, tornadoes, tropical storms and heavy snows could also adversely impact a substantial number of projects and affect our revenues and profitability. Warmer and drier weather during the third and fourth quarters of our fiscal year typically results in higher activity and revenues during those quarters. Our first and second fiscal quarters typically have lower levels of activity due to weather conditions. A cool, wet spring increases drying time on projects, which can delay sales in our third fiscal quarter, while a warm dry spring may enable earlier project startup.
Furthermore, the industries we serve can be cyclical in nature. Fluctuations in end-user demand within those industries, or in the supply of services within those industries, can affect demand for our services. As a result, our business may be adversely affected by industry declines or by delays in new projects. Variations or unanticipated changes in project schedules in connection with large construction and installation projects can create fluctuations in revenue and could adversely affect our business, consolidated financial position, results of operations and cash flows.
A portion of our contracts allocate the risk of price increases in supplies to us.
For certain contracts, including where we have assumed responsibility for procuring materials for a project, we are exposed to market risk of increases in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in all of our operations. In addition, our customers’ capital budgets may be impacted by the prices of certain materials. These prices could be materially impacted by general market conditions and other factors, including U.S. trade relationships with other countries or the imposition of tariffs. We are also exposed to increases in energy prices, including as they relate to gasoline prices for our rolling-stock fleet of approximately 8,000 units. Additionally, the price of fuel required to run our vehicles and equipment is unpredictable and fluctuates based on events outside our control. Any increase in fuel costs could materially reduce our profitability and liquidity to the extent we are not able to adjust our pricing for such expenses. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that price increases of commodities, if they were to occur, would be recoverable. Additionally, some of our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material or fuel costs could reduce our profitability with respect to such projects.
Our participation in joint ventures exposes us to liability and/or harm to our reputation for failures of our partners.
As part of our business, we have entered into joint venture arrangements and likely will continue to do so. The purpose of these joint ventures is typically to combine skills and resources to allow for the bidding and performance of particular projects. Success of these jointly performed projects can be adversely affected by the performance of our joint venture partners, over whom we may have little or no control. Differences in opinions or views between us and our joint venture partners could result in delayed decision-making or failure to agree on material issues that could adversely affect the business and operations of our joint ventures. Additionally, the failure by a joint venture partner to comply with applicable laws, regulations or client requirements could negatively impact our business.
We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of our joint ventures. If a joint venture partner fails to perform or is financially unable to bear its portion of required
15
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
capital contributions or other obligations, including liabilities stemming from claims or lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Further, if our partners experience cost overruns or project performance issues that we are unable to adequately address, the customer may terminate the project, which could result in legal liability to us, harm our reputation and reduce our profit or increase our loss on a project.
Our contracts contain provisions that may require us to pay damages or incur costs if we fail to meet our contractual obligations.
If we do not meet our contractual obligations, our customers may look to us to pay damages or pursue other remedies, including, in some instances, the payment of liquidated damages. Additionally, if we fail to meet our contractual obligations, or if our customer anticipates that we cannot meet our contractual obligations, our customers may, in certain circumstances, seek reimbursement from us to cover the incremental cost of having a third party complete or remediate our work. Our results of operations could be adversely affected if we are required to pay damages or incur costs as a result of a failure to meet our contractual obligations.
The loss of key senior management personnel or the failure to hire and retain highly skilled personnel could negatively affect our business.
We depend on our senior management and other key personnel to operate our businesses. We also rely on other highly skilled personnel. Competition for qualified personnel in the construction industry, especially with respect to specialized projects or unique skills sets in applicable trades, is intense. The loss of any of our executive officers or other key employees or the inability to identify, hire, train, retain, and manage skilled personnel, could harm our business.
Risks associated with our operations in Canada and the United Kingdom could harm our business and prospects.
Our overall business, consolidated financial condition, results of operations and cash flows could be negatively impacted by our activities and operations outside the United States. Our international operations are presently conducted primarily in Canada, but we also perform certain services in the United Kingdom and to a much lesser extent, Mexico, Asia and the Caribbean. Although approximately 7% of our revenue was derived from areas outside the United States as of December 31, 2018, it is possible the number of countries in which we operate and the amount of work we perform in foreign countries could increase in the future. We are paid for work outside the United States in currencies other than the U.S. dollar. Such payments may exceed our local currency needs, and, in certain instances, those amounts may be subject to temporary blocking or taxes or tariffs, and we may experience difficulties if we attempt to convert such amounts to U.S. dollars.
We could be adversely affected by our failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt Practices Act and other similar worldwide anti-bribery laws.
Applicable U.S. and non-U.S. anti-corruption laws, including but not limited to the U.S. Foreign Corrupt Practices Act (“FCPA”), prohibit us from, among other things, corruptly making payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with these laws may conflict with longstanding local customs and practices. Our policies mandate compliance with all applicable anti-corruption laws. We have policies and procedures designed to ensure that our employees and intermediaries who work for us outside the United States comply with these laws, and we otherwise require such employees and intermediaries to comply with these laws. However, there can be no assurance that such policies, procedures and other requirements will protect us from liability under the FCPA or other similar laws for actions or inadvertences taken by our employees or intermediaries. Liability for such actions or inadvertences could result in severe criminal or civil fines, penalties, forfeitures, disgorgements or other sanctions. This in turn could have a material adverse effect on our reputation, business, consolidated financial condition, results of operations, and cash flows. In addition, detecting, investigating and resolving actual or alleged violations of such laws is expensive and could consume significant time and attention of our senior management, in-country management, and other personnel.
16
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Our failure to comply with the regulations of OSHA, the U.S. DOT and other state and local agencies that oversee safety and transportation compliance could reduce our revenue, profitability and liquidity.
The Occupational Safety and Health Act of 1970, as amended, establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by OSHA and various recordkeeping, disclosure and procedural requirements. Various standards, including standards for notices of hazards and safety, may apply to our operations. We incur capital and operating expenditures and other costs in the ordinary course of business in complying with OSHA and other state and local laws and regulations, and could incur penalties and fines in the future, including, in extreme cases, criminal sanctions.
While we invest substantial resources in occupational health and safety programs, the construction industry involves a high degree of operational risk, and there can be no assurance that we will avoid significant liability. Although we have taken what we believe to be appropriate precautions, we have had employee injuries and fatalities in the past and may suffer additional injuries or fatalities in the future. Serious accidents of this nature may subject us to substantial penalties, civil litigation or criminal prosecution. Personal injury claims for damages, including for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our consolidated financial condition, results of operations or cash flows. In addition, if our safety record were to deteriorate, or if we suffered substantial penalties or criminal prosecution for violation of health and safety regulations, customers could cancel existing contracts and not award future business to us, which could materially adversely affect our liquidity, cash flows and results of operations. If we were not able to successfully resolve such issues, our ability to service our customers could be damaged, which could lead to a material adverse effect on our consolidated results of operations, cash flows and liquidity.
Unsatisfactory safety performance may subject us to liabilities, affect customer relationships, result in higher operating costs, negatively impact employee morale and result in higher employee turnover.
Our business is subject to operational hazards due to the nature of services we provide and the conditions in which we operate, including electricity, fires, explosions, mechanical failures and weather-related incidents. Construction projects undertaken by us expose our employees to electrical lines, pipelines carrying potentially explosive or toxic materials, heavy equipment, transportation accidents, adverse weather conditions and the risk of damage to equipment and property. These hazards, among others, can cause personal injuries and loss of life, severe damage to or destruction of property and equipment and other consequential damages and could lead to suspension of operations and large damage claims which could, in some cases, substantially exceed the amount we charge for the associated services. In addition, if serious accidents or fatalities occur, or if our safety records were to deteriorate, we may be restricted from bidding on certain work or obtaining new contracts, and certain existing contracts could be terminated. Our safety processes and procedures are monitored by various agencies and ratings bureaus. The occurrence of accidents in the course of our business could result in significant liabilities, employee turnover, increase the costs of our projects or harm our ability to perform under our contracts or enter into new customer contracts, all of which could materially adversely affect our profitability and our consolidated financial condition.
We are exposed to product liability, workmanship warranty, casualty, negligence, construction defect, breach of contract and other claims and legal proceedings.
From time to time, we are subject to product liability, workmanship warranty, casualty, negligence, construction defect, breach of contract and other claims and legal proceedings relating to the products we install that, if adversely determined, could adversely affect our consolidated financial condition, results of operations and cash flows. We rely on manufacturers and other suppliers to provide us with most of the products we install. Because we do not have direct control over the quality of such products manufactured or supplied by such third-party suppliers, we are exposed to risks relating to the quality of such products. In addition, we are exposed to potential claims arising from the conduct of our employees, and other subcontractors, for which we may be contractually liable.
We have in the past been, and may in the future be, subject to liabilities in connection with injury or damage incurred in conjunction with the installation of our products. Although we currently maintain what we believe to be suitable and adequate insurance, we may be unable to maintain such insurance on acceptable terms or such insurance may not provide adequate protection against potential liabilities.
17
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Such claims and legal proceedings can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. In addition, lawsuits relating to construction defects typically have statutes of limitations that can run as long as ten years. Claims of this nature could also have a negative impact on customer confidence in our businesses and services. Current or future claims could have a material adverse effect on our reputation, business, consolidated financial condition and results of operations.
We are subject to many laws and regulations in the jurisdictions in which we operate, and changes to such laws and regulations may result in additional costs and impact our operations.
We are committed to upholding the highest standards of corporate governance and legal compliance. We are subject to many laws and regulations in the jurisdictions in which we operate. We expect to be subject to various laws and regulations that apply specifically to U.S. public companies. These include the rules and regulations of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the various regulations, standards and guidance put forth by the SEC and other governmental agencies to implement those laws. New laws, rules and regulations, or changes to existing laws or their interpretations, could create added legal and financial costs and uncertainty for us. In addition, our United Kingdom operations are subject to laws and regulations that are in some cases different from those of the United States, including labor laws such as the U.K. Modern Slavery Act and laws and regulations governing information collected from employees, customers and others, specifically the European Union’s General Data Protection Regulation, which went into effect in May 2018. These laws and regulations, and the economic, financial, political and regulatory impact of the United Kingdom’s decision to leave the European Union, could increase the cost and complexity of doing business in the U.K. and negatively impact our financial position and results of operations. Our efforts to comply with evolving laws, regulations and reporting standards may increase our general and administrative expenses, divert management time and attention or limit our operational flexibility, all of which could have a material adverse effect on our consolidated financial position and results of operations.
Our failure to comply with environmental laws could result in significant liabilities and increased environmental regulations could result in increased costs.
Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products, PCBs, fuel storage, water quality and air quality. We perform work in many different types of underground environments. If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil, some of which may contain pollutants. These objects may also rupture, resulting in the discharge of pollutants. In such circumstances, we may be liable for fines and damages, and we may be unable to obtain reimbursement from the parties providing the incorrect information. We perform work in and around environmentally sensitive areas such as rivers, lakes and wetlands. In addition, we perform directional drilling operations below certain environmentally sensitive terrains and water bodies. Due to the inconsistent nature of the terrain and water bodies, it is possible that such directional drilling may cause a surface fracture, resulting in the release of subsurface materials. These subsurface materials may contain contaminants in excess of amounts permitted by law, potentially exposing us to remediation costs and fines. We also own and lease several facilities at which we store our equipment. Some of these facilities contain fuel storage tanks that are above or below ground. If these tanks were to leak, we could be responsible for the cost of remediation as well as potential fines.
Moreover, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, or the imposition of new clean-up requirements could require us to incur significant costs or become the basis for new or increased liabilities that could negatively impact our business, consolidated financial condition, results of operations and cash flows. In certain instances, we have obtained indemnification or covenants from third parties (including predecessors or lessors) for such clean-up and other obligations and liabilities. However, such third-party indemnities or covenants may not cover all of our costs and the indemnitors may not pay amounts owed to us, and such unanticipated obligations or liabilities, or future obligations and liabilities, may have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Further, we cannot be certain that we will be able to identify or be indemnified for all potential environmental liabilities relating to any acquired business.
18
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Misconduct by our employees, subcontractors or partners or our overall failure to comply with laws or regulations could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.
Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one or more of our employees, subcontractors or partners could have a significant negative impact on our business and reputation. Examples of such misconduct include employee or subcontractor theft, the failure to comply with safety standards, laws and regulations, customer requirements, environmental laws and any other applicable laws or regulations. While we maintain policies and procedures to prevent and detect these activities, such precautions may not be effective and are subject to inherent limitations, including human error and fraud. The failure of any of our employees to comply with applicable laws or regulations or other acts of misconduct could subject us to fines and penalties, harm our reputation, damage our relationships with customers, reduce our revenue and profits and subject us to criminal and civil enforcement actions.
As government contractors, our subsidiaries are subject to a number of rules and regulations, and their contracts with government entities are subject to audit. Violations of the applicable rules and regulations could result in a subsidiary being barred from future government contracts.
Government contractors must comply with many regulations and other requirements that relate to the award, administration and performance of government contracts. A violation of these laws and regulations could result in imposition of fines and penalties, the termination of a government contract or debarment from bidding on government contracts in the future. Further, despite our decentralized nature, a violation at one of our locations could impact other locations’ ability to bid on and perform government contracts. Additionally, because of our decentralized nature, we face risks in maintaining compliance with all local, state and federal government contracting requirements. Prohibition against bidding on future government contracts could have an adverse effect on our consolidated financial condition and results of operations.
In the event of a cybersecurity incident, we could experience operational interruptions, incur substantial additional costs, become subject to legal or regulatory proceedings or suffer damage to our reputation.
In addition to the disruptions that may occur from interruptions in our information technology systems, cybersecurity threats and sophisticated and targeted cyberattacks pose a risk to our information technology systems and the systems that we design and install. We have established security policies, processes and defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our information technology systems, disruption of our operations or the secure operation of the systems we install. Despite these efforts, our information technology systems may be damaged, disrupted or shut down due to attacks by unauthorized access, malicious software, computer viruses, undetected intrusion, hardware failures or other events, and in these circumstances our disaster recovery plans may be ineffective or inadequate. These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings and other costs. Such events could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. In addition, we could be adversely affected if any of our significant customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation. We maintain monitoring practices and protections of our information technology to reduce these risks and test our systems on an ongoing basis for potential threats. There can be no assurance, however, that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.
Certain of our businesses are party to asbestos-related litigation that could adversely affect our consolidated financial condition, results of operations and cash flows.
Certain of our businesses, along with numerous other third parties, are named as defendants in personal injury lawsuits based on alleged exposure to asbestos containing materials. These cases typically involve product liability claims based primarily on allegations of sale, distribution, installation or use of industrial products that
19
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
either contained asbestos or were used with asbestos containing components. We cannot predict with certainty the extent to which we will be successful in litigating or otherwise resolving lawsuits in the future and we continue to evaluate different strategies related to asbestos claims filed against us including entity restructuring and judicial relief. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and consolidated financial condition, results of operations and cash flows.
The amounts we have recorded for asbestos-related liabilities in the consolidated statements of financial position are based on our current strategy for resolving asbestos claims, currently available information, and a number of variables, estimates and assumptions. Key variables and assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the identity of defendants and the resolution of coverage issues with insurance carriers, amount of insurance, and the solvency risk with respect to our insurance carriers. Many of these factors are closely linked, such that a change in one variable or assumption will impact one or more of the others, and no single variable or assumption predominately influences the determination of our asbestos-related liabilities and insurance-related assets. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the later portion of the projection period. Other factors that may affect our liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in our calculations vary significantly from actual results. If actual liabilities are significantly higher than those recorded, the cost of resolving such liabilities could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
The due diligence undertaken in connection with the APi Acquisition may not have revealed all relevant considerations or liabilities of APi Group, which could have a material adverse effect on our consolidated financial condition or results of operations.
There can be no assurance that the due diligence undertaken by us in connection with our acquisition of APi Group has revealed all relevant facts that may be necessary to evaluate such acquisition, including the determination of the price, or to formulate a business strategy, particularly with respect to recent acquisitions completed by APi Group. Furthermore, the information provided during due diligence may have been incomplete, inadequate or inaccurate. As part of the due diligence process, we have also made subjective judgments regarding the results of operations, consolidated financial condition and prospects of APi Group. If the due diligence investigation has failed to correctly identify material issues and liabilities that may be present in APi Group, or if we consider any identified material risks to be commercially acceptable relative to the opportunity, we may incur substantial impairment charges or other losses. In addition, we may be subject to significant, previously undisclosed liabilities relating to the acquired businesses that were not identified during due diligence and which could contribute to poor operational performance, undermine any attempt to restructure the acquired companies or businesses in line with our business plan and have a material adverse effect on our business, consolidated results of operations, consolidated financial condition, cash flows, liquidity and/or prospects.
We may have limited recourse for indemnity claims under the business combination agreement governing the APi Acquisition.
Under the terms of the business combination agreement governing the APi Acquisition (the “BCA”), we will have limited recourse against the Sellers for losses and liabilities arising or discovered after the closing of the APi Acquisition. Except in the event of fraud or for certain specific indemnification matters, we cannot make a claim for indemnification against the Sellers for a breach of the representations and warranties or covenants in the BCA. In connection with the APi Acquisition, we obtained a representation and warranty insurance policy to provide indemnification for breaches of certain representations and warranties which policy is subject to certain specified limitations and exclusions. There can be no assurance that, in the event of a claim, the insurance policy will cover the relevant losses, or that proceeds that are recoverable under the insurance policy (if any) will be sufficient to compensate us for any losses incurred. Therefore, we may have limited recourse against the Sellers and/or the representations and warranties insurance provider in respect of claims for breach of the warranties, covenants and other provisions in the BCA, which could have a material adverse effect on our business, financial condition and results of operations.
20
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Financial Risks
Our substantial indebtedness may adversely affect our cash flow and our ability to operate our business and fulfill our obligations under our indebtedness.
As of December 31, 2019, on a consolidated basis, we had $[●] in principal amount of debt outstanding under our Credit Facilities (as later defined), capital lease obligations totaling approximately $[●] and other indebtedness totaling approximately $[●].
Our substantial indebtedness could have significant effects on our operations. For example, it may:
| • | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, dividends, research and development efforts and other general corporate purposes; |
| • | increase the amount of our interest expense, because our borrowings are at variable rates of interest, which, if interest rates increase, would result in higher interest expense; |
| • | cause credit rating agencies to view our debt level negatively; |
| • | increase our vulnerability to general adverse economic and industry conditions; |
| • | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
| • | limit our ability to make strategic acquisitions, introduce new technologies or exploit business opportunities; and |
| • | place us at a competitive disadvantage compared to our competitors that have less indebtedness. |
In addition, the credit agreement governing the Credit Facilities contains covenants that restrict our operations. These covenants restrict, among other things, our ability to incur additional debt, grant liens, pay cash dividends, enter new lines of business, redeem our ordinary shares, make certain investments and engage in certain merger, consolidation or asset sale transactions. These restrictions could limit our ability to plan for or react to market conditions, meet extraordinary capital needs or otherwise take actions that we believe are in the best interest of the Company. Further, a failure by us to comply with any of these covenants and restrictions could result in an event of default that, if not waived or cured, could result in the acceleration of all or a substantial portion of the outstanding indebtedness thereunder.
The terms of our indebtedness may limit our ability to borrow additional funds or capitalize on business opportunities, and our future debt level may limit our future financial and operating flexibility.
The credit agreement governing the Credit Facilities prohibits distributions on, or purchases or redemptions of, securities if any default or event of default is continuing. In addition, it contains various covenants limiting our ability to, among other things, incur indebtedness if certain financial ratios are not maintained, grant liens, engage in transactions with affiliates, enter into sale-leaseback transactions, and sell substantially all of our assets or enter into a merger or consolidation. The credit agreement governing the Credit Facilities also treats a change of control as an event of default and also requires us to maintain certain leverage ratios.
Our ability to access capital markets to raise capital on favorable terms will be affected by our debt level, our operating and financial performance, the amount of our current maturities and debt maturing in the next several years, and by prevailing credit market conditions. Moreover, if lenders or any future credit rating agency downgrade our credit rating, then we could experience increases in our borrowing costs, face difficulty accessing capital markets or incurring additional indebtedness, be unable to receive open credit from our suppliers and trade counterparties, be unable to benefit from swings in market prices and shifts in market structure during periods of volatility in the crude oil and natural gas markets or suffer a reduction in the market price of our common stock. If we are unable to access the capital markets on favorable terms at the time a debt obligation becomes due in the future. The price and terms upon which we might receive such extensions or additional bank credit, if at all, could be more onerous than those contained in existing debt agreements. Any such arrangements could, in turn, increase the risk that our leverage may adversely affect our future financial and operating flexibility and thereby impact our ability to pay cash distributions at expected rates.
21
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
We may need additional capital in the future for working capital, capital expenditures or acquisitions, and we may not be able to access capital on favorable terms, or at all, which would impair our ability to operate our business or achieve our growth objectives.
Our ability to generate cash is essential for the funding of our operations and the servicing of our debt. If existing cash balances together with the borrowing capacity under our Credit Facilities were not sufficient to make future investments, make acquisitions or provide needed working capital, we may require financing from other sources. Our ability to obtain such additional financing in the future will depend on a number of factors including prevailing capital market conditions, conditions in our industry, and our operating results. These factors may affect our ability to arrange additional financing on terms that are acceptable to us. If additional funds were not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or pursue other opportunities.
A portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial and surety markets or in our ability to obtain surety bonds may cause a material adverse effect on our bonding capacity and, therefore, our capacity to compete for or work on projects.
As of December 31, 2019, there was approximately $[●] in outstanding construction surety bonds (bid, payment, and performance bonds) related to our projects that required an underlying surety bond. Historically, surety market conditions have experienced times of difficulty as a result of significant losses incurred by surety companies and the results of macroeconomic trends outside of our control. Consequently, during times when less overall bonding capacity is available in the market, surety terms have become more expensive and more restrictive. We cannot guarantee our ability to maintain a sufficient level of bonding capacity in the future, which could preclude our ability to bid for certain contracts or successfully contract with some customers.
Additionally, even if we continue to access bonding capacity to sufficiently bond future projects, we may be required to post collateral to secure bonds, which would decrease the liquidity we would have available for other purposes. Our surety providers are under no commitment to guarantee us access to new bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our surety providers. If our surety companies were to limit or eliminate our access to bonds, the alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. If we were to experience an interruption or reduction in the availability of bonding capacity as a result of these or any other reasons, we may be unable to compete for or work on the portion of projects available to us that require bonding.
We could incur additional costs to cover certain guarantees.
In some instances, we guarantee completion of a project by a specific date or price, cost savings, achievement of certain performance standards or performance of our services at a certain standard of quality. If we subsequently fail to meet such guarantees, we may be held responsible for costs resulting from such failures. Such a failure could result in our payment of liquidated or other damages. To the extent that any of these events occur, the total costs of a project could exceed the original estimated costs, and we would experience reduced profits or, in some cases, a loss.
We are effectively self-insured against many potential liabilities.
Although we maintain insurance policies with respect to a broad range of risks, including automobile liability, general liability, workers’ compensation and employee group health, these policies do not cover all possible claims and certain of the policies are subject to large deductibles. Accordingly, we are effectively self-insured for a substantial number of actual and potential claims. In addition, if any of our insurance carriers defaulted on their obligations to provide insurance coverage by reason of its insolvency or for other reasons, our exposure to
22
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
claims would increase and our profits would be adversely affected. Our estimates for unpaid claims and expenses are based on known facts, historical trends and industry averages, utilizing the assistance of an actuary. The determination of such estimated liabilities and their appropriateness are reviewed and updated at least quarterly. However, these liabilities are difficult to assess and estimate due to many relevant factors, the effects of which are often unknown, including the severity of an injury or damage, the determination of liability in proportion to other parties, the timeliness of reported claims, the effectiveness of our risk management and safety programs and the terms and conditions of our insurance policies. Our accruals are based upon known facts, historical trends and our reasonable estimate of future expenses, and we believe such accruals are adequate. However, unknown or changing trends, risks or circumstances, such as increases in claims, a weakening economy, increases in medical costs, changes in case law or legislation, or changes in the nature of the work we perform, could render our current estimates and accruals inadequate. In such case, adjustments to our balance sheet may be required and these increased liabilities would be recorded in the period that the experience becomes known. Insurance carriers may be unwilling, in the future, to provide our current levels of coverage without a significant increase in insurance premiums and/or collateral requirements to cover our obligations to them. Increased collateral requirements may be in the form of additional letters of credit and/or cash, and an increase in collateral requirements could significantly reduce our liquidity. If insurance premiums increase, and/or if insurance claims are higher than our estimates, our profitability could be adversely affected.
We may be required to contribute cash to meet our underfunded obligations in certain multiemployer pension plans.
Our collective bargaining agreements generally require us to participate with other companies in multiemployer pension plans. To the extent those plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, may subject us to substantial liabilities under those plans if we withdraw from them or they are terminated or experience a mass withdrawal.
In addition, the Pension Protection Act of 2006 added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, cash flow position and whether it is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which we contribute or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that we may be obligated to contribute to these plans in the future cannot be estimated due to uncertainty of the future levels of work that require the specific use of union employees covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.
Increases in healthcare costs could adversely affect our financial results.
The costs of providing employee medical benefits have steadily increased over a number of years due to, among other things, rising healthcare costs and legislative requirements. Because of the complex nature of healthcare laws, as well as periodic healthcare reform legislation adopted by Congress, state legislatures, and municipalities, we cannot predict with certainty the future effect of these laws on our healthcare costs. Continued increases in healthcare costs or additional costs created by future health care reform laws adopted by Congress, state legislatures, or municipalities could adversely affect our consolidated results of operations and financial position.
Our backlog is subject to reduction or cancellation, and revenues may be realized in different periods than initially reflected in our backlog.
Our backlog includes the estimated unsatisfied performance obligations associated with the services to be performed under customer contracts. These estimates are based on contract terms and evaluations regarding the timing of the services to be provided. In many instances, our customers are not contractually committed to procure specific volumes of services under a contract. Revenue estimates reflected in our backlog can be subject to change due to a number of factors, including contract cancellations and contract changes made by our customers to the
23
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
amount or nature of the work actually performed under a contract. In addition, revenue reflected in our backlog may be realized in periods different from those previously reported due to the factors above as well as project accelerations, or delays due to various reasons, including, but not limited to, customer scheduling changes, commercial issues such as permitting, engineering revisions, difficult job site conditions, and adverse weather. The amount or timing of our backlog can also be impacted by the merger or acquisition activity of its customers. As a result, our backlog as of any particular date is an uncertain indicator of the amount of or timing of future revenues and earnings.
Our financial results are based, in part, upon estimates and assumptions that may differ from actual results. In addition, changes in accounting principles may cause unexpected fluctuations in our reported financial information.
In preparing our consolidated financial statements in conformity with GAAP, our management made a number of estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. These estimates and assumptions must be made because certain information used in the preparation of our consolidated financial statements is either dependent on future events or cannot be calculated with a high degree of precision from data available. In some cases, these estimates are particularly uncertain, and we must exercise significant judgment. Key estimates include: the recognition of revenue and project profit or loss, which we define as project revenue, less project costs of revenue, including project-related depreciation, in particular, on construction contracts accounted for under the cost-to-cost method, for which the recorded amounts require estimates of costs to complete and the amount of variable consideration included in the contract transaction price; allowances for doubtful accounts; fair value estimates, including those related to acquisitions, valuations of goodwill and intangible assets, acquisition-related contingent consideration and equity investments; asset lives used in computing depreciation and amortization; fair values of financial instruments; self-insurance liabilities; other accruals and allowances; income taxes; and the estimated effects of litigation and other contingencies. Actual results could differ materially from the estimates and assumptions that we use, which could have a material adverse effect on our consolidated results of operations, cash flows and liquidity.
In addition, accounting rules and regulations are subject to review and interpretation by the Financial Accounting Standards Board (the “FASB”), the SEC and various other governing bodies. A change in GAAP could have a significant effect on our reported financial results. Additionally, the adoption of new or revised accounting principles could require that we make significant changes to our systems, processes and controls. We cannot predict the effect of future changes to accounting principles, which could have a significant effect on our reported financial results and/or our consolidated results of operations, cash flows and liquidity.
We will face new challenges, increased costs and administrative responsibilities as a U.S. public company, and management will devote substantial time to related compliance initiatives.
As a U.S. publicly traded company with listed equity securities, we will need to comply with certain laws, regulations and requirements, including certain provisions of Sarbanes-Oxley, certain regulations of the SEC and certain of the NYSE requirements applicable to public companies. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our Board and management and will significantly increase our costs and expenses.
We will need to:
| • | institute a more comprehensive compliance framework; |
| • | update, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of Sarbanes-Oxley and the related rules and regulations of the SEC; |
| • | prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws; |
| • | revise our existing internal policies, such as those relating to disclosure controls and procedures and insider trading; |
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| • | comply with SEC rules and guidelines requiring registrants to provide their financial statements in interactive data format using eXtensible Business Reporting Language (“XBRL”); |
| • | involve and retain to a greater degree outside counsel and accountants in the above activities; and |
| • | enhance our investor relations function. |
In addition, we also expect that being a public company subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our Board, particularly to serve on our audit committee.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately and timely, which could harm our business and adversely affect our share price.
As a U.S. publicly traded company, we will be subject to the reporting requirements of the Exchange Act, Sarbanes-Oxley, and the rules and regulations and the listing standards of the NYSE. Accordingly, we will be required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with those requirements. Even when such controls are implemented, management will not be able to guarantee that our internal controls and disclosure controls and procedures will prevent all possible errors. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our business have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any system of controls may not succeed in achieving its stated goals under all potential future conditions. Over time, measures of control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
In connection with our preparation of our consolidated financial statements for the years ended December 31, 2018 and 2017, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting or remediate material weaknesses could adversely affect us.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Prior to the APi Acquisition, APi Group was not subject to public company internal control framework requirements and therefore did not design and document its control environment to be in compliance with required public company standards. Additionally, we and our independent registered public accounting firm were not required to and did not perform an evaluation of our internal control over financial reporting as of December 31, 2018 and 2017 in accordance with the provisions of the Sarbanes-Oxley Act. In connection with our preparation of our consolidated financial statements in this registration statement for the years ended December 31, 2018 and 2017, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting, and we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. If we fail to remediate any material weaknesses or if we otherwise fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
As indicated above, control deficiencies in our internal control over financial reporting have been identified which constitute material weaknesses relating to inadequate design and implementation of:
| • | information technology general controls that prevent the information systems from providing complete and accurate information consistent with financial reporting objectives and current needs; |
25
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| • | internal controls over the preparation of the financial statements, including the insufficient review and oversight over financial reporting, journal entries along with related file documentation; |
| • | internal controls to identify and manage segregation of certain accounting duties; |
| • | internal controls over estimated costs of completion on contracts where revenue is recognized over time; and |
| • | management review controls over projected financial information used in fair value financial models used for purchase accounting and intangible asset valuations. |
Under standards established by the United States Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Management is in the process of developing a remediation plan. The material weaknesses will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. We will monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate.
If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets.
We carry a significant amount of goodwill and identifiable intangible assets on our consolidated balance sheets. Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill and indefinite-lived intangible assets for impairment each year, or more frequently if circumstances suggest an impairment may have occurred. We have determined in the past and may again determine in the future that a significant impairment has occurred in the value of our goodwill. Additionally, we have a significant amount of identifiable intangible assets and fixed assets that could also be subject to impairment. If we determine that a significant impairment has occurred in the value of our unamortized intangible assets or fixed assets, we could be required to write off a portion of our assets, which could adversely affect our consolidated financial condition or our reported results of operations.
Our use of revenue recognition over time could result in a reduction or reversal of previously recorded revenue or profits.
A material portion of our revenue is recognized over time by measuring progress toward complete satisfaction of performance obligations in the proportion that our actual costs bear to our estimated contract costs at completion. The earnings or losses recognized on individual contracts are based on estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of change orders to the original contract, collection disputes with the customer on amounts invoiced or claims against the customer for increased costs incurred by us due to customer induced delays and other factors. Contract losses are recognized in the fiscal period when the loss is determined. Contract profit estimates are also adjusted in the fiscal period in which it is determined that an adjustment is required. As a result of the requirements of over time revenue recognition, the possibility exists, for example, that we could have estimated and reported a profit on a contract over several periods and later determined, usually near contract completion, that all or a portion of such previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement will be reported for the period in which such determination is made, thereby eliminating all or a portion of any profits from other contracts that would have otherwise been reported in such period or even resulting in a loss being reported for such
26
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
period. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.
We may incur substantial additional indebtedness, which could further exacerbate the risks that we may face.
Subject to the restrictions in the agreements that govern the Credit Agreement, we may incur substantial additional indebtedness (including secured indebtedness) in the future. These restrictions are subject to waiver and a number of significant qualifications and exceptions, and indebtedness incurred in compliance with these restrictions could be substantial.
Any material increase in our level of indebtedness will have several important effects on our future operations, including, without limitation:
| • | we would have additional cash requirements in order to support the payment of interest on our outstanding indebtedness; |
| • | increases in our outstanding indebtedness and leverage would increase its vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; and |
| • | depending on the levels of our outstanding indebtedness, our ability to obtain additional financing for working capital, capital expenditures and general corporate purposes could be limited. |
An increase in interest rates would increase the interest costs on our Credit Facilities and on our floating rate indebtedness and could impact adversely our ability to refinance existing indebtedness or to sell assets.
Interest payments for borrowings under the Credit Facilities are based on floating rates. As a result, an increase in interest rates will reduce our cash flow available for other corporate purposes.
Rising interest rates also could limit our ability to refinance existing indebtedness when it matures and increase interest costs on any indebtedness that is refinanced. We have and may continue to enter into agreements such as floating-to-fixed interest rate swaps, caps, floors and other hedging contracts in order to fully or partially hedge against the cash flow effects of changes in interest rates for floating rate debt. For example, effective October 1, 2019, we entered into an interest rate swap on a portion of our Term Loan, which swapped a portion of the principal amount which was accruing interest at a rate based on LIBOR for a fixed rate. However, we may not maintain interest rate swaps with respect to all of our floating rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk. In addition, these agreements expose us to the risk that other parties to the agreements will not perform or that the agreements will be unenforceable.
Discontinuation, reform or replacement of LIBOR and other benchmark rates, or uncertainty related to the potential for any of the foregoing, may adversely affect our business.
Interest payments for borrowings under the Credit Facilities are based on floating rates which at times references a LIBOR rate. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact interest expense related to borrowings under our Credit Facilities, including the Term Loan and the interest rate swap we entered into with respect thereto. We may in the future pursue amendments to our Credit Facilities to provide for a transition mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with its lenders on any such amendments. Further, certain of our current debt instruments limit the amount of indebtedness we and our subsidiaries may incur. As a result, additional financing to replace our LIBOR-based indebtedness may be unavailable, available on less favorable terms or restricted by the terms of our outstanding indebtedness.
27
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Risks Relating to Our Common Stock
There is currently no public trading market for our common stock and an active trading market for our common stock may not develop.
Other than limited trading on the OTC Market Group’s Pink marketplace, there is currently no public or other market for shares of our common stock. Although our ordinary shares were initially listed for trading on the LSE, trading of our ordinary shares was suspended upon announcement of our agreement to acquire APi Group. We do not currently anticipate that trading of our ordinary shares on the LSE will resume. Although we expect that listing on the NYSE will occur in connection with the Domestication, there is no guarantee that we will effect or maintain that listing or a listing on any other exchange.
Even if following the Domestication our common stock becomes listed on the NYSE, we cannot predict the extent to which investor interest in APG will lead to the development of an active trading market on the NYSE or how liquid that market might become. An active public market for our common stock may not develop or be sustained. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.
We have numerous equity instruments outstanding that would require us to issue additional shares of common stock. Therefore, you may experience significant dilution of your ownership interests and the future issuance of additional shares of our common stock, or the anticipation of such issuances, could have an adverse effect on our stock price.
We currently have outstanding numerous equity instruments outstanding that would require us to issue additional shares of common stock for no or a fixed amount of additional consideration. Specifically, as of November 30, 2019 we had outstanding the following:
| • | 4,000,000 Founder Preferred Shares, which will be convertible into shares of our ordinary shares (or common stock following the Domestication), on a one-for-one basis, at any time at the option of the holder; |
| • | 64,546,077 warrants, which are exercisable for 21,515,359 ordinary shares (or common stock following the Domestication) at any time at the option of the holder at a price of $11.50 per whole share; |
| • | 162,500 options which are exercisable to purchase ordinary shares (or common stock following the Domestication) on a one-for-one basis, at any time at the option of the holder at an exercise price of $11.50 per share; and |
| • | 1,441,546 unvested restricted stock units which vest and settle into ordinary shares (or common stock following the Domestication), on a one-for-one basis, based on the vesting schedule applicable to the restricted stock unit awards. |
We also had 15,558,454 ordinary shares available under the APi Group Corporation 2019 Equity Incentive Plan as of that date. In addition, we will be obligated to pay dividends on our 4,000,000 outstanding Founder Preferred Shares (or the Series A Preferred Stock into which they will be converted in the Domestication) based on the market price of our common stock if such market price exceeds certain trading price minimums. These dividends are payable in cash or shares of our common stock, at our sole option (which we intend to settle in shares). The issuance of ordinary shares pursuant to the terms of the Founder Preferred Shares will reduce (by the applicable proportion) the percentage shareholdings of those shareholders holding ordinary shares prior to such issuance which may reduce your net return on your investment in our ordinary shares (or common stock following the Domestication). We may also issue additional shares of our common stock or other securities that are convertible
28
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
into or exercisable for our common stock in connection with future acquisitions, future issuances of our securities for capital raising purposes or for other business purposes. Future sales by us of substantial amounts of our common stock, or the perception that sales could occur, could have a material adverse effect on the price of our common stock.
Our stock price may be volatile after the listing on the NYSE and, as a result, you could lose a significant portion or all of your investment.
The market price of our common stock on the NYSE may fluctuate after listing as a result of several factors, including the following:
| • | our operating and financial performance and prospects; |
| • | variations in our quarterly operating results or those of other companies in our industries; |
| • | volatility in our industries, the industries of our customers and suppliers and the securities markets; |
| • | risks relating to our businesses and industries, including those discussed above; |
| • | strategic actions by us or our competitors; |
| • | damage to our reputation, including as a result of issues relating to the quality or safety of the services we provide and systems we install; |
| • | actual or expected changes in our growth rates or our competitors’ growth rates; |
| • | investor perception of us, the industries in which we operate, the investment opportunity associated with the common stock and our future performance; |
| • | addition to or departure of our executive officers; |
| • | changes in financial estimates or publication of research reports by analysts regarding our common stock, other comparable companies or our industries generally, or termination of coverage of our common stock by analysts; |
| • | our failure to meet estimates or forecasts made by analysts, if any; |
| • | trading volume of our ordinary shares; |
| • | future sales of our common stock by us or our shareholders; |
| • | economic, legal and regulatory factors unrelated to our performance; |
| • | adverse or new pending litigation against us; or |
| • | the release or expiration of lock-up or other transfer restrictions on our outstanding common stock. |
Furthermore, the stock markets often experience significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions or interest rate changes may cause the market price of our common stock to decline.
29
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of our common stock.
Under the terms of APG Delaware’s new certificate of incorporation which will be in effect upon the effectiveness of the Domestication, our Board of Directors will be authorized to create and issue one or more additional series of preferred stock, and, with respect to each series, to determine number of shares constituting the series and the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, which may include dividend rights, conversion or exchange rights, voting rights, redemption rights and terms and liquidation preferences, without stockholder approval. If we create and issue one or more additional series of preferred stock, it could affect your rights or reduce the value of our outstanding common stock. Our Board of Directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock and which could have certain anti-takeover effects.
If securities or industry analysts either do not publish research about us, or publish inaccurate or unfavorable research about us, our businesses could be adversely impacted or, if such analysts change their recommendations regarding our common stock adversely, our stock price or trading volume could decline.
The trading market for our common stock will be influenced in part by the research and reports that securities or industry analysts may publish about us, our businesses, our market, or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our common stock, provide more favorable recommendations about our competitors, or publish inaccurate or unfavorable research about our businesses, the trading price of our common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We cannot assure you that we will declare dividends or have the available cash to make dividend payments.
To the extent we intend to pay dividends on our common stock, we will pay such dividends at such times (if any) and in such amounts (if any) as the Board determines appropriate and in accordance with applicable law. Payments of such dividends will be dependent on the availability of any dividends or other distributions from APi Group and its subsidiaries to us. We can therefore give no assurance that we will be able to pay dividends going forward or as to the amount of such dividends, if any.
We operate as a holding company and our principal source of operating cash will be income received from our subsidiaries.
We have a holding company structure and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. As a result, we are dependent on the income generated by our subsidiaries to meet our expenses and operating cash requirements. The amount of distributions and dividends, if any, which may be paid from APi Group and its subsidiaries to us will depend on many factors, including APi Group’s results of operations and consolidated financial condition, limits on dividends under applicable law, its constitutional documents, documents governing any indebtedness of APG or APi Group, and other factors which may be outside of our control. If our subsidiaries are unable to generate sufficient cash flow, we may be unable to pay its expenses or make distributions and dividends on the ordinary shares.
Risks Relating to Taxation
Our change in classification to a U.S. domestic corporation for U.S. federal income tax purposes may result in adverse tax consequences for you.
APG BVI believes that at the time of the APi Acquisition, APG BVI became a U.S. domestic corporation for U.S. federal income tax purposes as a result of an inversion transaction. See the description of the inversion
30
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
transaction in “Material U.S. Federal Income Tax Consequences—Inversion.” If you are a U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences” below) of APG ordinary shares, you may be subject to U.S. federal income tax as a result of APG becoming a U.S. domestic corporation for U.S. federal income tax purposes. If you are a non-U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences”) of APG ordinary shares or warrants, you may become subject to withholding tax on any dividends paid on the ordinary shares of APG BVI or the common stock of APG Delaware subsequent to APG becoming a U.S. domestic corporation for U.S. federal income tax purposes.
If you are a U.S. Holder who owns (directly, indirectly, or constructively) APG ordinary shares with a fair market value of $50,000 or more, but less than 10% of the total combined voting power of all classes of our shares entitled to vote (and less than 10% of the total value of all classes of our shares) at the time APG became taxable as a U.S. domestic corporation, you must generally recognize gain (but not loss) with respect to such APG ordinary shares, even if you continue to hold your stock and have not received any cash as a result of the APi Acquisition or Domestication. As an alternative to recognizing gain, however, such U.S. holder may elect to include in income the “all earnings and profits amount,” as the term is defined in Treasury Regulation Section 1.367(b)-2(d), attributable to its APG ordinary shares.
If a U.S. Holder owns (directly, indirectly, or constructively) APG ordinary shares representing 10% or more of the total combined voting power of all classes of our shares entitled or 10% or more of the total value of all classes of our shares at the time APG became taxable as a U.S. domestic corporation, such U.S. Holder will be required to include in income the “all earnings and profits amount” attributable to its APG ordinary shares. Complex attribution rules apply in determining whether a U.S. Holder owns 10% or more (by vote or value) of our shares for U.S. federal tax purposes.
If APG is a passive foreign investment company (“PFIC”) at any time during a U.S. Holder’s holding period of APG ordinary shares, such U.S. Holder may be required to recognize gain in connection with APG becoming a U.S. domestic corporation for U.S. federal income tax purposes and be subject to complex rules applicable to a shareholder of a PFIC. APG believes that it has been a PFIC since its inception. The determination of whether a non-U.S. corporation is a PFIC is primarily factual and there is little administrative or judicial authority on which to rely to make a determination.
EACH U.S. HOLDER IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR.
For a more detailed description of the material U.S. federal income tax consequences associated with the Domestication, please read “Material U.S. Federal Income Tax Consequences” starting on page 121 of this prospectus. WE STRONGLY URGE YOU TO CONSULT WITH YOUR OWN TAX ADVISOR.
Upon effectiveness of the Domestication, the rights of holders of APG Delaware common stock arising under the DGCL as well as our new organizational documents will differ from and may be less favorable to the rights of holders of APG ordinary shares arising under the BVI Companies Act as well as our current memorandum and articles of association.
Upon effectiveness of the Domestication, the rights of holders of APG Delaware common stock will arise under our new certificate of incorporation and bylaws as well as the DGCL. Those new organizational documents and the DGCL contain provisions that differ in some respects from those in our current memorandum and articles of association and the BVI Companies Act and, therefore, some rights of holders of APG Delaware common stock could differ from the rights that holders of APG ordinary shares currently possess. For instance, while class actions are generally not available to shareholders under the BVI Companies Act, such actions are generally available under the DGCL. This change could increase the likelihood that APG Delaware becomes involved in costly litigation, which could have a material adverse effect on APG Delaware. In addition, there are differences between the new organizational documents of APG Delaware and the current constitutional documents of APG BVI. For a more detailed description of the rights of holders of APG Delaware common stock and how they may differ from the rights of holders of APG ordinary shares, please see “Description of Capital Stock; Comparison of Rights.” The forms of the new certificate of incorporation and bylaws of APG Delaware are attached as Appendix B and Appendix C, respectively, to this prospectus and we urge you to read them.
31
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Delaware law and APG Delaware’s new organizational documents contain certain provisions, including anti-takeover provisions, that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
APG Delaware’s new certificate of incorporation and bylaws that will be in effect upon the effectiveness of the Domestication, and the DGCL, contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by APG Delaware’s board of directors and therefore depress the trading price of APG Delaware common stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of our board of directors or taking other corporate actions, including effecting changes in our management. Among other things, APG’s new organizational documents include provisions regarding:
| • | the ability of the APG Delaware board of directors to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; |
| • | the limitation of the liability of, and the indemnification of, APG Delaware’s directors and officers; |
| • | a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action, including the removal of directors; |
| • | the requirement that a special meeting of stockholders may be called only by a majority of the entire APG Delaware board of directors or APG Delaware’s chief executive officer, which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors; |
| • | controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; |
| • | the ability of the APG Delaware board of directors to amend the bylaws, which may allow APG Delaware’s board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and |
| • | advance notice procedures with which stockholders must comply to nominate candidates to the APG Delaware board of directors or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the APG Delaware board of directors and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of APG Delaware. |
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the APG Delaware board of directors or management. In addition, Section 203 of the DGCL restricts certain “business combinations” with “interested stockholders” for three years following the date that a person becomes an interested stockholder unless: (1) the “business combination” or the transaction which caused the person or entity to become an interested stockholder is approved by the Board of Directors prior to such business combination or transactions; (2) upon the completion of the transaction in which the person or entity becomes an “interested stockholder,” such interested stockholder holds at least 85% of the voting stock of APG Delaware not including (x) shares held by officers and directors and (y) shares held by employee benefit plans under certain circumstances; or (3) at or after the person or entity becomes an “interested stockholder,” the “business combination” is approved by the Board of Directors and holders of at least 66 2/3% of the outstanding voting stock, excluding shares held by such interested stockholder. A Delaware corporation may elect not to be governed by Section 203. APG Delaware has not made such an election.
32
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2019.
You should read this table in conjunction with “Selected Consolidated Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited financial statements and related notes included elsewhere in this prospectus.
| As of December 31, 2019 | ||||
| (in millions, except per share data) | ||||
Cash and cash equivalents | $ | |||
Debt: | ||||
Credit Facilities(1) | $ | |||
Other bank facilities | $ | |||
|
| |||
Total debt | $ | |||
Stockholders’ equity: | ||||
Ordinary shares (no par value)(2) | $ | |||
Preferred shares (no par value)(3) | ||||
Additional paid in capital | ||||
|
| |||
Retained deficit | ||||
|
| |||
Total shareholders’ equity | $ | |||
Total capitalization | $ | |||
|
| |||
| (1) | As of December 31, 2019, there was $[●] of indebtedness outstanding under the term loan facility and $[●] of indebtedness outstanding under the revolving credit facility we obtained in connection with the APi Acquisition. See “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.” |
| (2) | Does not include (i) 4,000,000 shares issuable upon the conversion of the Founder Preferred Shares, (ii) 21,515,359 shares issuable upon the exercise of the APG warrants, (iii) 162,500 shares issuable upon the exercise of the outstanding non-executive director options, (iv) 1,441,546 unvested restricted stock units which vest and settle into ordinary shares on a one-for-one basis or (v) shares issuable as dividends pursuant to the terms of our Founder Preferred Shares. |
| (3) | In connection with the Domestication, the 4,000,000 outstanding Founder Preferred Shares will be converted into 4,000,000 shares of Series A Preferred Stock which, as of October 1, 2019, entitle the holder to receive an annual dividend based on the market price of APG Delaware common stock if such market price exceeds certain trading price minimums. See “Description of Capital Stock; Comparison of Rights—Shares Reserved for Future Issuances.” |
33
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
MARKET AND DIVIDEND INFORMATION
Ordinary Shares
Our ordinary shares are listed for trading on the LSE under the symbol “JTWO”. Our shares began trading on the LSE on October 10, 2017 and were suspended from trading on September 3, 2019 due to the announcement of the then-pending APi Acquisition. Our ordinary shares are currently quoted on the OTC Market Group’s Pink marketplace under the symbol “JJAQF.”
In connection with the initial public offering on October 10, 2017, we issued 121,032,500 of our ordinary shares. As of November 30, 2019, we had 169,902,260 ordinary shares outstanding and 18 record holders of our ordinary shares. We have not declared or paid any dividends on our ordinary shares in the past two fiscal years, and have no current plans to pay dividends on our ordinary shares. In connection with the Domestication, we intend to list our common stock on the NYSE under the ticker symbol “APG”.
Warrants
Our warrants are listed for trading on the LSE under the symbol “JTOW”. Our warrants began trading on the LSE on October 10, 2017 and were suspended from trading on September 3, 2019 due to the announcement of the then-pending APi Acquisition.
On October 5, 2017, an aggregate of 125,032,500 warrants were issued (with each three warrants entitling the holder to subscribe for one ordinary share) pursuant to a warrant instrument executed by J2, and were exercisable to purchase an aggregate of 41,677,500 APG ordinary shares. On October 1, 2019, we completed the Warrant Financing, in which an aggregate of 60,486,423 warrants were exercised at a reduced exercise price of $10.25 for an aggregate of 20,162,141 ordinary shares.
As of November 30, 2019, there were approximately 64,546,077 warrants outstanding representing approximately 21,515,359 ordinary shares. As of November 30, 2019, we had one record holder of our warrants.
34
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
General
APG will effect the Domestication by filing with the Secretary of State of the State of Delaware a certificate of corporate domestication and a certificate of incorporation of APG Delaware, and by filing with the British Virgin Islands Registrar of Corporate Affairs a notice of continuance out of the British Virgin Islands and certified copies of the certificates filed in Delaware. The Domestication and the certificate of incorporation of APG Delaware were approved by our Board of Directors, and no action of our shareholders is required to effect the Domestication. Under Delaware law, the Domestication is deemed effective upon the filing of the certificate of corporate domestication and the certificate of incorporation with the Secretary of State of the State of Delaware. In addition, APG must file with the British Virgin Islands Registrar of Corporate Affairs a notice of continuance out of the British Virgin Islands and if the British Virgin Islands Registrar of Corporate Affairs is satisfied that the requirements of the BVI Companies Act have been satisfied with respect to the Domestication, it will issue a certificate of discontinuance and, at that time, we shall cease to be registered as a company in the British Virgin Islands and will continue as the same legal entity incorporated in Delaware. We intend to file the certificate of continuance with the British Virgin Islands Registrar of Corporate Affairs on the day certified copies of the certificates are issued by the Secretary of State of the State of Delaware. APG BVI has not received, and is not required by British Virgin Islands law to receive, approval of a plan of arrangement in the British Virgin Islands, and no plan of arrangement is contemplated.
In connection with the Domestication, APG Delaware’s Board of Directors will adopt bylaws, which, together with the new certificate of incorporation filed with the Secretary of State of the State of Delaware, will be the organizational documents of APG Delaware from and after the Domestication.
Background and Reasons for the Domestication
Our Board of Directors approved the domestication of APG from the British Virgin Islands to the State of Delaware in connection with the registration of the shares of common stock of APG Delaware with the SEC. Our Board of Directors believes that there are significant advantages to us that will arise as a result of a change of our domicile to Delaware and that any direct benefit that the DGCL provides to a corporation also indirectly benefits its stockholders, who are the owners of the corporation. Our Board of Directors further believes that there are several reasons why the Domestication is in the best interests of Company and its shareholders. As explained in more detail below, these reasons can be summarized as follows:
| • | Prominence, Predictability, and Flexibility of Delaware Law. For many years Delaware has followed a policy of encouraging incorporation in its state and, in furtherance of that policy, has been a leader in adopting, construing, and implementing comprehensive, flexible corporate laws responsive to the legal and business needs of corporations organized under its laws. Many corporations have chosen Delaware initially as a state of incorporation or have subsequently changed corporate domicile to Delaware. Because of Delaware’s prominence as the state of incorporation for many major corporations, both the legislature and courts in Delaware have demonstrated the ability and a willingness to act quickly and effectively to meet changing business needs. The DGCL is frequently revised and updated to accommodate changing legal and business needs and is more comprehensive, widely used and interpreted than other state corporate laws. This favorable corporate and regulatory environment is attractive to businesses such as ours. |
| • | Well-Established Principles of Corporate Governance. There is substantial judicial precedent in the Delaware courts as to the legal principles applicable to measures that may be taken by a corporation and to the conduct of a company’s board of directors, such as under the business judgment rule and other standards. Because the judicial system is based largely on legal precedents, the abundance of Delaware case law provides clarity and predictability to many areas of corporate law. We believe, such clarity would be advantageous to APG Delaware, our Board of Directors and management to make corporate decisions and take corporate actions with greater assurance as to the validity and consequences of those decisions and actions. Further, investors and securities professionals are generally more familiar with Delaware corporations, and the laws |
35
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
governing such corporations, increasing their level of comfort with Delaware corporations relative to other jurisdictions. The Delaware courts have developed considerable expertise in dealing with corporate issues, and a substantial body of case law has developed construing Delaware law and establishing public policies with respect to corporate legal affairs. Moreover, Delaware’s vast body of law on the fiduciary duties of directors provides appropriate protection for APG Delaware’s stockholders from possible abuses by directors and officers. |
| • | Increased Ability to Attract and Retain Qualified Directors. The Domestication from the British Virgin Islands to Delaware is attractive to directors, officers, and stockholders alike. Our reincorporation in Delaware may make APG Delaware more attractive to future candidates for our Board of Directors, because many such candidates are already familiar with Delaware corporate law from their past business experience. To date, we have not experienced difficulty in retaining directors or officers, but directors of public companies are exposed to significant potential liability. Thus, candidates’ familiarity and comfort with Delaware laws—especially those relating to director indemnification (as discussed below)—draw such qualified candidates to Delaware corporations. Our Board of Directors therefore believes that providing the benefits afforded directors by Delaware law will enable APG Delaware to compete more effectively with other public companies in the recruitment of talented and experienced directors and officers. Moreover, Delaware’s vast body of law on the fiduciary duties of directors provides appropriate protection for our stockholders from possible abuses by directors and officers. The frequency of claims and litigation pursued against directors and officers has greatly expanded the risks facing directors and officers of corporations in carrying out their respective duties. The amount of time and money required to respond to such claims and to defend such litigation can be substantial. While both British Virgin Islands and Delaware law permit a corporation to include a provision in its governing documents to reduce or eliminate the monetary liability of directors for breaches of fiduciary duty in certain circumstances, we believe that, in general, Delaware law is more developed and provides more guidance than British Virgin Islands law on matters regarding a company’s ability to limit director liability. As a result, we believe that the corporate environment afforded by Delaware will enable the surviving corporation to compete more effectively with other public companies in attracting and retaining new directors. |
Effects of the Domestication
The BVI Companies Act permits a British Virgin Islands company to discontinue from the British Virgin Islands and continue in an appointed jurisdiction (which includes Delaware) as if it had been incorporated under the laws of that other jurisdiction. The BVI Companies Act and our memorandum and articles of association authorize our Board of Directors to continue APG BVI in a jurisdiction outside of the British Virgin Islands (in this case, Delaware) without a shareholder vote. Consequently, we are not asking for your vote or soliciting proxies with respect to the Domestication. The BVI Companies Act does not provide shareholders with statutory rights of appraisal in relation to a discontinuance under the BVI Companies Act.
Section 388 of the DGCL provides that an entity organized in a country outside the United States may become domesticated as a corporation in Delaware by the filing with the Secretary of State of the State of Delaware of a certificate of incorporation and a certificate of corporate domestication stating, among other things, that the domestication has been approved as provided in the document, instrument or other writing, as the case may be, governing the internal offers of the non-United States entity and the conduct of its business or applicable non-Delaware law, as appropriate. Section 388 of the DGCL provides that prior to the filing of a certificate of corporate domestication with the Secretary of State of the State of Delaware, the domestication and the certificate of incorporation to be filed with the Secretary of State of the State of Delaware must be approved in the manner provided for by the document, instrument, agreement or other writing, as the case may be, governing the internal affairs of the non-United States entity and the conduct of its business or by applicable non-Delaware law, as appropriate. Section 388 of the DGCL does not provide any other approval requirements for a domestication. The DGCL does not provide stockholders with statutory rights of appraisal in connection with a domestication under Section 388 of the DGCL.
36
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Under Section 184 of the BVI Companies Act, APG BVI will cease to be a company incorporated under the BVI Companies Act and will continue as the same legal entity incorporated under the laws of Delaware. Similarly, Section 388 of the DGCL provides that, upon domesticating in Delaware:
| • | APG Delaware will be deemed to be the same entity as APG BVI, and the domestication will constitute a continuation of the existence of APG BVI in the form of APG Delaware; |
| • | all rights, privileges and powers, as well as all property, of APG BVI will remain vested in APG Delaware; |
| • | all debts, liabilities and duties of APG BVI will remain attached to APG Delaware and may be enforced against APG Delaware to the same extent as if originally incurred by it; and |
| • | unless otherwise agreed to or otherwise required under applicable British Virgin Islands law, the domestication will not be deemed a dissolution of APG BVI. |
No Change in Business, Locations, Fiscal Year or Employee Plans
The Domestication will effect a change in our jurisdiction of incorporation, and other changes of a legal nature, including changes in our organizational documents, which are described in this prospectus. Because there is no change in our legal entity, the business, assets and liabilities of APG and its subsidiaries on a consolidated basis, as well as our principal locations and fiscal year, will be the same upon effectiveness of the Domestication as they are prior to the Domestication.
Upon effectiveness of the Domestication, all of our obligations will continue as outstanding and enforceable obligations of APG Delaware.
All APG BVI employee benefit plans and agreements will be continued by APG Delaware.
Our Management and Our Board of Directors
Our executive officers will be the executive officers of APG Delaware immediately following the effectiveness of the Domestication. Our current executive officers are Russell Becker, President and Chief Executive Officer, Thomas Lydon, Chief Financial Officer, Julius Chepey, Chief Information Officer, Paul Grunau, Chief Learning Officer and Mark Polovitz, Vice President and Controller.
Our directors before the effectiveness of the Domestication will be the directors of APG Delaware immediately following the effectiveness of the Domestication. The composition of our Board of Directors changed upon the consummation of the APi Acquisition. Our current directors are Sir Martin E. Franklin, James E. Lillie, Ian G. H. Ashken, Russell Becker, Anthony E. Malkin, Thomas V. Milroy, Lord Paul Myners, Cyrus D. Walker and Carrie A. Wheeler. Mr. Franklin and Mr. Lillie are our Co-Chairmen. Upon the consummation of the APi Acquisition, Rory Cullinan, Jean-Marc Huët and Brian Kaufmann stepped down from our Board of Directors and Messrs. Ashken, Becker, Malkin and Walker and Ms. Wheeler joined our Board of Directors. See “Management and Corporate Governance—Board of Directors.”
Domestication Share Conversion
In connection with the Domestication, our currently issued and outstanding ordinary shares will automatically convert, on a one-for-one basis, into shares of APG Delaware common stock. Consequently, at the Effective Time, each holder of an APG ordinary share will instead hold a share of APG Delaware common stock representing the same proportional equity interest in APG Delaware as that shareholder held in APG BVI immediately prior to the Effective Time. The number of shares of APG Delaware common stock outstanding immediately after the Effective Time will be the same as the number of ordinary shares of APG BVI outstanding immediately prior to the Effective Time.
37
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
It is not necessary for shareholders of APG BVI to exchange their existing share certificates for share certificates of APG Delaware in connection with the Domestication. A shareholder who currently holds any of our share certificates will receive a new stock certificate upon request pursuant to Section 158 of the DGCL or upon any future transaction in APG Delaware common stock that requires the transfer agent to issue stock certificates in exchange for existing share certificates. Until surrendered and exchanged, each certificate evidencing APG ordinary shares will be deemed for all purposes of the Company to evidence the identical number of shares of APG Delaware common stock.
Similarly, outstanding options and warrants to acquire, and restricted stock units that settle into, APG ordinary shares will be converted into options or warrants to acquire, or restricted stock units that settle into, shares of APG Delaware common stock. APG Delaware will not issue new options or warrants to acquire, or restricted stock units that settle into, APG Delaware common stock until such future transaction that requires the issuance of options or warrants to acquire, or restricted stock units that settle into, APG Delaware common stock in exchange for existing options or warrants to acquire, or restricted stock units that settle into, APG ordinary shares. After the effectiveness of the Domestication and until surrendered and exchanged, each option or warrant to acquire, or restricted stock unit that settles into, a portion of APG ordinary shares will be deemed for all purposes of the Company to evidence an option or warrant to acquire, or restricted stock unit that settles into, the identical portion of shares of APG Delaware common stock.
Comparison of Shareholder Rights
The Domestication will change our jurisdiction of incorporation from the British Virgin Islands to the State of Delaware. While we are currently governed by the BVI Companies Act, upon Domestication, we will be governed by the DGCL. There are differences between British Virgin Islands corporate law and Delaware corporate law. In addition, in connection with the Domestication, we will be governed by a newly adopted certificate of incorporation and bylaws, which are different from our current organizational documents. For a more detailed description of how the new organizational documents and Delaware law may differ from our current organizational documents and British Virgin Islands law, please see “Description of Capital Stock; Comparison of Rights—Comparison of Rights” below. Our business, assets and liabilities on a consolidated basis, as well as our executive officers, principal business locations and fiscal year, will not change as a result of the Domestication.
The most significant differences between our current organizational documents and British Virgin Islands law and the new organizational documents and Delaware law are as follows:
| • | Delaware law requires that all amendments to the certificate of incorporation of APG Delaware (other than a certificate of designation setting forth a copy of the resolution of the APG Delaware Board of Directors fixing the designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of the shares of one or more new series of preferred stock of APG Delaware or a change in APG Delaware’s name) must be approved by the Board of Directors and by the stockholders, while amendments to the Amended and Restated Memorandum and Articles of Association of APG BVI may be made solely by resolutions of the directors (in limited circumstances) or by the holders of ordinary shares; |
| • | Delaware law prohibits the repurchase of shares of APG Delaware when it is or would be rendered insolvent by such repurchase, while there are no such limitations in the BVI Companies Act; |
| • | The APG Delaware certificate of incorporation will prohibit the common stockholders of APG Delaware from acting by written consent, while the APG BVI Amended and Restated Memorandum and Articles of Association permit shareholder action by written consent; |
| • | The APG Delaware bylaws will not permit the stockholders of APG Delaware to call meetings of stockholders under any circumstances, while the shareholders holding 30% of the voting rights in respect of the matter for which the meeting is called may require the directors to call a meeting of shareholders of APG BVI; |
38
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| • | Under Delaware law, only the stockholders may remove directors, while under British Virgin Islands law and the APG BVI Amended and Restated Memorandum and Articles of Association, a majority of the directors may remove a fellow director; |
| • | Under the APG Delaware certificate of incorporation and bylaws, subject to the rights of any series of preferred stock, vacancies and unfilled directorships will be filled solely by the remaining directors, while under the APG BVI Amended and Restated Memorandum and Articles of Association vacancies may be filled by either the directors or the shareholders; |
| • | Under Delaware law, directors may not act by proxy, while under British Virgin Islands law, directors may appoint another director or person to vote in his or her place, exercise his or her other rights as director, and perform his or her duties as director; |
| • | Under Delaware law, a sale of all or substantially all of the assets of APG Delaware requires stockholder approval, while the APG BVI Amended and Restated Memorandum and Articles of Association eliminate the shareholder vote otherwise required by the British Virgin Islands laws for a sale of more than 50% of the assets of APG BVI; and |
| • | Under Delaware law, “business combinations” with “interested stockholders” are prohibited for a certain period of time absent certain requirements, while British Virgin Islands law provides no similar prohibition. |
No Vote or Dissenters’ Rights of Appraisal in the Domestication
Under the BVI Companies Act and our memorandum and articles of association, shareholder approval of the Domestication is not required, and our shareholders do not have statutory rights of appraisal or any other appraisal rights of their shares as a result of the Domestication. Nor does Delaware law provide for any such rights. We are not asking you for a proxy and you are requested not to send us a proxy. No shareholder vote or action is required to effect the Domestication.
39
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected historical consolidated financial data as of the dates and for each of the periods indicated.
The selected historical consolidated financial data for the Successor was derived from our audited consolidated financial statements included in this prospectus.
The selected historical consolidated financial data for the Predecessor for the period from January 1, 2019 to September 30, 2019 and as of and for each of the years ended December 31, 2018 and December 31, 2017 was derived from the audited consolidated financial statements of the Predecessor included in this prospectus.
The selected historical consolidated financial data for the Predecessor as of and for each of the two years ended December 31, 2016 and 2015 was derived from the Predecessor’s financial statements that are not included in this prospectus.
Except as otherwise indicated, all of the selected consolidated financial information of the Predecessor and the Successor included in the following tables was prepared in accordance with GAAP.
The selected historical consolidated financial data included below is not necessarily indicative of future results and should be read in conjunction with “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “APi Group Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as our and APi Group’s consolidated audited financial statements and notes thereto contained in this prospectus.
Successor
($ in millions, except per share data) | As of and for the Year Ended December 31, 2019 | As of and for the Year Ended December 31, 2018 | Period from Inception (September 18, 2017) to December 31, 2017 | |||||||||
Statement of Operations data: | ||||||||||||
Net revenues | $ | — | — | |||||||||
Cost of revenues | — | — | ||||||||||
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Gross profit (loss) | — | — | ||||||||||
Selling, general and administrative expenses | 2,790 | 464 | ||||||||||
Non-cash charge related to Founder Preferred Shares | — | — | ||||||||||
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Operating income (loss) | (2,790 | ) | (464 | ) | ||||||||
Interest income (expense), net | 210 | 19 | ||||||||||
Other income (expense), net | — | — | ||||||||||
Investment income | 22,611 | 2,586 | ||||||||||
Income tax expense (benefit) | — | — | ||||||||||
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40
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Net income (loss), including noncontrolling interests | $ | — | — | |||||||||
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Net income (loss) attributable to Predecessor | $ | $ | 20,031 | $ | 2,141 | |||||||
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Balance Sheet data: | ||||||||||||
Total assets | $ | 1,249.75 | $ | 1,229.71 | ||||||||
Total stockholders’ equity | $ | 1,249.72 | $ | 1,229.69 |
Predecessor
| For the Period from January 1, 2019 to September 30, | As of and for the Year Ended December 31, | |||||||||||||||||||
($ in millions) | 2019 | 2018 | 2017 | 2016(1) | 2015(1) | |||||||||||||||
Statement of Operations data: | ||||||||||||||||||||
Net revenues | $ | $ | 3,728 | $ | 3,046 | $ | 2,608 | $ | 2,449 | |||||||||||
Cost of revenues | 2,941 | 2,382 | 2,004 | 1,906 | ||||||||||||||||
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Gross profit (loss) | 787 | 664 | 604 | 543 | ||||||||||||||||
Selling, general and administrative expenses | 576 | 480 | 448 | 397 | ||||||||||||||||
Amortization of intangibles | 49 | 31 | 50 | 34 | ||||||||||||||||
Impairment of goodwill, intangibles, and long-lived assets | — | 30 | — | — | ||||||||||||||||
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Operating income (loss) | 162 | 123 | 106 | 112 | ||||||||||||||||
Interest expense, net | 22 | 8 | 5 | 3 | ||||||||||||||||
Other income (expense), net | (2 | ) | (1 | ) | (3 | ) | (3 | ) | ||||||||||||
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Other expense, net | 20 | 7 | 2 | — | ||||||||||||||||
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Income before equity method investments and income taxes | 142 | 116 | 104 | 112 | ||||||||||||||||
Income from equity method investments | 4 | 4 | 9 | — | ||||||||||||||||
Income tax expense (benefit) | 10 | 8 | 9 | 6 | ||||||||||||||||
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Net income (loss) attributable to Predecessor | $ | $ | 136 | $ | 112 | $ | 104 | $ | 106 | |||||||||||
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41
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Balance Sheet data: | ||||||||||||||||||||
Total assets | N/A | $ | 2,041 | $ | 1,516 | $ | 1,423 | $ | 1,074 | |||||||||||
Total long-term debt, less current portion | N/A | $ | 305 | $ | 126 | $ | 138 | $ | 1 | |||||||||||
Total stockholders’ equity | N/A | $ | 633 | $ | 582 | $ | 526 | $ | 505 |
| (1) | The Predecessor consolidated financial statements as of and for each of the two years ended December 31, 2016 and 2015 were audited under U.S. accounting principles and standards applicable to private companies as promulgated by the AICPA. |
42
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APG MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of APG’s financial condition and results of operations for the year ended December 31, 2018 and the period from September 18, 2017 (our inception) to December 31, 2017. We were formed on September 18, 2017 and had no operations until we acquired APi Group on October 1, 2019.
In a pre-effective amendment to this registration statement, we will include all required MD&A disclosures related to the twelve months ended December 31, 2019 and the results of operations for APi Group for the period from January 1, 2019 to September 30, 2019.
Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. This discussion should be read in conjunction with “Prospectus Summary—Summary Consolidated Financial Information,” “Selected Consolidated Financial Information,” “APi Group Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our and APi Group’s historical audited consolidated financial statements included elsewhere in this prospectus.
The following financial information has been extracted from the audited consolidated financial statements of APG included in this prospectus.
Overview
On October 1, 2019, we completed our acquisition of APi Group. With over 90 years of history and more than 40 businesses operating from over 200 locations, APi Group is a market leading provider of commercial safety solutions, specialty services and industrial solutions operating primarily in the United States, as well as in Canada and the United Kingdom with approximately $[●] in total consolidated net revenue in 2019. We provide a variety of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance, service and repair, and retrofitting and upgrading. We offer comprehensive and diverse solutions on a broad geographic scale. We have a strong base of diverse, long-standing customer relationships in each of the industries we serve. We also have an experienced management team and a strong leadership development culture.
We were incorporated with limited liability under the laws of the British Virgin Islands under the BVI Companies Act on September 18, 2017 under the name J2 Acquisition Limited. We were formed for the purpose of acquiring a target company or business. On October 10, 2017, J2 raised gross proceeds of approximately $1.25 billion in connection with its initial public offering in the United Kingdom and its ordinary shares and warrants were listed on the LSE. We changed our name to APi Group Corporation in connection with the APi Acquisition.
We intend to domesticate into Delaware from the British Virgin Islands. In connection with the Domestication, we intend to list our common stock on the NYSE. It is currently anticipated that the listing of our ordinary shares and warrants on the LSE will be cancelled at or around the time the listing on the NYSE is achieved. Our listing on the LSE will remain suspended until such cancellation takes effect.
Prior to the APi Acquisition, we had no revenue or other operations other than the active solicitation of a target business with which to complete a business combination. We generated small amounts of non-operating income in the form of unrealized and realized gains on marketable securities and interest income on cash and cash equivalents. During that time, we had losses as a result of administrative costs and diligence costs related to actively soliciting target businesses, including transaction, financing and diligence costs related to the APi Acquisition and the Credit Facilities (as discussed below). We relied upon the proceeds from the initial public offering to fund our limited acquisition-related operations prior to the closing of the APi Acquisition.
43
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Recent Developments
APi Acquisition
On October 1, 2019, we completed our acquisition of APi Group, a market leading provider of commercial safety solutions, specialty services and industrial specialty services, for approximately $2.9 billion, consisting of approximately $2.05 billion in cash and the issuance of 28,373,000 ordinary shares to the Sellers. We funded the cash portion of the purchase price and related transaction expenses with a combination of cash on hand, a $1.2 billion term loan under the Term Loan Facility (as discussed below) and approximately $207 million of proceeds from the Warrant Financing. The Warrant Financing was an offer to permit holders of our warrants to early exercise all of their outstanding warrants at a ratio of three (3) warrants plus $10.25 per share for one of our ordinary shares.
Credit Facilities
In connection with the closing of the APi Acquisition, on October 1, 2019, we entered into a Credit Agreement by and among APi Group DE, Inc., our wholly-owned subsidiary, as borrower (the “Borrower”), APG, as a guarantor, the subsidiary guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative agent and as collateral agent (the “Credit Agreement”), pursuant to which we incurred a $1.2 billion seven-year senior secured term loan (the “Term Loan”) under the senior secured term loan facility (the “Term Loan Facility”), which was used to fund a part of the cash portion of the purchase price in the APi Acquisition. The Credit Agreement also provides for a $300 million five-year senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Term Loan Facility, the “Credit Facilities”). See “—Liquidity and Capital Resources—Credit Facilities” for more information regarding the Credit Facilities.
Initial Public Offering
In connection with the October 10, 2017 initial public offering and listing on the LSE, Mariposa Acquisition IV, LLC (the “Founder Entity”) purchased 4,000,000 preferred shares, no par value, for $40.0 million (the “Founder Preferred Shares”). Beginning in 2019, if the average stock price of our ordinary shares exceeds $11.50 per share for any ten (10) consecutive trading days of the calendar year, the holder of Founder Preferred Shares will receive a dividend in the form of APG ordinary shares or cash, at our sole option (which we intend to settle in shares) equal to 20% of the appreciation of the market price of APG ordinary shares issued to holders of APG ordinary shares in the initial public offering. See “Description of Capital Stock; Comparison of Rights—Authorized Share Capital—Preferred Stock—Dividends” for a description of the calculation of the annual dividend amount. Dividends are paid for the term the Founder Preferred Shares are outstanding. The Founder Preferred Shares will be automatically converted into APG ordinary shares on a one-for-one basis upon the last day of the seventh full financial year following the APi Acquisition, being December 31, 2026. Each Founder Preferred Share is convertible into one APG ordinary share at the option of the holder and votes with the APG ordinary shares as a single class.
In connection with the initial public offering on October 10, 2017, we issued 121,000,000 of our ordinary shares, no par value, for gross proceeds of $1.21 billion. In addition, on October 10, 2017, we issued an aggregate of 32,500 ordinary shares to our non-founder directors for $10.00 per share. Each APG ordinary share has voting rights and winding-up rights.
Each of the 4,000,000 Founder Preferred Shares, 121,000,000 APG ordinary shares issued in connection with the initial public offering as well as the 32,500 APG ordinary shares issued to the non-founder directors was issued with an APG warrant (64,546,077 warrants in aggregate), entitling the holder of each APG warrant to purchase 1/3 of an APG ordinary share with a strike price of $11.50 per whole APG ordinary share. Each APG warrant is exercisable until three (3) years from the date of the APi Acquisition, unless mandatorily redeemed by us.
44
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The APG warrants are mandatorily redeemable by us at a price of $0.01 per warrant should the average market price of an APG ordinary share exceed $18.00 for ten (10) consecutive trading days. On October 1, 2019, we completed the Warrant Financing, in which an aggregate of 60,486,423 warrants were exercised at a reduced exercise price of $10.25 for an aggregate of 20,162,141 ordinary shares. As of November 30, 2019, there were 64,546,077 warrants outstanding representing approximately 21,515,359 ordinary share equivalents. See Note [●] to the consolidated financial statements.
Results of Operations
($ in millions except per share data) | As of and for the Year Ended December 31, 2018 | Period from September 18, 2017 to December 31, 2017 and as of December 31, 2017 | ||||||
Statement of Operations data: | ||||||||
General and administrative expenses | $ | 2.8 | $ | 0.5 | ||||
Investment income | 22.6 | 2.6 | ||||||
Interest income | 0.2 | — | ||||||
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Net income | $ | 20.0 | $ | 2.1 | ||||
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Net income per ordinary share, basic and diluted | $ | 0.16 | $ | 0.02 | ||||
Weighted average ordinary shares, outstanding, basic | 121.0 | 94.5 | ||||||
Weighted average ordinary shares outstanding, diluted | 125.0 | 97.7 | ||||||
Our activity from inception to the closing of the APi Acquisition and the Credit Facilities on October 1, 2019 was the preparation for the acquisition of a target company. Since the initial public offering, our activity has been limited to the evaluation of business combination candidates. We did not generate any operating revenues until the closing of the APi Acquisition. During the period from inception until the APi Acquisition we generated investment income from our investment of our cash on hand in treasury securities. Our results for the year ended December 31, 2019 include the results of APi Group for the period from October 1, 2019 through December 31, 2019. We expect to incur increased legal, financial reporting, accounting and compliance expenses as a result of being an operating public company following the acquisition.
Year Ended December 31, 2018
For the year ended December 31, 2018, our general and administrative expenses increased to $2.8 million from $0.5 million for the period from inception to December 31, 2017, due primarily to full year of activity and also to the inclusion of certain expenses incurred in reviewing acquisition opportunities. Our investment income increased from $2.6 million for the period from inception to December 31, 2017 to $22.6 million for the year ended December 31, 2018 due to the inclusion of activity for a full year to increased rates of investment return on treasury security investments during the year ended December 31, 2018. Interest income was not material in either period presented.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash flows from the operating activities of our consolidated subsidiaries, available cash and cash equivalents, and our access to our Revolving Credit Facility. We believe that these sources will be sufficient to fund our liquidity requirements for at least the next twelve months. As of December 31, 2019, we had $[●] of total liquidity, comprising $[●] in cash and cash equivalents and $[●] of available borrowings under our Revolving Credit Facility. We also expect to continue to raise cash through equity and debt offerings when capital market conditions are favorable and other sources of liquidity are not sufficient. Our principal liquidity requirements have been, and we expect will be, any contingent consideration due to selling shareholders, including tax payments in connection therewith, for working capital and general corporate purposes, including capital expenditures and debt service, as well as to identify, execute and integrate strategic acquisitions. Capital expenditures were approximately $[●] in 2019, $[●] of which was incurred by APi Group prior to the APi Acquisition.
45
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Prior to the APi Acquisition, our sources of cash were primarily the net proceeds of our initial public offering and cash proceeds from the early exercise of the APG Warrants in connection with the Warrant Financing. We used this cash to fund ongoing costs and expenses, the costs and expenses incurred in connection with seeking to identify and effect our initial acquisition, and to fund the APi Acquisition.
Credit Facilities
Our Credit Agreement provides for (1) a term loan facility, pursuant to which we incurred a $1.2 billion Term Loan, which we used to fund a part of the cash portion of the purchase price in the APi Acquisition and (2) a $300 million Revolving Credit Facility of which up to $150 million can be used for the issuance of letters of credit. As of December 31, 2019, we had $[●] of indebtedness outstanding under the Term Loan and $[●] outstanding under the Revolving Credit Facility, including $[●] in letters of credit.
The interest rate applicable to the Term Loan is, at our option, either (1) a base rate plus an applicable margin equal to 1.50% or (2) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.50%. At the option of the Borrower, the interest period for a Term Loan that is a Eurocurrency rate loan may be one, two, three or six months (or twelve months or any other period agreed with the applicable lenders under the Term Loan). Interest on the Term Loan is payable (1) with respect to a Eurocurrency rate loan, at the end of each interest period except that, if the interest period exceeds three months, interest is payable every three months and (2) with respect to a base rate loan, on the last business day of each March, June, September and December. As of December 31, 2019, the Term Loan was bearing interest at [●]% per annum. Principal payments on the Term Loan will commence with the first quarter ending on March 31, 2020 and will be made in quarterly installments on the last day of each fiscal quarter, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the Term Loan. The Term Loan matures on October 1, 2026. We may prepay the Term Loan in whole or in part at any time without penalty, except that any prepayment in connection with a repricing transaction within six months of October 1, 2019 will be subject to 1% prepayment premium. Additionally, subject to certain exceptions, the Term Loan Facility may be subject to mandatory prepayments using (i) proceeds from non-ordinary course asset dispositions, (ii) proceeds from certain incurrences of debt or (iii) commencing in 2020, a portion of our annual excess cash flows based upon certain leverage ratios. Effective October 1, 2019, we entered into a 5-year interest rate swap on a portion of our Term Loan, which fixed $720 million of notional value which was accruing interest at one month LIBOR plus 250 basis points for a fixed rate of 1.62% per annum.
The interest rate applicable to borrowings under the Revolving Credit Facility is, at our option, either (1) a base rate plus an applicable margin equal to 1.25% or (2) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.25%. The unused portion of the Revolving Credit Facility is subject to a commitment fee of 0.375% or 0.50% based on our first lien net leverage ratio. We are also required to pay letters of credit fees on the amounts of outstanding letters of credit plus (i) a fronting fee to the issuing lender and (ii) processing fees and standard costs and charges to the issuing lender. Funds available under the Revolving Credit Facility were used, in part, to finance the APi Acquisition and fees and expenses for certain transactions related thereto, and may be used for general corporate purposes. The Revolving Credit Facility matures on October 1, 2024.
The Credit Agreement also provides for incremental facilities or loans pursuant to which the Borrower may request one or more new tranches of term loans, an increase in the principal amount of any term loan, one or more new tranches of revolving loan commitments and/or an increase in any tranche of revolving loan commitments up to an unlimited amount based upon certain financial covenants and leverage ratios and subject to compliance with customary conditions set forth in the Credit Agreement including compliance, on a pro forma basis, with the financial covenants and ratios set forth therein and, with respect to any additional term loan incurred no later than twelve months after October 1, 2019, which is secured on a pari passu basis with existing term loans and has a yield exceeding the applicable rate then in effect for any existing term loan by more than 50 basis points, an increase in the margin on existing term loans to the extent required by the terms of the Credit Agreement. Upon the Borrower’s request, each lender may decide whether to participate in any incremental facility or loan. The creation or provision of an incremental facility or loan does not require the consent of any existing lender other than any existing lender providing all or part of such incremental facility or loan.
46
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The obligations under the Credit Agreement are guaranteed, jointly and severally, by APG and substantially all of the Borrower’s material direct and indirect U.S. and Canadian subsidiaries (the “Guarantors”). In connection with the Credit Agreement, the Borrower and the Guarantors entered into a pledge and security agreement pursuant to which obligations under the Credit Agreement are secured by a first-priority security interest in substantially all of the assets of the Borrower and the Guarantors, whether existing at the time of entry into such agreement or acquired in the future, including mortgages on material real property and the pledge by the Borrower and the Guarantors generally of 100% of the capital stock and other equity interests in their respective domestic subsidiaries and 65% of the capital stock and other equity interests in their respective first tier non-domestic subsidiaries, in each case subject to certain exceptions.
The Credit Agreement contains customary representations and warranties, and affirmative and negative covenants, including limitations on additional indebtedness, dividends and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens on assets, transactions with affiliates and dispositions. To the extent total outstanding borrowings under the Revolving Credit Facility (excluding undrawn letters of credit up to $40 million) is greater than 30% of the total commitment amount of the Revolving Credit Facility, APG’s first lien net leverage ratio shall not exceed (i) 4.50 to 1.00 for each fiscal quarter ending in 2019 and 2020, (ii) 4.00 to 1.00 for each fiscal quarter ending in 2021 and (iii) 3.75 to 1.00 for each fiscal quarter ending thereafter, subject to a right to cure.
In addition, the Credit Agreement contains customary provisions relating to events of default that include, among others, non-payment of principal, interest or fees, breach of covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other indebtedness having an aggregate principal amount in excess of $75 million, bankruptcy and insolvency events, judgments in excess of $75 million or that could reasonably be expected to have a material adverse effect, change of control and certain events relating to ERISA plans. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the Credit Agreement may be accelerated and the lenders could foreclose on their security interests in the assets of the Borrower and the Guarantors.
As of the date hereof, APG was in compliance with the debt covenants contained in the Credit Agreement and, in accordance with applicable debt covenants.
Cash Flows
The following table summarizes net cash flows with respect to APG’s operating, investing and financing activities for the periods indicated:
| ($ in millions) | Year Ended December 31, 2018 | Period from September 18, 2017 to December 31, 2017 and as of December 31, 2017 | ||||||
Net cash provided by (used in) operating activities | $ | 20.6 | $ | (0.1 | ) | |||
Net cash provided by (used in) investing activities | 396.9 | (1,208.1 | ) | |||||
Net cash provided by financing activities | — | 1,227.2 | ||||||
Net increase (decrease) in cash and cash equivalents | 417.5 | 19.0 | ||||||
Cash and cash equivalents at end of the period | 436.5 | 19.0 | ||||||
Net cash provided by (used in) operating activities for the periods ended December 31, 2018 and 2017 included primarily investment income and certain cash administrative expenses. The only operating activities related during the periods ended December 31, 2018 to the administration of the company and the investment of the cash on hand.
47
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Net Cash provided by (used in) investing activities consisted of investments in treasury bills during the periods ended December 31, 2018 and 2017 offset by maturities of treasury bill investments during the year ended December 31, 2018.
Net cash provided by financing activities during the period from inception to December 31, 2017 consisted of the proceeds from the initial public offering offset by costs associated with the offering.
Contractual Obligations and Commitments
The following is a summary of material contractual obligations and other commercial commitments as of December 31, 2019 during the periods indicated below (in millions):
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | After 5 Years | |||||||||||||||
Term loan, revolving credit facility, and other notes payable | $ | $ | $ | $ | $ | |||||||||||||||
Capital lease obligations | ||||||||||||||||||||
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Other long-term obligations, including current portion | ||||||||||||||||||||
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Total contractual obligations | $ | $ | $ | $ | $ | |||||||||||||||
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Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial agreement involving assets.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2 to the APG consolidated financial statements.
Qualitative and Quantitative Disclosures About Market Risk
Historically, we were not subject to any material market or interest rate risk. Following the consummation of the our initial public offering, the net proceeds of our initial public offering have been invested in short-term U.S. government treasury securities. Due to the short-term nature of these investments, we believe there was no associated material exposure to interest rate risk.
48
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
API GROUP MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of APi Group’s financial condition and results of operations for the years ended December 31, 2018 and 2017. This discussion should be read in conjunction with the information contained in APi Group’s consolidated financial statements and the notes thereto included in this prospectus.
Overview
With over 90 years of history and more than 40 businesses operating from over 200 locations, APi Group is a market leading provider of commercial safety solutions, specialty services and industrial services operating primarily in the United States, as well as in Canada and the United Kingdom. APi Group provides a full suite of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance service and repair, and retrofitting and upgrading. APi Group offers comprehensive and diverse solutions on a broad geographic scale. APi Group has a strong base of diverse, long-standing customer relationships in each of the industries it serves. APi Group also has an experienced management team and a strong leadership development culture.
APi Group generated $3.7 billion in consolidated net revenues for the year ended December 31, 2018. APi Group operates its business under three primary operating segments which are also its reportable segments:
| • | Safety Solutions – A leading provider of safety solutions in North America, focusing on end-to-end integrated occupancy systems (fire protection solutions, HVAC and entry systems), including design, installation, inspection and service of these integrated systems. This segment also provides mission critical services, including life safety, emergency communication systems and specialized mechanical services. The work performed within this segment spans across industries and facilities and includes commercial, industrial, residential, medical and special-hazard settings. |
| • | Specialty Services – A leading provider of diversified, single-source infrastructure and specialty contractor solutions, focusing on infrastructure services and specialized industrial plant solutions, including maintenance and repair of water, sewer and telecom infrastructure. The customers in this segment vary from public and private utility, communications, industrial plants and governmental agencies throughout the United States. |
| • | Industrial Solutions – A leading provider of a variety of specialty contracting services and solutions to the energy industry focused on transmission and distribution. This segment’s services include oil and gas pipeline infrastructure, access and road construction, supporting facilities, and performing ongoing integrity management and maintenance. |
APi Group believes that it has recurring revenue and repeat business from its diversified long-standing customers across a variety of end markets, which provides it with stable cash flows and a platform for organic growth. Maintenance and service revenues are predictable through contractual arrangements with typical terms ranging from three months to three years, with the majority having durations of less than six months, and are often recurring due to consistent renewal rates and long-standing customer relationships.
APi Group has also generated growth through its disciplined acquisition platform which has historically provided strategic acquisitions that are integrated into APi Group’s operations. Since 2005, APi Group has completed more than 60 acquisitions. APi Group targets companies that align with its strategic priorities and demonstrate key value drivers such as culture, geography, end markets and client base, capabilities and leadership. Each of APi Group’s businesses maintains its identity, reputation, customer relationships and culture following acquisition, and APi Group invests heavily into cultivating leadership at each business. APi Group’s acquired businesses benefit from the resources of direct access to the APi Group network, which facilitates organizational sharing of knowledge and best practices, increases collaboration across its businesses and develops cross-brand solutions which foster enhanced experience, quality and efficiency.
49
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Certain Factors and Trends Affecting APi Group’s Results of Operations
Summary of Principal Acquisitions
2018
APi Group completed the following principal acquisitions in 2018:
| • | In February 2018, APi Group acquired a Minnesota-based industrial solutions provider with annual revenues of approximately $295 million for cash consideration of approximately $126 million, net of cash acquired. This business provides installation, maintenance and repair services for infrastructure in the communication, power distribution, gas distribution and alternative energy markets throughout the U.S. and is included in the Specialty Services segment since the date of acquisition. |
| • | In January 2018, APi Group acquired an Ohio-based industrial solutions provider with annual revenues of approximately $60 million for a cash consideration of approximately $92 million, net of cash acquired. This business provides pipeline construction services, including natural gas distribution, midstream, transmission and related facility services throughout the Midwest and Eastern U.S. and is included in the Specialty Services segment since the date of acquisition. |
| • | In January 2018, APi Group acquired a Texas-based safety solutions provider with annual revenues of approximately $56 million for a cash consideration of approximately $43 million, net of cash acquired. This business provides contracting, design and installation services related to automatic fire protection systems throughout the Midwest and Southern U.S. and is included in the Safety Solutions segment since the date of acquisition. |
2017
APi Group completed the following principal acquisition in 2017:
| • | In February 2017, APi Group acquired a Minnesota-based specialty services provider with annual revenues of approximately $68 million for a cash consideration of approximately $53 million, net of cash acquired. This business provides heavy highway contracting services in northern Minnesota and Wisconsin and is included in the Specialty Services segment since the date of acquisition. |
Economic, Industry and Market Factors
Management closely monitors the effects of changes in economic and market conditions on APi Group’s customers. General economic and market conditions can negatively affect demand for APi Group’s customers’ products and services, which can affect their planned capital and maintenance budgets in certain end markets. Market, regulatory and industry factors could affect demand for APi Group’s services, including: (i) changes to customers’ capital spending plans; (ii) mergers and acquisitions among the customers APi Group serve; (iii) new or changing regulatory requirements or other governmental policy changes or uncertainty; (iv) economic, market or political developments; (v) changes in technology, tax and other incentives; and (v) access to capital for customers in the industries APi Group serves. Availability of transportation and transmission capacity and fluctuations in market prices for oil, gas and other fuel sources can also affect demand for APi Group’s services for pipeline and power generation construction services. These fluctuations, as well as the highly competitive nature of APi Group’s industries, can result, and has resulted, in lower bids and lower profit on the services it provides. In the face of increased pricing pressure or other market developments, APi Group strives to maintain its profit margins through productivity improvements, cost reduction programs and business streamlining efforts. While APi Group actively monitors economic, industry and market factors that could affect its business, APi Group cannot predict the effect that changes in such factors may have on its future consolidated results of operations, liquidity and cash flows, and it may be unable to fully mitigate, or benefit from, such changes.
50
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Effect of Seasonality and Cyclical Nature of Business
APi Group’s revenue and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects. Typically, APi Group’s revenue is lowest at the beginning of the year and during the winter months in North America during the first quarter because cold, snowy or wet conditions cause project delays. Revenue is generally higher during the summer and fall months during the third and fourth quarters, due to increased demand for APi Group’s services when favorable weather conditions exist in many of the regions in which it operates but continued cold and wet weather can often affect second quarter productivity. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive effect on APi Group’s revenue. However, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects.
Additionally, the industries APi Group serves can be cyclical. Fluctuations in end-user demand within those industries, or in the supply of services within those industries, can affect demand for APi Group’s services. As a result, APi Group’s business may be adversely affected by industry declines or by delays in new projects. Variations or unanticipated changes in project schedules in connection with large construction and installation projects, can create fluctuations in revenue.
Income Taxes
Historically, APi Group has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal tax purposes. As a result, their income has not been subject to U.S. federal income taxes or state income taxes in those states where the S Corporation status is recognized. No provision or liability for federal or state income tax has been provided in APi Group’s consolidated financial statements except for those taxing jurisdictions where the S Corporation status is not recognized. The provision for income tax in the historical periods consists of these taxes. However, in prior periods, APi Group made significant distributions to its shareholders based on its S Corporation earnings. These distributions will no longer be necessary.
In connection with APG’s acquisition of APi Group during 2019, APi Group’s S Corporation status was terminated and APi Group will be treated as a C Corporation under Subchapter C of the Internal Revenue Code. The revocation of APi Group’s S Corporation election will have a material impact on APi Group’s consolidated results of operations, financial condition and cash flows. APi Group’s effective income tax rate for 2019 and future periods will increase as compared to prior periods and APi Group’s net income will decrease in 2019 and future periods relative to prior periods since APi Group will be subject to both federal and state taxes on APi Group’s earnings.
Description of Key Line Items
Net Revenues
Revenue is generated from the sale of various types of construction services, fabrication and distribution. APi Group derives revenue primarily from construction services under contractual arrangements with durations ranging from three months to three years, with the majority having durations of less than six months, and which may provide the customer with pricing options that include a combination of fixed, unit, or time and materials pricing. Revenue for fixed price agreements is generally recognized over time using the cost-to-cost method of accounting which measures progress based on the cost incurred to total expected cost in satisfying its performance obligation.
Revenue from time and material construction contracts is recognized as the services are provided. Revenue earned is based on total contract costs incurred plus an agreed-upon markup. Revenue for these cost-plus contracts is recognized over time on an input basis as labor hours are incurred, materials are utilized and services are performed. Revenue from wholesale or retail unit sales is recognized at a point-in-time upon shipment.
51
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Cost of Revenues
Cost of revenues consists of direct labor, materials, subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed.
Gross Profit
APi Group’s gross profit is influenced by direct labor, materials and subcontract costs. APi Group’s profit margins are also influenced by raw material costs, contract mix, weather and proper coordination with contract providers. Labor intensive contracts usually drive higher margins than those contracts that include material, subcontract and equipment costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel, facility leases, advertising and marketing expenses, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources and risk management and overhead associated with these functions. Selling expenses consist primarily of compensation and associated costs for sales and marketing personnel, costs of advertising, trade shows and corporate marketing. General and administrative expense consists primarily of compensation and associated costs for executive management, finance, legal, information systems, leadership development and other administrative personnel, facility leases, outside professional fees and other corporate expenses.
Amortization of Intangible Assets
Amortization expense reflects the charges incurred to amortize APi Group’s finite-lived identifiable intangible assets, such as customer relationships, which are primarily amortized on a straight-line basis over their estimated useful lives.
Impairment of Goodwill, Intangibles and Long-Lived Assets
APi Group does not amortize goodwill or other identifiable indefinite-lived intangible assets; rather, goodwill and other intangible assets with indefinite lives are tested for impairment annually, or more frequently as events and circumstances change. Expenses for impairment charges related to the write-down of goodwill balances and identifiable intangible assets balances are recorded to the extent their carrying values exceed their estimated fair values. Expenses for impairment charges related to the write-down of other long-lived assets are recorded when triggering events indicate their carrying values may exceed their estimated fair values.
52
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Results of Operations
Overview
The following table presents selected financial data for the years ended December 31, 2018, and 2017:
| Years Ended December 31, | Change | |||||||||||||||
| ($ in millions) | 2018 | 2017 | $ | % | ||||||||||||
Net revenues | $ | 3,728 | $ | 3,046 | $ | 682 | 22.4 | % | ||||||||
Cost of revenues | 2,941 | 2,382 | 559 | 23.5 | % | |||||||||||
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Gross profit | 787 | 664 | 123 | 18.5 | % | |||||||||||
Selling, general, and administrative expenses | 576 | 480 | 96 | 20.0 | % | |||||||||||
Amortization of intangible assets | 49 | 31 | 18 | 58.1 | % | |||||||||||
Impairment of goodwill, intangibles, and long-lived assets | — | 30 | (30 | ) | NM | |||||||||||
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Operating income (loss) | 162 | 123 | 39 | 31.7 | % | |||||||||||
Interest expense, net | 22 | 8 | 14 | 175.0 | % | |||||||||||
Other expense (income), net | (2 | ) | (1 | ) | (1 | ) | 100.0 | % | ||||||||
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Income before equity method investments and income taxes | 142 | 116 | 26 | 22.4 | % | |||||||||||
Income from equity method investments | 4 | 4 | — | 0.0 | % | |||||||||||
Income tax expense (benefit) | 10 | 8 | 2 | 25.0 | % | |||||||||||
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Net income attributable to APi Group | $ | 136 | $ | 112 | $ | 24 | 21.4 | % | ||||||||
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NM = Not meaningful
Year Ended December 31, 2018 compared to the Year Ended December 31, 2017
Net revenues
Net revenues for 2018 were $3.7 billion compared to $3.0 billion for 2017, an increase of $682 million or 22.4%. The increase in net revenues was largely attributable to acquisitions consummated during 2018 ($371 million) in the Safety Solutions and Specialty Services segments as well as increases in organic growth from the Industrial Solutions segment due to the market recovery in the oil and gas industry. This was partially offset by decreases in net revenues in the Specialty Services segment due to timing and completion of large projects in 2017.
53
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Cost of revenues and Gross profit
The following table presents cost of revenues, gross profit (revenues less cost of revenues), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2018 and 2017:
| For the Years Ended December 31, | ||||||||
| ($ in millions) | 2018 | 2017 | ||||||
Cost of revenues | $ | 2,941 | $ | 2,382 | ||||
Gross profit | 787 | 664 | ||||||
Gross profit margin | 21.1 | % | 21.8 | % | ||||
APi Group’s gross profit for the year ended December 31, 2018 was $787 million, a $123 million, or 18.5%, increase compared to gross profit of $664 million for the year ended December 31, 2017. The gross profit increase from 2017 to 2018 was primarily attributable to increased revenue. Of the $123 million increase, $50 million was attributable to incremental margin from companies acquired in 2018. APi Group’s gross profit margin was 21.1% and 21.8% for 2018 and 2017, respectively. The decrease in gross profit margin is primarily attributable to a change in the mix of revenue. Specifically, the Industrial Solutions segment is APi Group’s lowest gross profit margin business and it experienced a higher proportion of revenue growth in 2018 that negatively impacted consolidated gross margins.
Operating expenses
The following table presents operating expenses and operating margin (operating expenses as a percentage of revenues) for the years ended December 31, 2018 and 2017:
| For the Years Ended December 31, | ||||||||
| ($ in millions) | 2018 | 2017 | ||||||
Selling, general and administrative expenses | $ | 576 | $ | 480 | ||||
Amortization expenses | 49 | 31 | ||||||
Impairment of goodwill, intangibles, and long-lived assets | — | 30 | ||||||
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Total operating expenses | $ | 625 | $ | 541 | ||||
Operating expenses as a percentage of revenue | 16.8 | % | 17.8 | % | ||||
Operating margin | 4.3 | % | 4.0 | % | ||||
APi Group’s operating expenses for the year ended December 31, 2018 were $625 million, a $84 million increase compared to operating expenses of $541 million for the year ended December 31, 2017. Operating expenses as a percentage of revenues were 16.8% and 17.8% for 2018 and 2017, respectively. The increase in selling, general and administration expense is attributable to companies acquired in 2018 and 2017 ($32 million), including incremental increases earnout expense. In addition to the impact of acquisitions, selling general and administrative expenses increased due to increases in employee compensation as well as other selling general and administrative expenses such as information technology, consulting and other professional fees. Amortization expenses in 2018 increased $18 million over the prior year as a result of the acquisitions during the year. Impairment charges in 2017 were primarily related to the impairment of goodwill ($17 million) and intangible assets ($7 million) in APi Group’s Civil reporting unit within the Industrial Solutions segment. Operating expenses as a percent of revenue decreased for the year ended December 31, 2018 primarily due to leverage of APi Group’s scalable overhead structure.
Interest expense, net
Interest expense was $22 million and $8 million for 2018 and 2017, respectively. The increase in interest expense was primarily due to an increase in average outstanding borrowings of $187 million and higher average borrowing costs primarily related to APi Group’s 2018 acquisitions for which APi Group entered into an unsecured financing agreement consisting of a $330 million term loan and a $500 million revolving credit facility. The increase was further driven by a higher United States dollar LIBOR rate, impacting rates paid on variable rate debt.
54
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Operating Segment Results 2018 versus 2017
| Net Revenues | Operating Income (Loss) | |||||||||||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||||||||
| ($ in millions) | 2018 | 2017 | Increase (Decrease) | % Change | 2018 | 2017 | Increase (Decrease) | % Change | ||||||||||||||||||||||||
Safety Solutions | $ | 1,705 | $ | 1,601 | $ | 104 | 6.5 | % | $ | 178 | $ | 151 | $ | 27 | | 18 | % | |||||||||||||||
Specialty Services | 1,359 | 1,063 | 296 | 27.8 | % | 57 | 61 | (4 | ) | -7 | % | |||||||||||||||||||||
Industrial Solutions | 723 | 439 | 284 | 64.7 | % | 13 | — | 13 | 0 | % | ||||||||||||||||||||||
Corporate and Eliminations | (59 | ) | (57 | ) | (2 | ) | 3.5 | % | (86 | ) | (89 | ) | 3 | -3 | % | |||||||||||||||||
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| $ | 3,728 | $ | 3,046 | $ | 682 | 22.4 | % | $ | 162 | $ | 123 | $ | 39 | 32 | % | |||||||||||||||||
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The following discussion breaks down APi Group’s net revenues and operating income by operating segment for the year ended December 31, 2018 compared to the year ended December 31, 2017.
Safety Solutions
Segment net revenues increased by $104 million, or 6.5%, in 2018 primarily due to the acquisition of an automatic fire protection systems business ($56 million) as well as continued organic revenue growth from the segment’s base business.
Segment operating income as a percentage of net revenues for 2018 and 2017 was approximately 10.4% and 9.4%, respectively. The increase was primarily driven by improved project margins by APi Group’s continued focus on growing recurring revenue.
Specialty Services
Segment net revenues increased for 2018 by $296 million, or 27.8%. The increase was primarily due to the acquisitions of a pipeline services business and a business specializing in infrastructure installation and maintenance in 2018 (collectively contributing $315 million in revenue), partially offset by a decrease in revenue due to the timing and the completion of large projects in 2017.
Segment operating income as a percentage of net revenues declined to approximately 4.2% in 2018 from 5.7% in 2017. The decrease was primarily driven by lower gross margins related to lower labor productivity, as well as increased amortization and earnout expense of $23 million in connection with 2018 acquisitions.
Industrial Solutions
Segment net revenues for 2018 increased by $284 million, or 64.7%, primarily due to APi Group’s increased volume of projects dues to higher demand of customers program spending.
Segment operating income (loss) as a percentage of net revenues for 2018 and 2017 was approximately 1.8% and 0.0%, respectively. The increase was primarily driven by goodwill, intangible assets and long-lived asset impairment charges of $30 million recorded in 2017 within the Civil reporting unit.
Liquidity and Capital Resources
Overview
Overall, the APi Group believes that available cash and cash equivalents, cash flows generated from future operations, access to capital markets, and availability under its then existing revolving credit facility were adequate
55
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
to support the cash needs of APi Group for the periods presented. APi Group’s uses of available cash, borrowing capacity, cash flows from operations and financing arrangements were to invest in capital expenditures to support its growth, repay debt maturities as they became due, and complete its integration activities. APi Group’s principal liquidity requirements were for working capital and general corporate purposes, including capital expenditures and debt service, as well as to execute and integrate strategic acquisitions.
Capital Resources
On January 30, 2018, APi Group entered into an unsecured financing agreement consisting of a $330 million term loan and a $500 million revolving credit facility (together, the “APi Group Facility”). The agreement governing the APi Group Facility contained certain restrictive and financial covenants, including requirements for a fixed-charge coverage ratio and total leverage ratio. APi Group was in compliance with all of its debt covenants as of December 31, 2018. In connection with the APi Acquisition, on October 1, 2019, the entire principal amount of the term loan and the principal amount outstanding under the revolving credit facility were repaid and the APi Group Facility was terminated.
The term loan and the revolving credit facility under the APi Group Facility had a maturity date of January 30, 2023. The revolving credit facility permitted APi Group to borrow funds at a variety of interest rate terms, some of which were adjusted based on APi Group’s leverage ratios. The facility also provided for the issuance of up to $150 million of letters of credit, so long as there was a sufficient amount available for borrowing under the facility. At December 31, 2018, APi Group had $261 million outstanding under the revolving credit facility under the APi Group Facility, with a weighted-average interest rate of at 3.92% per annum, and $177 million was available after giving effect to $62 million of outstanding letters of credit, which reduced availability. At December 31, 2018, APi Group had $318 million outstanding under the term loan which with a weighted-average interest rate of 3.78% per annum.
In addition, one of APi Group’s subsidiaries had outstanding letters of credit of $19 million at December 31, 2017.
One of APi Group’s Canadian subsidiaries had a $20 million unsecured line of credit agreement with a variable interest rate based upon the prime rate. APi Group had $1 million outstanding under the line of credit at December 31, 2018.
Cash Flows
The following table summarizes net cash flows with respect to APi Group’s operating, investing and financing activities for the years ended December 31, 2017 and 2018:
| Years Ended December 31, | ||||||||
($ in millions) | 2018 | 2017 | ||||||
Net cash provided by operating activities | $ | 112 | $ | 118 | ||||
Net cash used in investing activities | (300 | ) | (56 | ) | ||||
Net cash provided by/(used in) financing activities | 203 | (106 | ) | |||||
Effect of foreign currency exchange rate change on cash and cash equivalents | (2 | ) | 3 | |||||
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Net increase (decrease) in cash and cash equivalents | $ | 13 | $ | (41 | ) | |||
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Beginning | 41 | 82 | ||||||
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Ending | $ | 54 | $ | 41 | ||||
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Net Cash provided by Operating Activities
Net cash provided by operating activities for 2018 was $112 million compared to $118 million for 2017. The reduction in cash flows from operating activities was primarily due to organic revenue growth which resulted in increased working capital levels, as well as incremental increase in working capital needs for business acquired in 2018 and increased interest payments ($16 million) from higher debt levels.
56
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Net Cash Used in Investing Activities
Net cash used in investing activities was $300 million for 2018 compared to net cash used in investing activities of $56 million for 2017. The increase in cash used in investing activities was attributed primarily to increased payments for acquisitions of businesses ($171 million) and increased capital expenditures ($35 million).
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities for 2018 was $203 million compared to net cash used in financing activities of $106 million in 2017. The increase in cash provided by financing activities was primarily due to APi Group’s issuance of a $330 million term loan, offset by repayments of debts.
Contractual Obligations and Commitments and Off-Balance Sheet Financing Arrangements
The following is a summary of material contractual obligations and other commercial commitments as of December 31, 2018 during the periods indicated below ($ in millions):
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | |||||||||||||||
Term loan, revolving credit facility, and other notes payable (1) | $ | 595 | $ | 293 | $ | 63 | $ | 239 | $ | — | ||||||||||
Capital lease obligations (2) | 5 | 2 | 2 | 1 | — | |||||||||||||||
Operating leases (3) | 129 | 37 | 51 | 26 | 15 | |||||||||||||||
Other long-term obligations, including current portion (4) | 9 | 1 | 2 | 2 | 4 | |||||||||||||||
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Total contractual obligations (5) | $ | 738 | $ | 333 | $ | 118 | $ | 268 | $ | 19 | ||||||||||
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| (1) | Amounts represent contractual obligations based on the earliest date that the obligation may become due, excluding interest, based on borrowings outstanding as of December 31, 2018. For further information relating to these obligations, see Note 6 to the consolidated financial statements. The estimated future interest payment obligations on borrowings outstanding as of December 31, 2018 was approximately $17.6 million, $30.0 million $4.0 million and $0.0 for the periods of less than 1 year, 1-3 years, 3-5 years and after 5 years, respectively. Interest on floating-rate debt was estimated using the rate in effect as of December 31, 2018. |
| (2) | Amounts represent contractual minimum lease obligations on capital leases as of December 31, 2018. For further information relating to these obligations, see Note 6 to the consolidated financial statements. |
| (3) | Amounts represent contractual minimum lease obligations on operating leases as of December 31, 2018. For further information regarding these obligations, see Note 10 to the audited consolidated financial statements. |
| (4) | Amounts primarily represent obligations for asbestos claims as of December 31, 2018. |
| (5) | Total does not include contractual obligations reported on the December 31, 2018 balance sheet as current liabilities, except for current portion of long-term debt, short-term debt. |
APi Group did not have any obligations, assets or liabilities which would be considered off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
APi Group reviews new accounting standards to determine the expected impact, if any, of the adoption of such standards will have on their financial position and/or results of operations. See Note 2 – Summary of Significant Accounting Policies to the notes to APi Group’s consolidated financial statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on APi Group’s consolidated financial position, results of operations or liquidity.
57
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires APi Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. APi Group has identified the following as its critical accounting policies:
Revenue Recognition from Contracts with Customers
APi Group believes their most critical accounting policy is revenue recognition in accordance with ASC 606. ASC 606 was adopted by APi Group under the modified retrospective method as of January 1, 2018. ASC 606 aligns revenue recognition with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This core principle is achieved through the application of the following five step model: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue as performance obligations are satisfied.
APi Group recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. APi Group can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. APi Group transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the APi Group’s performance as APi Group performs, (b) APi Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) APi Group’s performance does not create an asset with an alternative use to them, and APi Group has an enforceable right to payment for performance completed to date.
For APi Group’s performance obligations satisfied over time, APi Group recognizes revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input or output method and requires judgment based on the nature of the goods or services to be provided.
For APi Group’s construction contracts, revenue is generally recognized over time as APi Group’s performance creates or enhances an asset that the customer controls as it is created or enhanced. APi Group’s fixed price construction projects generally use a cost-to-cost input method to measure progress towards completion satisfaction of the performance obligation as they believe it best depicts the transfer of control to the customer which occurs as APi Group incurs costs on its contracts. Under the cost-to-cost measure of progress, 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. Costs incurred include direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in the results of operations under cost of sales. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as work is performed.
Revenue from time and material construction contracts is recognized as the services are provided and is equal to the sum of the contract costs incurred plus an agreed upon markup. Revenue earned from distribution contracts is recognized upon shipment or performance of the service.
APi Group has a right to payment for performance completed to date at any time throughout APi Group’s performance of a contract, including in the event of a cancellation, and as such, revenue is recognized over time. These performance obligations use the cost-to-cost input method to measure their progress towards complete satisfaction of the performance obligation as management believes it best depicts the transfer of control to the customer which occurs as APi Group incurs costs on the contracts.
58
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised from time to time on an on-going basis. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from APi Group’s long-term construction projects when revenues recognized under the cost-to-cost measure of progress exceed amounts invoiced to APi Group’s customers. Such amounts are recoverable from APi Group’s customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of APi Group’s time and materials arrangements, as well as APi Group’s contracts to perform turnaround services within the Specialty Services segment, are billed in arrears pursuant to contract terms that are standard within the industry, and resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract assets are generally classified as current within the consolidated balance sheets. As of December 31, 2018 and 2017, no contract assets included unbilled revenues for unapproved change orders.
Contract liabilities from APi Group’s long-term construction contracts arise when amounts invoiced to their customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from APi Group’s customers on certain contracts. Contract liabilities decrease as APi Group recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when they expect to recognize such revenue. The long-term portion of contract liabilities is included in Other long-term obligations in the consolidated balance sheets.
Business Combinations
The determination of the fair value of net assets acquired in a business combination and estimates of acquisition-related contingent consideration, or “earn-out” liabilities, requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques. Fair values of earn-out liabilities are estimated using an income approach such as discounted cash flows or option pricing models. APi Group allocates purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, future expected cash flows from backlog, customer relationships, and trade names; the period of time APi Group expects to use the acquired intangible asset; and discount rates. In estimating the future cash flows, management considers demand, competition and other economic factors. Management’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates, which could result in impairment charges in the future.
Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year from the date of acquisition in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition, or adjust the fair values, of acquisition-related assets and liabilities and/or consideration paid, and are referred to as “measurement period adjustments.”
Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an acquired business, could materially affect APi Group’s operating results in the period such changes are recognized.
59
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Insurance Liabilities
APi Group uses high retention insurance programs to manage its risk for health, workers’ compensation, general liability and auto insurance. Accrued liabilities include APi Group management’s best estimates of amounts expected to be incurred for these losses. The estimates are based on claim reports provided by the insurance carrier and actuarial analyses provided by third-party actuarial specialists, and APi Group management’s best estimates including the maximum premium for a policy period. The amounts that APi Group will ultimately incur could differ in the near term from the estimated amounts accrued. At December 31, 2018 and 2017, APi Group had accrued $57 million and $48 million, respectively, relating to workers’ compensation, general, and automobile claims, with $38 million and $30 million, respectively, included in other noncurrent liabilities. APi Group recorded a receivable from the insurance carriers of $10 million and $7 million at December 31, 2018 and 2017, respectively, to offset the liabilities due above our deductible, which, under contract, are payable by the insurance carrier. APi Group had outstanding letters of credit as collateral totaling approximately $61 million and $50 million as of December 31, 2018 and 2017, respectively. APi Group had $4 million accrued within accrued expenses relating to outstanding health insurance claims at both December 31, 2018 and 2017.
Litigation and Contingencies
Accruals for litigation and contingencies are based on APi Group’s assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable. As additional information becomes available, APi Group reassesses potential liabilities related to pending claims and litigation and may revise previous estimates, which could materially affect APi Group’s consolidated results of operations in a given period.
The Periodic Assessment of Potential Impairment of Goodwill
Goodwill represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses and is stated at cost. Goodwill is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. APi Group’s annual impairment testing date is October 1.
APi Group early adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) as of January 1, 2017. ASU 2017-04 eliminated the second step in goodwill impairment testing, which required that goodwill impairment losses be measured as the difference between the implied value of a reporting unit’s goodwill and its carrying amount. Under the new guidance, goodwill impairment losses are measured as the excess of a reporting unit’s carrying amount, including goodwill and related goodwill tax effects, over its fair value.
As a result of acquisitions in prior years, APi Group has significant intangible assets on the consolidated balance sheet that include goodwill. Upon acquisition, these businesses were either combined into one of the existing companies or managed on a stand-alone basis as an individual company. The companies are included within one of APi Group’s three reportable segments, Safety Solutions, Specialty Services, and Industrial Solutions. Goodwill is required to be measured for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available. APi Group performs its annual impairment testing of goodwill at the reporting unit level.
APi Group uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. The qualitative approach, which was only applied to a portion of APi Group’s reporting units, assesses various factors including, in part, the macroeconomic environment, industry and market specific conditions, financial performance, operating costs and cost impacts, as well as issues or events specific to the reporting unit. If necessary, the next step in the goodwill impairment test involves comparing the fair value of each of the reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, an impairment loss would be recognized (not to exceed the carrying amount of goodwill).
60
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Both qualitative and quantitative goodwill impairment testing requires significant use of judgment and assumptions, including the identification of reporting units; the assignment of assets and liabilities to reporting units; and the estimation of future cash flows, business growth rates, terminal values, discount rates, market multiples and total enterprise value. APi Group uses various valuation approaches, such as the income approach and market approach. The income approach used is the discounted cash flow methodology and is based on multi-year cash flow projections. The cash flows projected are analyzed on a “debt-free” basis (before cash payments to equity and interest-bearing debt investors) in order to develop an enterprise value from operations for the reporting unit. A provision is also made, based on these projections, for the value of the reporting unit at the end of the forecast period, or terminal value. The present value of the finite-period cash flows and the terminal value are determined using a selected discount rate. The market approach involves estimating value based on the trading multiples for comparable public companies and recent transactions involving similar companies to the reporting unit. Multiples are determined through an analysis of certain publicly traded companies that are selected based on operational and economic similarity with the business operations of the reporting unit and through an analysis of guideline transactions involving similar companies to the reporting unit. A comparative analysis between the reporting unit and the public companies and guideline transactions forms the basis for the selection of appropriate risk-adjusted multiples. The comparative analysis incorporates both quantitative and qualitative risk factors which relate to, among other things, the nature of the industry in which the reporting unit and other comparable companies are engaged.
The amount of goodwill subject to the annual goodwill impairment testing as of October 1, 2018 was $320 million. Based on results of its annual impairment testing on October 1, 2018, APi Group determined that none of its goodwill was impaired. However, the estimated fair values for two reporting units within the Specialty Services segment exceeded their carrying values by less than a 10% threshold since their projected cashflows were similar to projection amounts used within their initial valuations. Based on a sensitivity analysis for each reporting unit’s projections, a 100 basis point increase in the discount rate would have resulted in an $8 million impairment for one reporting unit, while the other reporting unit’s fair value headroom would have been reduced to 2% above its carrying value.
While APi Group believes it has made reasonable estimates and assumptions to calculate the fair values of the reporting units, it is possible changes could occur. As for all APi Group’s reporting units, if in future years, the reporting unit’s actual results are not consistent with the estimates and assumptions used to calculate fair value, APi Group may be required to recognize material impairments to goodwill. APi Group will continue to monitor its reporting units for any triggering events or other signs of impairment and may be required to perform additional impairment tests based on changes in the economic environment and other factors, which could result in impairment charges in the future. Although management cannot predict when improvements in macroeconomic conditions will occur, if the construction industry declines significantly in the future or if market prices for oil and gas and other fuel sources deteriorates significantly from current levels, it is reasonably likely APi Group will be required to record impairment charges in the future.
The Periodic Assessment of Potential Impairment of Indefinite-Lived Intangible Assets
APi Group periodically reviews the carrying amount of its long-lived asset groups when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate the carrying value may not be recoverable. If facts or circumstances support the possibility of impairment, APi Group will compare the carrying value of the asset or asset group with the undiscounted future cash flows related to the asset or asset group of the asset group. If the carrying value of the asset or asset group is greater than the undiscounted cash flows, the resulting impairment will be determined as the difference between the carrying value and the fair value, where fair value is determined for the carrying amount of the specific asset groups based on discounted future cash flows or appraisal of the asset groups.
In 2017, APi Group concluded it had a triggering event requiring assessment of impairment for certain intangible assets in the Industrial Solutions segment. As a result, APi Group reviewed the intangible assets for impairment and recorded a $7 million impairment charge within impairment of goodwill, intangibles and long-lived assets on the consolidated statement of operations for the year ending December 31, 2017. The impairment was measured under the market approach utilizing an appraisal to determine fair values of the impaired assets. This method is consistent with the methods APi Group employed in prior periods to value other intangible assets.
61
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Additionally, in 2017, management concluded it had a triggering event requiring assessment of impairment for certain long-lived assets in the Specialty Services segment because of a material change in the market in Western North Dakota. As a result, APi Group reviewed the long-lived assets for impairment and recorded a $6 million impairment charge within selling, general, and administrative expenses on the consolidated statement of operations for the year ending December 31, 2017. The impairment was measured under the market approach utilizing an appraisal to determine fair values of the impaired assets. This method is consistent with the methods APi Group employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy, as defined in ASC Topic 820.
Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Risk
As of December 31, 2018, APi Group’s variable interest rate debt was primarily related to APi Group’s unsecured financing agreement. Interest on outstanding revolving loans and APi Group’s term loan under APi Group’s unsecured financing agreement accrues at variable rates based, either at the Base rate advance or Eurodollar rate advance, as defined in the agreement. As of December 31, 2018, APi Group had $261 million aggregate principal amount of outstanding revolving loans under the APi Group Facility with a weighted-average interest rate of 3.92% and a term loan with a balance of $318 million with a weighted-average interest rate of 3.78%. A 100-basis point increase in the applicable interest rates under APi Group’s credit facilities would have increased its interest expense by approximately $6 million for the year ended December 31, 2018.
Foreign Currency Risk
APi Group’s foreign operations are primarily in Canada and the United Kingdom. Revenue generated from foreign operations represented approximately 7% of APi Group’s total revenue for the year ended December 31, 2018. Revenue and expense related to APi Group’s foreign operations are, for the most part, denominated in the functional currency of the foreign operation, which minimizes the impact that fluctuations in exchange rates would have on net income or loss. APi Group is subject to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than the functional currencies. Such transactions were not material to their operations in 2018. Translation gains or losses, which are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet, result from translation of the assets and liabilities of APi Group’s foreign subsidiaries into U.S. dollars. For the year ended December 31, 2018, foreign currency translation losses totaled approximately $11 million.
APi Group’s exposure to fluctuations in foreign currency exchange rates could increase in the future if they continue to expand APi Group’s operations outside of the United States. APi Group seeks to manage foreign currency exposure by minimizing its consolidated net asset and liability positions in currencies other than the functional currency, which exposure was not significant to their consolidated financial position as of December 31, 2018.
Other Market Risk
APi Group is also exposed to construction market risk and its potential related impact on accounts receivable or contract assets on uncompleted contracts. The amounts recorded may be at risk if APi Group’s customers’ ability to pay these obligations is negatively impacted by economic conditions. APi Group continually monitors the creditworthiness of its customers and maintain ongoing discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, management believes it takes appropriate action to manage market and other risks, but there is no assurance that management will be able to reasonably identify all risks with respect to the collectability of these assets. See also the previous discussions of Revenue Recognition from Contracts with Customers and Accounts Receivable under Critical Accounting Policies within this section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In addition, APi Group is exposed to market risk of fluctuations in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in APi Group’s operations.
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APi Group is also exposed to increases in energy prices, particularly as they relate to gasoline prices for their vehicle fleet. While management believes APi Group can increase its contract prices to adjust for some price increases in commodities, there can be no assurance that such price increases, if they were to occur, would be recoverable. Additionally, APi Group’s fixed price contracts do not allow it to adjust prices and, as a result, increases in material costs could reduce profitability with respect to projects in progress.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information for the year ended December 31, 2019 gives effect to our acquisition of API Group on October 1, 2019 (the “Acquisition”).
The pro forma information is preliminary, is being furnished solely for informational purposes and is not necessarily indicative of the combined results of operations that might have been achieved for the period indicated, nor is it necessarily indicative of the future results of the combined company. Income taxes do not reflect the amounts that would have resulted had APG and APi Group filed consolidated income tax returns during the periods presented.
The unaudited condensed combined financial information gives effect to events that are directly attributable to the Acquisition, factually supportable and, with respect to the statements of operations, expected to have a continuing impact on the combined company.
The pro forma adjustments and allocation of purchase price are preliminary and are based on management’s current estimates of the fair value of the assets to be acquired and liabilities to be assumed and are based on all available information. Management’s estimates of the fair values reflected in the unaudited pro forma condensed combined financial statements are subject to change and may differ materially from actual adjustments, which will be based on the final determination of fair values and useful lives.
A final determination of fair value will be determined by management after giving consideration to relevant information. Any final adjustments may change the allocation of purchase price and could affect the fair value assigned to the assets and liabilities and result in a change to the unaudited pro forma condensed combined financial statements presented herein. Amounts preliminarily allocated to and the estimated useful lives of intangible assets with indefinite and definite lives may change significantly, which could result in a material increase or decrease in amortization of definite lived intangible assets. Estimates related to the determination of fair value and useful lives of other assets acquired may also change, which could affect the fair value assigned to the other assets and result in a material increase or decrease in depreciation or amortization expense.
An unaudited pro forma condensed combined balance sheet is not presented herein since APG’s condensed consolidated balance sheet at December 31, 2019 included in this prospectus presents the balance sheet of the combined company.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 is presented as if the Acquisition had been completed on January 1, 2019. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 combines the historical results of APG for the year ended December 31, 2019 and the historical results of APi Group for the period from January 1, 2019 to September 30, 2019.
The unaudited pro forma condensed combined statements of operations should be read in conjunction with the historical consolidated financial statements and accompanying notes included in this prospectus.
The estimated income tax rate applied to the pro forma adjustments is [●]%, the expected statutory rate, and all other tax amounts are stated at their historical amounts as the combined company’s overall effective tax rate has not yet been determined.
The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the consolidated financial condition or results of operations of the combined company that would have been reported had the transaction been completed as of the dates presented and should not be considered as representative of the future consolidated financial condition or results of operations of the combined company.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
For the Year Ended December 31, 2019
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See notes to the unaudited pro forma financial statements
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Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
[To come.]
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Confidential Treatment Requested by APi Group Corporation
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History
We were incorporated on September 18, 2017 with limited liability under the laws of the British Virgin Islands under the BVI Companies Act under the name J2 Acquisition Limited. J2 was created for the purpose of acquiring a target company or business. On October 10, 2017, J2 raised gross proceeds of approximately $1.25 billion in connection with its initial public offering in the United Kingdom and its ordinary shares and warrants were listed on the LSE.
On October 1, 2019, we completed our acquisition of APi Group, a market leading provider of commercial safety solutions and industrial specialty services, and we changed our name to APi Group Corporation.
The total consideration for the APi Acquisition was approximately $2.9 billion, consisting of approximately $2.05 billion in cash and the issuance of 28,373,000 ordinary shares to the Sellers. We funded the cash portion of the purchase price and related transaction expenses with a combination of cash on hand, a $1.2 billion term loan under the new term loan facility and approximately $207 million of proceeds from the Warrant Financing. See “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments” for more information.
The issuance of ordinary shares as part of the consideration in the APi Acquisition was exempt from registration in reliance on Section 4(a)(2) of the Securities Act as they were issued in a transaction not involving a public offering to a limited number of sophisticated investors with knowledge and experience of financial and business matters related to an investment in the Company’s securities.
APi Group was founded in 1926 as a small insulation contracting and distribution company and has grown organically and through disciplined acquisitions to be an industry leader with more than 40 businesses operating from over 200 locations providing commercial safety solutions, specialty services and industrial solutions to diversified industries. For the year ended December 31, 2019, we generated approximately $[●] in total consolidated net revenue.
Our Industry
The industries in which we operate are highly fragmented and comprised of national, regional and local companies that provide services to customers across various end markets and geographies. We believe the following industry trends are affecting, and will continue to affect, demand for our services.
Increased Regulation. According to the National Fire Prevention Association, in 2018, there were over 1.3 million reported fires resulting in 3,655 related civilian deaths, 15,200 related civilian injuries and $25.6 billion in related property damage. As a result, the life safety industry is highly regulated at the federal, state and local levels and continuous regulatory changes, including mandated building codes and inspections and maintenance requirements, continue to generate increasing demand for our services, often on a recurring basis. Specifically, the Uniform Building Codes written by the National Fire Protection Association, and the International Code Council regulate fire suppression and sprinkler systems. Among other things, these codes require testing, inspections, repair, maintenance and specific retrofits of building fire suppression and sprinkler systems which generates recurring revenue related to those services. As these associations and government agencies continue to adopt new, more stringent regulations, the demand for our services increases.
Additionally, the Tax Cuts and Jobs Act of 2017 provides federal tax incentives to businesses that install fire suppression and sprinkler systems in new buildings, upgrade existing systems or retrofit existing structures with systems.
Deferred Infrastructure Investment. Following several years of deferred investment, the aging U.S. infrastructure system requires significant maintenance, repair and retrofit services which has spurred demand in our industry. State and local municipalities have deferred infrastructure spending for many years which has resulted in the need to rebuild or retrofit a large portion of the U.S. infrastructure. One industry publication anticipates that up to an estimated $4 trillion will need to be invested in U.S. infrastructure by 2025. Additionally, the Fixing America’s Surface Transportation Act, enacted in December 2015, approved over $300 billion in spending through 2020 to repair U.S. road systems.
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Furthermore, demand for oil and gas pipeline infrastructure has grown significantly in recent years as technological advances and cost-effective production technologies have increased producible U.S. oil and natural gas reserves. According to the U.S. Energy Information Administration’s October 2019 Short-Term Energy Outlook report, the U.S. will produce an estimated average of 12.3 million barrels of crude oil per day in 2019 and will rise by 0.9 million barrels per day in 2020 to an annual average of 13.2 million barrels per day. This increase in oil production, along with strong demand and aging pipeline infrastructure, has led to capacity issues, whereby more pipeline infrastructure is required to move this increased level of production to market. These trends are expected to continue to drive demand for U.S. oil and gas production, thus creating expanded opportunities for new pipeline infrastructure and maintenance of existing pipeline infrastructure throughout North America.
Increased Non-Residential Construction. The demand for non-residential construction has led to an increased demand for specialty contracting services. Many of the non-residential end markets, including commercial markets such as lodging and retail, are benefitting from an increase in consumer income in the U.S. which has enabled additional discretionary spending. As a leading provider of specialty contracting services, we expect to benefit from this increased demand in non-residential construction. This demand for non-residential construction also necessitates the installation of life safety systems, thereby creating a growing base of non-residential buildings that require mandatory, recurring maintenance of existing life safety systems. We believe that we are well positioned as one of the largest providers of specialty contracting services and safety solutions to benefit from these significant and multiple non-residential construction opportunities.
Our Business
With over 90 years of history and more than 40 businesses operating from over 200 locations, we are a market leading provider of commercial safety solutions, specialty services and industrial solutions operating primarily in the United States, as well as in Canada and the United Kingdom with approximately $[●] in total consolidated net revenue in 2019. We provide a variety of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance, service and repair, and retrofitting and upgrading. We offer comprehensive and diverse solutions on a broad geographic scale. We have a strong base of diverse, long-standing customer relationships in each of the industries we serve. We also have an experienced management team and a strong leadership development culture.
We believe that our core strategies of driving organic growth and growth through accretive acquisitions, promoting sharing of best practices across all of our businesses and leveraging our scale and services offerings, place us in the position to capitalize on opportunities and trends in the industries we serve, grow our businesses and advance our position in each of our markets. We believe that our diverse customer base, regional approach to operating our businesses, specialty operations in niche markets, strong commitment to leadership development, long-standing customer relationships with a robust reputation in the industries we serve, and strong safety track record differentiates us from our competitors.
We have a disciplined acquisition platform which has historically provided strategic acquisitions that are integrated into our operations. Since 2005, we have completed more than 60 acquisitions. We target companies that align with our strategic priorities and demonstrate key value drivers such as culture, geography, end markets and client base, capabilities and leadership. Each of our businesses maintains its identity, reputation, customer relationships and culture following acquisition, and we invest heavily into cultivating leadership at each business. Our acquired businesses benefit from the resources of direct access to the APG network, which facilitates organizational sharing of knowledge and best practices, increases collaboration across our businesses and develops cross-brand solutions which foster enhanced experience, quality and efficiency.
We employ a regional operating model designed to improve speed and responsiveness to our customers across our businesses, empower leadership of our businesses to drive business performance and execute key decisions and foster cross-functional sharing of best practices. This structure promotes a business-owner mindset among our individual business leaders and combines the personal attention of a small-to-medium sized company with the strength and support of an industry leader. It also allows each of our businesses to remain highly focused on best positioning itself within the categories in which it competes and reinforces strong accountability for operational and financial performance.
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
We generated $[•] in total consolidated net revenue for the year ended December 31, 2019. We operate our business under three primary operating segments which are also our reportable segments: Safety Solutions, Specialty Services and Industrial Solutions.
Safety Solutions
In our Safety Solutions business, we focus on providing a full suite of commercial industrial building and mechanical system solutions focused on occupancy systems and installation. The Safety Solutions segment focuses on end-to-end integrated mechanical systems (fire protection solutions, HVAC and entry systems), including design, installation, inspection, and service of integrated mechanical systems. Our businesses within this segment also provide mass notification and emergency communication systems. The work performed within this segment spans across industries and facilities and includes commercial, industrial, healthcare, education, retail, government, high tech and special-hazard settings. These systems typically have a finite lifecycle which, coupled with mandated inspection, provides us with predictable, recurring revenue stream opportunities.
We believe that we are the leading provider of fire protection and sprinkler system solutions in North America based on revenue, with well-established safety solutions companies located principally in the U.S. and Canada with operations in the United Kingdom. Our broad footprint, which is comprised of more than 150 branch offices across the U.S., allows us to execute multi-site roll-outs for national accounts which are serviced through a single point of contact, the APi National Service Group (“NSG”) team. As a nationwide service team providing 24-hour consistent and coordinated service to our customers, our NSG team allows us to enhance our understanding of our customers on a national scale, and build deeper relationships with them which positively contributes to our revenue and captures growth opportunities.
For the year ended December 31, 2019, the Safety Solutions segment generated total net revenue of $[●] and segment operating income of $[●].
Specialty Services
In our Specialty Services business, we provide a variety of infrastructure services and specialized industrial plant solutions, which include installation, maintenance and repair of critical infrastructure such as underground electric, gas, water, sewer and telecommunications infrastructure. Our services include engineering and design, fabrication, installation, maintenance, service and repair, and retrofitting and upgrading. With infrastructure and specialty contracting companies throughout the U.S., we are a single-source provider encompassing a variety of facility life cycle solutions from initial project concept and design, through the start-up and construction phases to complex retrofits and upgrades. We serve customers in the public and private sectors, including utilities, communications, healthcare, education, manufacturing, industrial plants and government agencies from various facilities across North America. Our specialty infrastructure services include underground electrical, transmission line and fiber optic cable installation, natural gas line distribution services, road and bridge maintenance, water line and sewer installation, servicing and repair, solar farm preparation erection, groundwater remediation, waste control and environmental dredging, and demolition. We also provide specialty services, including electrical containment systems, insulation, refrigeration, heating, ventilation and other temperature control, specialty and industrial ductwork, as well as structural fabrication and erection and material and equipment distribution.
With the increasing complexity and demand associated with sophisticated engineering services, we leverage our scale, in-house engineering expertise and experience, and technological advances in design to provide differentiated, high value-add specialty services to our customers. This enables us to access larger, more complex design-build projects with greater margin opportunity.
The typical facility infrastructure life cycle ranges from 10 to 20 years. Our large installed base of infrastructure projects provides us with repeat revenue opportunity as well as recurring revenue from related non-discretionary maintenance and service spend. With our diversified revenue model, we are not dependent on new facility activity.
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Confidential Treatment Requested by APi Group Corporation
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For the year ended December 31, 2019, the Specialty Services segment generated total net revenue of $[●] and segment operating income of $[●].
Industrial Solutions
In our Industrial Solutions business, we are a regional transmission and distribution services contractor providing a variety of niche contracting services and solutions to the energy industry, including designing and building new, or retrofitting and upgrading existing, oil and gas pipeline infrastructure and supporting facilities, and performing ongoing integrity management and maintenance services. Our portfolio of niche industrial specialty services contractor businesses is strategically positioned geographically to address opportunities in active oil and gas basins. Our industrial solutions service lines include earthwork, installation and maintenance services. Our earthwork services include right-of-way clearing, restoration and maintenance and mat hauling. Our installation services encompass design and installation of energy pipeline transmission and distribution systems, gas compressors and construction of oil pumping stations and oil terminal facilities, and directional drilling. Our maintenance services include pipeline inspection and cleaning, maintenance and rehabilitation, compression and metering station inspection, quality assurance and control, leak repair and pipeline replacement.
We provide these critical transmission and distribution specialty services to energy companies, including those involved in the development, transportation, storage and processing of natural gas, oil and other related products, utilities, government agencies and other contractors. We believe that regulatory-mandated inspection and services requirements have been increasing, which we expect to provide us with recurring revenue opportunities for our maintenance services.
For the year ended December 31, 2019, the Industrial Solutions segment generated total net revenue of $[●] and segment operating income of $[●].
Our Competitive Strengths
We believe that the following are our key competitive strengths:
Leading Market Positions in Diverse Set of Niche Industries. We believe that we are one of the leaders in each of the niche industries we serve, including the industry leader in fire protection and sprinkler system solutions and among the top five specialty contractors in North America. We believe that our diverse and strong customer base in each of our end markets, regional approach to operating our businesses, operations in niche industries with strong cross-selling opportunities and recurring revenue potential, strong commitment to leadership development, long-standing customer relationships with a robust reputation in the industries we serve, and strong safety track record differentiates us from our competitors. As a result, we believe we have better access to new business opportunities, allowing us to maintain and advance our market share positions.
Attractive Industry Fundamentals. We believe that the industries in which we operate are subject to increasingly complex and evolving regulatory environments and have experienced pent-up demand resulting from years of deferred maintenance and retrofit investment. In addition, we believe that there is increasing demand for specialty contracting services and for inspection and maintenance services relating to aging energy infrastructure as customers try to prolong the useful lives of their pipelines and limit incidents. We believe these tailwinds present great opportunities for us to drive growth in our businesses and enhance our market share positions. We also believe that the diversity of the niche markets we serve and the regulatory-driven demand for our services will enable us to continue our growth throughout various economic cycles.
Recurring and Repeat Revenue with Diverse, Strong Customer Base. We believe that we have recurring revenue and repeat business with long-term, well-diversified customers across a variety of end markets, which we believe provides us with a stable cash flow profile and substantial runway for organic growth. For example, for the year ended December 31, 2019, approximately [●]% of our contract-based revenue was related to repeat customers, and approximately [●]% of our total net revenue was maintenance and service revenue which is recurring in nature. Maintenance and service revenues are less cyclical, and are highly recurring due to consistent renewal rates and deep customer relationships. We have longstanding relationships with our diverse roster of repeat blue chip customers who are spread across a variety of end markets.
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Disciplined Acquisition Platform with History of Strategic Acquisitions. We have a disciplined acquisition platform through which we systematically target, execute and integrate strategic acquisitions. Since 2005, we have completed over 60 acquisitions. Through our selective approach, we identify and assess companies that align with our strategic priorities and demonstrate key value drivers such as culture, geography, end markets and client base, capabilities and leadership, opportunity to expand our service offering or geographic footprint, or provide a competitive opportunity such as new end markets or client base. Each of our businesses maintains its identity, reputation, customer relationships and culture following acquisition while benefiting from the resources of the APG network, which we believe is an important differentiator.
Differentiated Leadership Culture and Operating Model. We believe that one of our core pillars of success is our distinct leadership development culture predicated on Building Great LeadersTM, our cross-functional leadership development platform designed to enable independent company leadership, cultivate broad management skills, enhance organizational flexibility, and empower the next cohort of leaders across our businesses. This culture of investing in leadership development at all levels of the organization has created an empowered, entrepreneurial atmosphere which facilitates organizational sharing of knowledge and best practices and enables the development of cross-brand solutions and innovation. Moreover, we employ a decentralized operating model which improves speed and responsiveness to customers in industries with strict requirements. This also empowers the leaders of our businesses to drive business performance and execute key decisions, while highlighting the significant focus we place on ensuring members of our team receive continuous investment in their development.
Attractive Financial Performance and Strong Margin and Cash Flow Profile. We believe that, due to our differentiated operating model, diversified services offerings, historically strong organic growth and disciplined acquisition strategy, we have an attractive financial performance profile. In addition, we support margin growth by leveraging our scale to benefit from procurement savings resulting from enhanced purchasing power, serving higher-margin, niche industries, and requiring minimal ongoing maintenance capital expenditures (typically 2% of total net revenue). We also have significant recurring revenue, which supports our ability to generate strong operating cash flows.
Our Business Strategy
We intend to continue to grow our businesses, both organically and through acquisitions and advance our position in each of the markets we serve by pursuing the following integrated business strategies:
Drive Organic Growth. We believe that we can continue to grow our businesses organically and capture additional market share across each of our segments by focusing on growing maintenance and service revenues and maximizing cross-selling opportunities.
| • | Grow Maintenance and Service Revenue. We believe that we can drive substantial organic growth by focusing on growing our maintenance and service revenue, which is a component of our business in each of our segments. We plan to capitalize on our broad base of installed projects, cross-selling opportunities with respect to new project installations, and customer relationships to continue to grow maintenance and service revenue. |
| • | Maximize Cross-Selling Opportunities. With over 40 businesses, a broad reach across a variety of different industries, geographies, and end markets and a culture of collaboration, we believe that we have significant cross-selling opportunities to service more of the project life cycle and, once a project is completed, to continue to grow attractive recurring revenue streams. |
Accelerate Growth through Acquisitions. We have a well-established acquisition platform with a track record of executing accretive acquisitions through our selective approach to targeting and assessing potential acquisitions that align with our values and strategic priorities. We believe that the markets in which we operate are fragmented and lend themselves to continued opportunistic acquisitions. We have grown, and plan to continue to drive growth through, accretive acquisitions, targeting businesses in our existing segments and those complementary to our service offerings.
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Continue to Foster Leadership Development throughout All Levels of the Organization. We plan to continue to invest in and support our leadership development culture through our Building Great LeadersTM platform, which we believe will continue to empower the leaders across our businesses, drive business performance and create future cross-selling opportunities. Our programmatic training and development curriculum focuses on a range of topics from enhancing technical capabilities to developing soft skills, and decision-making training to enable independent company leadership. We believe that this culture will continue to support our decentralized operating model, which combines the personal attention of a small-to-medium sized company with the strength and support of an industry leader.
Leverage Our Scale and Services Portfolio. We believe that we can grow our businesses and increase our market position by leveraging our scale and broad portfolio of services offerings to capitalize on demand for single-source national providers. For example, we plan to focus on expanding national accounts and further developing an entity-wide purchasing program to realize the benefits from volume discounts and vendor pricing. In addition, we plan to leverage our industry-leading positions and the leadership across our businesses to capture growth opportunities across each of our segments.
Customers
We have long-standing relationships with many customers in each of the industries we serve. We serve customers in both the public and private sectors, including commercial, industrial, manufacturing, retail, education, healthcare, communications, utilities, energy, high tech and governmental markets. Our customers range from Fortune 500 companies with diverse, worldwide operations to single-location companies. We have low customer concentration with no single customer accounting for more than [●]% of our total net revenue for 2019.
Our focus on providing high quality service promotes deep, long-term relationships with our customers which often results in continued opportunities for new business and a reliable source of recurring revenue for ongoing inspection, maintenance and monitoring services. We often provide services under master service and other service agreements, which can be multi-year agreements, subject to earlier termination. The remainder of our work is generated pursuant to contracts for specific projects or jobs that require shorter-term specialty contracting services.
Customers are billed with varying frequency, the timing of which is generally dependent upon advance billing terms, milestone billings based on completion of certain phases of the work, or when services are provided. Under the typical payment terms of master and other service agreements and contracts for specific projects, the customer makes progress payments based on quantifiable measures of performance as defined in the agreements. Some of our contracts include retainage provisions, under which a portion of the contract amount can be retained by the customer until final contract settlement.
Government Regulation and Environmental Matters
A significant portion of our business activities is subject to foreign, federal, state and local laws and regulations. These regulations are administered by various foreign, federal, state and local health and safety and environmental agencies and authorities, including OSHA of the U.S. Department of Labor and the EPA. Failure to comply with these laws and regulations may involve civil and criminal liability. From time to time, we are also subject to a wide range of reporting requirements, certifications and compliance as prescribed by various federal and state governmental agencies. Expenditures relating to such regulations are made in the normal course of our business and are neither material nor place us at any competitive disadvantage. We do not currently expect that compliance with such laws and regulations will require us to make material expenditures. We believe we have all required licenses to conduct our business activities and are in substantial compliance with applicable regulatory requirements. If we fail to comply with applicable regulations, we could be subject to substantial fines or revocation of our operating licenses.
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Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
We are subject to various federal and state labor and employment laws and regulations, including the Fair Labor Standards Act, Equal Opportunity Employment Act and wage and hour laws, that govern minimum wage requirements, overtime, working conditions, mandatory benefits, health insurance and other employment-related matters. Additionally, a large portion of our business uses labor that is provided under collective bargaining agreements. As such, we are subject to federal laws and regulations related to unionized labor and collective bargaining, including the National Labor Relations Act.
We also are subject to various environmental laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, liabilities can be imposed for cleanup of properties, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. The presence of contamination from such substances or wastes could interfere with ongoing operations or adversely affect our business. In addition, we could be held liable for significant penalties and damages under certain environmental laws and regulations. Our contracts with customers may also impose liabilities on us regarding environmental issues that arise through the performance of our services. From time to time, we may incur costs and obligations related to environmental compliance and/or remediation matters.
Competitive Environment
We operate in industries which are highly competitive and highly fragmented. There are relatively few barriers to entry in many of the industries in which we operate, and as a result, any organization that has adequate financial resources and access to technical expertise could become a competitor. In each of our segments, we compete with a number of companies, ranging from small, owner-operated businesses operating in narrow geographic regions to large companies with national scale who have significant financial, technical and marketing resources. The national or regional firms that compete with us include (1) in our Safety Solutions segment, Tyco (Johnson Controls), EMCOR, Comfort Systems, (2) in our Specialty Services segment, Quanta Services, EMCOR, MasTec and Comfort Systems USA, and (3) in our Industrial Solutions segment, Quanta Services and MasTec.
We compete based on a variety of factors, including price, service, technical expertise and experience, quality, safety record, response time and reputation for customer service. A portion of our revenue is derived from agreements with customers that contain fixed price or per unit terms, and price is often an important factor in the bid process for such work. However, we believe our customers also consider a variety of other factors, including those described above, when selecting a service provider, and we believe that our technical capabilities, broad geographic reach and skilled labor force enable us to compete against our larger competitors.
Supply
We have multiple domestic and foreign supply sources at competitive pricing for substantially all of our raw material and installed components. The raw materials and various purchased components we use such as piping, steel, sheet metal, fire suppression/detection components and HVAC equipment have generally been available in sufficient quantities in a timely manner. We do and can rely on multiple third-party manufacturers as a source for pre-fabricated goods or system components. Historically we have been able to mitigate commodity cost exposure by purchasing or price locking commodities early for particular projects, as well as selectively using time or market-based escalation provisions in proposals and contracts. We do not anticipate experiencing any significant procurement challenges, as the purchases of required materials can be sourced from multiple sources; however, tariffs or other changes in U.S. trade relations could result in increased costs for some materials.
Sales and Marketing
All employees, from leadership to project managers, are responsible for developing and maintaining successful long-term relationships with key customers in each of the industries we serve. We intend to continue our emphasis on developing and maintaining long-term relationships with our customers by providing reliable, high-quality service in a professional manner. We believe we can continue to leverage specific technical and marketing strengths at the individual business-level to expand the services offered in each business’s market. Our culture of collaboration across more than 40 businesses provides significant cross-selling opportunities to leverage our current project base, existing relationships and professional expertise to provide additional services to our existing customers.
For our safety solutions business, we provide a single point of contact for customers with a regional or national portfolio of properties through our NSG team which enhances our understanding of customers on a national scale and allows us to build more meaningful relationships with our customers. Through our NSG team, we are able to quickly and efficiently allocate resources to meet customer needs.
Recruiting, Training and Safety
Our continued success will depend, in part, on our ability to continue to attract, motivate, retain and reward high-quality, skilled employees. We are a military veteran recruiter in the U.S. and benefit from the leadership and
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loyalty that military veterans bring to our Company. We believe our success in attracting and retaining qualified employees will be based on the quality of our training, leadership development and opportunities for advancement. Our unique Leadership Development Program, predicated on Building Great LeadersTM, was created for select employees to develop their leadership skills from mentors inside the Company while also broadening their understanding of the services offered across our businesses. This rotational program exposes participants to several of the Company’s businesses across all three segments over the span of one year. On each rotation, the participant is assigned a mentor who provides real-time feedback and counseling and is offered first-hand exposure to various leadership roles and functions. Graduates of the program are placed at an individual business based on their performance and feedback from their mentors.
We have a safety culture that is grounded in our commitment to zero incidents. We have established safety training and on-site safety programs throughout our operations to ensure that all employees comply with safety standards we have established and that are established under federal, state and local laws and regulations. We have implemented our safety program, STEPS (Striving Toward Excellence and Professionalism in Safety), which promotes safety culture awareness throughout our operations. Additionally, we participate in an annual Safety Week which includes activities designed to elevate safety awareness and we hold an annual competition to acknowledge and reward businesses exhibiting excellence in safety. Safety audits are conducted by safety professionals at each business to ensure the highest safety standards are upheld.
Our rate of incidents recordable under the standards of the Occupational Safety and Health Administration (“OSHA”) per one hundred employees per year, also known as the OSHA recordable rate, was 1.4 during 2018, less than half of the most recently published OSHA rate for our industry.
Insurance and Legal Proceedings
The primary insured risks in our operations are bodily injury, property damage and workers’ compensation injuries. We are insured for workers’ compensation, employer’s liability, auto liability, general liability and employee group health insurance and retain the risk for claims resulting from uninsured deductibles per-incident or occurrence. Because we have very large deductibles, the vast majority of our claims are paid by us, so as a practical matter we self-insure the great majority of these risks. Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts, historical trends and industry averages using the assistance of an actuary to project the extent of these obligations, and management believes such accruals are adequate.
We are subject to certain claims and lawsuits arising in the normal course of business. We maintain various insurance coverages to minimize financial risk associated with these claims. We have estimated and provided accruals for probable losses and related legal fees associated with certain litigation in our consolidated financial statements. While we cannot predict the outcome of these proceedings, in our opinion and based on reports of counsel, any liability arising from these matters individually and in the aggregate will not have a material effect on our operating results, cash flows or consolidated financial condition, after giving effect to provisions already recorded.
Seasonality and Cyclicality
Our revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, receipt of required regulatory approvals, permits and rights of way, project timing and schedules, and holidays. Typically, our revenue is lowest at the beginning of the year and during the winter months in North America during the first quarter because cold, snowy or wet conditions cause project delays. Revenue is generally higher during the summer and fall months during the third and fourth quarters, due to increased demand for our services when favorable weather conditions exist in many of the regions in which it operates but continued cold and wet weather can often affect second quarter productivity. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive effect on our revenue. However, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects.
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Additionally, the industries we serve can be cyclical. Fluctuations in end-user demand within those industries, or in the supply of services within those industries, can affect demand for our services. As a result, our business may be adversely affected by industry declines or by delays in new projects. Variations or unanticipated changes in project schedules in connection with large construction and installation projects, can create fluctuations in revenue.
Properties
We own our corporate headquarters in New Brighton, Minnesota and own and lease other facilities throughout the United States, Canada and other foreign locations where we conduct business. Our facilities are utilized for operations in our three reportable segments and include offices, warehouses, storage, maintenance shops and training and educational facilities. As of December 31, 2019, we owned approximately [●] facilities and leased approximately [●] facilities. We believe that our existing facilities are sufficient for our current needs.
Remaining Unsatisfied Performance Obligations
Our remaining unsatisfied performance obligations (“remaining performance obligations”) at December 31, 2019 were $[●]. Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time as the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of total transaction price can be made.
Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations due to the inherent substantial economic penalty that would be incurred by our customers upon cancellation. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us.
Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination.
Our remaining performance obligations are comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business, (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented.
Employees
As of December 31, 2019, we had approximately [●] employees, of which approximately [●] were represented by unions or were subject to [●] different collective bargaining agreements. We have not experienced and do not expect any significant strikes or work stoppages and believe our relations with employees covered by collective bargaining agreements are good.
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MANAGEMENT AND CORPORATE GOVERNANCE
Board of Directors
Upon consummation of the Domestication, the bylaws of APG Delaware will permit our Board of Directors to set the size of the Board at not less than one director. Our Board of Directors currently consists of nine directors. For the size and scope of our business and operations, we believe a board of approximately this size is appropriate as it is small enough to allow for effective communication among the members but large enough so that we get a diverse set of perspectives and experiences around our board room. The APG Delaware bylaws will provide that, in uncontested elections, directors will be elected by a majority of the votes cast, and in contested elections, directors will be elected by a plurality of the votes cast.
Upon consummation of the Domestication, each director on our Board of Directors will serve a one-year term or until their successor has been duly elected and qualified, subject to their earlier death, resignation, disqualification or removal. Pursuant to the DGCL and our bylaws, in general, any vacancies on our Board of Directors resulting from death, retirement, resignation, disqualification, removal or other cause may be filled only by an affirmative vote of a majority of the remaining directors then in office, although less than a quorum, or by a sole remaining director. Our current directors are as follows:
Name | Age | |||
Sir Martin E. Franklin* | 55 | |||
James E. Lillie* | 58 | |||
Ian G. H. Ashken | 59 | |||
Russell Becker | 54 | |||
Anthony E. Malkin | 57 | |||
Thomas V. Milroy | 64 | |||
Lord Paul Myners | 71 | |||
Cyrus D. Walker | 52 | |||
Carrie A. Wheeler | 48 | |||
| * | Denotes Co-Chairman |
Upon the consummation of the APi Acquisition, Rory Cullinan, Brian Kaufmann and Jean-Marc Huët stepped down from our Board of Directors and Messrs. Ashken, Becker, Malkin and Walker and Ms. Wheeler joined our Board of Directors.
We believe that each of our directors possesses the experience, skills and qualities to fully perform his or her duties as a director and contribute to our success. Our directors were nominated because we believe each is of high ethical character, highly accomplished in his or her field with superior credentials and recognition, has a reputation, both personal and professional, that is consistent with our image and reputation, has the ability to exercise sound business judgment, and is able to dedicate sufficient time to fulfilling his or her obligations as a director. Our directors as a group complement each other and each of their respective experiences, skills and qualities so that collectively the Board operates in an effective, collegial and responsive manner. Each director’s principal occupation and other pertinent information about particular experience, qualifications, attributes and skills that led the Board to conclude that such person should serve as a director, appears on the following pages.
Sir Martin E. Franklin served as a director of J2 since its inception on September 18, 2017, and continues to serve as a director and Co-Chairman of APG since the completion of the APi Acquisition on October 1, 2019. Mr. Franklin is the founder and Chief Executive Officer of Mariposa Capital LLC and Chairman and controlling shareholder of Royal Oak Enterprises, LLC, a manufacturer of charcoal and grilling products, since July 2016. Mr. Franklin is also founder and Executive Chairman of Element Solutions Inc (previously known as Platform Specialty Products Corporation), a specialty chemicals company, and has served as a director since its inception in April 2013, and co-founder and co-chairman of Nomad Foods, a leading European frozen food company, and has served as a director since its inception April 2014. Mr. Franklin was the founder and Chairman of Jarden Corporation (“Jarden”), a broad-based consumer products company, from 2001 until April 2016 when Jarden merged with
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Newell Brands Inc. (“Newell”). Mr. Franklin became Chairman and Chief Executive Officer of Jarden in 2001, and served as Chairman and Chief Executive Officer until 2011, at which time he began service as Executive Chairman. Prior to founding Jarden in 2001, between 1992 and 2000, Mr. Franklin served as the Chairman and/or Chief Executive Officer of three public companies: Benson Eyecare Corporation, an optical products and services company; Lumen Technologies, Inc., a holding company that designed, manufactured and marketed lighting products; and Bollé Inc., a holding company that designed, manufactured and marketed sunglasses, goggles and helmets worldwide. In the last five years, Mr. Franklin also served as a director of the following public companies: Restaurant Brands International Inc. and Newell.
We believe Mr. Franklin’s qualifications to serve on our Board of Directors include his leadership, extensive experience as a member of other corporate boards and his knowledge of public companies.
James E. Lillie served as a director of J2 since its inception on September 18, 2017, and continues to serve as a director and Co-Chairman of APG since the completion of the APi Acquisition on October 1, 2019. Mr. Lillie served as Jarden’s Chief Executive Officer from June 2011 until the consummation of Jarden’s business combination with Newell in April 2016. Mr. Lillie joined Jarden in 2003 as Chief Operating Officer and was named President in 2004 and Chief Executive Officer in June 2011. From 2000 to 2003, Mr. Lillie served as Executive Vice President of Operations at Moore Corporation, Limited. From 1999 to 2000, he served as Executive Vice President of Operations at Walter Industries, Inc., a Kohlberg, Kravis, Roberts & Company (“KKR”) portfolio company. From 1990 to 1999, Mr. Lillie held a succession of senior level management positions across a variety of disciplines including human resources, manufacturing, finance and operations at World Color, Inc., another KKR portfolio company. Since June 2015, Mr. Lillie has served on the board of directors of Nomad Foods Limited and since February 2017, he has served on the board of directors of Tiffany & Co.
We believe Mr. Lillie’s qualifications to serve on our Board of Directors include his executive experience, service on other corporate boards and his knowledge of public companies.
Ian G. H. Ashken has served as a director of APG since the completion of the APi Acquisition on October 1, 2019. Mr. Ashken was the co-founder of Jarden and served as its Vice Chairman and President until the consummation of Jarden’s business combination with Newell in April 2016. Mr. Ashken was appointed to the Jarden board in June 2001 and served as Vice Chairman, Chief Financial Officer and Secretary from September 2001. Mr. Ashken was Secretary of Jarden until February 2007 and Chief Financial Officer until June 2014. Prior to Jarden, Mr. Ashken served as the Vice Chairman and/or Chief Financial Officer of three public companies: Benson Eyecare Corporation, Lumen Technologies, Inc. and Bollé Inc. between 1992 and 2000. Mr. Ashken also serves as a director of Element Solutions Inc and Nomad Foods Limited, and is a director or trustee of a number of private companies and charitable institutions. During the last five years, Mr. Ashken also previously served as a director of Newell.
We believe Mr. Ashken’s qualifications to serve on our Board of Directors include his executive experience, service on other corporate boards and his knowledge of public companies.
Russell Becker has served as a director of APG since the completion of the APi Acquisition on October 1, 2019. Mr. Becker joined APi Group in 2002 as its President and Chief Operating Officer and became its Chief Executive Officer in 2004. Prior to leading APi Group, Mr. Becker served in a variety of roles at The Jamar Company, a subsidiary of APi Group, including as a Manager of Construction from 1995 to 1997 and as President from 1998 until he joined APi Group in 2002. Mr. Becker served as a project manager for Ryan Companies from 1993 to 1995 and as a field engineer with Cherne Contracting from 1991 to 1993. Previously, Mr. Becker served on the board of directors for Children’s Hospitals and Clinics of Minnesota Foundation and the Construction Industry Round Table. Since July 2017, Mr. Becker has served on the board of directors of Liberty Diversified Industries and since January 2019 has served on the board of directors for Marvin Companies, each a private company. Mr. Becker also serves on the advisory board for the Construction Management Program at Michigan Technical University.
We believe Mr. Becker’s qualifications to serve on our Board of Directors include his extensive knowledge of APi Group and his years of leadership at APi Group.
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Anthony E. Malkin has served as a director of APG since the completion of the APi Acquisition on October 1, 2019. Since October 2013, Mr. Malkin has served as Chairman and Chief Executive Officer of Empire State Realty Trust, Inc. (“ESRT”), a real estate investment trust. Mr. Malkin joined ESRT’s predecessor entities in 1989. Mr. Malkin has experience in existing building energy efficiency retrofits through coordinating the team of Clinton Climate Initiative, Johnson Controls, JLL and Rocky Mountain Institute in a groundbreaking project at the Empire State Building. Mr. Malkin helped develop standards for energy efficient office tenant installations, now known as the Tenant Energy Optimization Program, at the Urban Land Institute. Mr. Malkin also serves as a member of the Real Estate Roundtable and Chair of its Sustainability Policy Advisory Committee, Urban Land Institute, the Board of Governors of the Real Estate Board of New York, the Partnership for New York City’s Innovation Council, the Building Committee of the Metropolitan Museum of Art and the Committee Encouraging Corporate Philanthropy.
We believe Mr. Malkin’s qualifications to serve on our Board of Directors include his real estate investment experience, service on other corporate boards and his knowledge of public companies.
Thomas V. Milroy served as a director of J2 since its inception on September 18, 2017, and continues to serve as a director of APG since the completion of the APi Acquisition on October 1, 2019. Previously, Mr. Milroy served as a director of Tim Hortons Inc. from August 2013 to December 2014 and Restaurant Brands International Inc. from December 2014 to June 2018. Mr. Milroy also served as Managing Director of Generation Capital Limited, a private investment company, from January 2016 to January 2019. From March 2008 to October 2014, Mr. Milroy served as Chief Executive Officer of BMO Capital Markets, where he was responsible for all of BMO’s business involving corporate, institutional and government clients globally and acted as senior advisor to the Chief Executive Officer of BMO Financial Group from November 2014 to January 2015. Mr. Milroy also serves as a director of Interfor Corporation, a large lumber producer, and Generation Capital Limited. Mr. Milroy is a member of the Law Society of Upper Canada.
We believe Mr. Milroy’s qualifications to serve on our Board of Directors include his experience as past Chief Executive Officer of a large financial services company, service on other corporate boards and his knowledge of finance, investment and corporate banking, mergers and acquisitions, risk assessment and business development.
Lord Paul Myners served as a director and Chairman of J2 since its inception on September 18, 2017, and continues to serve as a director of APG since the completion of the APi Acquisition on October 1, 2019. Lord Myners is Chancellor of the University of Exeter and a member of the Court of the London School of Economics and Political Science. Lord Myners served as the Financial Services Secretary in Her Majesty’s Treasury, the United Kingdom’s finance ministry, from October 2008 to May 2010. Prior to his service at the Treasury, Lord Myners served as chairman or a member of the board of several organizations, including as chairman of Guardian Media Group from 2000 to 2008, director of GLG Partners Inc. from 2007 to 2008, director of Land Securities Group plc from 2006 to 2008 (chairman from 2007 to 2008), chairman of Marks & Spencer plc from 2004 to 2006, chairman of Aspen Insurance Holdings Ltd from 2002 to 2007. Lord Myners served as chairman of Platform Acquisition Holdings Limited (now known as Element Solutions Inc) from April 2013 until its business combination with MacDermid, Incorporated in October 2013 and a director of Gartmore Investment Management Limited from 1986 to 2001. Lord Myners also served as the chairman of Justice Holdings Limited from February 2011 until its business combination with Burger King Worldwide, Inc. in June 2012. Lord Myners has also served in an advisory capacity to the United Kingdom Treasury and the United Kingdom Department of Trade & Industry, with particular focus on corporate governance practices. Other positions held by Lord Myners have included chairman of the Trustees of Tate, chairman of the Low Pay Commission, a member of the Court of the Bank of England, and a member of the Investment Board of GIC, Singapore’s sovereign wealth fund. Lord Myners is currently serving as a non-executive director of Nomad Foods Limited, Landscape Acquisition Holdings Limited, a special purpose acquisition company, and Windmill Hill Asset Management. Lord Myners is vice-chairman of Global Counsel, chairman and a partner of Cevian Capital LLP, Chairman of Daniel J Edelman (UK) and an Independent Director of Rockefeller Capital Management. Lord Myners is a Visiting Fellow at Nuffield College, Oxford, an Executive Fellow at London Business School and a crossbench member of the UK’s House of Lords, the senior chamber in Parliament.
We believe Lord Myners’ qualifications to serve on our Board of Directors include his extensive experience in investment management and banking, service on other corporate boards and his knowledge of finance and international banking.
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Cyrus D. Walker has served as a director of APG since the completion of the APi Acquisition on October 1, 2019. Since April 1, 2018, Mr. Walker has served as the founder and Chief Executive Officer of The Dibble Group, an insurance brokerage and consulting firm. From January 2000, Mr. Walker served in several roles at Nemco Group, LLC, an insurance brokerage and consulting firm, including serving as its Co-Chief Executive Officer until April 2012, when it was acquired by a subsidiary of NFP Corp., a multi-national insurance brokerage and consulting business. Mr. Walker also founded and served as Chief Executive Officer of OSI Benefits, an insurance brokerage consulting firm and division of Opportunity Systems, Inc., from 1995 to January 2000. Mr. Walker currently serves as a director of Folding Helmet Technology Limited, a UK-based privately held helmet safety technology firm. Mr. Walker previously served on the boards of Blue Marble Materials, a privately held sustainability and energy business, and Opportunity Systems, Inc., a privately held data processing firm.
We believe Mr. Walker’s qualifications to serve on our Board of Directors include his executive experience and service on other corporate boards.
Carrie A. Wheeler has served as a director of APG since the completion of the APi Acquisition on October 1, 2019. From 1996 to December 2017, Ms. Wheeler served in several roles of increasing responsibility at TPG Global, a global private equity firm, including as a Partner and Head of Consumer Retail Investing. Ms. Wheeler currently serves on the board of directors and audit committee of Dollar Tree (since March 2019) and on the board of directors of Opendoor, a tech-based real estate company (since September 2019). Ms. Wheeler also serves on the boards of several not-for-profit organizations focused on education and children’s healthcare. In addition, Ms. Wheeler has previously served on a number of other corporate boards.
We believe Ms. Wheeler’s qualifications to serve on our Board of Directors include her extensive experience in business assessment, mergers and acquisitions, financing and guiding public market transactions, and her substantial experience serving on audit committees.
Corporate Governance
Corporate Governance Guidelines
Our Board of Directors is responsible for overseeing the management of our company. The Board has adopted Corporate Governance Guidelines (“Governance Guidelines”) which set forth our governance principles relating to, among other things:
| • | director independence; |
| • | director qualifications and responsibilities; |
| • | mandatory retirement age for independent directors at 73; |
| • | board structure and meetings; |
| • | management succession; |
| • | share ownership guidelines, which urge independent directors with more than one year of service to own at least 1,000 shares of common stock; and |
| • | the performance evaluation of our Board. |
Our Governance Guidelines will be available in the Investor Relations section of our website at www.apigroupinc.com.
Director Independence
The composition of the Board and its committees will be subject to the independence standards set forth under the NYSE governance standards as well as the Governance Guidelines which have been adopted by the
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Board. Under the NYSE governance standards, a director qualifies as independent if the Board affirmatively determines that the director has no material relationship with us. While the focus of the inquiry is independence from management, the Board is required to broadly consider all relevant facts and circumstances in making an independence determination. In making each of these independence determinations, the Board has considered all of the information provided by each director in response to detailed inquiries concerning his or her independence and any direct or indirect business, family, employment, transactional or other relationship or affiliation of such director with us. Specifically, Mr. Malkin currently serves as an executive officer of a company that has in the past procured services from one or more APi Group companies. We reviewed these commercial relationships and found that all transactions between us and the relevant companies were made in the ordinary course of business and negotiated at arms’ length. Furthermore, these commercial relationships were below the threshold set forth in the NYSE governance standards (i.e., two percent of such other company’s consolidated gross revenues for such year or $1 million, whichever is greater). As a result, our Board determined that these commercial relationships did not impair Mr. Malkin’s independence.
Based on information provided by each director concerning his or her background, employment, and affiliations, and after considering the transactions described above, the Board has affirmatively determined that each of Lord Myners, Messrs. Ashken, Lillie, Milroy, Malkin and Walker and Ms. Wheeler are “independent” as that term is defined under the applicable rules and regulations of the SEC and the NYSE governance standards. Because Mr. Franklin controls the entity which receives advisory fees from us, he is not independent under NYSE governance standards. As Chief Executive Officer of APG and of APi Group prior to the APi Acquisition, Mr. Becker is also not independent.
Board Committees
Our Board has three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Copies of the committee charters of each of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee setting forth the responsibilities of the committees will be available in the Investor Relations section of our website at www.apigroupinc.com, and such information is also available in print to any stockholder who requests it through our Investor Relations department. The committees will periodically review their respective charters and recommend any needed revisions to the Board. The following is a summary of the composition of each committee:
Name | Audit Committee | Compensation Committee | Nominating and Corporate Governance Committee | |||
Ian G. H. Ashken | X* | X | ||||
Anthony E. Malkin | X | |||||
Thomas V. Milroy | X | X* | ||||
Lord Paul Myners | X* | |||||
Cyrus D. Walker | X | |||||
Carrie C. Wheeler | X | X |
| * | Denotes Chair of applicable Committee |
Audit Committee
The Board has adopted a written Audit Committee Charter that governs the responsibilities of the Audit Committee. The Audit Committee is responsible for, among other things:
| • | overseeing preparation of our financial statements, the financial reporting process and our compliance with legal and regulatory matters; |
| • | appointing and overseeing the work of our independent auditor; |
| • | preapproving all auditing services and permitted non-auditing services to be performed for us by our independent auditor and approving the fees associated with such work; |
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| • | approving the scope of the annual audit; |
| • | reviewing interim and year-end financial statements; |
| • | overseeing our internal audit function, reviewing any significant reports to management arising from such internal audit function and reporting to the Board; and |
| • | approving the audit committee report required to be included in our annual proxy statement. |
The Audit Committee has the power to investigate any matter brought to its attention within the scope of its duties and to retain counsel for this purpose where appropriate. Pursuant to the Audit Committee Charter, the Audit Committee reviews and pre-approves all audit and non-audit services performed by our independent accountant.
The Board has reviewed the background, experience, and independence of the Audit Committee members and based on this review, has determined that each member of the Audit Committee:
| • | meets the independence requirements of the NYSE governance standards; |
| • | meets the enhanced independence standards for audit committee members required by the SEC; and |
| • | is financially literate, knowledgeable and qualified to review financial statements. |
In addition, the Board has determined that each of Mr. Ashken and Ms. Wheeler qualifies as an “audit committee financial expert” under the SEC rules.
Compensation Committee
The Board has adopted a written Compensation Committee Charter that governs the responsibilities of the Compensation Committee. The Compensation Committee is responsible for, among other things:
| • | assisting the Board in developing and evaluating potential candidates for executive positions; |
| • | reviewing and approving corporate goals and objectives with respect to compensation for the Chief Executive Officer (“CEO”), evaluating the CEO’s performance and approving the CEO’s compensation based on such evaluation; |
| • | determining the compensation of other non-CEO executive officers and all equity awards to such executive officers and other employees; |
| • | reviewing on a periodic basis compensation and benefits paid to directors and recommending such compensation to the Board of Directors for approval; |
| • | reviewing and approving our equity-based compensation plans and incentive compensation plans, including reviewing and approving the target performance benchmarks, if any, and range of aggregate value of our annual incentive program for senior management; and |
| • | approving the compensation committee report on executive compensation required to be included in our annual proxy statement. |
The Board has reviewed the background, experience and independence of the Compensation Committee members and based on this review, has determined that each member of the Compensation Committee:
| • | meets the independence requirements of the NYSE governance standards; |
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| • | is a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act; and |
| • | meets the enhanced independence standards for Compensation Committee members established by the SEC. |
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee who presently serve or in the past year have served on the Compensation Committee has interlocking relationships as defined by the SEC or had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of certain relationships and related party transactions.
Nominating and Corporate Governance Committee
The Board has adopted a written Nominating and Corporate Governance Committee Charter that governs the responsibilities of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is responsible for, among other things:
| • | assisting our Board in identifying prospective director nominees and recommending nominees for each annual meeting of shareholders to our Board; |
| • | leading the search for individuals qualified to become members of the Board and selecting director nominees to be presented for stockholder approval at our annual meetings; |
| • | reviewing the Board’s committee structure and recommending to the Board for approval directors to serve as members of each committee; |
| • | developing and recommending to the Board for approval a set of corporate governance guidelines and generally advising the Board on corporate governance matters; |
| • | reviewing such corporate governance guidelines on a periodic basis and recommending changes as necessary; and |
| • | reviewing director nominations submitted by stockholders. |
The Nominating and Corporate Governance Committee may, when it deems appropriate, delegate certain of its responsibilities to one or more Nominating and Corporate Governance Committee members or subcommittees. In making nominations, the Nominating and Corporate Governance Committee is required to submit candidates who have the highest personal and professional integrity, who have demonstrated exceptional ability and judgment and who shall be most effective, in conjunction with the other nominees to the Board, in collectively serving the long-term interests of the stockholders. In evaluating nominees, the Nominating and Corporate Governance Committee is required to take into consideration the following attributes, which are desirable for a member of the Board: leadership, independence, interpersonal skills, financial acumen, business experiences, industry knowledge and diversity of viewpoints.
The Board has reviewed the background, experience and independence of the Nominating and Corporate Governance Committee members and based on this review, has determined that each member of the Nominating and Corporate Governance Committee meets the independence requirements of the NYSE governance standards and SEC rules and regulations.
Code of Business Conduct and Ethics
On [●], 2020, our Board adopted a written Code of Business Conduct and Ethics (“Code of Conduct”) that establishes the standards of ethical conduct applicable to all our directors, officers, and employees. In addition, on [●], 2020, our Board adopted a written Code of Ethics for Senior Financial Officers (“Code of Ethics”) applicable to
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our CEO and senior financial officers. Copies of our Code of Conduct and Code of Ethics will be publicly available in the Investor Relations section of our website at www.apigroupinc.com. Any waiver of our Code of Ethics with respect to our chief executive officer, chief financial officer, controller or persons performing similar functions or waiver of our Code of Conduct with respect to our directors or executive officers may only be authorized by our Board of Directors and will be disclosed on our website as promptly as practicable, as may be required under applicable SEC and NYSE rules.
Director Compensation Policy
From September 18, 2017 until October 1, 2019, we paid our non-founder directors an annual fee of $75,000 and our chairman an annual fee of $100,000 and our then-chairman, Lord Myners, an annual fee of $100,000. For 2017, each such director received his annual fee in the form of ordinary shares of the Company.
In connection with the initial public offering, Lord Myners was granted a five-year option to acquire 50,000 ordinary shares and Mr. Milroy and our other then-non-founder directors (other than Mr. Kaufmann) were each granted a five-year option to acquire 37,500 ordinary shares pursuant to Option Deeds, all at an exercise price of $11.50 per ordinary share (subject to adjustment in accordance with their respective Option Deeds).
In connection with the completion of the APi Acquisition, we adopted the following non-employee director compensation policy:
| • | Annual Retainer. Each non-employee director is entitled to an annual cash fee of $75,000, payable quarterly. |
| • | Committee Fees. Members of any of our Committees are entitled to an additional annual cash fee of $5,000. Each of the chairs of our Committees is entitled to an additional $10,000 annual cash fee. |
| • | Annual Equity Award. Each non-employee director will be granted annually a number of restricted stock units equal to $100,000 at the date of issue. The restricted stock units will vest and settle into shares of APG Delaware common stock on the earlier of the one-year anniversary of the date of issuance and the date of the following year’s annual meeting of stockholders. |
In addition, all of our directors are entitled to be reimbursed by APG for reasonable expenses incurred by them in the course of their directors’ duties relating to APG.
Lord Myners and Messrs. Ashken, Milroy, Malkin and Walker and Ms. Wheeler will be paid compensation for their respective services on our Board. Mr. Franklin will not receive any additional compensation for services as a director in light of his affiliation with Mariposa Capital, LLC, which provides advisory services to the Company in exchange for a fee. In addition, Mr. Becker, who serves as our Chief Executive Officer, is not entitled to receive any additional compensation for his services as a director. For his initial term as director, Mr. Lillie has elected to waive all compensation for service as a director.
The table below sets forth the non-employee director compensation for the year ended December 31, 2019. Mr. Becker, our Chief Executive Officer, is omitted from the table as he does not receive any additional compensation for his services as a director. For more information on Mr. Becker’s compensation, see “Executive Compensation”.
Name | Fees Earned or Paid in Cash ($) (2) | Stock Awards ($) (3)(4) | Total ($) | |||||||||
Sir Martin E. Franklin | ||||||||||||
James E. Lillie | ||||||||||||
Ian G. H. Ashken | ||||||||||||
Anthony E. Malkin | ||||||||||||
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Thomas V. Milroy | ||||||||||||
Lord Paul Myners | ||||||||||||
Cyrus D. Walker | ||||||||||||
Carrie A. Wheeler | ||||||||||||
Rory Cullinan (1) | ||||||||||||
Jean-Marc Huët (1) | ||||||||||||
Brian Kaufmann (1) |
| (1) | Each of Messrs. Cullinan, Huët and Kaufman stepped down from our Board of Directors in connection with the APi Acquisition. |
| (2) | Reflects annual retainers paid under our prior director compensation program from January 1, 2019 through September 30, 2019 and our current director compensation program from October 1, 2019 through December 31, 2019, calculated on a pro-rata basis. |
| (3) | Represents the aggregate grant date fair values of restricted stock units granted during 2019, computed in accordance with FASB ASC Topic 718. For a discussion of valuation assumptions used in calculating the amounts for 2019, see Note [●] to our historical consolidated financial statements included elsewhere in this prospectus. |
| (4) | The following table sets forth the aggregate number of restricted stock units and unexercised stock options outstanding at December 31, 2019 for each of our non-employee directors: |
Name | Aggregate Number of Restricted Stock Units Outstanding at December 31, 2019 | Aggregate Number of Unexercised Stock Options Outstanding at December 31, 2018 | ||||||
Sir Martin E. Franklin | ||||||||
James E. Lillie | ||||||||
Ian G. H. Ashken | ||||||||
Anthony E. Malkin | ||||||||
Thomas V. Milroy | ||||||||
Lord Paul Myners | ||||||||
Cyrus D. Walker | ||||||||
Carrie A. Wheeler | ||||||||
Rory Cullinan (4) | ||||||||
Jean-Marc Huët (4) | ||||||||
Brian Kaufmann (4) | ||||||||
Executive Officers
Set forth below is certain information relating to our current executive officers. Biographical information with respect to Mr. Becker is set forth above under “—Board of Directors”.
| Name | Age | Title | ||
Russell Becker | 54 | President and Chief Executive Officer | ||
Thomas Lydon | 55 | Chief Financial Officer of APG and Secretary of APi Group | ||
Julius Chepey | 58 | Chief Information Officer | ||
Paul Grunau | 54 | Chief Learning Officer | ||
Mark Polovitz | 37 | Vice President and Controller |
Thomas Lydon has served as Chief Financial Officer of APG since the completion of the APi Acquisition on October 1, 2019, and previously served as Chief Financial Officer of APi Group since July 2014. Prior to joining APi Group, Mr. Lydon was a partner at KPMG LLP, where he served for 28 years in positions of increasing responsibility. From 1995 to 1997, Mr. Lydon ran KPMG’s U.S. desk in Sydney, Australia, and from 1999 to 2001, he led KPMG’s internal audit practice in Minneapolis, Minnesota. In 2001, Mr. Lydon became managing partner of KPMG’s Des Moines, Iowa office and was promoted in 2009 as business unit partner in charge of audit for the Des Moines and Minneapolis offices. Mr. Lydon also serves on the boards of two non-profits and is a certified public accountant.
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Julius Chepey has served as Chief Information Officer of APG since the completion of the APi Acquisition on October 1, 2019, and previously served as Chief Information Officer of APi Group since February 2010. Prior to joining APi Group, Mr. Chepey was VP Information Technology at J. D. Irving Limited, a large private company with operations in various industries in Atlantic Canada, reporting directly to the owner. From 1998 to 2007, Mr. Chepey was the IT Leader of Information Technology for M. A. Mortenson Company, a construction and development company based in Golden Valley, Minnesota, serving as Information Technology Director from 1998 to 2001, and was promoted to Chief Information Officer in 2002. Mr. Chepey also serves on the board of a non-profit.
Paul Grunau has served as Chief Learning Officer of APG since the completion of the APi Acquisition on October 1, 2019, and previously served as Chief Learning Officer of APi Group since January 2016. Mr. Grunau also previously served as Chief Operating Officer of APi Group from 2009 to 2011. Mr. Grunau initially joined APi Group in 2006 following the acquisition of Grunau Company by APi Group, and had been the President and owner of Grunau Company from 1999 until its acquisition. From 2011 to December 2015, he served as Chief Operating Officer of Health Payment Systems, a health care technology startup in which he was a founding investor. Mr. Grunau also served as a director of APi Group from 2011 until the closing of the APi Acquisition. Mr. Grunau also serves on the boards of two private companies and previously served on the boards of non-profits.
Mark Polovitz has served as Vice President and Controller of APG since the completion of the APi Acquisition on October 1, 2019, and previously served as Vice President and Controller of APi Group since July 2011. Mr. Polovitz initially joined APi Group in January 2009, where he served in a variety of roles on the corporate accounting and finance team and led internal business system conversions for legacy and acquired companies. Prior to joining APi Group, Mr. Polovitz was a CPA with PWC in their audit practice from 2005 to January 2009. Mr. Polovitz also serves on the audit committee of the board of a non-profit.
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COMPENSATION DISCUSSION AND ANALYSIS
Overview
This Compensation Discussion and Analysis provides information regarding our executive compensation philosophy, programs and decisions for 2019 for our named executive officers. For 2019, our named executive officers are:
Russell Becker | President and Chief Executive Officer | |
Thomas Lydon | Chief Financial Officer | |
Julius Chepey | Chief Information Officer | |
Paul Grunau | Chief Learning Officer | |
Mark Polovitz | Vice President and Controller |
We did not have any executive officers prior to the completion of the APi Acquisition. Messrs. Becker, Lydon, Chepey, Grunau and Polovitz were executive officers of APi Group during 2019 through the APi Acquisition on October 1, 2019. Upon completion of the APi Acquisition, each became executive officers of APG. The APi Group board of directors and management were responsible for all decisions regarding executive compensation prior to October 1, 2019, the date of the APi Acquisition.
Compensation Philosophy and Objectives
Our Compensation Committee’s guiding principle when reviewing and determining executive compensation is to assure that the Company’s compensation policies attract and retain the key employees necessary to support the Company’s growth and success, both operationally and strategically, and to motivate executives to achieve short- and long-term goals with the ultimate objective of creating sustainable improvements in shareholder value.
Our executive compensation program, which is comprised of base salary, annual cash incentive compensation and long-term incentive opportunities in the form of equity grants under the Company’s 2019 Equity Incentive Plan, is designed to further the Company’s compensation philosophy and objectives of maintaining a top-tier management team that is competitively compensated and promoting shareholder alignment. The program also seeks to ensure that:
| • | executives are appropriately rewarded for their contributions to our successful performance; |
| • | a significant portion of each executive’s compensation is “at risk” and tied to overall Company, business unit, and individual performance; and |
| • | there is a balance of short and long-term compensation elements to motivate and reward superior performance without encouraging excessive or unnecessary risk taking. |
Executive Compensation Setting Process
Review of the Compensation Committee
Our Board of Directors has adopted a written Compensation Committee Charter that governs the responsibilities of the Compensation Committee. The Compensation Committee is responsible for, among other things, the design, implementation and administration of short- and long-term compensation (including benefits and awards under our 2019 Equity Incentive Plan) for directors, executive officers and other employees. The Compensation Committee is also responsible for reviewing and approving corporate goals and objectives with respect to compensation for the Chief Executive Officer (“CEO”), evaluating the CEO’s performance and approving the CEO’s compensation based on such evaluation.
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When making compensation decisions, the Compensation Committee intends to consider the dynamics of operating in the commercial safety solutions, industrial specialty services and specialty contracting services industries, the importance of rewarding and retaining talented and experienced executives to continue to guide the Company, the alignment of our executive compensation program with stockholders’ interests and the voting guidelines of certain proxy advisory firms and stockholders. In reviewing and determining executive compensation, the Compensation Committee also expects to consider: compensation levels at peer companies, derived from compensation surveys provided by outside consultants; the Company’s past-year performance, growth and relative stockholder return; the results of any say on pay votes by shareholders; achievement of specific pre-established financial goals; a subjective determination of the executives’ past performance and expected future contributions to the Company; and past equity awards granted to such executives.
Peer Group and Market Benchmarking
In designing competitive and appropriate compensation packages for the named executive officers, the Compensation Committee expects to identify a representative peer group in the same or similar industries. Factors used to select our peer group will include industry segment, revenues, profitability, market capitalization and number of employees. The Compensation Committee will consider compensation data and practices of this group of peer companies, as well as current market trends and practices generally.
Use of Outside Consultants
The Compensation Committee expects to retain an outside compensation and benefits consulting firm from time to time to respond directly to the Compensation Committee and its inquiries regarding management pay, compensation design and other related matters. The information from the outside consultant regarding pay practices at other companies will be provided to the Compensation Committee as a resource for their deliberations for executive compensation decisions and will be useful in at least two respects. First, the Compensation Committee recognizes that compensation practices must be competitive in the marketplace. Second, this marketplace information is one of the many factors that management and the Compensation Committee will consider in assessing the reasonableness and appropriateness of our compensation programs. Although at this time we do not intend to target executive compensation to any peer group median, we do intend to strive to provide a compensation package that is competitive in the market and rewards each executive’s performance in executing the strategic and financial goals of the Company.
Role of Executives in Establishing Compensation
We expect our CEO to evaluate the individual performance and the competitive pay positioning of senior management members who report directly to the CEO, including the named executive officers. Our CEO can then make recommendations to the Compensation Committee regarding the target compensation, job leveling and grading for such named executive officers and other senior level employees of the Company.
Components of the Executive Compensation Program
Prior to the APi Acquisition, the primary components of the Company’s executive compensation program consisted of base salary, annual cash incentive compensation and the opportunity to receive stock options. In connection with the APi Acquisition, our Board of Directors approved executive employment agreements for Messrs. Becker and Lydon and an offer of employment for Mr. Grunau (collectively, the “Employment Agreements”) which provide for a base salary, annual cash incentive compensation, annual time- and performance-based equity incentive awards (each, an “LTI Award”) and participation in our employee benefits plans. Although Messrs. Chepey and Polovitz do not have formal employment or employment-related agreements with the Company, they will receive a base salary and may also receive (i) annual incentive compensation based on individual and/or Company performance and/or (2) an LTI awards The Compensation Committee believes that a combination of these components provides these named executive officers with a competitive executive compensation package that serves to motivate and retain the executive while promoting the Company’s pay-for-performance philosophy.
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The Employment Agreements also provide for an initial long-term equity incentive grant (the “Initial Grant”) and a one-time cash transaction bonus for Messrs. Becker and Lydon (the “Transaction Bonus”) relating to the APi Acquisition.
Base Salary
The Compensation Committee believes base salary serves to attract and retain high-quality executives needed to lead our complex business. The Compensation Committee expects to annually review the named executive officers’ base salaries and make appropriate adjustments subject to the terms of any individual employment agreements. Any adjustments will be based on individual responsibilities and performance, internal pay equity, compensation history and executive potential.
Pursuant to their respective Employment Agreements, Mr. Becker is entitled to a base salary of $1.25 million, Mr. Lydon is entitled to a base salary of $825,000 and Mr. Grunau is entitled to a base salary of $340,000, which amounts will be reviewed and adjusted annually by the Compensation Committee. Messrs. Chepey and Polovitz have current base salaries of $300,000 and $275,000, respectively.
Annual Cash Incentive Compensation
Consistent with the Company’s pay-for-performance philosophy, and to promote alignment with stockholders’ interests, the Company expects that, beginning in 2020, a portion of each named executive officer’s compensation will be based on performance against annual individual and Company performance metrics and targets approved by the Compensation Committee annually. Performance metrics will be chosen to reinforce our focus on profitability and enhancement of long-term shareholder value. Performance targets will be designed to be challenging, yet reasonably achievable, in order to incentivize superior performance while maintaining focus on the Company’s long-term growth. The Company expects that target payout opportunities under the Annual Cash Incentive Plan will be based on factors such as the Company’s performance and growth, achievement of specific financial goals and creation of stockholder value, a subjective determination of the executives’ past performance and expected future contributions to the Company and aggregate compensation of persons holding similar positions with comparable companies.
Pursuant to their respective Employment Agreements, Mr. Becker and Mr. Lydon are both eligible to receive an annual cash incentive award with a target incentive opportunity equal to 100% of their annual base salary and a maximum incentive opportunity equal to 200% of their annual base salary, in each case subject to the performance metrics and targets to be established by the Compensation Committee. Messrs. Grunau, Chepey and Polovitz are also expected to participate in any annual cash incentive program established by the Compensation Committee. For 2019, each of Mr. Becker and Mr. Lydon were eligible to receive a full year cash incentive opportunity of $2.0 million and $150,000, respectively, provided that the Company achieves a minimum of $400.0 million of Adjusted EBITDA for fiscal 2019 (calculated in the same manner as used in connection with the closing of the APi Acquisition, and generally defined as EBITDA (net income attributable to APi Group plus interest expenses, income taxes, depreciation and amortization), excluding the impact of certain additional items included in earnings). For 2019, pursuant to his Employment Agreement, Mr. Grunau will be entitled to receive $275,000 under the annual cash incentive program based on Company performance for 2019. The Company achieved $[●] of Adjusted EBITDA in 2019. As a result, Messrs. Becker and Lydon earned $[●] and $[●], respectively, in annual cash incentive compensation for 2019. Messrs. Grunau, Chepey and Polovitz each received $[●], $[●] and $[●] in annual cash incentive program.
LTI Awards
Any LTI Awards granted by the Compensation Committee are intended to align the financial interests of our executives with those of the stockholders of the Company by rewarding stock price appreciation and the achievement of specific pre-established financial metrics over multi-year performance periods, therefore creating long-term stockholder value. We believe that stockholders’ interests are best served by balancing the focus of executives’ decisions between short and long-term measures. We also believe that providing executives with opportunities to acquire significant stakes in the Company’s growth incentivizes and rewards executives for sound business decisions and high-performance team environments, while fostering the accomplishment of short- and
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long-term strategic objectives and improvement in stockholder value, all of which are essential to our ongoing success. We expect our executive officers and other key management personnel to be and remain stockholders in the Company.
All LTI Awards will be granted under the Company’s 2019 Equity Incentive Plan, which was approved by our Board of Directors effective as of October 1, 2019 in connection with the closing of the APi Acquisition, or such other long-term incentive plans, programs and arrangements established and modified from time to time by the Compensation Committee. We expect any LTI Awards will be granted in the form of stock options, restricted stock units, performance shares or other forms of equity or long-term incentive as determined by the Compensation Committee and on terms to be specified by the Compensation Committee in its discretion.
2019 LTI Program
Pursuant to their respective Employment Agreements, Mr. Becker, Mr. Lydon and Mr. Grunau each received an initial grant of 490,000, 150,000 and 48,780 restricted stock units, respectively, which will vest in three equal annual installments on the first, second and third anniversaries of the grant date. The Compensation Committee awarded Messrs. Chepey and Polovitz 19,510 and 24,390 restricted stock units in November 2019. These units will also vest in three equal annual installments.
Messrs. Becker, Lydon, Grunau, Chepey and Polovitz will be eligible to participate in our 2019 Equity Incentive Plan and any other long-term incentive plan, program and/or arrangements applicable to senior-level executives as established and modified from time to time by the Compensation Committee, in its sole discretion. Pursuant to their respective Employment Agreements, Messrs. Becker and Lydon will be awarded time and/or performance based long term compensation awards under the 2019 Equity Incentive Plan and/or such other plans, programs or arrangements having a grant date value of not less than 400% and 185%, respectively, of his then current base salary. The awards will be granted in the form of stock options, restricted stock units, performance shares or other forms of equity or long-term incentive as determined by the Compensation Committee and on terms to be specified by the Compensation Committee in its discretion. All other awards granted to the named executive officers will be made at the discretion of the Compensation Committee on terms and conditions approved by the Compensation Committee.
Benefits and Other Perquisites
We provide employees, including the named executive officers, with a range of employee benefits including life and health insurance, disability benefits and retirement benefits (as described below), that are designed to assist in attracting and retaining skilled employees critical to our long-term success and to be competitive with market practice.
Profit Sharing & 401(k) Plan
Most of our domestic employees, including our named executive officers, are eligible to participate in the Company’s tax-qualified Profit Sharing & 401(k) Plan (the “401(k) Plan”). Pursuant to the 401(k) Plan, employees may elect to contribute a portion of their current compensation to the 401(k) Plan, in an amount up to the statutorily prescribed annual limit. The 401(k) Plan provides the option for the Company to make matching contributions. Participants may also direct the investment of their 401(k) Plan accounts into several investment alternatives.
Company matching contributions allocated to each named executive officer under the 401(k) Plan are shown in the “All Other Compensation” column in the Summary Compensation Table for Fiscal 2019 in the “Executive Compensation” section.
Other Compensation-Related Practices and Policies
Change in Control
The Employment Agreements for our named executive officers provide that if an executive is terminated either without “cause” (as defined in the Employment Agreements) or terminates their employment for “good
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reason” (as defined in the Employment Agreements) during the two-year period immediately following a “change in control” (as defined in the 2019 Equity Incentive Plan), they shall be entitled to certain payments and benefits. See “—Potential Payments Upon Termination or Change in Control.” We believe such change in control provisions serve the best interests of the Company and our stockholders by allowing our executives to exercise sound business judgement without fear of significant economic loss in the event they lose their employment with the Company as a result of a change in control. We also believe that such arrangements are competitive, reasonable and necessary to attract and retain key executives.
Severance
The Employment Agreements provide that if an executive is involuntarily terminated without “cause” or terminates their employment for “good reason”, they shall be entitled to all previously earned and accrued but unpaid amounts of their base salary up to their termination date. Subject to certain conditions, such an executive will also be entitled to severance pay as set forth in their Employment Agreement and described under “—Potential Payments Upon Termination or Change in Control.”
Clawback Policy
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010, required stock exchanges to adopt rules requiring listed companies to develop and implement a policy for recovery (i.e., clawback) of incentive-based compensation from executive officers in the event of the restatement of previously published financial statements resulting from a material accounting error, material noncompliance with financial reporting requirements or violations of U.S. securities laws.
The Company’s 2019 Equity Incentive Plan includes a clawback policy with respect to any equity awards issued thereunder. The Compensation Committee will review, amend or adopt a clawback policy as necessary to ensure compliance with these regulations.
Equity Holding Policy
To ensure strong linkage between the interests of our management team and those of our stockholders, the Compensation Committee may adopt stock ownership guidelines for executive officers. Under such a policy, the executive officers of the Company, including the named executive officers and certain other employees who receive LTI Awards, may be required to meet certain equity holding requirements.
2019 Equity Incentive Compensation Plan
Overview
Effective as of October 1, 2019, our Board of Directors approved the APi Group Corporation 2019 Equity Incentive Plan, hereinafter referred to as our “2019 Plan.” The purpose of our 2019 Plan is to assist our Company and its subsidiaries and other designated affiliates, which we refer to as “Related Entities”, in attracting, motivating, retaining and rewarding high-quality executives and other employees, officers, directors, consultants and other persons who provide services to our Company or its Related Entities, by enabling such persons to acquire or increase a proprietary interest in our Company in order to strengthen the mutuality of interests between such persons and our stockholders, and providing such persons with long term performance incentives to expend their maximum efforts in the creation of shareholder value.
Administration. Our 2019 Plan is to be administered by a committee designated by our Board of Directors consisting of not less than two directors, hereinafter referred to as the “Plan Committee”; provided, however, that except as otherwise expressly provided in the 2019 Plan, our Board of Directors may exercise any power or authority granted to the Plan Committee under our 2019 Plan. The Plan Committee will consist solely of independent directors, each of whom is intended to be, to the extent required by Rule 16b-3 under the Exchange Act, a non-employee director.
Subject to the terms of our 2019 Plan, the Plan Committee is authorized to select eligible persons to receive awards, determine the type, number and other terms and conditions of, and all other matters relating to, awards,
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prescribe award agreements (which need not be identical for each participant), and the rules and regulations for the administration of the 2019 Plan, construe and interpret the 2019 Plan and award agreements, and correct defects, supply omissions or reconcile inconsistencies therein, and make all other decisions and determinations as the Plan Committee may deem necessary or advisable for the administration of our 2019 Plan.
Eligibility. The persons eligible to receive awards under our 2019 Plan are the officers, directors, employees, consultants and other persons who provide services to our Company or any Related Entity. An employee on leave of absence may be considered as still in the employ of our Company or a Related Entity for purposes of eligibility for participation in our 2019 Plan.
Types of Awards. Our 2019 Plan provides for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, bonus stock and awards in lieu of cash compensation, other stock-based awards and performance awards. Performance awards may be based on the achievement of certain business or personal criteria or goals, as determined by the Plan Committee.
Shares Available for Awards; Annual Per-Person Limitations. The total number of ordinary shares of our Company that may be subject to the granting of awards under our 2019 Plan is equal to 17,000,000 shares, of which 15,558,454 are currently available. The foregoing limit shall be increased by the number of shares with respect to which awards granted under our 2019 Plan are forfeited, expire or otherwise terminate without issuance of shares, or that are settled for cash or otherwise do not result in the issuance of shares. Awards issued in substitution for awards previously granted by a company acquired by our Company or a Related Entity, or with which our Company or any Related Entity combines, do not reduce the limit on grants of awards under our 2019 Plan.
The Plan Committee is authorized to adjust outstanding awards (including adjustments to exercise prices of options and other affected terms of awards) in the event that a dividend or other distribution (whether in cash, shares or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the ordinary shares so that an adjustment is appropriate. The Plan Committee is also authorized to adjust performance conditions and other terms of awards in response to these kinds of events or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations, or business conditions.
Description of Awards
Stock Options and Stock Appreciation Rights. The Plan Committee is authorized to grant stock options, including both incentive stock options, which can result in potentially favorable tax treatment to the participant, and non-qualified stock options, and stock appreciation rights entitling the participant to receive the amount by which the fair market value of an ordinary share on the date of exercise exceeds the grant price of the stock appreciation right. The exercise price per share subject to an option and the grant price of a stock appreciation right are determined by the Plan Committee, but must not be less than the fair market value of an ordinary share on the date of grant. For purposes of the 2019 Plan, the term “fair market value” means the fair market value of an ordinary share or other property as determined by the Plan Committee or under procedures established by the Plan Committee. Unless otherwise determined by the Plan Committee, the fair market value of an ordinary share as of any given date shall be the closing sales price per ordinary share of the Company as reported on the principal stock exchange or market on which the ordinary shares are traded on the date as of which such value is being determined or, if there is no sale on that date, then on the last previous day on which a sale was reported. The maximum term of each option or stock appreciation right, the times at which each option or stock appreciation right will be exercisable, and provisions requiring forfeiture of unexercised options or stock appreciation rights at or following termination of employment or other service generally are fixed by the Plan Committee, except that no option or stock appreciation right may have a term exceeding ten years. Methods of exercise and settlement and other terms of the stock appreciation right are determined by the Plan Committee. The Plan Committee, thus, may permit the exercise price of options awarded under the 2019 Plan to be paid in cash, shares (including the withholding of shares otherwise deliverable pursuant to the award), other awards or other property (including loans to participants). Options may be exercised by payment of the exercise price in cash, ordinary shares or other property having a fair market value equal to the exercise price, as the Plan Committee may determine from time to time.
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Restricted Stock and Restricted Stock Units. The Plan Committee is authorized to grant restricted stock and restricted stock units. Restricted stock is a grant of ordinary shares which may not be sold or disposed of, and which shall be subject to such risks of forfeiture and other restrictions as the Plan Committee may impose. A participant granted restricted stock generally has all of the rights of a stockholder of the Company, unless otherwise determined by the Plan Committee. An award of restricted stock units confers upon a participant the right to receive ordinary shares, cash equal to the fair market value of a specified number of ordinary shares, or a combination thereof, as determined by the Plan Committee, at the end of a specified deferral period, subject to such risks of forfeiture and other restrictions as the Plan Committee may impose. Prior to settlement, an award of restricted stock units carries no voting or dividend rights or other rights associated with share ownership, although dividend equivalents may be granted, as discussed below.
Dividend Equivalents. The Plan Committee is authorized to grant dividend equivalents conferring on participants the right to receive, currently or on a deferred basis, cash, ordinary shares, other awards or other property equal in value to dividends paid on a specific number of ordinary shares or other periodic payments. Dividend equivalents may be granted alone or in connection with another award, may be paid currently or on a deferred basis and, if deferred, may be deemed to have been reinvested in additional ordinary shares, awards or otherwise as specified by the Plan Committee.
Bonus Stock and Awards in Lieu of Cash Obligations. The Plan Committee is authorized to grant ordinary shares as a bonus free of restrictions, or to grant ordinary shares or other awards in lieu of Company obligations to pay cash under our 2019 Plan or other plans or compensatory arrangements, subject to such terms as the Plan Committee may specify.
Other Stock-Based Awards. The Plan Committee is authorized to grant awards that are denominated or payable in, valued by reference to, or otherwise based on or related to common shares. The Plan Committee determines the terms and conditions of such awards.
Performance Awards. The Plan Committee is authorized to grant performance awards to participants on terms and conditions established by the Plan Committee. The performance criteria to be achieved during any performance period and the length of the performance period is determined by the Plan Committee upon the grant of the performance award. Performance awards may be valued by reference to a designated number of ordinary shares (in which case they are referred to as performance shares) or by reference to a designated amount of property including cash (in which case they are referred to as performance units). Performance awards may be settled by delivery of cash, shares or other awards, or any combination thereof, as determined by the Plan Committee.
Other Terms of Awards. Awards may be settled in the form of cash, ordinary shares, other awards or other property, in the discretion of the Plan Committee. The Plan Committee may require or permit participants to defer the settlement of all or part of an award in accordance with such terms and conditions as the Plan Committee may establish, including payment or crediting of interest or dividend equivalents on deferred amounts, and the crediting of earnings, gains and losses based on deemed investment of deferred amounts in specified investment vehicles. The Plan Committee is authorized to place cash, shares or other awards in trusts or make other arrangements to provide for payment of our obligations under the 2019 Plan. The Plan Committee may condition any payment relating to an award on the withholding of taxes and may provide that a portion of any ordinary shares or other property to be distributed will be withheld (or previously acquired ordinary shares or other property be surrendered by the participant) to satisfy withholding and other tax obligations. Awards granted under our 2019 Plan generally may not be pledged or otherwise encumbered and are not transferable except by will or by the laws of descent and distribution, or to a designated beneficiary upon the participant’s death, except that the Plan Committee may, in its discretion, permit transfers, subject to any terms and conditions the Plan Committee may impose pursuant to the express terms of an award agreement, and such transfers are by gift or pursuant to a domestic relations order and are to a “permitted assignee” (as defined in the 2019 Plan) that is a permissible transferee under the applicable rules of the SEC for registration of shares of stock on a Form S-8 registration statement.
Awards under our 2019 Plan are generally granted without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from the exercise), except to the extent required by law. The Plan Committee may, however, grant awards in exchange for other awards under our 2019 Plan, awards under other Company plans, or other rights to payment from our Company, and may grant awards in addition to and in tandem with such other awards, rights or other awards.
92
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Minimum Vesting. Except for certain limited situations (including death, disability, retirement, a “change in control” of our Company (as defined in the 2019 Plan), grants to new hires to replace forfeited compensation, grants representing payment of earned performance awards or other incentive compensation, substitute awards, or grants to directors), all awards shall be subject to a minimum vesting period of one year. The Plan Committee may not waive the vesting requirements set forth in the foregoing sentence. The minimum vesting limitations is not required to cover awards representing an aggregate of up to 5% of the maximum number of shares authorized under the 2019 Plan (subject to adjustment as provided under the 2019 Plan).
Acceleration of Vesting; Change in Control. The Plan Committee may, in its discretion, accelerate the exercisability, the lapsing of restrictions or the expiration of deferral or vesting periods of any award, and such accelerated exercisability, lapse, expiration and, if so provided in the award agreement or otherwise determined by the Plan Committee, vesting shall occur in the case of a “change in control” of our Company, as defined in our 2019 Plan. In addition, the Plan Committee may provide in an award agreement that the performance goals relating to any performance award will be deemed to have been met upon the occurrence of any “change in control.”
Amendments, Termination and Governing Law
Amendment and Termination. Our Board of Directors may amend, alter, suspend, discontinue or terminate our 2019 Plan or the Plan Committee’s authority to grant awards without further stockholder approval, except stockholder approval must be obtained for any amendment or alteration if such approval is required by law or regulation or under the rules of any stock exchange or quotation system on which our ordinary shares are then listed or quoted. Thus, stockholder approval may not necessarily be required for every amendment to our 2019 Plan. Our 2019 Plan will terminate at the earliest of (a) such time as no shares remain available for issuance under our 2019 Plan, (b) termination of our 2019 Plan by our Board of Directors, or (c) the tenth anniversary of the effective date of the 2019 Plan. Awards outstanding upon expiration of our 2019 Plan shall remain in effect until they have been exercised or terminated, or have expired.
Governing Law. The validity, construction and effect of the 2019 Plan, any rules and regulations under the 2019 Plan, and any award agreement will be determined in accordance with the laws of the British Virgin Islands (prior to the Domestication) and the laws of the State of Delaware (after the Domestication).
93
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Summary Compensation Table for Fiscal 2019
The following table summarizes the compensation to our named executive officers for the fiscal year ended December 31, 2019, which includes compensation paid by APi Group for the period from January 1, 2019 through September 30, 2019 and by APG for the period of October 1, 2019 through December 31, 2019. The APi Group board of directors and management were responsible for all decisions regarding compensation prior to the October 1, 2019 APi Acquisition.
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
Russell Becker | 2019 | |||||||||||||||||||||||||||||||
President and | ||||||||||||||||||||||||||||||||
Chief Executive Officer | ||||||||||||||||||||||||||||||||
Thomas Lydon | 2019 | |||||||||||||||||||||||||||||||
Chief Financial Officer | ||||||||||||||||||||||||||||||||
Julius Chepey | 2019 | |||||||||||||||||||||||||||||||
Chief Information Officer | ||||||||||||||||||||||||||||||||
Paul Grunau | 2019 | |||||||||||||||||||||||||||||||
Chief Learning Officer | ||||||||||||||||||||||||||||||||
Mark Polovitz | 2019 | |||||||||||||||||||||||||||||||
Vice President and | ||||||||||||||||||||||||||||||||
Controller | ||||||||||||||||||||||||||||||||
| (1) |
|
| (2) |
|
| (3) |
|
Grants of Plan-Based Awards During Fiscal 2019
The table below provides information regarding equity and non-equity awards granted to APG’s named executives during fiscal 2019.
Name | Grant Date | Estimated Possible Payouts under Non-Equity Incentive Plan Awards (1) | All Other Stock Awards: Number of Shares of Stock or Units (#) (2) | Grant Date Fair Value of Stock Awards ($) | ||||||||||||||||||||
| Threshold ($) | Target ($) | Maximum ($) | ||||||||||||||||||||||
Russell Becker | ||||||||||||||||||||||||
Thomas Lydon | ||||||||||||||||||||||||
Julius Chepey | ||||||||||||||||||||||||
Paul Grunau | ||||||||||||||||||||||||
Mark Polovitz | ||||||||||||||||||||||||
| (1) |
|
| (2) |
|
94
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Outstanding Equity Awards at Fiscal 2019 Year End
The following table provides information concerning unvested restricted stock units held by each of our named executive officers as of December 31, 2019.
| Stock Awards | ||||||||||||
Name | Grant Date | Number of Shares or Units of Stock That Have Not Vested (#)(1) | Market Value of Shares or Units of Stock That Have Not Vested ($)(2) | |||||||||
Russell Becker | ||||||||||||
Thomas Lydon | ||||||||||||
Julius Chepey | ||||||||||||
Paul Grunau | ||||||||||||
Mark Polovitz | ||||||||||||
| (1) |
|
| (2) |
|
Options Exercised and Stock Vested During Fiscal 2019
In connection with the consummation of the APi Acquisition on October 1, 2019, all outstanding unvested equity awards (which consisted of options to purchase APi Group common stock) automatically vested and were settled in exchange for the right to receive an amount equal to the excess of the per share APi Acquisition consideration over the strike price of the application options and each was automatically cancelled and terminated. The following table provides information regarding the compensation received by each of our named executive officers from APi Group on October 1, 2019 relating to the settlement of their respective APi Group stock options:
Name | Amount | |||
Russell Becker | ||||
Thomas Lydon | ||||
Julius Chepey | ||||
Paul Grunau | ||||
Mark Polovitz | ||||
95
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Potential Payments Upon Termination or Change in Control
Our Employment Agreements with Messrs. Becker, Lydon and Grunau (each an “Executive,” and collectively “Executives”) provide for severance payments under certain circumstances. Under these Employment Agreements, the Company may terminate Executive’s employment at any time with or without “cause,” as defined in the Employment Agreements, and Executive may terminate employment at any time for “good reason,” as defined in the applicable Employment Agreements. With respect to Messrs. Becker and Lydon, if the Company should terminate Executive without cause or if Executive terminates employment for good reason, Executive would be entitled to receive (i) his base salary for two years from the date of termination, (ii) an amount equal to two times his target annual bonus, paid in two annual installments, assuming all targets are met, (iii) any earned and accrued but unpaid base salary up to the date of termination, (iv) his pro-rata annual bonus for the year in which the termination occurs, (v) any unpaid annual bonus with respect to any completed fiscal year and (vi) his vested employee benefits. Executive would not be entitled to any unearned salary, bonus or other benefits if the Company were to terminate him for cause or if Executive were to terminate employment voluntarily without good reason. With respect to Mr. Grunau, if the Company should terminate Executive without cause, he would be entitled to receive an amount equal to two times his annual base salary, payable in equal installments over a 24-month period.
With respect to Messrs. Becker and Lydon, if the Company should terminate Executive without cause or if Executive terminates employment for good reason during the two-year period immediately following a “change in control,” as defined in the Employment Agreements, then in lieu of any amounts otherwise payable, Executive would be entitled to receive (i) all earned and accrued but unpaid base salary and annual bonus amounts up to the date of termination, (ii) an amount equal to two times his base salary, (iii) an amount equal to two times his target annual bonus, assuming all targets are met, (iv) continued insurance coverage for eighteen months following the date of termination, (v) full and immediate vesting of all outstanding long-term incentive awards, (vi) reasonable legal fees and related expenses as a result of the termination and (vii) outplacement counseling.
With respect to Messrs. Becker and Lydon, if employment should terminate as a result of the death or disability of the Executive, the Executive, or his estate, would be entitled to receive (i) all previously earned and accrued but unpaid base salary up to the date of termination and (ii) his pro-rata annual bonus for the year in which termination occurs. The Company’s obligation under the Employment Agreements with Executives terminates on the last day of the month in which Executive’s death occurs or on the date of termination of employment on account of Executive’s disability.
As neither Mr. Chepey nor Mr. Polovitz has an employment agreement, the only benefits that either would be entitled to receive would be the benefit resulting from the acceleration of his unvested restricted stock units upon a change in control.
The following table shows the estimated benefits payable to each Executive in the event of termination of employment or change in control of the Company. The amounts shown assume that a termination of employment or a change of control occurs on December 31, 2019. The amounts do not include payments or benefits provided under insurance or other plans that are generally available to all full-time employees.
Name | Termination without Cause or for Good Reason ($) | Death or Disability ($) | Change in Control ($) | |||||||||
Russell Becker | ||||||||||||
Cash Severance (1) | ||||||||||||
Intrinsic Value of Equity (2) | ||||||||||||
Insurance Benefits (3) | ||||||||||||
Thomas Lydon | ||||||||||||
Cash Severance (1) | ||||||||||||
Intrinsic Value of Equity (2) | ||||||||||||
Insurance Benefits (3) | ||||||||||||
96
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Julius Chepey | ||||||
Intrinsic Value of Equity (2) | ||||||
Paul Grunau | ||||||
Cash Severance (1) | ||||||
Mark Polovitz | ||||||
Intrinsic Value of Equity (2) | ||||||
| (1) | For Messrs. Becker and Lydon, cash severance includes: (i) base salary for two years and (ii) two times target annual bonus amount. For Mr. Grunau, cash severance includes two times annual base salary. |
| (2) | In the event of termination for death or disability or termination without cause or for good reason during the two-year period immediately following a change in control, the amount includes the immediate vesting of Executive’s restricted stock unit awards. |
| (3) | Amount includes the cost of continuing health insurance for eighteen months. |
CEO Pay Ratio
In a pre-effective amendment to this registration statement, we will disclose, as required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, information about the relationship of the median annual total compensation of our employees and the annual total compensation of our CEO, Mr. Becker for the year ended December 31, 2019.
97
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Since January 1, 2018 through the date of this prospectus, we have not entered into any related party transactions other than (1) transactions between APi Group and its chief executive officer and a former director which were terminated in connection with the APi Acquisition and (2) as set forth below:
Advisory Services Agreement
On October 1, 2019, APG entered into an Advisory Services Agreement with Mariposa Capital, LLC, an affiliate of Mr. Franklin. Under this agreement, Mariposa Capital, LLC agreed to provide certain services, including corporate development and advisory services, advisory services with respect to mergers and acquisitions, investor relations services, strategic planning advisory services, capital expenditure allocation advisory services, strategic treasury advisory services and such other services relating to APG as may from time to time be mutually agreed. In connection with these services, Mariposa Capital, LLC is entitled to receive an annual fee equal to $4,000,000, payable in quarterly installments. The initial term of this agreement will terminate on October 1, 2020 and will be automatically renewed for successive one-year terms unless either party notifies the other party in writing of its intention not to renew this agreement no later than 90 days prior to the expiration of the term. This agreement may only be terminated by APG upon a vote of a majority of our directors. In the event that this agreement is terminated by APG, the effective date of the termination will be six months following the expiration of the initial term or a renewal term, as the case may be.
Placing Agreement
On October 5, 2017, we entered into a Placing Agreement (the “Placing Agreement”) with Mr. Franklin, Mr. Lillie, Mr. Ashken, Lord Myners and the other then non-founder independent directors, and the Founder Entity, and Citigroup Global Markets Limited and UBS Limited (together, the “Placing Agents”), in connection with our October 2017 public offering, pursuant to which the Placing Agents procured subscribers for APG BVI’s ordinary shares (with matching warrants), other than the ordinary shares that were subscribed for by the Founder Entity. Under the Placing Agreement, each of the directors and the Founder Entity agreed that they would not, without the prior written consent of the Placing Agents, offer, sell, contract to sell, pledge or otherwise dispose of any ordinary shares or warrants (or any preferred shares in the case of Founder Entity) which they held directly or indirectly in J2, for a period commencing on the date of the Placing Agreement and ending one year after the completion of the APi Acquisition.
Registration Rights
The Company has agreed to provide Mr. Franklin, Mr. Lillie, Mr. Ashken and the Founder Entity with certain registration rights that require the Company to provide them with such information and assistance following the APi Acquisition, subject to the restrictions described in the paragraph above and customary exceptions, as they may reasonably request to enable it to effect a disposition of all or part of their ordinary shares or warrants, including, without limitation, the preparation, qualification and approval of a prospectus in respect of such ordinary shares or warrants.
In connection with the Warrant Financing, each of the Founder Entity and entities managed by Viking Global Investors LP, a beneficial owner of more than 5% of the Company’s issued and outstanding common shares, irrevocably committed to exercise their respective APG Warrants. In exchange for such commitment, the Company agreed, among other things, that when requested by written notice (delivered not earlier than three months following the APi Acquisition), the Company would use commercially reasonable efforts to promptly enter into a customary registration rights agreement with such entity, which agreement will provide for customary registration rights (subject to customary exceptions) with respect to the ordinary shares, or any other equity interests later acquired by the undersigned in exchange for the ordinary shares in connection with a recapitalization, redomiciliation or similar transaction.
98
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Additional Stock Issuances to Our Founder Entity, Certain Directors and Executive Officer
On October 1, 2019, in connection with the closing of the Warrant Financing, we issued and sold at $10.25 per share (1) 3,333,333 ordinary shares to the Founder Entity, (2) 8,333,333 ordinary shares to Viking Global Opportunities Liquid Portfolio Sub-Master LP, (3) 3,333 ordinary shares to Lord Paul Myners and (4) 2,500 ordinary shares to each of Thomas V. Milroy, Rory Cullinan and Jean-Marc Huët.
On October 1, 2019, in connection with the closing of the APi Acquisition, we issued and sold 59,500 ordinary shares at $10.25 per share to Thomas Lydon, Chief Financial Officer, for a total purchase price of $609,875.
Policy Concerning Related Party Transactions
The Board of Directors has determined that the Audit Committee is best suited to review and approve or ratify transactions with related persons, in accordance with the policy set forth in the Audit Committee Charter. Such review will apply to any transaction or series of related transactions or any material amendment to any such transaction involving a related person and the Company or any subsidiary of the Company. For purposes of the policy, “related persons” will consist of executive officers, directors, director nominees, any stockholder beneficially owning more than 5% of the issued and outstanding common stock, and immediate family members of any such persons. In reviewing related person transactions, the Audit Committee will take into account all factors that it deems appropriate, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction. No member of the Audit Committee will be permitted to participate in any review, consideration or approval of any related person transaction in which the director or any of his immediate family member is the related person.
99
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The following table sets forth certain information regarding (1) all shareholders known by the Company to be the beneficial owners of more than 5% of the Company’s issued and outstanding ordinary shares and (2) each director, each named executive officer and all directors and named executive officers as a group, together with the approximate percentages of issued and outstanding ordinary shares owned by each of them. Percentages are calculated based upon shares issued and outstanding plus shares which the holder has the right to acquire under share options or warrants exercisable within 60 days. Unless otherwise indicated, amounts are as of [●], 2020 and each of the shareholders has sole voting and investment power with respect to the ordinary shares beneficially owned, subject to community property laws where applicable. As of [●], 2020, we had [●] APG ordinary shares issued and outstanding.
Unless otherwise indicated, the address of each person named in the table below is c/o APi Group, Inc., 1100 Old Highway 8 NW, New Brighton, MN 55112.
| Ordinary shares beneficially owned | ||||||||
Beneficial Owner | Number | % | ||||||
More than 5% Shareholders: | ||||||||
Mariposa Acquisition IV, LLC(1) | (2 | ) | ||||||
Senator Investment Group LP(3) | (4 | ) | ||||||
Viking Global Investors LP(5) | ||||||||
Permian Investment Partners, L.P.(6) | ||||||||
APi Group, Inc. Employee Stock Ownership Plan(7) | ||||||||
Named Executive Officers and Directors: | ||||||||
Martin E. Franklin | (2 | ) | ||||||
James E. Lillie | (8 | ) | ||||||
Ian G. H. Ashken | (8 | ) | ||||||
Russell Becker | (9 | ) | ||||||
Julius Chepey | ||||||||
Paul Grunau | ||||||||
Thomas Lydon | (10 | ) | ||||||
Thomas V. Milroy | (11 | ) | ||||||
Anthony E. Malkin | ||||||||
Lord Paul Myners | (12 | ) | ||||||
Mark Polovitz | ||||||||
Cyrus D. Walker | ||||||||
Carrie A. Wheeler | ||||||||
All executive officers and directors as a group (13 persons) | (13 | ) | ||||||
| * | Represents beneficial ownership of less than one percent (1%) of our outstanding ordinary shares. |
| (1) | The address for Mariposa Acquisition IV, LLC is c/o Mariposa Capital LLC, 500 South Pointe Drive, Suite 240, Miami Beach, FL 33139. |
| (2) | This amount includes (i) [●] APG ordinary shares and (ii) 4,000,000 APG ordinary shares issuable upon conversion of Founder Preferred Shares, which are convertible at any time at the option of the holder into APG ordinary shares on a one-for-one basis. The reported securities are held by Mariposa Acquisition IV, LLC. Mr. Franklin owns or controls, directly or indirectly, [●]% of Mariposa Acquisition IV, LLC representing [●] APG ordinary shares and [●] Founder Preferred Shares. |
| (3) | Based on a Form TR-1 filed by Senator Investment Group LP as of October 12, 2017. The address for Senator Investment Group LP is 510 Madison Avenue, 28th Floor, New York, NY 10022. |
| (4) | This amount includes (i) [●] APG ordinary shares and (ii) [●] APG ordinary shares underlying [●] APG warrants to purchase ordinary shares, which are exercisable at any time at the option of the holder at a rate of three APG warrants for one APG ordinary share. |
| (5) | Based on a Form TR-1 filed by Viking Global Investors LP on October 2, 2019. The address for Viking Global Investors LP is 55 Railroad Avenue, Greenwich, CT 06830. |
100
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| (6) | Based on a Form TR-1 filed by Permian Investment Partners, L.P. on October 3, 2019. The address for Permian Investment Partners, L.P. is [●]. |
| (7) | These ordinary shares are held by the APi Group, Inc. Employee Stock Ownership Plan for the benefit of the employees of APi Group. The trustee of the APi Group, Inc. Employee Stock Ownership Plan is GreatBanc Trust Company. The address for the APi Group, Inc. Employee Stock Ownership Plan is c/o GreatBanc Trust Company, Trustee, 901 Warrenville Road, Suite 500, Lisle, Illinois 60532. |
| (8) | Messrs. Ashken and Lillie have an indirect pecuniary interest in Mariposa Acquisition IV, LLC, but they have no voting or dispositive power over such shares. Mr. Ashken’s pecuniary interest in such entity represents [●] APG ordinary shares and [●] Founder Preferred Shares and Mr. Lillie’s pecuniary interest in such entity represents [●] APG ordinary shares and [●] Founder Preferred Shares. |
| (9) | This amount does not include approximately [●] ordinary shares held in the APi Group, Inc. Employee Stock Ownership Plan, which has been terminated effective upon the APi Acquisition. |
| (10) | This amount does not include approximately [●] ordinary shares held in the APi Group, Inc. Employee Stock Ownership Plan, which has been terminated effective upon the APi Acquisition. |
| (11) | This amount includes (i) 10,000 APG ordinary shares and (ii) 37,500 APG ordinary shares underlying options to purchase ordinary shares, pursuant to an Option Deed, which are exercisable at any time at the option of the holder. |
| (12) | This amount includes (i) 13,333 APG ordinary shares and (ii) 50,000 APG ordinary shares underlying options to purchase ordinary shares, pursuant to an Option Deed, which are exercisable at any time at the option of the holder. |
| (13) | This amount includes an aggregate of [●] APG ordinary shares issuable upon conversion of Founder Preferred Shares or exercise of options to purchase APG ordinary shares that are convertible or exercisable within 60 days after [●], 2020. |
101
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
DESCRIPTION OF CAPITAL STOCK; COMPARISON OF RIGHTS
The following description of the APG Delaware capital stock (common and preferred) reflects our capital stock as it will exist from and after the effectiveness of the Domestication, as governed by our new certificate of incorporation and bylaws and by Delaware law. We also identify the material differences between the current rights of shareholders of APG BVI, a BVI limited liability entity, and the rights that the stockholders of APG Delaware will have once APG is a Delaware corporation. These descriptions are a summary only. We urge you to read the forms of the new certificate of incorporation and bylaws of APG Delaware in their entirety, which are attached as Appendix B and Appendix C, respectively, to this prospectus.
General
We currently are a company incorporated with limited liability under the laws of the British Virgin Islands and are registered with the Registrar of Corporate Affairs of the British Virgin Islands under registration number 1955622. We were incorporated in the British Virgin Islands on September 18, 2017 under the name J2 Acquisition Limited, and we changed our name to APi Group Corporation in connection with the APi Acquisition.
Authorized Share Capital
Until the effectiveness of the Domestication, APG will not exist as a Delaware entity and therefore will not have any Delaware capital stock. Upon effectiveness of the Domestication, APG Delaware’s authorized capital stock will consist of [●] shares of common stock, par value $0.0001 per share, and [●] shares of preferred stock, par value $0.0001 per share, of which 4,000,000 will be designated Series A Preferred Stock (the “Series A Preferred Stock”).
As of November 30, 2019, APG BVI had 169,902,260 ordinary shares issued and outstanding, and 4,000,000 Founder Preferred Shares issued and outstanding.
As of November 30, 2019, APG BVI had reserved 17,000,000 of its unlimited authorized ordinary shares for issuance under its existing share-based compensation and other benefit plans, subject to increase in accordance with the terms of such plans, and upon effectiveness of the Domestication, APG Delaware will reserve a similar number of its [●] authorized shares of common stock for such issuances.
APG Delaware Common Stock
Voting. Except as otherwise required by applicable law or as provided by the APG Delaware certificate of incorporation, including matters required to be submitted solely to a vote of the holders of Series A Preferred Stock (or any other series of preferred stock of APG Delaware then outstanding), each holder of APG Delaware common stock will be entitled to one vote for each share of APG Delaware common stock owned of record on all matters submitted to a vote of stockholders of APG Delaware. Except as otherwise required by applicable law or as provided by the APG Delaware certificate of incorporation, including matters required to be submitted solely to a vote of the holders of Series A Preferred Stock (or any other series of preferred stock of APG Delaware then outstanding), holders of APG Delaware common stock (as well as holders of any series preferred stock then outstanding and entitled to vote together with the holders of APG Delaware common stock, including the Series A Preferred Stock) will vote together as a single class on all matters presented to the APG Delaware stockholders for their vote or approval, including the election of directors. There will be no cumulative voting rights with respect to the election of directors or any other matters submitted to a vote of the stockholders of APG Delaware.
Dividends and distributions. Subject to applicable law and the rights of the holders of Series A Preferred Stock and the rights, if any, of the holders of any other series of preferred stock of APG Delaware then outstanding, the holders of APG Delaware common stock will have the right to receive dividends and distributions, whether payable in cash or otherwise, as may be declared from time to time by the APG Delaware board of directors from amounts legally available therefor.
102
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Liquidation, dissolution or winding up. Subject to applicable law and the rights, if any, of the holders of any series of preferred stock of APG Delaware then outstanding, including the Series A Preferred Stock, in the event of the liquidation, dissolution or winding-up of APG Delaware, holders of its common stock will be entitled to share ratably in proportion to the number of shares of common stock held by them in the assets of APG Delaware available for distribution after payment or reasonable provision for the payment of all creditors of APG Delaware.
Redemption, conversion or preemptive rights. Holders of APG Delaware common stock will have no redemption rights, conversion rights or preemptive rights to subscribe to any or all additional issues of APG Delaware shares or securities convertible into APG Delaware capital stock.
Other provisions. There will be no redemption provisions or sinking fund provisions applicable to the common stock of APG Delaware.
The designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of the holders of the APG Delaware common stock will be subject to, and may be adversely affected by, the designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of the holders of any series of preferred stock of APG Delaware then outstanding, including the Series A Preferred Stock.
Shares Reserved For Future Issuances
Outstanding Warrants. As of November 30, 2019, there were 64,546,077 warrants outstanding, each warrant conferring the right to subscribe for one-third of an APG ordinary share (the “APG Warrants”). The APG Warrants were issued pursuant to that Warrant Instrument executed by J2 on October 5, 2017 (as supplemented, amended or amended and restated, the “APG Warrant Instrument”). Each APG Warrant entitles the registered holder (an “APG Warrantholder”) to subscribe for one-third of an APG BVI ordinary share upon exercise at a price of $11.50 per whole APG BVI ordinary share (subject to any prior adjustment in accordance with the terms and conditions set out in the APG Warrant Instrument and discussed below) at any time during the Subscription Period (defined below). Upon the effectiveness of the Domestication, the APG Warrants will be exercisable into the right to acquire the same portion of a share of APG Delaware common stock.
Outstanding APG Warrants are exercisable until 5:00 p.m. London time on October 1, 2022 (provided that if such day is not a trading day, the trading day immediately following such day), unless earlier redeemed in accordance with the APG Warrant Instrument and as described below (the “Subscription Period”). Subject to any such prior adjustment, each APG Warrantholder will be required to hold and validly exercise three APG Warrants in order to receive one APG BVI ordinary share (prior to the effectiveness of the Domestication) or one share of APG Delaware common stock (after the effectiveness of the Domestication).
The APG Warrants are subject to mandatory redemption. APG may call the APG Warrants for redemption:
| • | in whole but not in part, |
| • | at a price of $0.01 per APG Warrant, |
| • | upon not less than 20 days’ prior written notice of redemption to each APG Warrantholder, |
| • | if, and only if, the “Average Price” (as defined in the APG Warrant Instrument) of the APG BVI ordinary shares (prior to the effectiveness of the Domestication) or shares of APG Delaware common stock (after the effectiveness of the Domestication) equals or exceeds $18.00 per share (subject to any prior adjustment in accordance with the terms and conditions set out in the APG Warrant Instrument) for any 10 consecutive trading days. |
The right to exercise the APG Warrants will be forfeited unless the APG Warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of one or more APG Warrants will have no further rights except to receive the redemption price for such holder’s APG Warrants upon
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surrender of such APG Warrants. The redemption criteria for the APG Warrants has been established at a price which is intended to provide APG Warrantholders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing price of APG BVI ordinary shares (prior to the effectiveness of the Domestication) or shares of APG Delaware common stock (after the effectiveness of the Domestication) and the exercise price of the APG Warrants so that if the share price declines as a result of the redemption call, the redemption will not be expected to cause the share price to drop below the exercise price of the APG Warrants.
The exercise price and number of shares issuable on exercise of the APG Warrants may be adjusted in certain circumstances including in the event of a stock dividend or distribution, recapitalization, consolidation, combination or stock split. However, the APG Warrants will not be adjusted for issuances of shares at a price below the exercise price of the APG Warrants.
Subject to the terms and conditions of the APG Warrant Instrument, each of the APG Warrants will be transferable by an instrument of transfer in any usual or common form, or in any other form which may be approved by the APG Delaware board of directors. No transfer of any of the APG Warrants to any person will be registered without the consent of APG if it would constitute a transfer to a Prohibited Person (as defined in the APG Warrant Instrument).
The APG Warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration of the Subscription Period at the offices of the Receiving Agent (as defined in the APG Warrant Instrument), with the subscription notice form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price in cleared funds for the number of whole shares being acquired with respect to the APG Warrants being exercised. The APG Warrantholders do not have the rights or privileges of holders of shares until they exercise their warrants and receive shares. After the issuance of APG BVI ordinary shares upon exercise of the APG Warrants prior to the effectiveness of the Domestication, each holder will be entitled to one vote for each whole APG BVI ordinary share held of record on all matters to be voted on by shareholders. After the issuance of shares of APG Delaware common stock upon exercise of the APG Warrants after the effectiveness of the Domestication, each holder will be entitled to one vote for each whole share of APG Delaware common stock held of record on all matters to be voted on by the holders of APG Delaware common stock.
No fractional shares will be issued upon exercise of the APG Warrants. Accordingly, no APG Warrants are exercisable unless a sufficient number of APG Warrants are exercised to equal a whole number of shares upon such exercise. In addition, no fraction of an APG Warrant will be issued or returned to the APG Warrantholder following exercise and any such fraction, determined after aggregation of all APG Warrants being exercised by such holder, will lapse and be cancelled.
Outstanding Options. As of November 30, 2019, there were 162,500 options exercisable to purchase the same number of APG BVI ordinary shares, at an exercise price of $11.50 per share, pursuant to the Option Deeds, which are exercisable at any time at the option of the holder. Upon the effectiveness of the Domestication, such options will be converted into the right to acquire shares of APG Delaware common stock. Such options have a term of five years and an exercise price of $11.50 per share. The exercise price and number of shares issuable on exercise of such options may be adjusted in certain circumstances including in the event of a stock dividend or distribution, a subdivision or consolidation or other variation to shares. Holders of APG options do not have the rights or privileges of holders of shares until they exercise their options and receive shares. After the issuance of APG BVI ordinary shares upon exercise of the APG options prior to the effectiveness of the Domestication, a holder will be entitled to one vote for each whole APG BVI ordinary share held of record on all matters to be voted on by shareholders. After the issuance of shares of APG Delaware common stock upon exercise of the APG Warrants after the effectiveness of the Domestication, a holder will be entitled to one vote for each whole share of APG Delaware common stock held of record on all matters to be voted on by the holders of shares of APG Delaware common stock.
Outstanding Restricted Stock Units. As of November 30, 2019, there were 1,441,546 unvested restricted stock units held by employees and directors which vest and settle into the same number of APG BVI ordinary shares based on the vesting schedule applicable to the restricted stock unit awards. Upon the effectiveness of the Domestication, the unvested restricted stock units will be converted into the right to receive the same number of
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shares of APG Delaware common stock based on the vesting schedule applicable to the restricted stock unit awards. The restricted stock units generally vest in three equal annual installments for employees and upon the first anniversary of the grant date for directors. The number of shares issuable upon vesting and settlement of the restricted stock units may be adjusted in certain circumstances including in the event of a stock dividend or distribution, recapitalization, combination or stock split. Holders of APG restricted stock units do not have the rights or privileges of holders of shares until their restricted stock units are vested and they receive shares.
Preferred Stock
Blank Check Preferred. Under the new APG Delaware certificate of incorporation, without stockholder approval, the APG Delaware board of directors will be authorized by resolution to create and issue one or more series of preferred stock of APG Delaware (in addition to the Series A Preferred Stock), and, with respect to each such series, to determine the number of shares constituting the series and the designations and the powers (including voting powers), preferences and rights, if any, which may include dividend rights, conversion or exchange rights, redemption rights and terms and liquidation preferences, and the qualifications, limitations and restrictions, if any, of the series. The APG Delaware board of directors may therefore create and issue one or more new series of preferred stock with voting power and preferences and rights that could adversely affect the holders of APG Delaware common stock and which could have certain anti-takeover effects. Before APG Delaware may issue any new series of preferred stock, its board of directors will be required to adopt resolutions creating and designating such series of preferred stock and certificate of designations setting forth a copy of such resolutions will be required to be executed, acknowledged and filed with the Secretary of State of the State of Delaware.
Series A Preferred Stock. Prior to the Domestication, APG had 4,000,000 Founder Preferred Shares outstanding. In connection with the Domestication, each Founder Preferred Share will be converted into one share of Series A Preferred Stock. The designations and the powers, preferences and rights, and the qualifications, limitations and restrictions of the Series A Preferred Stock are set forth in the form of the new APG Delaware certificate of incorporation attached to this prospectus.
Dividends. Subject to applicable law and the rights, if any, of any series of preferred stock of APG Delaware then outstanding ranking senior to the Series A Preferred Stock as to dividends and on parity with the rights, if any, of any series of APG Delaware preferred stock then outstanding ranking on parity with the Series A Preferred Stock and, at any time on or after the consummation of the APi Acquisition, if the Average Price (as defined in the APG Delaware certificate of incorporation) per share of APG Delaware common stock (subject to adjustment in accordance with the APG Delaware certificate of incorporation) is $11.50 or more for any ten consecutive trading days, the holders of the Series A Preferred Stock will be entitled to receive, in respect of each Dividend Year (as defined below), in the aggregate, the “Annual Dividend Amount,” which is calculated as follows (the “Annual Dividend Amount”):
A X B, where:
A = an amount equal to 20% of the increase (if any) in the value of a share of APG Delaware common stock, such increase calculated as being the difference between (i) the Average Price (as defined in the APG Delaware certificate of incorporation) per share of APG Delaware common stock over the last ten consecutive trading days of the Dividend Year for such Dividend Year (the “Dividend Price”) and (ii) (x) if no Annual Dividend Amount has previously been paid, a price of $10.00 per share of APG Delaware common stock, or (y) if an Annual Dividend Amount has previously been paid, the highest Dividend Price for any prior Dividend Year (subject to adjustment in accordance with the APG Delaware certificate of incorporation); and
B = 141,194,638 shares, being a number of shares of APG Delaware common stock equal to the number of APG ordinary shares outstanding immediately following the APi Acquisition, including any APG ordinary shares issued pursuant to the exercise of APG Warrants, but excluding any APG ordinary shares issued to shareholders or other beneficial owners of APi Group, Inc. in connection with the APi Acquisition, which such number of shares is subject to adjustment as provided in the APG Delaware certificate of incorporation) (the “Series A Preferred Dividend Equivalent”).
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“Dividend Year” means, if the Domestication occurs on or before December 31, 2019, September 1, 2018 to December 31, 2019, and thereafter the calendar year or such other financial year (which may be twelve months or any longer or shorter period) as determined by the APG Delaware board of directors, except that (i) in the event of APG Delaware’s dissolution, the relevant Dividend Year will end on the trading day immediately prior to the date of dissolution and (ii) in the event of the automatic conversion of shares of Series A Preferred Stock of APG Delaware into shares of common stock of APG Delaware, the relevant Dividend Year will end on the trading day immediately prior to the date of such automatic conversion.
The Annual Dividend Amount is payable in shares of APG Delaware common stock or cash, as determined by the APG Delaware board of directors. Each Annual Dividend Amount will be divided between the holders of Series A Preferred Stock pro rata to the number of Series A Preferred Stock held by them on the last day of the relevant Dividend Year (the “Dividend Date”). If the APG board of directors determines to pay the Annual Dividend Amount in shares of APG Delaware common stock, the Annual Dividend Amount will be paid no later than ten trading days after the Dividend Date (except in respect of any Annual Dividend Amount becoming due on the trading day immediately prior to the commencement of APG Delaware’s dissolution, in which case payment will be made on such trading day) by the issue to each holder of Series A Preferred Stock of such number of shares of APG Delaware common stock as is equal to the pro rata amount of the Annual Dividend Amount to which they are entitled, divided by the relevant Dividend Price.
Subject to applicable law and the rights, if any, of any series of preferred stock of APG Delaware then outstanding ranking senior to the Series A Preferred Stock as to dividends and on parity with the common stock of APG Delaware and any series of preferred stock of APG Delaware ranking on parity with such common stock, (i) a dividend per share of Series A Preferred Stock equal to the product obtained by multiplying the number of shares of APG Delaware common stock into which such shares of Series A Preferred Stock could then be converted, by the dividend payable on each such share of common stock, and (ii) a dividend per share of Series A Preferred Stock equal to the amount determined by dividing an amount equal to 20% of the dividend which would be distributable on such number of shares of APG Delaware common stock equal to the Series A Preferred Dividend Equivalent, by the number of shares of Series A Preferred Stock outstanding.
Conversion
Automatic Conversion. The Series A Preferred Stock will be automatically converted into shares of APG Delaware common stock on a one-for-one basis (subject to adjustment in accordance with the APG Delaware certificate of incorporation) on the last day of the seventh full financial year of APG Delaware following October 1, 2019 (or if such date is not a trading day, the first trading day immediately following such date) (the “Automatic Conversion”).
Optional Conversion. By notice in writing to APG Delaware, a holder of Series A Preferred Stock will be able to convert some or all of such holder’s Series A Preferred Stock into an equal number of shares of APG Delaware common stock (subject to adjustment in accordance with the APG Delaware certificate of incorporation) and, in such circumstances, the shares of Series A Preferred Stock that were subject to such notice will be converted into shares of APG Delaware common stock on the fifth trading day after receipt by APG Delaware of such written notice (the “Optional Conversion”). In the event of an Optional Conversion, no relevant portion of the Annual Dividend Amount will be payable in respect of those shares of Series A Preferred Stock that are converted into shares of APG Delaware common stock for the Dividend Year in which the date of the Optional Conversion occurs.
Voting Rights. Each holder of Series A Preferred Stock will be entitled to one vote per share of Series A Preferred Stock on all matters submitted to a vote of stockholders of APG Delaware generally, together with holders of APG Delaware common stock as a single class. The holders of Series A Preferred Stock will also have the right to vote separately as a single class on any amendment to the APG Delaware certificate of incorporation, whether by merger, consolidation or otherwise, that would alter or change the powers, preferences or rights or the qualifications, limitations or restrictions of the Series A Preferred Stock so as to affect them adversely and as provided by applicable Delaware law.
Nomination Rights. For so long as the initial holder of the Series A Preferred Stock or one of its affiliates or permitted transferees holds 20% or more of such shares, such holder will be entitled to nominate up to three individuals to serve on the APG Delaware Board of Directors. The Founder Entity has notified us that it does not currently intend to exercise its designation right.
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Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Registration Rights
In connection with the Warrant Financing, each of the Founder Entity and entities managed by Viking Global Investors LP, a beneficial owner of more than 5% of the Company’s issued and outstanding APG BVI ordinary shares, irrevocably committed to exercise their respective APG Warrants. In exchange for such commitment, the Company agreed, among other things, that when requested by written notice (delivered not earlier than three months following the APi Acquisition), the Company would use commercially reasonable efforts to promptly enter into a customary registration rights agreement with such entity, which agreement will provide for customary registration rights with respect to the APG BVI ordinary shares, or any other equity interests later acquired by the undersigned in exchange for such ordinary shares in connection with a recapitalization, redomiciliation or similar transaction, which includes the shares of APG Delaware common stock received by such entity in connection with the Domestication.
In addition, the Placing Agreement also provides Mr. Franklin, Mr. Lillie, Mr. Ashken and the Founder Entity with certain registration rights that require the Company to provide them with such information and assistance following the APi Acquisition, subject to the restrictions described in the paragraph above, as they may reasonably request to enable it to effect a disposition of all or part of their APG BVI ordinary shares or APG BVI Warrants, including, without limitation, the preparation, qualification and approval of a prospectus in respect of such APG BVI ordinary shares or APG Warrants.
BCA Seller Lockup
Under the BCA, each of the sellers who received shares pursuant to the BCA agreed not to offer, pledge, sell or otherwise transfer or dispose of any such shares until [●], 2020, which is the date that is 90 days from the date of listing of our shares on the NYSE, without our prior written consent (subject to customary exceptions). In addition, the trustee of the APi Group, Inc. Employee Stock Ownership Plan has agreed that during this period (except in connection with the satisfaction of certain indemnification obligations) it will not effect any transfers or distributions of shares to any of its participants.
Comparison of Rights
The rights of APG BVI’s shareholders are currently governed by the BVI Companies Act and APG BVI’s Amended and Restated Memorandum and Articles of Association (the “APG BVI Articles”). At the Effective Time, the shareholders of APG BVI holding ordinary shares will automatically receive shares of APG Delaware common stock. Accordingly, after the Domestication, the rights of the holders of APG Delaware common stock will be governed by Delaware law and APG Delaware’s certificate of incorporation and bylaws. The following discussion summarizes material differences between the current rights of holders of APG BVI ordinary shares under the BVI Companies Act and the APG BVI Articles and the rights of the holders of APG Delaware common stock under Delaware law and APG Delaware’s certificate of incorporation and bylaws.
Provision | APG BVI | APG Delaware | ||
| Authorized Capital | Unlimited number of ordinary shares and preferred shares, no par value per share. | [●] shares of common stock, $0.0001 par value per share, and [●] shares of preferred stock, $0.0001 par value per share, of which shares of preferred stock, 4,000,000 shares will be designated as Series A Preferred Stock. | ||
| Preferred (Preference) Shares | Directors may issue one or more classes of preferred shares with preferences and other designations as | The APG Delaware certificate of incorporation will empower the APG Delaware board of directors to, by | ||
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Provision | APG BVI | APG Delaware | ||
| they determine, in accordance with the BVI Companies Act and the APG BVI Articles. Other than the ability pursuant to the APG BVI Articles for directors to issue preferred shares as Founder Preferred Shares, this action requires an amendment to the APG BVI Articles. | resolution, create and issue one or more series of preferred stock and, with respect to such series, determine the number of shares constituting the series and the designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of the series. | |||
| Amendments to Organizational Documents (i.e., APG BVI Articles and APG Delaware certificate of incorporation and bylaws) | Amendments to the APG BVI Articles may be made by resolution of the directors (in limited circumstances) or by the shareholders (holders of ordinary shares and Founder Preferred Shares), provided that in the case of amendment by directors such amendment may only be made where the directors, in their discretion (acting in good faith) determine such amendment to be necessary or desirable in connection with or resulting from the APi Acquisition (including at any time after the APi Acquisition was consummated), including in connection with admission to listing on the NYSE and provided such amendment doesn’t have a materially adverse effect on the rights attaching to any class of shares as set out in the APG BVI Articles, unless the shareholders of the affected class consent in accordance with the APG BVI Articles. | Pursuant to Delaware law, amendments to the APG Delaware certificate of incorporation will be required to be approved by the APG Delaware board of directors and by the holders of at least a majority of the outstanding stock entitled to vote on the amendment, and if applicable, by the holders of at least a majority of the outstanding stock of each class or series entitled to vote on the amendment as a separate class or series. As permitted by Delaware law, the APG Delaware certificate of incorporation will require the prior vote or consent of the holders of at least a majority of the shares of Series A Preferred Stock then outstanding, voting or consenting as a separate class, to amend the APG Delaware certificate of incorporation, whether by merger, consolidation or otherwise, if such amendment would alter or change the powers, preferences or rights or the qualifications, limitations or restrictions of the Series A Preferred Stock so as to affect them adversely. As permitted by Delaware law, the APG Delaware certificate of incorporation will require the vote of the holders of at least two-thirds of the outstanding stock entitled to vote to amend the APG Delaware bylaws.
As permitted (but not required) by Delaware law, the APG Delaware certificate of incorporation will confer upon the APG Delaware board of directors the power to amend the APG Delaware bylaws. | ||
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Provision | APG BVI | APG Delaware | ||
| Voting Rights | Each ordinary share has one vote for each share. Each Founder Preferred Share has one vote for each share. | Each share of APG Delaware common stock will be entitled to one vote for each share. Each share of Series A Preferred Stock will be entitled to one vote for each share. | ||
| Directors are elected by a resolution of directors to fill a vacancy or appoint an additional director or by a vote of shareholders. See “—Directors—Election/Appointment” below for information regarding the Founder Entity’s right to nominate and have appointed up to three directors. | The APG Delaware bylaws will provide that directors are elected by majority of the votes cast (rather than the plurality of votes otherwise provided by Delaware law), and in contested elections, by plurality of the votes cast. See “—Directors—Election/Appointment” below for information regarding the Founder Entity’s right to nominate up to three individuals to serve on the APG Delaware Board of Directors. All other matters submitted to stockholders will be decided by the affirmative vote of a majority of the votes cast with respect to such matter unless otherwise specified by the APG Delaware certificate of incorporation or bylaws, Delaware law or the rules or regulations of an exchange upon which the securities of APG Delaware are listed. | |||
| Redemption of Shares; Treasury Shares | Shares may be repurchased as determined by the board subject to shareholder consent. There are no capital limitations in the BVI Companies Act. | Pursuant to Delaware law, shares may be repurchased or otherwise acquired, subject to the solvency restrictions of Delaware law, and except that shares subject to redemption at the option of APG Delaware may not be repurchased at a price which exceeds the price at which they could then be redeemed. | ||
| APG BVI may hold or sell treasury shares. | Pursuant to Delaware law, APG Delaware may hold or sell treasury shares. | |||
| Shareholder/Stockholder Written Consent | Pursuant to British Virgin Islands law, any action required to be taken by meeting of shareholders may be taken without meeting if consent is in writing and is signed by a majority of the shareholders entitled to vote if permitted by the articles of association. The APG BVI Articles provide for such consent in writing. | The APG Delaware certificate of incorporation will provide that, except for actions requiring solely a vote of the Series A Preferred Stock voting separately as a single class or as otherwise provided for or fixed pursuant to the APG Delaware certificate of incorporation with respect to another series of preferred stock of APG Delaware, no action that is required or permitted to be taken by stockholders at a meeting may be effected by written consent in lieu of a meeting. | ||
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Provision | APG BVI | APG Delaware | ||
| Notice Requirements for Shareholder/Stockholder Nominations and Other Proposals | To bring a matter before a meeting or to nominate a candidate for director, 10 days’ written notice must be given by APG BVI to the shareholders. | As permitted (but not required) by Delaware law, the APG Delaware bylaws will provide that, in general, to bring a matter before an annual meeting of stockholders or to nominate a candidate for election as a director, a stockholder must give notice of the proposed matter or nomination not less than 90 days and not more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders. The APG Delaware bylaws will provide that in the event the date of the annual meeting of stockholders is more than 30 days before or more than 70 days after such anniversary date, such stockholder notice must be delivered not less than 90 days and not more than 120 days prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by APG Delaware. | ||
| Meeting of Shareholders/ Stockholders—Notice | BVI Companies Act permits as few as 7 days’ notice of meetings of shareholders to be provided to shareholders. Under the APG BVI Articles, not less than 10 days’ notice is required; no maximum limit. | As required by Delaware law, the APG Delaware bylaws will require not less than 10 days’ nor more than 60 days’ notice of a meeting of stockholders to be provided to stockholders, unless Delaware law provides for a different period. | ||
| Meeting of Shareholders/ Stockholders—Call of Meeting | Meetings of shareholders may be called by the directors and shall be called by the directors upon requisition by shareholders holding 30 percent of the voting rights in respect of the matter for which the meeting is requested. Pursuant to the APG BVI Articles, a meeting of the shareholders may be called by shorter notice if shareholders holding at least 90% of total voting rights on all matters to be considered at the meeting have waived notice of the meeting. | The APG Delaware bylaws will provide that (i) annual meetings of stockholders are designated by the board of directors and (ii) special meetings are called only by the board of directors or the chief executive officer. | ||
| Meeting of Shareholders/ Stockholders—Quorum | Pursuant to British Virgin Islands law, a quorum for a meeting of shareholders is as designated in the | Pursuant to Delaware law, the certificate of incorporation or bylaws may specify the number of shares | ||
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Provision | APG BVI | APG Delaware | ||
| memorandum and articles of association. A quorum for a meeting of shareholders is designated in the APG BVI Articles as one shareholder. Meetings of shareholders may be adjourned for such time as directors determine. | required to constitute a quorum at a meeting of stockholders, but in no event may a quorum consist of less than one-third of shares entitled to vote at a meeting of stockholders.
Under the APG Delaware bylaws, the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to vote at meeting of stockholders will be required to constitute a quorum. Also under the APG Delaware bylaws, if a quorum is absent at a meeting of stockholders, the stockholders present, by a majority in voting power thereof, will be able to adjourn the meeting. The person presiding at a meeting of stockholders will also be able to adjourn a meeting of stockholders under the APG Delaware bylaws. Notice will not need to be given of the adjourned meeting if the time and place thereof are announced at the meeting from which the adjournment is taken. If the adjournment is for more than thirty days, however, a notice of the adjourned meeting will be required to be given to each stockholder of record entitled to vote at the meeting. If, after the adjournment, a new record date for the stockholders entitled to vote is fixed for the adjourned meeting, the APG Delaware board of directors will be required to fix a new record date for notice of the adjourned meeting and give notice of the adjourned meeting to each stockholder of record entitled to vote at such adjourned meeting as of the record date fixed for notice of such adjourned meeting. | |||
| Meeting of Shareholders/ Stockholders—Record Date | The record date for determining the shareholders entitled to vote at a meeting of shareholders is as fixed by the directors. | Pursuant to Delaware law, the record date for determining the stockholders entitled to notice of any meeting of stockholders will be as fixed by the board of directors, but may not precede the date on which the resolution fixing the record date is adopted by the board of directors and may not be more than 60 days nor | ||
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Provision | APG BVI | APG Delaware | ||
| less than 10 days before the date of such meeting of stockholders. If the board of directors so fixes a date, such date will also be the record date for determining the stockholders entitled to vote at such meeting unless the board of directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting will be the date for making such determination. If no record date is fixed by the board of directors, the record date for determining the stockholders entitled to notice of and to vote at a meeting of stockholders will be the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. | ||||
| Directors—Election/Appointment | Directors are elected by the shareholders as entitled by their terms, including the holders of ordinary shares. Directors may also appoint a director to fill vacancy or as an additional director.
In addition, pursuant to the APG BVI Articles, for so long as the initial holder holds 20% or more of the Founder Preferred Shares, such holder will be entitled to nominate, and the directors will be required to appoint, up to three persons as director, and such holder may cause any director so nominated to be removed and replaced. | Directors of APG Delaware will be elected annually by the stockholders entitled to vote, including by the holders of APG Delaware common stock and the holders of Series A Preferred Stock (and any other series of preferred stock then outstanding and so entitled to vote), voting together as a single class.
For so long as the initial holder holds 20% or more of the shares of Series A Preferred Stock, such holder will be entitled to nominate up to three individuals to serve on the Board of Directors.
The APG Delaware bylaws will provide that individuals the age of 70 or above will be disqualified from serving as a director. | ||
| Directors—Term | The term of APG BVI directors is fixed by resolution of shareholders or directors; if no term is fixed at appointment, the director serves indefinitely. | Directors of APG Delaware will serve for annual terms. | ||
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Provision | APG BVI | APG Delaware | ||
| Directors—Removal | APG directors may be removed by resolution of the shareholders or a resolution of directors. | Pursuant to Delaware law, directors may be removed by the stockholders, with or without cause, solely by the affirmative vote of the holders of at least a majority in voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. | ||
| Directors—Vacancy | Vacancies and new directorships may be filled by a majority vote of shareholders or a majority of the directors, subject to the designation rights of the holder of Founder Preferred Share under the APG BVI Articles. | Under APG Delaware’s certificate of incorporation and bylaws, subject to the rights of any series of preferred stock, vacancies and newly created directorships will be filled solely by majority of remaining directors although less than a quorum or the sole remaining director (rather than also by the stockholders). | ||
| Directors—Number | Board must consist of at least one director. Maximum number of directors can be changed by amendment to the APG BVI Articles. The APG BVI Articles provide that there shall be not less than one director, with no maximum. | Under Delaware law, the number of directors is fixed by or in the manner provided in the bylaws unless fixed by the certificate of incorporation and if fixed by the certificate of incorporation, the number may be changed only by amendment to the certificate of incorporation. The APG Delaware bylaws will provide that the number of directors (not less than one) will be determined by resolution of the APG Delaware board of directors. | ||
| Directors—Quorum and Vote Requirements | A quorum of directors is as fixed by the directors with a minimum of two, except if there is only one director then a quorum will be one. | As permitted by Delaware law, the APG Delaware bylaws will provide that the presence of the directors entitled to cast a majority of the votes of the APG Delaware board of directors constitutes a quorum. | ||
| A resolution of directors may be effected at a meeting of the directors by the affirmative vote of a majority of the directors present at the meeting who voted except that where a director is given more than one vote, he shall be counted by the number of votes he casts for the purpose of establishing a majority. | Except where applicable law or the APG Delaware certificate of incorporation or bylaws otherwise provide, a majority of the votes cast by the directors present at a meeting at which there is a quorum will constitute action by the APG Delaware board of directors. | |||
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Provision | APG BVI | APG Delaware | ||
| Directors—Managing Director | Provision for the board to select one or more officers to be managing director. | Not applicable. | ||
| Director—Alternates | Directors may appoint another director or person to attend and vote in his place at any meeting of the directors and perform the duties and functions and exercise the rights of such appointing director. | Under Delaware law, directors may not act by proxy. | ||
| Directors and Officers—Fiduciary Duties | In summary, under British Virgin Islands law, directors and officers owe the following fiduciary duties:
• Duty to act in good faith in what the directors believe to be in the best interests of the company as a whole;
• Duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose;
• Directors should not improperly fetter the exercise of future discretion;
• Duty to exercise powers fairly as between different groups of shareholders;
• Duty not to put himself in a position of conflict between their duty to the company and their personal interests; and
• Duty to exercise independent judgment. | Under Delaware law:
• Directors and officers must act in good faith, with due care, and in the best interest of the corporation and all of its stockholders.
• Directors and officers must refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits.
• Decisions made by directors on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the corporation and all of its stockholders will be protected by the “business judgment rule.” | ||
In addition to the above, directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement to act as “a reasonably diligent person” having both:
• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and | ||||
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Provision | APG BVI | APG Delaware | ||
• the general knowledge, skill and experience that that director has.
As set out above, directors have a duty not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of his position. However, in some instances, a breach of this duty can be forgiven and/or authorized in advance by the shareholders provided that there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles or alternatively by shareholder approval at general meetings. | ||||
| Director—Indemnification; Indemnification Insurance | A summary of indemnification of officers and directors under the BVI Companies Act and the APG BVI Articles is discussed below following this table of comparison. | A summary of indemnification of officers and directors under Delaware law, the APG Delaware bylaws and director indemnification agreements is discussed below following this table of comparison. | ||
| A British Virgin Islands company may purchase insurance in relation to any person who is or was a director or officer of the company, including a liquidator of the company. | A Delaware corporation may purchase insurance in relation to any person who is or was a director or officer of the corporation. | |||
| Sale of Assets | Under the BVI Companies Act, the sale of more than 50% of the assets of the company not otherwise in the ordinary course of business requires approval by a majority of the ordinary shares at a meeting at which a quorum is present (a quorum being 50% of the votes of the outstanding voting shares), unless disapplied. The APG BVI Articles dissaply this requirement. | Pursuant to Delaware law, the sale of all or substantially all the assets of APG Delaware requires approval by the APG Delaware board of directors and the stockholders holding at least a majority of the outstanding shares of stock entitled to vote thereon. | ||
| Compulsory Acquisition | Under the BVI Companies Act, subject to any limitations in a company’s memorandum and articles, shareholders holding 90% of the votes of the outstanding shares entitled to vote, and shareholders | Under Delaware law, in a process known as a “short form” merger, a corporation that owns at least 90% of the outstanding shares of each class of stock of another corporation that, absent such law, would be entitled to | ||
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Provision | APG BVI | APG Delaware | ||
| holding 90% of the votes of the outstanding shares of each class of shares entitled to vote, may give a written instruction to the company directing the company to redeem the shares held by the remaining shareholders. | vote on such merger, may either merge the other corporation into itself and assume all of its obligations or merge itself into the other corporation by executing, acknowledging and filing with the Secretary of State of the State of Delaware a certificate of such ownership and merger setting forth a copy of the resolution of its board of directors authorizing such merger. If the parent corporation is a Delaware corporation that is not the surviving corporation, the merger also must be approved by a majority of the outstanding stock of the parent corporation entitled to vote thereon. If the parent corporation does not own all of the stock of the subsidiary corporation immediately prior to the merger, the minority stockholders of the subsidiary corporation party to the merger have appraisal rights. | |||
| Dissolution/Winding Up | Not applicable. | Under Delaware law, the dissolution of a corporation requires either (1) the approval of the board of directors and at least a majority of the outstanding stock entitled to vote thereon or (2) the approval of all of the stockholders entitled to vote thereon. | ||
| Dissenters’/Appraisal Rights | Not applicable. | A stockholder may dissent and obtain fair value of shares in connection with certain mergers and consolidations. | ||
| Shareholders’/Stockholders’ Derivative Actions | Generally speaking, the company is the proper plaintiff in any action. Derivative actions brought by one or more of the registered shareholders may only be brought with the leave of the Supreme Court where the following circumstances apply:
• Those who control the company have refused a request by the shareholders to move the company to bring the action;
• Those who control the company have refused to do so for improper reasons such that | Pursuant to Delaware law, in any derivative suit instituted by a stockholder of a corporation, it must be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which the stockholder complains or that such stockholder’s stock thereafter devolved upon such stockholder by operation of law.
Pursuant to Delaware law, the complaint must set forth with particularity the efforts of the plaintiff to obtain action by the board of directors (“demand refusal”) or | ||
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Provision | APG BVI | APG Delaware | ||
they are perpetrating a “fraud on the minority” (this is a legal concept and is different to “fraud” in the sense of dishonesty);
• a company is acting or proposing to act illegally or beyond the scope of its authority;
• the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained; or
• the individual rights of the plaintiff shareholder have been infringed or are about to be infringed.
Once a shareholder has relinquished his, her or its shares (whether by redemption or otherwise), it is generally the case that they could no longer bring a derivative action as they would no longer be a registered shareholder. | the reasons for not making such effort (“demand excusal”).
Such action may not be dismissed or compromised without the approval of the court.
In general, the stockholder instituting the derivative suit must maintain stock ownership through the pendency of the derivative suit. | |||
| Anti-Takeover Provisions | Not applicable. | Delaware law generally prohibits “business combinations,” including mergers, sales and leases of assets, issuances of securities and similar transactions by a corporation, with an “interested stockholder” who directly or indirectly beneficially owns 15% or more of a corporation’s voting stock, within three years after the person or entity becomes an interested stockholder, unless:
• the business combination or the transaction which caused the person or entity to become an interested stockholder is approved by the board of directors prior to the business combination or the transaction;
• upon the completion of the transaction in which the person | ||
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Provision | APG BVI | APG Delaware | ||
or entity becomes an interested stockholder, the interested stockholder holds at least 85% of the voting stock of the corporation not including (a) shares held by officers and directors and (b) shares held by employee benefit plans under certain circumstances; or
• at or after the person or entity becomes an interested stockholder, the business combination is approved by the board of directors and holders of at least 66 2/3% of the outstanding voting stock, excluding shares held by the interested stockholder.
A Delaware corporation may elect not to be governed by this Delaware law by provision of its initial certificate of incorporation. APG Delaware will not make such an election in the APG Delaware certificate of incorporation. |
Indemnification of Directors and Officers
The APG BVI Articles provide that APG BVI may indemnify any person who is or was a director or who is or was, at our request, serving as a director of, or in any other capacity is or was acting for, another entity, against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. A person may be indemnified only if he or she acted honestly and in good faith with a view to our best interests and, in the case of criminal proceedings, had no reasonable cause to believe that his or her conduct was unlawful. The decision of the APG BVI board of directors as to whether the director or officer acted honestly and in good faith with a view to APG BVI’s best interests and as to whether the director or officer had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purpose of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director or officer did not act honestly and in good faith and with a view to our best interests or that the director or officer had reasonable cause to believe that his or her conduct was unlawful.
Under the DGCL, a Delaware corporation may include in its certificate of incorporation a provision that, subject to the limitations described below, eliminates or limits the personal liability of a director to the corporation or its stockholders for monetary damages for breaches of fiduciary duty as a director. Such a provision may not eliminate or limit the liability of a director for (i) any breach of the duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) the willful or negligent payment of unlawful dividends or purchases or redemptions of shares of stock, or (iv) transactions from which such director derived an improper personal benefit. The new APG Delaware certificate of incorporation will include a provision providing that directors of APG Delaware shall not be liable to APG Delaware or its stockholders for monetary damages for breach of fiduciary duty, except to the extent such exemption or limitation is not permitted by the DGCL.
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The DGCL also provides that a Delaware corporation has the power to indemnify any person who is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee of another entity, against reasonable expenses (including attorneys’ fees) and, in actions not brought by or in the right of the corporation, judgments, fines and amounts paid in settlement, in each case, actually and reasonably incurred in connection with such action, suit or proceeding, but only if such person acted in a manner reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action, had no reasonable cause to believe his or her conduct was unlawful, except that in any action brought by or in the right of the corporation, such indemnification may not be made if such person is adjudged liable to the corporation (unless otherwise determined by the court in which such action, suit or proceeding was brought or the Delaware Court of Chancery). In addition, under Delaware law, to the extent that a present or former director or officer of a Delaware corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above or any claim, issue or matter therein, he or she must be indemnified by the corporation against expenses (including attorneys’ fees) actually and reasonably incurred by him or her. Furthermore, under Delaware law, a Delaware corporation is permitted to maintain directors’ and officers’ insurance.
The new APG Delaware bylaws will require APG Delaware to indemnify any person who is or was a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding described above by reason of the fact that such person is or was a director of APG Delaware or, while a director or officer of APG Delaware, is or was serving at the request of APG Delaware as a director, officer, employee or agent of another entity, to the fullest extent permitted by law. APG Delaware’s bylaws also will require APG Delaware to pay the legal expenses (including attorneys’ fees) of any such person in defending any such action, suit or proceeding in advance of its final disposition subject, in the case of present directors and officers, to the provision by such director or officer of an undertaking to repay the amounts advanced if it is ultimately determined that such director or officer is not entitled to be indemnified under the APG Delaware bylaws or otherwise.
Delaware Anti-Takeover Laws and the New APG Delaware Certificate of Incorporation and Bylaws
Delaware law and the new APG Delaware certificate of incorporation and bylaws will contain provisions that may prevent or discourage a third party from acquiring APG Delaware, even if the acquisition would be beneficial to its stockholders.
Upon effectiveness of the Domestication and pursuant to the APG Delaware certificate of incorporation, the board of directors of APG Delaware will have the authority to create one or more series of preferred stock of APG Delaware (in addition to the Series A Preferred Stock) and to fix the designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of shares of such new series of preferred stock of APG Delaware and to issue shares of such series without a stockholder vote, which could be used to dilute the ownership of a hostile acquiror.
Upon the effectiveness of the Domestication and pursuant to the APG Delaware certificate of incorporation, the APG Delaware board of directors will have the power to amend the bylaws of APG Delaware, which may allow APG Delaware’s board of directors to take certain actions to prevent an unsolicited takeover.
Upon effectiveness of the Domestication, APG Delaware will also be subject to Delaware law prohibiting APG Delaware from engaging in any “business combination” with an “interested stockholder” for a period of three years subsequent to the time that the stockholder became an interested stockholder unless:
| • | prior to such time, the APG Delaware’s board of directors approved either the business combination or the transaction in which the stockholder became an interested stockholder; |
| • | upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock (with certain exclusions); or |
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| • | at or after the person becomes an interested stockholder, the business combination is approved by the APG Delaware board of directors and authorized by a vote of at least 66 2/3% of the outstanding voting stock of APG Delaware not owned by the interested stockholder. |
For purposes of Delaware law, an “interested stockholder” generally is defined as an entity or person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) directly or indirectly beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated or associated with such entity or person.
For purposes of Delaware law, a “business combination” includes mergers, asset sales and other transactions resulting in financial benefit to a stockholder. This Delaware law could prohibit or delay mergers or other takeover or change of control attempts with respect to APG Delaware and, accordingly, may discourage attempts that might result in a premium over the market price for the shares held by stockholders of APG Delaware.
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Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
Subject to the qualifications, assumptions and limitations in the opinion attached as Exhibit 8.1, the statements of law and legal conclusions set forth below represent the opinion of Greenberg Traurig.
This section describes the material U.S. federal income tax consequences of (A) the APi Acquisition and the Domestication to a U.S. Holder (as defined below) of APG ordinary shares and (B) the ownership and disposition of APG ordinary shares after the APi Acquisition and the ownership and disposition of shares of APG Delaware common stock after the Domestication by a non-U.S. Holder (as defined below). This section applies only to holders that hold APG ordinary shares or APG Delaware common stock, as applicable, as capital assets for U.S. federal income tax purposes (generally, property held for investment). This section is general in nature and does not discuss all aspects of U.S. federal income taxation that might be relevant to a particular holder in light of its personal investment circumstances or status, nor does it address tax considerations applicable to a holder that is a member of a special class of holders subject to special rules, including:
| • | a broker or dealer in securities; |
| • | a trader in securities that elects to use a mark-to-market method of accounting for securities holdings; |
| • | a tax-exempt organization, qualified retirement plan, individual retirement account or other tax deferred account; |
| • | a financial institution, underwriter, insurance company, real estate investment trust or regulated investment company; |
| • | a person liable for alternative minimum tax; |
| • | a U.S. expatriate or former long-term resident of the United States; |
| • | a person that owns (directly, indirectly, or by attribution) 10% or more of APG voting stock (except as specifically provided below); |
| • | a partnership or other pass-through entity for U.S. federal income tax purposes, or a beneficial owner of a partnership or other pass-through entity; |
| • | a person that holds APG ordinary shares or APG Delaware common stock as part of a straddle, hedging or conversion transaction, constructive sale, or other arrangement involving more than one position; |
| • | a person that is required to accelerate the recognition of any item of gross income with respect to the APG ordinary shares or APG Delaware common stock as a result of such income being recognized on an applicable financial statement; |
| • | a U.S. holder whose functional currency is not the U.S. dollar; |
| • | a person that received APG ordinary shares or APG Delaware common stock as compensation for services; |
| • | a controlled foreign corporation; or |
| • | a passive foreign investment company. |
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This section is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed Treasury regulations promulgated under the Code (the “Treasury Regulations”), published rulings by the U.S. Internal Revenue Service (“IRS”) and court decisions, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. This discussion does not address U.S. federal tax laws other than those pertaining to U.S. federal income taxation (such as estate or gift tax laws or the Medicare tax on investment income), nor does it address any aspects of U.S. state or local or non-U.S. taxation.
We have not and do not intend to seek any rulings from the IRS regarding the APi Acquisition or the Domestication. The Domestication will be effected in part under the applicable provisions of British Virgin Islands law which are not identical to analogous provisions of U.S. corporate law. There is no assurance that the IRS will not take positions concerning the tax consequences of the APi Acquisition and/or the Domestication that are different from those discussed below, or that any such different positions would not be sustained by a court.
If a partnership (including for this purpose any entity or arrangement so characterized for U.S. federal income tax purposes) holds APG ordinary shares, the tax treatment of such partnership and a person treated as a partner of such partnership generally will depend on the status of the partner and the activities of the partnership.
Partnerships holding APG ordinary shares or APG Delaware common stock and persons that are treated as partners of such partnerships should consult their own tax advisors as to the particular U.S. federal income tax consequences of the APi Acquisition and the Domestication and holding or disposing of APG ordinary shares or APG Delaware common stock.
This summary does not address the U.S. federal income tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the APi Acquisition and the Domestication (whether or not any such transactions are undertaken in connection with APi Acquisition and the Domestication) including, without limitation, the exercise of an option to acquire APG ordinary shares or other right to acquire APG ordinary shares; or the consequences of the APi Acquisition to shareholders of APi Group.
THE FOLLOWING IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE. SHAREHOLDERS SHOULD CONSULT WITH THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE API ACQUISITION AND THE DOMESTICATION AND CONSIDERATIONS RELATING TO THE OWNERSHIP AND POSSIBLE DISPOSITION OF APG DELAWARE COMMON STOCK, INCLUDING THE EFFECTS OF U.S. FEDERAL, STATE, AND LOCAL AND NON-U.S. TAX LAWS.
U.S. Holders
The following describes the material U.S. federal income tax consequences of the APi Acquisition and/or the Domestication, as the case may be, to a U.S. Holder. For purposes of this discussion, a U.S. Holder means a beneficial owner of an APG ordinary share that is, for U.S. federal income tax purposes:
| • | an individual who is a citizen or resident of the United States; |
| • | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or any state thereof (including the District of Columbia); |
| • | an estate whose income is subject to U.S. federal income tax regardless of its source; or |
| • | a trust if (1) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or (2) the trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
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Assumptions
This summary is based upon certain understandings and assumptions with respect to the business, assets and shareholders of APG BVI, including that APG BVI is not, nor at any time has been, a “controlled foreign corporation” as defined in Section 957 of the Code (“CFC”). APG believes that it is not and has never been a CFC. In the event that one or more of such understandings or assumptions proves to be inaccurate, the following summary may not apply and material adverse U.S. federal income tax consequences may result to U.S. Holders.
Inversion
APG BVI has determined that it will be treated as an “inverted corporation” as a result of the APi Acquisition, and, therefore, will be treated for U.S. federal income tax purposes as a U.S. domestic corporation thereafter, notwithstanding that it remains a BVI corporation. There is no assurance that the IRS will agree with this position. Based upon APG’s determination that it became a U.S. domestic corporation on the date of the APi Acquisition, the provisions of Section 367 of the Code, the passive foreign investment company (“PFIC”) rules, and other matters described below will be applicable on the date of the APi Acquisition.
U.S. Federal Income Tax Characterization of the APi Acquisition and the Domestication
Under Section 368(a)(1)(F) of the Code, a reorganization (an “F Reorganization”) is a “mere change in identity, form, or place of organization of one corporation, however effected.” The APi Acquisition and the Domestication, as the case may be, will each constitute an F reorganization and the remainder of this section assumes that each of the APi Acquisition and the Domestication so qualify. Therefore, U.S. Holders will not recognize taxable gain or loss as a result of the APi Acquisition or the Domestication for U.S. federal income tax purposes, except as provided below under the caption headings “—Effect of Section 367” and “—PFIC Considerations.”
Basis and Holding Period Considerations
Since each of the APi Acquisition and the Domestication, respectively, qualifies as an F Reorganization, the tax basis of APG ordinary shares deemed received in the APi Acquisition and the APG Delaware common stock received by a U.S. Holder in the Domestication, as the case may be, will equal the U.S. Holder’s tax basis in the APG ordinary shares surrendered in exchange therefor, increased by any amount included in the income of such U.S. Holder as a result of Section 367 of the Code. See the discussion under the caption heading “—Effect of Section 367,” below. The holding period for the APG ordinary shares received in the APi Acquisition and the APG Delaware common stock received by a U.S. Holder in the Domestication will include such holder’s holding period for the APG ordinary shares surrendered in exchange therefor.
Effect of Section 367
Section 367 of the Code applies to certain non-recognition transactions involving foreign corporations, including a domestication of a foreign corporation in an F Reorganization. When it applies, Section 367 imposes income tax on certain United States persons in connection with transactions that would otherwise be tax-free. Based on APG BVI’s determination to treat itself as a U.S. domestic corporation as of the date of the APi Acquisition, Section 367(b) will generally apply to U.S. Holders of APG ordinary shares at the time of the APi Acquisition, not at the time of the Domestication.
| A. | U.S. Holders of 10 Percent or More of APG Ordinary Shares |
A U.S. Holder who on the day of the APi Acquisition beneficially owns (directly, indirectly or constructively) 10% or more of the total combined voting power of all classes of APG BVI stock entitled to vote or 10% or more of the total value of shares of all classes of APG BVI stock (a “U.S. 10% Shareholder”) must include in income as a dividend the “all earnings and profits amount” attributable to the APG BVI stock it directly owns, within the meaning of Treasury Regulation Section 1.367(b)-2(d). A U.S. Holder’s ownership of stock options will be taken into account in determining whether such holder owns 10% or more of the total combined voting power of
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all classes of APG BVI stock entitled to vote or 10% or more of the total value of shares of all classes of APG BVI stock. Complex attribution rules apply in determining whether a U.S. Holder owns 10% or more (by vote or value) of APG BVI stock.
A U.S. 10% Shareholder’s all earnings and profits amount with respect to its APG ordinary shares is the net positive earnings and profits of the corporation (as determined under Treasury Regulation Section 1.367(b)-2(d)(2)) attributable to the shares (as determined under Treasury Regulation Section 1.367(b)-2(d)(3)) but without regard to any gain that would be realized on a sale or exchange of such shares. Treasury Regulation Section 1.367(b)-2(d)(3) provides that the all earnings and profits amount attributable to a shareholder’s stock is determined according to the principles of Section 1248 of the Code. In general, Section 1248 of the Code and the Treasury Regulations thereunder provide that the amount of earnings and profits attributable to a block of stock in a foreign corporation is the ratably allocated portion of the foreign corporation’s earnings and profits generated during the period the shareholder held the block of stock.
Accordingly, under Treasury Regulation Section 1.367(b)-3(b)(3), a U.S. 10% Shareholder should be required to include in income as a deemed dividend the all earnings and profits amount (as defined in Treasury Regulation Section 1.367(b)-2(d)) with respect to its APG ordinary shares. Since the determination of the all earnings and profits amount requires an analysis by a tax accountant of the earnings and profits of APG BVI since its incorporation, APG BVI will engage an independent certified public accounting firm to perform this analysis. Based on its own expectation of its projected earnings and profits through the APi Acquisition, APG BVI expects to have cumulative earnings and profits through the date of the APi Acquisition, although APG BVI does not expect that the amount of such earnings and profits will be significant on a per-share basis. As a result, depending upon the period in which such a U.S. 10% Shareholder held its APG ordinary shares, such U.S. 10% Shareholder would be required to include its earnings and profits amount in income as a deemed dividend under Treasury Regulation Section 1.367(b)-3(b)(3) as a result of the APi Acquisition. We intend to advise all APG BVI shareholders of the results of the all earnings and profits analysis by posting the results on our website.
The determination of APG’s earnings and profits is a complex determination and may be impacted by numerous factors. It is possible that the amount of APG BVI’s earnings and profits could be greater than expected through the date of the APi Acquisition or could be adjusted as a result of an IRS examination.
| A | U.S. Holders That Own Less Than 10 Percent of APG Ordinary Shares |
A U.S. Holder who on the date of the APi Acquisition beneficially owns (directly, indirectly or constructively) APG ordinary shares with a fair market value of $50,000 or more, but less than 10% of the total combined voting power of all classes of APG BVI stock entitled to vote and less than 10% or more of the total value of shares of all classes of APG BVI stock, may elect to recognize gain with respect to the deemed receipt of APG ordinary shares in the APi Acquisition or, in the alternative, recognize the “all earnings and profits” amount as described below.
Unless a U.S. Holder makes the “all earnings and profits” election as described below, such holder generally must recognize gain (but not loss) with respect to the deemed receipt of APG ordinary shares in the APi Acquisition. Any such gain should be equal to the excess of the fair market value of the APG ordinary shares received over the U.S. Holder’s adjusted basis in the APG ordinary shares deemed to be surrendered in exchange therefor. Such gain should be capital gain, and should be long-term capital gain if the holder held the APG ordinary shares for longer than one year.
In lieu of recognizing any gain as described in the preceding paragraph, a U.S. Holder may elect to include in income the all earnings and profits amount attributable to its APG ordinary shares under Section 367(b). There are, however, strict conditions for making this election. This election must comply with applicable Treasury Regulations and generally must include, among other things: (i) a statement that the transaction is a Section 367(b) exchange; (ii) a complete description of the transaction, (iii) a description of any stock, securities or other consideration transferred or received in the transaction, (iv) a statement describing the amounts required to be taken into account for U.S. federal income tax purposes, (v) a statement that the U.S. Holder is making the election that includes (A) a copy of the information that the U.S. Holder received from APG BVI establishing and substantiating the U.S. Holder’s all earnings and profits amount with respect to the U.S. Holder’s APG ordinary shares, and (B) a
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representation that the U.S. Holder has notified APG BVI (or APG Delaware) that the U.S. Holder is making the election, and (vi) certain other information required to be furnished with the U.S. Holder’s tax return or otherwise furnished pursuant to the Code or the Treasury Regulations. In addition, the election must be attached by the U.S. Holder to its timely filed U.S. federal income tax return for the year of the APi Acquisition and the U.S. Holder must send notice to APG BVI of the election no later than the date such tax return is filed. In connection with this election, APG intends to provide each U.S. Holder eligible to make such an election with information regarding APG’s earnings and profits upon request.
APG BVI expects that its cumulative earnings and profits will be greater than zero through the date of the APi Acquisition, although APG does not expect that the amount of such earnings and profits will be significant on a per-share basis. As a result, a U.S. Holder that makes the election described herein would have an all earnings and profits amount with respect to its APG ordinary shares, and thus would be required to include that amount in income as a deemed dividend as a result of the APi Acquisition.
The determination of APG’s earnings and profits is a complex determination and may be impacted by numerous factors. It is possible that the amount of APG’s earnings and profits could be greater than expected through the date of the APi Acquisition or could be adjusted as a result of an IRS examination.
U.S. HOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING WHEN AND WHETHER TO MAKE THIS ELECTION AND, IF THE ELECTION IS DETERMINED TO BE ADVISABLE, THE APPROPRIATE FILING REQUIREMENTS WITH RESPECT TO THIS ELECTION.
| B. | U.S. Holders that Own APG Ordinary Shares with a Fair Market Value Less Than $50,000 |
A U.S. Holder who on the date of the APi Acquisition owns (or is considered to own) stock of APG BVI with a fair market value less than $50,000 should not be required to recognize any gain or loss under Section 367 of the Code in connection with the APi Acquisition, and generally should not be required to include any part of the all earnings and profits amount in income.
| C. | Shareholder Basis in and Holding Period for APG Delaware common stock |
For a discussion of a U.S. Holder’s tax basis and holding period in APG Delaware common stock received in the Domestication, see above under “—Basis and Holding Period Considerations.”
U.S. HOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TIMING OF THE APPLICABILITY AND THE CONSEQUENCES OF SECTION 367(b) IN THE CASE OF THE API ACQUISITION AND THE DOMESTICATION.
PFIC Considerations
In addition to the discussion above, the APi Acquisition could be a taxable event to U.S. Holders under the PFIC provisions of the Code if APG BVI is or ever was a PFIC.
| A. | Definition of a PFIC |
In general, APG BVI will be a PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S. Holder held the APG ordinary shares, (a) at least 75% or more of APG BVI’s gross income for the taxable year was passive income or (b) at least 50% or more of the value, determined on the basis of a quarterly average, of APG BVI’s assets is attributable to assets that produce or are held to produce passive income. Passive income generally includes dividends, interest, rents and royalties (other than certain rents and royalties that are derived in the active conduct of a trade or business), and gains from the disposition of passive assets.
125
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| B. | PFIC Status of APG |
We believe APG BVI was a PFIC from its inception. The determination of whether a foreign corporation is a PFIC is primarily factual and there is little administrative or judicial authority on which to rely to make this determination.
| C. | Effect of PFIC Rules on the APi Acquisition |
Section 1291(f) of the Code requires that, to the extent provided in Treasury Regulations, a U.S. person who disposes of stock of a PFIC recognizes gain notwithstanding any other provision of the Code. No final Treasury Regulations are currently in effect under Section 1291(f). However, proposed Treasury Regulations under Section 1291(f) have been promulgated and may be applied with a retroactive effective date. If finalized in their current form, those regulations would generally require taxable gain recognition to U.S. Holders of the APG ordinary shares on the APi Acquisition if APG BVI was classified as a PFIC at any time during such U.S. Holder’s holding period for such shares and the U.S. Holder had not made a QEF Election (as discussed below) for the first taxable year in which the U.S. Holder owned the APG ordinary shares and in which APG BVI was a PFIC (or, if in a later taxable year, a QEF Election together with a deemed sale election). The tax on any such recognized gain would be imposed at the rate applicable to ordinary income and an interest charge would apply based on a complex set of computational rules designed to offset the tax deferral with respect to the undistributed earnings of APG BVI. Under these rules:
| • | the U.S. Holder’s gain would be allocated ratably over the U.S. Holder’s holding period for such U.S. Holder’s APG ordinary shares; |
| • | the amount of gain allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain, or to the period in the U.S. Holder’s holding period before the first day of the first taxable year in which APG BVI was a PFIC, would be taxed as ordinary income; |
| • | the amount of gain allocated to other taxable years (or portions thereof) of the U.S. Holder and included in such U.S. Holder’s holding period would be taxed at the highest tax rate in effect for that year applicable to the U.S. Holder; and |
| • | the interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder. |
The proposed Treasury Regulations under Section 1291(f) of the Code were proposed before the Code was amended to allow a U.S. person to make a mark-to-market election (as discussed below). Accordingly, it is not clear how these rules would apply to a U.S. Holder who has made such an election.
If the proposed Treasury Regulations are adopted in their final form, the tax consequences should be as set forth above in this section under the caption heading “—PFIC Considerations—C. Effect of PFIC Rules on the APi Acquisition.” However, because the proposed Treasury Regulations have not yet been adopted in final form, they are not currently effective and there is no assurance they will be finally adopted in the form and with the effective date proposed. Nevertheless, the IRS has announced that taxpayers may apply reasonable interpretations of Code provisions applicable to PFICs and that it considers the rules set forth in the proposed Treasury Regulations to be reasonable interpretations of those Code provisions. If the proposed Treasury Regulations are not adopted in the form and with the effective date proposed, the tax consequences should be as set forth above under the caption headings “—U.S. Federal Income Tax Characterization of the APi Acquisition and the Domestication” and “—Effect of Section 367.”
Any “all earnings and profits amount” included in income by a U.S. Holder under Section 367(b) of the Code as a result of the APi Acquisition generally would be treated as gain subject to the PFIC rules. In addition, the proposed Treasury Regulations would provide coordinating rules with Section 367(b) of the Code, whereby, if the gain recognition rule of the proposed Treasury Regulations under Section 1291(f) applies to a disposition of PFIC stock that results from a transfer with respect to which Section 367(b) requires the shareholder to recognize gain or include an amount in income as a distribution under Section 301 of the Code, the gain realized on the transfer is taxable as an excess distribution under Section 1291 of the Code, and the excess, if any, of the amount to be included in income under Section 367(b) over the gain realized under Section 1291 is taxable as provided under Section 367(b). See the discussion above under the caption heading “—Effect of Section 367.”
126
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| D. | QEF Election and Mark-to-Market Election |
The impact of the PFIC rules on a U.S. Holder of APG ordinary shares will depend on whether the U.S. Holder has made a timely and effective election to treat APG BVI as a “qualified electing fund” under Section 1295 of the Code for the taxable year that is the first year in the U.S. Holder’s holding period of APG ordinary shares during which APG was classified as a PFIC (a “QEF Election”) or, if in a later taxable year, the U.S. Holder made a QEF Election together with a deemed sale election. A deemed sale election creates a deemed sale of the U.S. Holder’s APG ordinary shares at their then fair market value and requires the U.S. Holder to recognize gain pursuant to the election subject to the special PFIC tax and interest charge rules described above. As a result of any deemed sale election, the U.S. Holder would have a new basis and holding period in its APG ordinary shares. The QEF Election requires the U.S. Holder to include in income its pro rata share of APG BVI’s net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which APG BVI’s taxable year ends. If a QEF Election has been made, the electing U.S. Holder generally will not be subject to the special taxation rules of Section 1291 of the Code discussed herein.
The impact of the PFIC rules on a U.S. Holder of APG ordinary shares may also depend on whether the U.S. Holder has made an election under Section 1296 of the Code. U.S. Holders who hold (or are deemed to hold) stock of a foreign corporation that is classified as a PFIC may annually elect to mark such stock to its market value if such stock is “marketable stock,” generally, stock that is regularly traded on a national securities exchange that is registered with the SEC, including the NYSE, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value (a “mark-to-market election”). If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) APG ordinary shares and for which APG BVI is classified as a PFIC, such holder generally will not be subject to the special taxation rules of Section 1291 of the Code discussed herein. Instead, in general, the U.S. Holder will include as ordinary income for each of the taxable years the excess, if any, of the fair market value of its APG ordinary shares at the end of such taxable year over the adjusted basis in its APG ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its APG ordinary shares over the fair market value of its APG ordinary shares at the end of such taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s basis in its APG ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the APG ordinary shares will be treated as ordinary income. As discussed above, it is not clear how the proposed Treasury Regulations under Section 1291(f) of the Code would apply to a U.S. Holder who has made a mark-to-market election.
| E. | Information Reporting |
A U.S. Holder that owns (or is deemed to own) shares in a PFIC during any taxable year of the U.S. Holder generally is required to file an IRS Form 8621 (whether or not a QEF Election or mark-to-market election is made) and such other information as may be required under the Treasury Regulations or other IRS guidance. In addition to penalties, a failure to satisfy such reporting requirements may result in an extension of the period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors regarding these filing requirements.
The PFIC rules are complex and the implementation of certain aspects of the PFIC rules requires the issuance of Treasury Regulations which in many instances have not been promulgated but which may be promulgated with retroactive effect. There can be no assurance that any of these proposals will be enacted or promulgated, and if so, the form they will take or the effect that they may have on this discussion. Accordingly, and due to the complexity of the PFIC rules, U.S. Holders are strongly urged to consult their own tax advisers concerning the impact of these rules on the APi Acquisition and the Domestication, including, without limitation, whether a QEF Election, deemed sale election and/or mark to market election is available with respect to their APG ordinary shares and the consequences to them of any such election.
127
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Non-U.S. Holders
We do not expect the APi Acquisition or the Domestication to result in any U.S. federal income tax consequences to non-U.S. Holders of APG ordinary shares. The following describes the material U.S federal income tax consequences of the ownership and disposition of APG ordinary shares after the APi Acquisition and shares of APG Delaware common stock after the Domestication by a non-U.S. Holder. For purposes of this discussion, a non-U.S. Holder means a beneficial owner of a share of APG ordinary shares or APG Delaware common stock that is neither a U.S. Holder nor a partnership (or entity or arrangement treated as a partnership) for U.S. federal income tax purposes.
Dividends
As discussed under the section entitled “Risk Factors” above, APG Delaware does not anticipate paying dividends. In the event that APG BVI or APG Delaware does make a distribution of cash or property with respect to APG ordinary shares or APG Delaware common stock, respectively, any such distribution will be treated as a dividend for U.S. federal income tax purposes to the extent paid from the APG BVI’s or APG Delaware’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Dividends paid to a non-U.S. Holder generally will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty. In order to obtain a reduced rate of withholding, a non-U.S. holder generally will be required to provide to APG BVI or APG Delaware an IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying its entitlement to benefits under the treaty.
The withholding tax does not apply to dividends paid to a non-U.S. Holder that provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. Holder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to U.S. tax on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons (subject to an applicable income tax-treaty providing otherwise). A foreign corporation receiving effectively connected dividends may also be subject to an additional “branch profits tax” imposed at a rate of 30% (or a lower treaty rate).
If a non-U.S. Holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty, the non-U.S. Holder may obtain a refund of any amounts withheld in excess of that rate by timely filing a refund claim with the IRS.
If the amount of a distribution paid by APG BVI or APG Delaware on an APG ordinary share or a share of APG Delaware common stock to a non-U.S. Holder exceeds APG BVI’s or APG Delaware’s current and accumulated earnings and profits, as the case may be, such excess will be treated first as a tax-free return of capital to the extent of the non-U.S. Holder’s adjusted tax basis in such share, and thereafter as capital gain from a sale or other disposition of such share that is taxed as described below under the heading “—Sale or Other Disposition of APG Ordinary Shares or APG Delaware Common Stock.”
Sale or Other Disposition of APG Ordinary Shares or APG Delaware Common Stock
A non-U.S. Holder generally will not be subject to U.S. federal income tax on gain realized on a sale or other disposition of an APG ordinary share or a share of APG Delaware common stock unless:
| (i) | the non-U.S. Holder is an individual who was present in the United States for 183 days or more in the taxable year of the disposition and other requirements are met, |
| (ii) | the gain is effectively connected with a trade or business of the non-U.S. Holder in the United States (in which case, the gain will be subject to U.S. tax on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons (subject to an applicable income tax-treaty providing otherwise) and, if the non-U.S. Holder is a corporation, an additional “branch profits tax” imposed at a rate of 30% (or a lower treaty rate) may also apply), or |
128
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| (iii) | APG BVI or APG Delaware is or has been a U.S. real property holding corporation at any time within the five-year period preceding the disposition or the non-U.S. Holder’s holding period, whichever period is shorter, and either (A) the APG ordinary shares or the APG Delaware common stock have ceased to be regularly traded on an established securities market or (B) the non-U.S. Holder has owned or is deemed to have owned, at any time within the five-year period preceding the disposition or the non-U.S. Holder’s holding period, whichever period is shorter, more than 5% of the APG ordinary shares or APG Delaware’s common stock. |
APG BVI has not been and is not, and APG Delaware does not anticipate becoming, a U.S. real property holding corporation for U.S. federal income tax purposes. However, the determination of whether a corporation is a U.S. real property holding corporation is primarily factual and there can be no assurance whether such facts will change or whether the IRS or a court will agree with our determination.
Information Reporting Requirements and Backup Withholding
Information returns will be filed with the IRS in connection with payments of dividends on and the proceeds from a sale or other disposition of APG ordinary shares or APG Delaware common stock. A non-U.S. Holder may have to comply with certification procedures to establish that it is not a United States person or otherwise establish an exemption in order to avoid information reporting and backup withholding requirements. The certification procedures required to claim a reduced rate of withholding under a treaty will satisfy the certification requirements necessary to avoid the backup withholding as well. The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such non-U.S. Holder’s U.S. federal income tax liability and may entitle such non-U.S. Holder to a refund, provided that the required information is furnished to the IRS in a timely manner.
Under the Code and the Treasury Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. U.S. Holders are urged to consult with their own tax advisors concerning such reporting requirements, including whether any reporting is required under Section 367(b).
Withholding on Payments to Foreign Financial Institutions and Foreign Non-financial Institutions
The Code generally imposes a U.S. federal withholding tax of 30% on dividends and the gross proceeds of a disposition of our common stock paid to a “foreign financial institution” (as specifically defined for this purpose) unless such institution enters into an agreement with the U.S. government to, among other things, withhold on “withholdable payments” (which includes interest and dividends from U.S. sources and gains from the disposition of assets that produce interest and dividends) and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners).
The Code also generally imposes a U.S. federal withholding tax of 30% on payments of dividends on APG ordinary shares or APG Delaware common stock to a non-financial foreign entity unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides certain information regarding direct and indirect U.S. owners of the entity. Additionally, such withholding may apply to payments of gross proceeds from the sale or other disposition of APG ordinary shares or APG Delaware common stock.
Recently proposed Treasury Regulations eliminate such withholding on payments of gross proceeds entirely. Pursuant to the proposed Treasury Regulations, an issuer and any withholding agent may (but are not required to) rely on this proposed change to withholding on payments of gross proceeds until final Treasury Regulations are issued. Holders are encouraged to consult with their own tax advisors regarding the possible implications of these rules on their ownership of APG ordinary shares or APG Delaware common stock.
THIS SECTION IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE, LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR SHAREHOLDER.
129
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE DESCRIBED TRANSACTIONS IN THEIR PARTICULAR CIRCUMSTANCES.
130
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
SECURITIES ACT RESTRICTIONS ON RESALE OF APG DELAWARE COMMON STOCK
At the Effective Time, the outstanding shares of common and preferred stock of APG Delaware will have been registered under the Securities Act, and holders of shares of such stock who are not affiliates of the Company may freely resell their stock under the Securities Act. Holders of such shares of such stock who are affiliates of the Company, however, will not be permitted to resell their shares except pursuant to an effective resale registration statement under the Securities Act or an available exemption from registration under the Securities Act, such as Rule 144 thereunder. In general, Rule 144 will permit an affiliate of the Company to resell shares of stock received in connection with the Domestication only if certain requirements are met. Among other things, the affiliate of the Company may not sell shares of any class (including any shares of that class otherwise acquired) in an amount that, during any three-month period, exceeds 1% of the outstanding shares of that class (or, solely in the case of the common stock, the average weekly trading volume of the stock on the NYSE during the four calendar weeks preceding the filing of the notice referenced below, if greater). In addition, all such resales must be made in unsolicited brokers’ transactions, the Company must have filed all periodic reports it was required to file under the Exchange Act within the year preceding the resale and (depending on the amount being resold), the affiliate of the Company must have filed a notice of sale on Form 144 with the SEC. For this purpose, an “affiliate” of the Company is any person who controls, is controlled by or is under common control with the Company.
ACCOUNTING TREATMENT OF THE DOMESTICATION
There will be no accounting effect or change in the carrying amount of the consolidated assets and liabilities of APG BVI as a result of Domestication. The consolidated business, capitalization, assets, liabilities and financial statements of APG Delaware immediately following the Domestication will be the same as those of APG BVI immediately prior to thereto.
The validity of the shares common stock of APG Delaware into which the outstanding ordinary shares of APG BVI will be converted in connection with the Domestication will be passed upon for APG Delaware by Greenberg Traurig.
The opinion that the Domestication will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code has been passed upon by Greenberg Traurig.
CHANGE IN APG CERTIFYING ACCOUNTANT
| (a) | Previous independent registered public accounting firm |
| (i) | In connection with the APi Acquisition, PricewaterhouseCoopers LLP (United Kingdom) resigned as the independent registered public accounting firm for APi Group Corporation. Neither our Board of Directors nor our Audit Committee recommended or approved that we change accountants prior to this decision by PricewaterhouseCoopers LLP (United Kingdom). Such resignation became effective on November 8, 2019. |
| (ii) | The report of PricewaterhouseCoopers LLP (United Kingdom) on the financial statements for the period from September 18, 2017 (inception) to August 31, 2018 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. |
| (iii) | During the period from September 18, 2017 (inception) to August 31, 2018 and the subsequent interim period through November 8, 2019, there have been no disagreements with PricewaterhouseCoopers LLP (United Kingdom) on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, |
131
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
| which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP (United Kingdom) would have caused them to make reference thereto in their reports on the financial statements for such years. |
| (iv) | During the period from September 18, 2017 (inception) to August 31, 2018 and the subsequent interim period through November 8, 2019, there have been no reportable events (as defined in S-K 304(a)(1)(v)). |
| (v) | The Registrant has requested that PricewaterhouseCoopers LLP (United Kingdom) furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, dated December 20, 2019, is filed as Exhibit 16.1 to this registration statement on Form S-4. |
| (b) | New independent registered public accounting firm |
| (i) | The Registrant engaged KPMG LLP as its new independent registered public accounting firm as of November 14, 2019. Prior to such engagement, the Registrant had not consulted with KPMG LLP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Registrant’s financial statements, and neither a written report was provided to the Registrant or oral advice was provided that KPMG LLP concluded was an important factor considered by the Registrant in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in S-K 304(a)(1)(iv) and the related instructions to S-K 304, or a reportable event, as that term is defined in S-K 304(a)(1)(v). |
The financial statements of APi Group Corporation as of December 31, 2018 and 2017 and for the year ended December 31, 2018 and for the period from September 18, 2017 (date of inception) to December 31, 2017, included in this prospectus have been so included in reliance on the report of KPMG LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of APi Group, Inc. and subsidiaries as of December 31, 2018 and 2017, and for each of the two years in the period ended December 31, 2018, included in this prospectus have been so included in reliance on the report of KPMG LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
In connection with the filing of the Registration Statement, the Company requested that KPMG LLP (“KPMG”) affirm its independence relative to the rules and regulations of the Public Company Accounting Oversight Board (“PCAOB”) and the SEC. KPMG was previously engaged by APi as its external auditor and had performed its audits in accordance with private company auditing standards. In anticipation of the filing of the Registration Statement, KPMG was engaged to perform audits of the consolidated financial statements presented in the Registration Statement under PCAOB and SEC rules and regulations.
Our Chief Financial Officer was a partner with KPMG immediately prior to joining APi Group in July 2014. He was not involved in KPMG’s audits of APi Group during his tenure with KPMG. He did serve as an audit business unit partner-in-charge at KPMG and held a supervisory role over two persons who each served as a KPMG lead audit engagement partner for its previous audits of APi Group as a private company, including the audit periods provided in the Registration Statement. Additionally, as a former partner, he was eligible to receive payments under KPMG’s unfunded partner long-term compensation plan with payments scheduled to commence in 2022.
In accordance with SEC Regulation S-X, Rule 2-01(c)(2)(iii), in part, an accountant is not independent if the accountant has an employment relationship with an audit client, such as a former partner in a financial reporting oversight role at an audit client, unless the individual has no financial arrangement with the accounting firm other than one pursuant to a fully funded retirement plan, rabbi trust, or similar vehicle. While previously permissible under private company auditing standards, KPMG was in violation of the above-mentioned rule because the Chief Financial Officer was eligible for the above-described payments from the unfunded partner long-term compensation plan during the audit periods. To remediate the violation, prior to being engaged to perform its audits in accordance with PCAOB standards, KPMG fully funded the amounts owed to our Chief Financial Officer under that plan in a rabbi trust. The amounts payable to our Chief Financial Officer under that plan were not material to APi, the Company or KPMG. Additionally, the lead audit partner for KPMG’s audits of the consolidated financial statements included in the Registration Statement, that were performed under PCAOB standards and SEC rules and regulations, never reported to our Chief Financial Officer while he was a business unit partner-in-charge at KPMG.
KPMG considered specifically the facts and circumstances above and concluded that it is capable of exercising objective and impartial judgment on all issues encompassed within the audit engagements included in the Registration Statement. After taking into consideration the facts and circumstances stated above and KPMG’s determination, our board of directors and its audit committee each concluded that KPMG’s objectivity and ability to exercise impartial judgment has not been impaired.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC the Registration Statement on Form S-4 (the “Registration Statement”) under the Securities Act with respect to the Domestication. This prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information about us and the Domestication, we refer you to the Registration Statement and the exhibits and schedules filed as a part of the Registration Statement. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete. If a contract or document has been filed as an exhibit to the Registration Statement, we refer you to the copy of the contract or document that has been filed as an exhibit to the Registration Statement, each statement about such contract or document being qualified in all respects by such reference.
The SEC maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is www.sec.gov. Our reports and any other information that we have filed or may in the future file with the SEC are not incorporated by reference into, and do not constitute a part of, this prospectus or the Registration Statement.
132
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
You may obtain copies of the information and documents incorporated by reference in this prospectus at no charge by writing or telephoning us at the following address or telephone number:
APi Group Corporation
1100 Old Highway 8 NW
New Brighton, MN 55112
(651) 636-4320
Attention: Tom Lydon
We will become subject to the full informational requirements of the Exchange Act following effectiveness of the Registration Statement. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We intend to furnish our shareholders with annual reports containing consolidated financial statements certified by an independent public accounting firm.
133
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
API GROUP CORPORATION F/K/A J2 ACQUISITION LIMITED
Financial Statements
Audited Financial Statements for the Period from September 18, 2017 (Inception) through December 31, 2018
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
F-1
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
APi Group Corporation:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of APi Group Corporation (the Company) as of December 31, 2018 and 2017, the related statements of income, stockholders’ equity, and cash flows for the year ended December 31, 2018, and the period from September 18, 2017 through December 31, 2017 and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the year ended December 31, 2018 and the period from September 18, 2017 through December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and 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 financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2019.
Minneapolis, Minnesota
December 20, 2019
F-2
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Balance Sheets
As of December 31, 2018 and 2017
(in thousands, except share and per share amounts)
| December 31, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 436,544 | $ | 19,039 | ||||
Marketable securities at fair value | 813,174 | 1,210,657 | ||||||
Prepayments and other assets | 28 | 9 | ||||||
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Total assets | $ | 1,249,746 | $ | 1,229,705 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accrued expenses | $ | 26 | $ | 16 | ||||
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Total current liabilities | 26 | 16 | ||||||
Total liabilities | 26 | 16 | ||||||
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Stockholders’ equity | ||||||||
Preferred shares, no par value; unlimited authorized shares; 4,000,000 shares issued and outstanding as of December 31, 2018 and 2017 | — | — | ||||||
Ordinary shares, no par value; unlimited authorized shares; 121,032,500 shares issued and outstanding as of December 31, 2018 and 2017 | — | — | ||||||
Additional paid-in capital | 1,227,548 | 1,227,548 | ||||||
Retained earnings | 22,172 | 2,141 | ||||||
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Total stockholders’ equity | 1,249,720 | 1,229,689 | ||||||
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Total liabilities and stockholders’ equity | $ | 1,249,746 | $ | 1,229,705 | ||||
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| |||||
The accompanying notes are an integral part of these financial statements.
F-3
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Statements of Income
For the Year Ended December 31, 2018 and the Period from September 18, 2017 to December 31, 2017
(in thousands, except share and per share amounts)
| For the period from September 18, 2017 | ||||||||
| For the year ended | Through | |||||||
| December 31, 2018 | December 31, 2017 | |||||||
Operating expenses: | ||||||||
General and administrative | $ | 2,790 | $ | 464 | ||||
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| |||||
Total operating expenses | 2,790 | 464 | ||||||
|
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Loss from operations | (2,790 | ) | (464 | ) | ||||
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Other income: | ||||||||
Investment income | 22,611 | 2,586 | ||||||
Interest income | 210 | 19 | ||||||
|
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Total other income | 22,821 | 2,605 | ||||||
|
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Net income | $ | 20,031 | $ | 2,141 | ||||
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Net income per ordinary share, basic and diluted | $ | 0.16 | $ | 0.02 | ||||
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Weighted average ordinary shares outstanding, basic | 121,032,500 | 94,520,619 | ||||||
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Weighted average ordinary shares outstanding, diluted | 125,032,500 | 97,674,465 | ||||||
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The accompanying notes are an integral part of these financial statements.
F-4
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Statements of Stockholders’ Equity
For the Year Ended December 31, 2018 and the Period from September 18, 2017 to December 31, 2017
(in thousands, except share amounts)
| Preferred Shares | Ordinary Shares | Additional | Retained | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-in Capital | Earnings | Equity | ||||||||||||||||||||||
Balance as of inception, September 18, 2017 | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Issuance of shares and warrants, net of fees | 4,000,000 | — | 121,000,000 | — | 1,227,223 | — | 1,227,223 | |||||||||||||||||||||
Share-based compensation - directors | — | — | 32,500 | — | 325 | — | 325 | |||||||||||||||||||||
Net income | — | — | — | — | — | 2,141 | 2,141 | |||||||||||||||||||||
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Balance as of December 31, 2017 | 4,000,000 | — | 121,032,500 | — | 1,227,548 | 2,141 | 1,229,689 | |||||||||||||||||||||
Net income | — | — | — | — | — | 20,031 | 20,031 | |||||||||||||||||||||
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Balance as of December 31, 2018 | 4,000,000 | $ | — | 121,032,500 | $ | — | $ | 1,227,548 | $ | 22,172 | $ | 1,249,720 | ||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
F-5
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Statements of Cash Flows
For the Year Ended December 31, 2018 and the Period from September 18, 2017 to December 31, 2017
(in thousands)
| For the period from September 18, 2017 | ||||||||
| For the year ended | through | |||||||
| December 31, 2018 | December 31, 2017 | |||||||
Net income | $ | 20,031 | $ | 2,141 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Unrealized gain (loss) on marketable securities | 530 | (2,586 | ) | |||||
Share-based compensation - directors | — | 325 | ||||||
Changes in operating assets and liabilities: | ||||||||
Prepaids and other assets | (19 | ) | (9 | ) | ||||
Accruals | 10 | 16 | ||||||
|
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|
| |||||
Net cash provided by (used in) operating activities | 20,552 | (113 | ) | |||||
|
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|
| |||||
INVESTING ACTIVITIES: | ||||||||
Purchase of marketable securities - short-term | (2,860,503 | ) | (1,208,071 | ) | ||||
Sale of marketable securities - short-term | 3,257,456 | — | ||||||
|
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| |||||
Net cash provided by (used in) investing activities | 396,953 | (1,208,071 | ) | |||||
|
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| |||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of Founder Preferred Shares and Warrants | — | 40,000 | ||||||
Proceeds from issuance of Ordinary Shares and Warrants, net | — | 1,187,223 | ||||||
|
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| |||||
Net cash provided by financing activities | — | 1,227,223 | ||||||
|
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| |||||
Net increase in cash and cash equivalents | 417,505 | 19,039 | ||||||
Cash and cash equivalents at beginning of period | 19,039 | — | ||||||
|
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| |||||
Cash and cash equivalents at end of period | 436,544 | 19,039 | ||||||
|
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| |||||
The accompanying notes are an integral part of these financial statements.
F-6
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group Corporation (the Company or APG f/k/a J2 Acquisition Limited) was incorporated with limited liability under the laws of the British Virgin Islands under the BVI Companies Act (as amended) on September 18, 2017. The Company was created by its founders (the Founders) for the purpose of acquiring a target company or business (the Acquisition). The Company’s ordinary shares and warrants were traded on the Main Market of the London Stock Exchange beginning on October 10, 2017, after raising gross proceeds of approximately $1.25 billion in an initial public offering (the IPO). On October 1, 2019, the Company completed the acquisition of APi Group Inc. (APi Group), a market-leading provider of commercial life safety solutions and industrial specialty services, for approximately $2.9 billion (the APi Acquisition). (See Note 8).
Note 2 – Summary of Significant Accounting Policies
Basis of preparation
The accompanying financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
While cash held by financial institutions may at times exceed federally insured limits, the Company believes that no material credit or market risk exposure exists due to the high quality of the institutions. The Company has not experienced any losses on such accounts. The Company considers all highly liquid investments purchased with a maturity of three months or less from the date of purchase to be cash equivalents. The Company has $436,544 and $19,039 of cash equivalents as of December 31, 2 018 and 2017, respectively.
Investments in Marketable Securities
Marketable securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. All unrealized gains and losses are reported in investment income in the statements of income.
Fair Value Measurements
Fair value is determined using the principles of ASC 820, Fair Value Measurement. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes and defines the inputs to valuation techniques as follows:
| • | Level 1— Observable quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| • | Level 2—Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. |
| • | Level 3—Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. |
F-7
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Marketable securities are recorded at fair value. The Company uses the Level 2 fair value hierarchy assumptions to measure the marketable securities as of December 31, 2018 and 2017. The Company’s cash and cash equivalents and accrued expenses are carried at cost, which approximates fair value due to the short-term nature of these instruments and are considered level 1 securities.
The inputs used to measure the fair value of an asset or a liability are categorized within levels of the fair value hierarchy. The fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the measurement. There have not been any transfers between the levels of the hierarchy for the year ended December 31, 2018 and the period from September 18, 2017 through December 31, 2017.
Share-based compensation
The Company expenses share-based compensation over the requisite service period of the awards (usually the vesting period) based on the grant date fair value of awards. For stock option grants with performance-based milestones, the expense is recorded over the service period after the achievement of the milestone is probable or the performance condition is achieved. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. An offsetting increase to stockholders’ equity will be recorded equal to the amount of the compensation expense charge. The Company recognize forfeitures as they occur as a reduction of expense. The Company does not have any forfeitures for the year ended December 31, 2018 and the period from September 18, 2017 through December 31, 2017. See Note 6.
Founder Preferred Shares
In connection with the IPO, the Company issued 4,000,000 preferred shares (the Founder Preferred Shares) at $10 per share to Mariposa Acquisition IV, LLC (the Founder Entity) an entity controlled by the Founders. The Founder Preferred Shares are not mandatorily redeemable and do not embody an unconditional obligation to settle in a variable number of equity shares. As such, the Founder Preferred Shares are classified as permanent equity in the accompanying balance sheets. The Founder Preferred Shares are not unconditionally redeemable or conditionally puttable by the Holder for cash. The Founders Preferred Shares are considered an equity-like host for purposes of assessing embedded derivative features for potential bifurcation. In accordance with ASC 815, Derivatives and Hedging, the conversion features and participating dividends of the Founders preferred shares are not bifurcated and are included in permanent equity as they are clearly and closely related to the host. The preferred shares do not have a par value or stated value and thus the have been recorded in additional paid-in capital. See Note 4.
Warrants
The Company has warrants issued with its ordinary shares and Founder Preferred Shares that were determined to be equity classified in accordance with ASC 815, Derivatives and Hedging (see Note 4). The Company also issued warrants with shares issued to non-executive directors for compensation that were determined to be equity classified in accordance with ASC 718 – Compensation – Stock Compensation. The fair value of the warrants was recorded as additional paid-in capital on the issuance date, and no further adjustments were made.
Revenue Recognition
The Company accounts for revenue earned from contracts with customers under ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company does not have any revenue for the year ended December 31, 2018 or the period from September 18, 2017 through December 31, 2017.
Earnings per Share
Basic earnings per ordinary share excludes dilution and is computed by dividing net income by the weighted average number of ordinary shares outstanding during the period. The Company has determined that its Founder Preferred Shares are participating securities as the Founder Preferred Shares participate in undistributed earnings on an as-if-converted basis. Accordingly, the Company used the two-class method of computing earnings per share, for ordinary and Founder Preferred Shares according to participation rights in undistributed earnings. Under this method, net income applicable to holders of ordinary shares is allocated on a pro rata basis to the holders of ordinary and Founder Preferred Shares to the extent that each class may share income for the period; whereas undistributed net loss is allocated to ordinary shares because Founder Preferred Shares are not contractually obligated to share the loss.
F-8
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Income Taxes
Income taxes are recorded in accordance with ASC 740, Accounting for Income Taxes (ASC 740), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company does not have any deferred taxes.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company does not have any significant uncertain tax positions.
As a British Virgin Islands limited liability company, the Company is not subject to any income, withholding or capital gains taxes.
Comprehensive Income
Comprehensive income is the same as net income for all periods presented.
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors as it is the body that makes strategic decisions. The Company does not have any operations and accordingly the Company has one operating and reporting segment.
Recently Adopted Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The new standard was effective on January 1, 2018; however, early adoption is permitted. The Company adopted ASU No. 2017-09 as of January 1, 2018. The adoption of this update did not impact the Company’s financial statements.
In January 2017, the FASB issued an ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted ASU 2017-01 on January 1, 2018. The adoption of this update did not impact the Company’s financial statements.
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods
F-9
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted ASU No. 2018-07 as of the period of inception. The adoption of this update did not have a material impact on the Company’s financial statements.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.
Note 3 – Marketable Securities
The Company’s investment in marketable securities consists of U.S. Treasury Bills. Investment income is recorded as a realized investment income at the time the investment in U.S. Treasury Bills matures.
The change in the unrealized gains on these investments are included in the statements of Income as investment income. Unrealized gains on the U.S. Treasury Bills are summarized as follows:
| Cost | Gross Unrealized Gain | Gross Unrealized Loss | Net Unrealized Gain | Fair Value | ||||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||
U.S. Treasury Bills | $ | 811,118 | $ | 2,056 | $ | — | $ | 2,056 | $ | 813,174 | ||||||||||
As of December 31, 2017 | ||||||||||||||||||||
U.S. Treasury Bills | $ | 1,208,071 | $ | 2,586 | $ | — | $ | 2,586 | $ | 1,210,657 | ||||||||||
As of December 31, 2018, $426.3 million of U.S. Treasury Bills were classified as cash and cash equivalents as their original maturities were less than three months. These securities had an unrealized gain of $2.4 million and are included in cash and cash equivalents in the accompanying balance sheets.
Note 4 – Stockholders’ Equity
On October 10, 2017, the Company’s IPO raised gross proceeds of $1.25 billion, consisting of $1.21 billion through the placement of ordinary shares at $10 per share, and $40 million through the subscription of 4,000,000 preferred shares at $10 per share by the Founders through the Founder Entity. Issuance fees of $22,777 were paid in relation to the IPO, resulting in net proceeds of $1,227,223. Each ordinary share and Founder Preferred Share was issued with a warrant as described below.
Founder Preferred Shares
After the closing of an Acquisition, and if the average stock price of the ordinary shares is at least $11.50 per share for any ten consecutive trading days, the holders of the Founder Preferred Shares will be entitled to receive a dividend in the form of ordinary shares or cash, at the option of the Company, equal to 20% of the appreciation of the market price of ordinary shares issued to ordinary shareholders in the initial offering. In the first year a dividend is payable (if any), the dividend amount will be calculated at the end of the calendar year based on the appreciated stock price (the Dividend Price, as defined below) compared to the initial offering price of $10 per ordinary share. In subsequent years, the dividend amount will be calculated based on the appreciated stock price compared to the highest Dividend Price previously used in calculating the Preferred stock dividends. For the purposes of determining the Annual Dividend Amount, the Dividend Price is the average price per ordinary share for the last ten consecutive trading days in the relevant Dividend Year. Upon the liquidation of the Company, an Annual Dividend Amount shall be payable for the shortened Dividend Year. Subsequent to the liquidation, the holders of Founder Preferred Shares shall have the right to a pro rata share (together with holders of the ordinary shares) in the distribution of the surplus assets of the Company.
F-10
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
The Founder Preferred Shares will participate in any dividends on the ordinary shares on an as converted basis. In addition, commencing on and after consummation of the Acquisition, where the Company pays a dividend on its ordinary shares the Founder Preferred Shares will also receive an amount equal to 20 per cent of the dividend which would be distributable on such number of ordinary shares. All such dividends on the Founder Preferred Shares will be paid at the same time as the dividends on the ordinary shares. Dividends are paid for the term the Preferred stock is outstanding.
The Preferred shares will be automatically converted into ordinary shares on a one for one basis upon the last day of the seventh full financial year following an Acquisition (the Conversion). Each Preferred share is convertible into one ordinary share at the option of the holder until the Conversion. If there is more than one holder of Founder Preferred Shares, a holder of Founder Preferred Shares may exercise its rights independently of any other holder of Founder Preferred Shares.
In accordance with ASC 718 – Compensation – Stock Compensation, the Annual Dividend Amount based on the market price of the Company’s ordinary shares is akin to a market condition award settled in shares. As the right to the Annual Dividend Amount was only triggered upon the Acquisition (which was not considered probable until consummated), the fair value of the Annual Dividend Amount measured on the date of issuance of the Founder Preferred Shares was recognized upon consummation of the APi Acquisition as a one-time charge to the income statement. The fair value of the Annual Dividend Amount, $155 million, has been measured using a Monte Carlo method which takes into consideration different stock price paths. Following are the assumptions used in calculating the issuance date fair value:
Number of securities issued | 4,000,000 | |||
Vesting period | Immediate | |||
Assumed price upon Acquisition | US$10.00 | |||
Probability of winding-up | 16.7 | % | ||
Probability of Acquisition | 83.3 | % | ||
Time to Acquisition | 1.5 years | |||
Volatility (post-Acquisition) | 35.1 | % | ||
Risk free interest rate | 2.33 | % |
The Founder Preferred Shares carry the same voting rights as are attached to the Ordinary Shares being one vote per Founder Preferred Share. Additionally, the Founder Preferred Shares alone carry the right to vote on any Resolution of Members required, pursuant to BVI law, to approve any matter in connection with an Acquisition, or a merger or consolidation in connection with an Acquisition. Initial Founder Preferred Shareholders, that hold 20% of the Founder Preferred Shares, can nominate up to three people as directors of the Company.
Ordinary shares
In connection with the Initial Public Offering on October 17, 2017, the Company issued 121,000,000 ordinary shares (no par value) for gross proceeds of $1.21 billion. In conjunction with the IPO, the Company also issued an aggregate of 32,500 ordinary shares to non-founder directors for $10 per share in lieu of their cash directors’ fees for one year. Each ordinary share was issued with a Warrant. Ordinary shares have voting rights and winding-up rights.
Warrants
The Company issued 125,032,500 Warrants to the purchasers of both ordinary shares and Founder Preferred Shares (including the 32,500 Warrants that were issued to non-founder directors for their fees). Each Warrant has a term of 3 years following an Acquisition and entitles a Warrant holder to purchase one-third of an ordinary share upon exercise. Warrants will be exercisable in multiples of three for one ordinary share at a price of $11.50 per whole ordinary share. The warrants are mandatorily redeemable by the Company at a price of $0.01 should the average market price of an ordinary share exceed $18.00 for 10 consecutive trading days (subject to any prior adjustment in accordance with the terms of the Warrants).
F-11
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Note 5 – Commitments and Contingencies
The Company may be subject to lawsuits or claims as a result of the proposed business combination. As of December 31, 2018, there were no known or threatened lawsuits or unasserted claims.
Note 6 – Share-based Compensation
On October 10, 2017, the Company issued its non-executive directors 162,500 stock options (the Stock Options) to purchase ordinary shares of the Company that vest upon an Acquisition. The non-executive directors are required to have continued service until the time of the Acquisition to vest in the Stock Options. The options expire on the 5th anniversary following an Acquisition and have an exercise price of $11.50 per share (subject to such adjustment as the Directors consider appropriate in accordance with the terms of the Option Deeds). The Stock Options have a performance condition of vesting on an Acquisition (which is not considered probable until an Acquisition). Therefore, in accordance with ASC 718 – Compensation – Stock Compensation, the fair value of the awards, as determined on the grant date, will be recognized as an expense and an increase of additional paid-in capital upon consummation of an Acquisition.
The following table summarizes the stock option activity:
| Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
Options outstanding at inception | — | $ | — | $ | — | |||||||
Granted | 162,500 | $ | 11.50 | $ | — | |||||||
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Options outstanding at December 31, 2017 | 162,500 | $ | 11.50 | $ | — | |||||||
|
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Options outstanding at December 31, 2018 | 162,500 | $ | 11.50 | $ | — | |||||||
|
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Options vested and exercisable | — | $ | — | $ | — | |||||||
|
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The fair value of each stock option was estimated at $2.76 on the grant date using the Black-Scholes option pricing model with the following assumptions for the grant during the period from September 18, 2017 through December 31, 2017:
Share Price | $ | 10.00 | ||
Exercise Price | $ | 11.50 | ||
Risk-Free Rate | 2.15 | % | ||
Dividend Yield | — | |||
Post-Acquisition Volatility | 32.99 | % |
On October 17, 2017, the Company issued 32,500 ordinary shares and Warrants to independent non-founder directors for their first year’s annual fees in lieu of cash. The $10 fair value of the shares and warrants was based on the price paid by outside shareholders in the equity offering on October 17, 2017 (see Note 4). In accordance with ASC 718 – Compensation – Stock Compensation, as the shares and related Warrants were fully vested and have a non-substantive service period, the fair value of $325 was recorded as an expense on the grant date.
F-12
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Note 7 – Related Party
During the period ended December 31, 2017, 4,000,000 Founder Preferred Shares, 6,000,000 ordinary shares and 10,000,000 warrants were issued to the Founder Entity. Sir Martin E. Franklin, a Founder and Director, is a beneficial owner and the manager of the Founder Entity and, as such, may be considered to have beneficial ownership of all the Founder Entity’s interests in the Company. James E. Lillie, also a Founder and Director, holds an indirect pecuniary interest of 20% in the Founder Entity. Other directors were issued 32,500 ordinary shares and 32,500 warrants along with 162,500 stock options.
There were no shares, warrants and options issued to the directors of the Company for the year ended December 31, 2018.
An entity owned by Sir Franklin, received $0.3 million and $0.1 million in management fees for the year ended December 31, 2018 and the period from September 18, 2017 through December 31, 2017, respectively.
Note 8 – Earnings Per Share
Net income is allocated between the ordinary share and other participating securities based on their participation rights. The Founder Preferred Shares (see Note 4), represent participating securities. Earnings attributable to Founder Preferred Shares is not included in earnings attributable to ordinary shares in calculating earnings per ordinary share. For the year ended December 31, 2018 and the period from September 18, 2017 through the year ended December 31, 2017, the Company excluded the stock options to purchase 162,500 ordinary shares from the diluted earnings per ordinary share as the performance condition (see Note 6) for these stock options was not considered probable until the time of the Acquisition.
The following table sets forth the computation of basic and diluted earnings per ordinary share using the two-class method (see Note 2):
| For the year ended | For the period from September 18, 2017 through | |||||||
| December 31, 2018 | December 31, 2017 | |||||||
Numerator: | ||||||||
Net income | $ | 20,031 | $ | 2,141 | ||||
Adjustment for vested participating preferred stock | (641 | ) | (69 | ) | ||||
|
|
|
| |||||
Net income attributable to ordinary shares | $ | 19,390 | $ | 2,072 | ||||
Denominator: | ||||||||
Weighted average shares outstanding - basic | 121,032,500 | 94,520,619 | ||||||
|
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|
| |||||
Weighted average shares outstanding - diluted | 125,032,500 | 97,674,465 | ||||||
|
|
|
| |||||
Basic and diluted earnings per ordinary share | $ | 0.16 | $ | 0.02 | ||||
|
|
|
| |||||
Ordinary shares issuable upon conversion of Founder Preferred Shares | 4,000,000 | 4,000,000 | ||||||
|
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| |||||
F-13
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Note 9 – Subsequent Events
On October 1, 2019, the Company completed the APi Acquisition, for approximately $2.9 billion.
The Company intends to re-domicile to Delaware from the British Virgin Islands. The Company also intends to apply to the New York Stock Exchange for the listing of its common stock. It is currently anticipated that the Company’s listing of ordinary shares and warrants on the London Stock Exchange will be cancelled at or around the time the New York Stock Exchange listing is achieved. The Company’s listing on the London Stock Exchange will remain suspended until such cancellation takes effect.
As of the closing of APi Acquisition, the Company will record a one-time, non-cash expense preliminarily estimated to be approximately $155.0 million, which represents the fair value of the Founder preferred dividend rights at the time the Founder Preferred Shares were issued. See Note 4.
F-14
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
API GROUP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Audited Financial Statements as of and for the Years Ended December 31, 2018 and 2017
F-15
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
APi Group, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of APi Group, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years ended December 31, 2018 and 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years ended December 31, 2018 and 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2012.
Minneapolis, Minnesota
December 23, 2019
F-16
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2018 and 2017
(In Millions)
| 2018 | 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 54 | $ | 41 | ||||
Accounts receivable, net of allowances of $2 at December 31, 2018 and 2017 | 765 | 595 | ||||||
Inventories | 56 | 42 | ||||||
Contract assets | 240 | 158 | ||||||
Prepaid expenses and other current assets | 27 | 11 | ||||||
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Total current assets | 1,142 | 847 | ||||||
Property and equipment, net | 328 | 243 | ||||||
Goodwill | 320 | 249 | ||||||
Intangible assets, net | 204 | 136 | ||||||
Other assets | 47 | 41 | ||||||
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Total assets | $ | 2,041 | $ | 1,516 | ||||
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Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Short-term and current portion of long-term debt | $ | 295 | $ | 130 | ||||
Accounts payable | 174 | 152 | ||||||
Related-party liabilities | 42 | 41 | ||||||
Accrued salaries and wages | 124 | 96 | ||||||
Other accrued liabilities | 161 | 151 | ||||||
Contract liabilities | 203 | 185 | ||||||
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Total current liabilities | 999 | 755 | ||||||
Long-term debt, less current portion | 305 | 126 | ||||||
Related-party liabilities | 48 | 8 | ||||||
Other noncurrent liabilities | 56 | 45 | ||||||
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Total liabilities | 1,408 | 934 | ||||||
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Commitments and contingencies (Note 11 and 12) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.0025 (whole dollars) par value, authorized, 150 shares; issued and outstanding, 11 shares at December 31, 2018 and 2017 | — | — | ||||||
Additional paid-in-capital | — | — | ||||||
Note receivable from stockholder | (2 | ) | (3 | ) | ||||
Retained earnings | 663 | 602 | ||||||
Accumulated other comprehensive loss | (28 | ) | (17 | ) | ||||
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Total stockholders’ equity | 633 | 582 | ||||||
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Total liabilities and stockholders’ equity | $ | 2,041 | $ | 1,516 | ||||
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See notes to consolidated financial statements.
F-17
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2018 and 2017
(In Millions)
| 2018 | 2017 | |||||||
Net revenues | $ | 3,728 | $ | 3,046 | ||||
Cost of revenues | 2,941 | 2,382 | ||||||
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Gross profit | 787 | 664 | ||||||
Selling, general, and administrative expenses | 576 | 480 | ||||||
Amortization of intangible assets | 49 | 31 | ||||||
Impairment of goodwill, intangibles, and long-lived assets | — | 30 | ||||||
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Operating income | 162 | 123 | ||||||
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Interest expense, net | 22 | 8 | ||||||
Other expense (income), net | (2 | ) | (1 | ) | ||||
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Other expense, net | 20 | 7 | ||||||
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Income before income from equity method investments and income tax provision | 142 | 116 | ||||||
Income from equity method investments | 4 | 4 | ||||||
Income tax provision | (10 | ) | (8 | ) | ||||
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Net income | $ | 136 | $ | 112 | ||||
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See notes to consolidated financial statements.
F-18
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2018 and 2017
(In Millions)
| 2018 | 2017 | |||||||
Net income | $ | 136 | $ | 112 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustment | (11 | ) | 8 | |||||
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Comprehensive income | $ | 125 | $ | 120 | ||||
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See notes to consolidated financial statements.
F-19
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2018 and 2017
(In Millions)
| Accumulated | Note | |||||||||||||||||||||||||||
| Common Stock Issued | Additional | Other | Receivable | Total | ||||||||||||||||||||||||
| and Outstanding | Paid-In | Retained | Comprehensive | From | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | Stockholder | Equity | ||||||||||||||||||||||
Balance, December 31, 2016 | 11 | $ | — | $ | — | $ | 602 | $ | (25 | ) | $ | (6 | ) | $ | 571 | |||||||||||||
Net income | — | — | — | 112 | — | — | 112 | |||||||||||||||||||||
Distributions | — | — | — | (111 | ) | — | — | (111 | ) | |||||||||||||||||||
Stock repurchase | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||
Repayments on stockholder note | — | — | — | — | — | 3 | 3 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 8 | — | 8 | |||||||||||||||||||||
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Balance, December 31, 2017 | 11 | $ | — | $ | — | $ | 602 | $ | (17 | ) | $ | (3 | ) | $ | 582 | |||||||||||||
Cumulative-effect adjustment from adoption of ASC 606 (see note 1) | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||
Net income | — | — | — | 136 | — | — | 136 | |||||||||||||||||||||
Distributions | — | — | — | (74 | ) | — | — | (74 | ) | |||||||||||||||||||
Repayments on stockholder note | — | — | — | — | — | 1 | 1 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (11 | ) | — | (11 | ) | |||||||||||||||||||
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Balance, December 31, 2018 | 11 | $ | — | $ | — | $ | 663 | $ | (28 | ) | $ | (2 | ) | $ | 633 | |||||||||||||
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See notes to consolidated financial statements.
F-20
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018 and 2017
(In Millions)
| 2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 136 | $ | 112 | ||||
Adjustments to reconcile net income, to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 109 | 69 | ||||||
Equity in earnings of unconsolidated entities, net of distributions received | 3 | 1 | ||||||
Gain on sale of property and equipment | (2 | ) | (2 | ) | ||||
Impairment of goodwill, intangibles, and long-lived assets | — | 30 | ||||||
Contingent consideration | 1 | (2 | ) | |||||
Stock-based compensation expense | 3 | 10 | ||||||
Changes in operating assets and liabilities, net of effects of business acquisitions: | ||||||||
Accounts receivable | (119 | ) | (86 | ) | ||||
Contract assets | (54 | ) | (20 | ) | ||||
Inventories | (9 | ) | (1 | ) | ||||
Prepaid expenses and other assets | 7 | 1 | ||||||
Accounts payable | 1 | 5 | ||||||
Accrued liabilities and income taxes payable | 14 | 10 | ||||||
Contract liabilities | 9 | — | ||||||
Related-party liabilities | 13 | (9 | ) | |||||
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Net cash provided by operating activities | 112 | 118 | ||||||
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Cash flows from investing activities: | ||||||||
Acquisitions, net of cash acquired | (234 | ) | (63 | ) | ||||
Purchases of property and equipment | (74 | ) | (39 | ) | ||||
Proceeds from sales of property and equipment | 5 | 9 | ||||||
Advances on related-party and other notes receivable | (16 | ) | (23 | ) | ||||
Payments received on related-party and other notes receivable | 19 | 46 | ||||||
Purchase of marketable securities | — | (1 | ) | |||||
Proceeds from sale of marketable securities | — | 15 | ||||||
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Net cash used in investing activities | (300 | ) | (56 | ) | ||||
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Cash flows from financing activities: | ||||||||
Proceeds from long-term borrowings and revolving line of credit | 1,111 | 1,226 | ||||||
Payments on long-term borrowings and revolving line of credit | (808 | ) | (1,186 | ) | ||||
Repurchase of common stock | — | (1 | ) | |||||
Payments of acquisition-related contingent consideration | (25 | ) | (34 | ) | ||||
Deferred financing costs paid | (1 | ) | — | |||||
Distributions paid | (74 | ) | (111 | ) | ||||
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Net cash provided by (used in) financing activities | 203 | (106 | ) | |||||
Effect of foreign currency exchange rate change on cash and cash equivalents | (2 | ) | 3 | |||||
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Net increase (decrease) in cash and cash equivalents | 13 | (41 | ) | |||||
Cash and cash equivalents, beginning of year | 41 | 82 | ||||||
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Cash and cash equivalents, end of year | $ | 54 | $ | 41 | ||||
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Supplemental schedule of disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 24 | $ | 8 | ||||
Cash paid for income taxes, net of refunds | 9 | 8 | ||||||
Non-cash capital lease obligation incurred for use of equipment | 3 | 1 | ||||||
Non-cash accrued contingent consideration issued in business combinations | 31 | 14 | ||||||
See notes to consolidated financial statements.
F-21
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies |
Nature of business: APi Group, Inc., with its wholly owned subsidiaries and its majority-owned subsidiaries (together herein referred to as APi Group), is engaged in various businesses related to the construction industry and certain service and maintenance of industrial and commercial facilities. APi Group is involved in construction, fabrication, installation, service and maintenance of various commercial and industrial systems, through various types of construction contracts, primarily in the United States, Canada and the United Kingdom.
Principles of consolidation: The consolidated financial statements include the accounts of APi Group. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in entities over which APi Group has significant influence but not control are accounted for using the equity method of accounting. These investments are initially recorded at cost and subsequently adjusted based on APi Group’s proportionate share of earnings, losses and distributions from each entity.
Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that 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. The most significant estimates include the estimation of total contract costs used for revenue and cost recognition from construction contracts, allowance for doubtful accounts and notes receivable, fair value estimates included in the accounting for acquisitions, valuation of long-lived assets and acquisition-related contingent consideration, self-insurance liabilities, income taxes and the estimated effects of litigation and other contingencies.
Foreign currency and currency translation: The assets and liabilities of foreign subsidiaries with a functional currency other than the U.S. dollar are translated into U.S. dollars at period-end exchange rates, with resulting translation gains or losses included within other comprehensive income or loss. Revenue and expenses are translated into U.S. dollars at average rates of exchange during the applicable period. Substantially all of APi Group’s foreign operations use their local currency as their functional currency. Currency gains or losses resulting from transactions executed in currencies other than the functional currency are included in other income or expense, net in the consolidated statements of operations.
Revenue recognition and contract costs: APi Group adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is also referred to as FASB Accounting Standards Codification (ASC) Topic 606, under the modified retrospective transition approach effective January 1, 2018, with application to all existing contracts that were not complete as of January 1, 2018. APi Group also adopted ASC Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, related to the accounting for costs to obtain and costs to fulfill a contract simultaneously with ASC 606.
The difference between the recognition criteria under ASC 606 and ASC 340 and APi Group’s previous revenue recognition practices under the historical guidance, ASC Subtopic 605-35, was recognized through a cumulative effect adjustment of approximately $1 that was made to the opening balance of retained earnings as of January 1, 2018. The offsetting adjustments were to prepaid assets and other current assets, which includes the immaterial deferred contract fulfillment costs, and contract assets and liabilities. Consistent with the modified retrospective transition approach, the comparative 2017 prior period was not restated.
F-22
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Under ASC 606, revenue is recognized when, or as, control of promised goods and services is transferred to customers, and the amount of revenue recognized reflects the consideration to which an entity expects to be entitled in exchange for the goods and services transferred. The adoption of ASC 606 did not have a material effect on the timing or amount of revenue recognized as compared with APi Group’s previous revenue recognition practices for the year ended December 31, 2018. Revenue is primarily recognized by APi Group over time utilizing the cost-to-cost measure of progress, consistent with APi Group’s previous revenue recognition practices. Revenue recognized at a point in time relates primarily to distribution contracts and was approximately $70 and $64 for the years ended December 31, 2018 and 2017, respectively.
Contracts with customers: APi Group derives revenue primarily from safety solutions, specialty services and industrial solutions contracts with a duration of three months to three years, with the majority of contracts with durations of less than 6 months, which are subject to multiple pricing options, including fixed price, unit price, time and materials, or cost plus a markup. APi Group also enters into fixed-price service contracts related to monitoring, maintenance and inspection of safety solution systems. APi Group may utilize subcontractors in the fulfillment of its performance obligations. When doing so, APi Group is considered the principal in these transactions and revenue is recognized on a gross basis.
Revenue for fixed price agreements is generally recognized over time using the cost-to-cost method of accounting, which measures progress based on the cost incurred to total expected cost in satisfying its performance obligation. The cost-to-cost method is used as it best depicts the continuous transfer of control of goods or services to the customer. Costs incurred include direct materials, labor and subcontract costs, and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in the results of operations under cost of sales. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed.
Revenue from time and material construction contracts is recognized as the services are provided and is equal to the sum of the contract costs incurred plus an agreed upon markup. Revenue earned from distribution contracts is recognized upon shipment or performance of the service.
The cost estimation process for recognizing revenue over time under the cost-to-cost method is based on the professional knowledge and experience of APi Group’s project managers, engineers and financial professionals. Management reviews estimates of total contract transaction price and total project costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected variable consideration are factors that influence estimates of the total contract transaction price, total costs to complete those contracts and APi Group’s profit recognition. Changes in these factors could result in cumulative revisions to revenue in the period in which the revisions are determined, which could materially affect APi Group’s consolidated results of operations for that period. Provisions for estimated losses on uncompleted contracts are recorded in the period in which such estimated losses are determined.
F-23
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
APi Group disaggregates its revenue from contracts with customers primarily by segment, service type, and country, as the nature, timing and uncertainty of cash flows are relatively consistent within each of these categories. For the year ended December 31, 2017, revenues from construction contracts were recognized in accordance with ASC Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. Disaggregated revenue information is as follows:
| December 31, 2018 | ||||||||||||||||||||
| Safety | Specialty | Industrial | Corporate and | |||||||||||||||||
| Solutions | Services | Solutions | Eliminations | Consolidated | ||||||||||||||||
Life safety | $ | 1,322 | $ | — | $ | — | $ | — | $ | 1,322 | ||||||||||
Mechanical | 383 | — | — | — | 383 | |||||||||||||||
Infrastructure | — | 733 | — | — | 733 | |||||||||||||||
Fabrication | — | 142 | — | — | 142 | |||||||||||||||
Specialty contracting | — | 484 | — | — | 484 | |||||||||||||||
Transmission | — | — | 455 | — | 455 | |||||||||||||||
Civil | — | — | 68 | — | 68 | |||||||||||||||
Inspection | — | — | 200 | — | 200 | |||||||||||||||
Corporate and eliminations | — | — | — | (59 | ) | (59 | ) | |||||||||||||
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Net revenues | $ | 1,705 | $ | 1,359 | $ | 723 | $ | (59 | ) | $ | 3,728 | |||||||||
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| December 31, 2017 | ||||||||||||||||||||
| Safety | Specialty | Industrial | Corporate and | |||||||||||||||||
| Solutions | Services | Solutions | Eliminations | Consolidated | ||||||||||||||||
Life safety | $ | 1,171 | $ | — | $ | — | $ | — | $ | 1,171 | ||||||||||
Mechanical | 430 | — | — | — | 430 | |||||||||||||||
Infrastructure | — | 498 | — | — | 498 | |||||||||||||||
Fabrication | — | 121 | — | — | 121 | |||||||||||||||
Specialty contracting | — | 444 | — | — | 444 | |||||||||||||||
Transmission | — | — | 253 | — | 253 | |||||||||||||||
Civil | — | — | 67 | — | 67 | |||||||||||||||
Inspection | — | — | 119 | — | 119 | |||||||||||||||
Corporate and eliminations | — | — | — | (57 | ) | (57 | ) | |||||||||||||
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Net revenues | $ | 1,601 | $ | 1,063 | $ | 439 | $ | (57 | ) | $ | 3,046 | |||||||||
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F-24
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
| December 31, 2018 | ||||||||||||||||||||
| Safety | Specialty | Industrial | Corporate and | |||||||||||||||||
| Solutions | Services | Solutions | Eliminations | Consolidated | ||||||||||||||||
United States | $ | 1,505 | $ | 1,359 | $ | 654 | $ | (59 | ) | $ | 3,459 | |||||||||
Canada and UK | 200 | — | 69 | — | 269 | |||||||||||||||
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Net revenues | $ | 1,705 | $ | 1,359 | $ | 723 | $ | (59 | ) | $ | 3,728 | |||||||||
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| December 31, 2017 | ||||||||||||||||||||
| Safety | Specialty | Industrial | Corporate and | |||||||||||||||||
| Solutions | Services | Solutions | Eliminations | Consolidated | ||||||||||||||||
United States | $ | 1,408 | $ | 1,063 | $ | 403 | $ | (57 | ) | $ | 2,817 | |||||||||
Canada and UK | 193 | — | 36 | — | 229 | |||||||||||||||
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Net revenues | $ | 1,601 | $ | 1,063 | $ | 439 | $ | (57 | ) | $ | 3,046 | |||||||||
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APi Group’s contracts with its customers generally require significant services to integrate complex activities and equipment into a single deliverable, and are therefore generally accounted for as a single performance obligation to provide a single construction service for the duration of the construction project. For contracts with multiple performance obligations, the transaction price of a contract is allocated to each performance obligation and recognized as revenue when or as the performance obligation is satisfied using the estimated stand-alone selling price of each distinct good or service. The stand-alone selling price is estimated using the expected cost plus a margin approach for each performance obligation. The aggregate amount of transaction price allocated to the performance obligations that are unsatisfied as of December 31, 2018, was $1.0 billion.
When more than one contract is entered into with a customer on or close to the same date, management evaluates whether those contracts should be combined and accounted for as a single contract as well as whether those contracts should be accounted for as one, or more than one, performance obligation. This evaluation requires significant judgment and is based on the facts and circumstances of the various contracts.
Contracts are often modified through change orders to account for changes in the scope and price of the goods or services being provided. Although APi Group evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of change orders are for goods or services that are not distinct within the context of the original contract and, therefore, are not treated as separate performance obligations but rather as a modification of the existing contract and performance obligation.
F-25
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Variable consideration: Transaction prices for customer contracts may include variable consideration, which comprises items such as early completion bonuses and liquidated damages provisions. Management estimates variable consideration for a performance obligation utilizing estimation methods that are believed to best predict the amount of consideration to which APi Group will be entitled. Variable consideration is included in the transaction price only to the extent it is probable, in APi Group’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Changes in the estimates of transaction prices are recognized in revenue on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from APi Group’s previous estimate. For the years ended December 31, 2018 and 2017, APi Group did not recognize significant revenue associated with the final settlement of contract value for any projects that were completed in prior periods. In addition, for the years ended December 31, 2018 and 2017, there were no significant reversals of revenue recognized associated with the revision of transaction prices. APi Group typically does not incur any returns, refunds or similar obligations after the completion of the performance obligation since any deficiencies are corrected during the course.
Contract assets and liabilities: APi Group typically invoices customers with payment terms of net due in 30 days. It is also common for the contract in the construction industry to specify that a general contractor is not required to submit payments to a subcontractor until it has received those funds from the owner or funding source. In most instances, APi Group receives payment of invoices between 30 to 90 days of the date of the invoice.
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from APi Group’s construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to APi Group’s customers, as the amounts cannot be billed under the terms of APi Group’s contracts. In addition, many of APi Group’s time and materials arrangements are billed in arrears pursuant to contract terms, resulting in contract assets being recorded, as revenue is recognized in advance of billings.
APi Group utilizes the practical expedient under ASC 606 and does not adjust for a significant financing component if the time between payment and the transfer of the related good or service is expected to be one year or less. APi Group’s revenue arrangements are typically accounted for under such expedient as payments are within one year of performance for APi Group’s services. As of January 1, 2019, none of APi Group’s contracts contained a significant financing component.
F-26
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Contract liabilities from APi Group’s construction contracts arise when amounts invoiced to APi Group’s customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities also include advance payments from APi Group’s customers on certain contracts. Contract liabilities decrease as APi Group recognizes revenue from the satisfaction of the related performance obligation. Contact assets and liabilities are classified as current in the consolidated balance sheets as all amounts are expected to be relieved within one year. Substantially all revenue included in contract liabilities at January 1, 2018 was recognized during the year ended December 31, 2018. The total revenue recognized during the year ended December 31, 2018, which was included in contract liabilities at January 1, 2018, was $192.
The opening and closing balances of accounts receivable, net of allowances, contract assets and contract liabilities from contracts with customers for the year ended December 31, 2018, are as follows:
| December 31, | January 1, | |||||||
| 2018 | 2018 | |||||||
Accounts receivable, net of allowances | $ | 765 | $ | 595 | ||||
Contract assets | 240 | 157 | ||||||
Contract liabilities | 203 | 192 | ||||||
In accordance with industry practice, accounts receivable includes retentions receivable, a portion of which may not be received within one year. At December 31, 2018 and 2017, retentions receivable were $116 and 94, respectively. Changes to the contract assets and contract liabilities balances during the year ended December 31, 2018, were due primarily to the timing of invoicing and revenue recognition. Contract assets and liabilities increased by $41 and $8, respectively, due to acquisitions during 2018. There were no other significant changes due to business acquisitions or significant changes in estimates of contract progress or transaction price. There was no significant impairment of contract assets recognized during the period.
Net contract assets and liabilities on uncompleted construction projects as of December 31, 2018 and 2017, are as follows:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
Costs incurred on uncompleted contracts: | ||||||||
Total costs incurred | $ | 3,825 | $ | 3,587 | ||||
Estimated earnings | 835 | 760 | ||||||
|
|
|
| |||||
| 4,660 | 4,347 | |||||||
Less billings to date | (4,623 | ) | (4,374 | ) | ||||
|
|
|
| |||||
| $ | 37 | $ | (27 | ) | ||||
|
|
|
| |||||
Contract assets | 240 | 158 | ||||||
Contract liabilities | (203 | ) | (185 | ) | ||||
|
|
|
| |||||
| $ | 37 | $ | (27 | ) | ||||
|
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|
| |||||
F-27
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Costs to obtain or fulfill a contract: APi Group generally does not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. APi Group may incur certain fulfilment costs such as initial design or mobilization costs which are capitalized if i) they relate directly to the contract, ii) are expected to generate resources that will be used to satisfy APi Group’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Such costs, which are amortized over the life of the respective project, were not material for the year ended December 31, 2018. APi Group generally does not incur any significant costs related to obtaining a contract with a customer.
For the year ended December 31, 2017, revenues from construction contracts were recognized in accordance with ASC Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. Revenue from fixed-price construction contracts is recognized using the percentage-of-completion method and measured by comparison of costs incurred to date to estimated total costs for each contract. The revenue and profit recognized under the percentage-of-completion method are based on management’s estimates such as total contract revenues, contract costs and the extent of progress towards completion. Revenue from time and material construction contracts is recognized as the services are provided and is equal to the sum of the contract costs incurred plus an agreed-upon markup. Revenue earned from fabrication sales are recognized using the percentage-of-completion method. Contract costs under ASC 605-35 include all direct labor and materials and indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are identified. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, final contract settlements and claims resolution, may result in revisions to costs and revenue. Revenue from revisions is recognized in the period in which the revisions are identified, and the amounts can be reasonably estimated, as evidenced by either payment or signed agreements.
Cash and cash equivalents: APi Group considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. APi Group maintains cash in bank accounts that, at times, may exceed federally insured limits. APi Group has not experienced any losses in such accounts.
Fair value of financial instruments: The financial instruments of APi Group include cash and cash equivalents, accounts and notes receivable, accounts payable, related-party assets and liabilities, acquisition-related contingent consideration and debt obligations.
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market as of the measurement date. ASC Topic 820, Fair Value Measurements, provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to and is composed of the following levels:
| Level 1: | Quoted prices for identical assets or liabilities in active markets |
| Level 2: | Observable inputs other than Level 1 inputs that would include quoted prices in markets that are not active, or financial instruments for which significant inputs are observable, either directly or indirectly |
| Level 3: | Unobservable inputs that cannot be corroborated by observable market data and include management estimate and assumptions |
F-28
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
The carrying values of cash and cash equivalents, accounts receivable, other receivables, accounts payable, related-party assets and liabilities, and accrued liabilities approximates their fair values because of their short maturity. The carrying values of the notes receivable approximate their fair values based on the current rates of return on similar investments. The fair value of APi Group’s revolving line of credit facilities and long-term debt are based on current lending rates for similar borrowings, assuming the debt is outstanding through maturity, and considering the collateral. The carrying values of long-term debt and revolving line of credit facilities approximate their fair values because of the variable interest rates of these instruments.
Inventories: Inventories consist primarily of wholesale insulation products, contracting materials and supplies. Inventories are valued at the lower of cost and net realizable value, generally using the first-in, first-out method.
Property and equipment: Property and equipment, including additions, replacements and improvements, is stated at cost, or fair value for assets acquired in a business combination, less accumulated depreciation. Expenditures for maintenance and repairs are charged to operating expenses as incurred. Depreciation expense is recognized over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation and amortization are removed from the consolidated balance sheets and any resulting gain or loss is recognized in the consolidated statements of operations.
Goodwill: Goodwill represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses, is stated at cost. Goodwill is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. APi Group has recorded goodwill in connection with its historical acquisitions of businesses. Upon acquisition, these businesses were either combined into one of the existing components or managed on a stand-alone basis as an individual component. The components are aligned to one of its three reportable segments, Safety Solutions, Specialty Services, or Industrial Solutions. Goodwill is required to be measured for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available.
Management identifies its reporting units by assessing whether components (i) have discrete financial information available; (ii) engage in business activities; and (iii) have a segment manager regularly review the component’s operating results. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment test. APi Group
F-29
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
APi Group early adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, as of January 1, 2017. ASU 2017-04 eliminated the second step in goodwill impairment testing, which required that goodwill impairment losses be measured as the difference between the implied value of a reporting unit’s goodwill and its carrying amount. Under the new guidance, goodwill impairment losses are measured as the excess of a reporting unit’s carrying amount, including goodwill and related goodwill tax effects, over its fair value.
APi Group performs its annual goodwill impairment assessment at October 1 each fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. An assessment can be performed by first completing a qualitative assessment on none, some or all of its reporting units. APi Group can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test, and then resume the qualitative assessment in any subsequent period. Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, a significant change in business climate, a loss of a significant customer, increased competition, a sustained decrease in share price, or a decrease in estimated fair value below book value may trigger the need for interim impairment testing of goodwill associated with one or more reporting units.
If APi Group believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. The quantitative test involves comparing the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recorded as a reduction to goodwill with a corresponding charge to earnings in the period the goodwill is determined to be impaired. The income tax effect associated with an impairment of tax deductible goodwill is also considered in the measurement of the goodwill impairment. Any goodwill impairment is limited to the total amount of goodwill allocated to that reporting unit.
APi Group determines the fair value of its reporting units using a combination of the income approach (discounted cash flow method) and market approach (guideline transaction method and guideline public company method), Management weighs each of the methods applied to determine the fair value of its reporting units.
Under the discounted cash flow method, APi Group determines fair value based on the estimated future cash flows for each reporting unit, discounted to present value using a risk-adjusted industry weighted-average cost of capital, which reflects the overall level of inherent risk for each reporting unit and the rate of return an outside investor would expect to earn. Cash flow projections are derived from budgeted amounts (typically a one-year model) and subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur. All cash flow projections by reporting unit are evaluated by management. A terminal value is derived by capitalizing free cash flow into perpetuity. The capitalization rate is derived from the weighted-average cost of capital and the estimated long-term growth rate for each reporting unit.
F-30
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Under the guideline transaction and guideline public company methods, APi Group determines the estimated fair value for each of its reporting units by applying transaction multiples and public company multiples, respectively, to each reporting unit’s applicable earnings measure. The transaction multiples are based on observed purchase transactions for similar businesses adjusted for size, diversification and risk. The public company multiples are based on peer group multiples adjusted for size, growth, risk and margin.
APi Group’s annual impairment testing date is October 1, as this date generally coincides with APi Group’s annual budgeting process. For the annual goodwill impairment assessment, APi Group first concluded to assess qualitative factors to determine whether it was necessary to perform a quantitative fair value impairment analysis. As a result of the qualitative assessment, APi Group identified certain reporting units for which a quantitative goodwill impairment assessment was determined appropriate based on either changes in market conditions or specific performance indicators. As a result of these quantitative impairment assessments, impairment charges of $17 were recorded to impairment of goodwill, intangibles and long-lived assets on the consolidated statements of operations for the year ended December 31, 2017.
See Note 3 for additional detail on goodwill and other intangible assets.
Impairment of long-lived assets excluding goodwill: APi Group periodically reviews the carrying amount of its long-lived asset groups, including property and equipment and other identifiable intangibles subject to amortization, when events or changes in circumstances such as asset utilization, physical change, legal factors or other matters indicate the carrying value may not be recoverable. If facts or circumstances support the possibility of impairment, APi Group will compare the carrying value of the asset or asset group with the undiscounted future cash flows related to the asset or asset group. If the carrying value of the asset or asset group is greater than its undiscounted cash flows, the resulting impairment will be determined as the difference between the carrying value and the fair value, where fair value is determined for the carrying amount of the specific asset groups based on discounted future cash flows or appraisal of the asset groups.
In 2017, APi Group concluded it had a triggering event requiring assessment of impairment for certain intangible assets in the Industrial Solutions segment. As a result, APi Group reviewed the intangible assets for impairment and recorded a $7 impairment charge within impairment of goodwill, intangibles and long-lived assets on the consolidated statement of operations for the year ended December 31, 2017. The impairment was measured under the market approach utilizing an appraisal to determine fair values of the impaired assets. This method is consistent with the methods APi Group employed in prior periods to value other intangible assets.
Additionally, in 2017, APi Group concluded it had a triggering event requiring assessment of impairment for certain long-lived assets because of a material change in the market in western North Dakota. As a result, APi Group reviewed the long-lived assets for impairment and recorded a $6 impairment charge within impairment of goodwill, intangibles and other long-lived assets on the consolidated statement of operations for the year ended December 31, 2017. The impairment was measured under the market approach utilizing an appraisal to determine fair values of the impaired assets. This method is consistent with the methods APi Group employed in prior periods to value other long lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy, as defined in ASC Topic 820.
F-31
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Definite-lived intangibles: Intangibles consist of trade names, customer relationships and backlog intangibles. The trade names and customer relationships are amortized on a straight-line basis over their estimated useful lives, which range from three to 15 years. Backlog intangibles are calculated as the remaining margin on uncompleted contracts at date of acquisition and are amortized over the remaining life of the contract.
Stock-based compensation: APi Group’s Option Plan provides for share-based compensation awards. APi Group has reserved 3,600 shares of its common shares for share-based awards under the Option Plan. Option awards granted under the Plan have an exercise price equal to the year-end market valuation price of APi Group’s stock. Awards under this plan are determined on a discretionary basis by APi Group’s Board of Directors and are made at the end of the fiscal year. APi Group has elected to value its options under the intrinsic-value method. Future compensation expense will be recognized based upon the change in the fair value of APi Group’s common stock. The fair value of the stock, in whole dollars, was $111.04 and $107.90 per share at December 31, 2018 and 2017, respectively. The fair value was determined by a third-party valuation using discounted cash flow and guideline public company methods.
Income taxes and distributions: APi Group’s stockholders elected to treat APi Group as a Subchapter S corporation under sections of the federal and state income tax laws, which provide that, in lieu of corporate income taxes, the stockholders separately account for APi Group’s items of income, deductions, losses and credits. Distributions may be declared periodically in amounts that will cover the individual stockholder’s income tax liabilities arising from the taxable income of APi Group and for other purposes.
For APi Group’s Canadian and U.K. subsidiaries, along with certain states that do not recognize Subchapter S corporations, APi Group pays corporate income taxes and records a tax provision for the anticipated consequences of the results of APi Group’s operations.
Income taxes are accounted for under the asset and liability method for nonrecognized S corporation entities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.
APi Group recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. APi Group records interest and penalties relating to unrecognized tax benefits and penalties in income tax expense.
F-32
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Insurance liabilities: Accrued liabilities include management’s best estimates of amounts expected to be incurred for health insurance claims, workers’ compensation, general liability and automobile liability losses. The estimates are based on claim reports provided by the insurance carrier, management’s best estimates, and the maximum premium for a policy period. The amounts APi Group will ultimately incur could differ in the near term from the estimated amounts accrued. At December 31, 2018 and 2017, APi Group had accrued $57 and $48, respectively, relating to workers’ compensation, general and automobile claims, with $38 and $30, respectively, included in other noncurrent liabilities. APi Group recorded a receivable from the insurance carriers of $10 and $7 at December 31, 2018 and 2017, respectively, to offset the liabilities due above APi Group’s deductible, which, under contract, are payable by the insurance carrier. APi Group has outstanding letters of credit as collateral totaling approximately $61 and $50 as of December 31, 2018 and 2017, respectively. APi Group had $4 accrued within accrued expenses relating to outstanding health insurance claims at both December 31, 2018 and 2017.
Recent accounting pronouncements:
Accounting standards issued and adopted: In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires revenue to be recognized based on the amount an entity is expected to be entitled to for promised goods or services provided to customers. The standard also requires expanded disclosures regarding contracts with customers. The guidance in this standard supersedes the revenue recognition requirements in ASC Subtopic 605-35 and most industry-specific guidance. As discussed above, APi Group adopted the requirements of ASC 606, under the modified retrospective transition approach effective January 1, 2018, with application to all existing contracts that were not substantially completed as of January 1, 2018.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available for sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. ASU 2016-01 is effective for annual and interim periods for fiscal years beginning after December 15, 2017. APi Group adopted this guidance on January 1, 2018, and the adoption did not have a material impact on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods for fiscal years beginning after December 15, 2017, and requires application using a retrospective transition method. APi Group adopted this guidance on January 1, 2018, and the adoption did not have a material impact on the consolidated financial statements.
F-33
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions rather than business combinations across all industries, particularly in real estate, pharmaceuticals and life sciences, and oil and gas. The new guidance will also affect the accounting for disposal transactions. ASU 2017-01 is effective for annual and interim periods for fiscal years beginning after December 15, 2017. Early adoption is permitted. The amendments can be applied to transactions occurring before the guidance was issued (January 5, 2017) as long as the applicable financial statements have not been issued. Prospective application to transactions consummated after the effective date is required. APi Group adopted this guidance on January 1, 2017, and the adoption did not have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The standard is effective for APi Group for fiscal years beginning after December 15, 2019. APi Group adopted ASU 2017-04 on January 1, 2017, for goodwill impairment testing. The adoption of this guidance did not have a material impact on APi Group’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Subtopic 350-402 to determine which implementation costs to capitalize as assets. The guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. APi Group adopted this guidance as of January 1, 2018. The adoption of this guidance did not have a material impact on APi Group’s consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17 guidance eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider such indirect interests on a proportionate basis. This pronouncement is effective for fiscal years ending after December 15, 2019, with early adoption permitted. APi Group adopted this guidance as of January 1, 2018. The adoption of this guidance did not have a material impact on APi Group’s consolidated financial statements.
F-34
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 1. | Nature of Business and Significant Accounting Policies (Continued) |
Accounting standards issued but not yet adopted: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The ASU removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. APi Group is evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. For trade and other receivables, loans and other financial instruments, APi Group will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. APi Group is evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02, including all the related amendments subsequent to its issuance, will supersede the current guidance for lease accounting. Lessees will be required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of the lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases).
APi Group will adopt ASU 2016-02 on January 1, 2019. As of December 31, 2018, APi Group was still assessing the impact of ASU 2016-02 to its consolidated financial statements; however, APi Group expects that adoption of ASU 2016-02 will have a material impact on APi Group’s consolidated balance sheet. APi Group also expects expanded qualitative and quantitative financial statement disclosures regarding APi Group’s leasing arrangements. APi Group does not expect ASU 2016-02 will have a material impact on APi Group’s consolidated results of operations or cash flows.
F-35
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 2. | Acquisitions |
The following table is a summary of the estimated fair value of assets acquired, and liabilities assumed in connection with acquisitions during the year ended December 31, 2018. The following were based primarily on Level 3 valuation techniques:
| Acquisition | ||||||||||||
| A18 | B18 | C18 | ||||||||||
Assets acquired: | ||||||||||||
Trade accounts receivable | $ | 13 | $ | 6 | $ | 36 | ||||||
Inventories | 1 | — | 5 | |||||||||
Contract assets and other current assets | — | 1 | 32 | |||||||||
Intangibles | 24 | 44 | 47 | |||||||||
Goodwill | 16 | 33 | �� | 21 | ||||||||
Property and equipment | — | 13 | 61 | |||||||||
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Total assets acquired | 54 | 97 | 202 | |||||||||
Less liabilities assumed: | ||||||||||||
Trade accounts payable | 5 | 3 | 16 | |||||||||
Accrued and contract liabilities | 6 | 2 | 19 | |||||||||
Debt and other long term liabilities | — | — | 41 | |||||||||
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Net assets acquired | $ | 43 | $ | 92 | $ | 126 | ||||||
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Accrued and contingent consideration | $ | 10 | $ | 7 | $ | 12 | ||||||
Cash paid | 33 | 85 | 114 | |||||||||
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Total purchase price, net of cash acquired | $ | 43 | $ | 92 | $ | 126 | ||||||
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Potential contingent consideration/compensation | $ | 3 | $ | 25 | $ | 44 | ||||||
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Acquisition A18: On January 1, 2018, APi Group acquired all of the outstanding shares of a Dallas, Texas based safety solutions provider to grow its business in the Safety Solutions segment for a purchase price of $43, net of cash acquired including $3 that was held back and paid into escrow and is scheduled to be released from escrow in 2019 and $10 of accrued earn-out. The purchase agreement also includes $3 of potential future earn-out consideration to be paid if prescribed performance benchmarks are achieved. APi Group paid a premium over the fair value of tangible and identified intangible assets, resulting in goodwill recorded of $16. A qualitative description of the factors that make up the goodwill amount recognized includes other intangible assets, such as acquired workforce and growth opportunities, which do not qualify as separately recognizable intangible assets under GAAP. The results of the acquisition are included in the accompanying consolidated statements of operations and comprehensive income from the acquisition date forward. The net sales and income (loss) before taxes of the company included in the consolidated statement of operations was $56 and $4, respectively, for the year ended December 31, 2018. The fair value measurements are final at December 31, 2018.
F-36
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 2. | Acquisitions (Continued) |
Acquisition B18: On January 31, 2018, APi Group acquired all of the outstanding shares of a Mansfield, Ohio based specialty solutions provider to grow its business in the Specialty Services segment for a purchase price of $92, net of cash acquired including $12 that was held back until 2019 of which $9 was paid into escrow. The purchase agreement also includes $25 of potential contingent consideration to paid if prescribed performance benchmarks are achieved. APi Group paid a premium over the fair value of tangible and identified intangible assets, resulting in goodwill recorded of $33. A qualitative description of the factors that make up the goodwill amount recognized includes other intangible assets, such as acquired workforce and growth opportunities, which do not qualify as separately recognizable intangible assets under GAAP. The results of the acquisition are included in the accompanying consolidated statements of operations and comprehensive income from the acquisition date forward. The net sales and income (loss) before taxes of the company included in the consolidated statement of operations was $57 and $(10), respectively, for the year ended December 31, 2018.
Acquisition C18: On February 28, 2018, APi Group acquired a Maple Lake, Minnesota based supplier of specialty solutions to grow its business in its Specialty Services segment for a purchase price of $126, net of cash acquired, including $12 that was held back until 2019 which includes accrued earn-out of $1. The purchase agreement also includes $44 of potential future earn-out consideration to be paid if prescribed performance benchmarks are achieved. APi Group paid a premium over the fair value of tangible and identified intangible assets, resulting in goodwill recorded of $21. A qualitative description of the factors that make up the goodwill amount recognized includes other intangible assets, such as acquired workforce and growth opportunities, which do not qualify as separately recognizable intangible assets under GAAP. The results of the acquisition are included in the accompanying consolidated statements of operations and comprehensive income from the acquisition date forward. The net sales and income (loss) before taxes of the company included in the consolidated statement of operations was $258 and $(5), respectively, for the year ended December 31, 2018. The fair value measurements are final at December 31, 2018, except for potential adjustment for the final determination of the 338(h) election gross-up payment due to the sellers.
APi Group also acquired seven other businesses during the year ended December 31, 2018. These entities were acquired for an aggregate purchase price net of cash acquired of $4, including $1 that was held back until 2020 and $1 of accrued earn-out. In addition to the accrued earn-out, the purchase agreements include an additional $1 of potential future earn-out to be recognized in the consolidated statements of operations for financial reporting purposes over the next five years as earn-out is achieved. APi Group paid a premium over the fair value of tangible and identified intangible assets, resulting in goodwill of $2 being recorded primarily within the Safety Solutions segment. A qualitative description of the factors that make up the goodwill amount recognized includes other intangible assets, such as acquired workforce and growth opportunities, which do not qualify as separately recognizable intangible assets under GAAP. The results of the acquisitions are included in the accompanying consolidated statements of operations and comprehensive income from the acquisition dates forward. The fair value measurements are final at December 31, 2018. These acquisitions were determined to be immaterial for pro forma disclosure.
In general, the earn-out consideration described above is consistent with terms of the purchase agreements that require APi Group to pay the sellers’ additional amounts based on final outcomes of certain activities with the passage of time or future performance as defined in the purchase agreements. APi Group records this consideration within selling, general and administrative expenses in the accompanying consolidated statement of operations.
F-37
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 2. | Acquisitions (Continued) |
The following table is a summary of final fair value of assets acquired and liabilities assumed in connection with the 2017 acquisitions. The following were based primarily on Level 3 valuation techniques:
| Acquisition | ||||
| A17 | ||||
Asset acquired: | ||||
Trade accounts receivable | $ | 2 | ||
Inventories | 4 | |||
Contract assets and other current assets | 1 | |||
Intangibles | 15 | |||
Goodwill | 17 | |||
Property and equipment | 31 | |||
|
| |||
Total assets acquired | 70 | |||
Less liabilities assumed: | ||||
Trade accounts payable | 3 | |||
Accrued and contract liabilities | 1 | |||
Debt | 13 | |||
|
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Net assets acquired | $ | 53 | ||
|
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Accrued and contingent consideration | $ | 13 | ||
Cash paid | 40 | |||
|
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Total purchase price, net of cash acquired | $ | 53 | ||
|
| |||
Potential contingent consideration/compensation | $ | — | ||
|
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Acquisition A17: On February 28, 2017, APi Group acquired a Duluth, Minnesota based specialty services providers to grow its presence in the Industrial Solutions segment for a total purchase price, net of cash acquired of $53, including $13 that was held back until 2019. APi Group paid a premium over the fair value of tangible and identified intangible assets, resulting in goodwill recorded of $17. A qualitative description of the factors that make up the goodwill amount recognized includes other intangible assets, such as acquired workforce and growth opportunities, which do not qualify as separately recognizable intangible assets under GAAP. The results of the acquisition are included in the accompanying consolidated statements of operations and comprehensive income from the acquisition date forward.
F-38
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 2. | Acquisitions (Continued) |
APi Group also acquired six other entities during the year ended December 31, 2017. These entities were acquired for an aggregate purchase price net of cash acquired of $27, including $2 that was held back until 2019 and $1 of accrued earn-out. In addition to the accrued earn-out, the purchase agreements include an additional $1 of potential future earn-out to be recognized in the consolidated statements of income for financial reporting purposes over the next five years as earn-out is achieved. APi Group paid a premium over the fair value of tangible and identified intangible assets, resulting in goodwill recorded of $7. A qualitative description of the factors that make up the goodwill amount recognized includes other intangible assets, such as acquired workforce and growth opportunities, which do not qualify as separately recognizable intangible assets under GAAP. The results of the acquisitions are included in the accompanying consolidated statements of operations and comprehensive income from the acquisition dates forward. These acquisitions were determined to be immaterial for pro forma disclosure.
As summarized above, acquisitions include the fair value of contingent consideration to be paid to the sellers based on future earnings of the acquired business, as well as amounts held back to be paid after the passage of time. Accrued contingent consideration and amounts held back amounted to $84 and $45, with $42 and $5 included in noncurrent related-party liabilities and the remainder as current related-party liabilities at December 31, 2018 and 2017, respectively. The Company incurred $22 and $6 of expense related to earn-outs paid to sellers of the acquired companies during the years ended December 31, 2018 and 2017, respectively.
Transaction costs related to the acquisitions noted above were not material to the consolidated financial statements.
Accrued contingent consideration and amounts held back estimated to be paid out subsequent to December 31, 2018, is as follows:
Years ending December 31: | ||||
2019 | $ | 42 | ||
2020 | 22 | |||
2021 | 20 | |||
2022 | — | |||
2023 | — | |||
Thereafter | — | |||
|
| |||
Total estimated accrued contingent consideration to be paid | $ | 84 | ||
|
|
Pro forma consolidated financial information (unaudited): The following unaudited pro forma consolidated financial information reflects the results of operations of APi Group as if the 2018 acquisitions had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, after giving effect to certain purchase accounting adjustments. These pro forma results are not necessarily indicative of what APi Group’s operating results would have been had the acquisitions actually taken place at the beginning of the fiscal year prior to the fiscal year of acquisition.
| 2018 | 2017 | |||||||
Revenue | $ | 3,777 | $ | 3,437 | ||||
|
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Net income | $ | 142 | $ | 131 | ||||
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F-39
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 2. | Acquisitions (Continued) |
The unaudited pro forma financial information for the years ended December 31, 2017 and 2018, included the following nonrecurring adjustments:
| • | Include the pro forma results of operations of the acquired companies for the years ended December 31, 2018 and 2017. |
| • | Include adjustments to depreciation expense related to the fair value of acquired property, plant and equipment to account for the changes in basis and to conform to APi Group’s depreciation methodologies. |
| • | An increase related to the amortization of intangible assets (trade names, customer relationships, backlog). Prior to the acquisitions, there were no intangible assets being amortized by the acquired companies. |
| • | Included interest expense related to debt used to finance the acquisitions. |
| Note 3. | Goodwill and Intangibles |
Goodwill: The changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2018 and 2017, are as follows:
| Safety | Specialty | Industrial | Total | |||||||||||||
| Solutions | Services | Solutions | Goodwill | |||||||||||||
Goodwill as of December 31, 2016 | $ | 145 | $ | 74 | $ | 23 | $ | 242 | ||||||||
Acquisitions | 7 | — | 17 | 24 | ||||||||||||
Impairments (1) | — | — | (17 | ) | (17 | ) | ||||||||||
|
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| |||||||||
Goodwill as of December 31, 2017 | 152 | 74 | 23 | 249 | ||||||||||||
Acquisitions | 18 | 53 | — | 71 | ||||||||||||
Impairments | — | — | — | — | ||||||||||||
Transfers | — | (2 | ) | 2 | — | |||||||||||
|
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Goodwill as of December 31, 2018 | $ | 170 | $ | 125 | $ | 25 | $ | 320 | ||||||||
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| (1) | Impairment charge was recorded as a result of APi Group’s annual impairment testing, and resulted primarily from a decrease in the future forecasted cash flows. In the Industrial Solutions segment, the impairment charge of $17 was recorded within the Civil reporting unit. APi Group recorded accumulated goodwill impairment of $67 as of December 31, 2016. |
F-40
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 3. | Goodwill and Intangibles (Continued) |
Intangibles: APi Group has the following identifiable intangible assets as of December 31, 2018 and 2017:
| December 31, 2018 | ||||||||||||||||
| Weighted- | ||||||||||||||||
| Average | Gross | |||||||||||||||
| Useful Lives | Carrying | Accumulated | Net Carrying | |||||||||||||
| (Years) | Amount | Amortization | Amount | |||||||||||||
Amortized intangibles: | ||||||||||||||||
Backlog intangibles | 3.0 | $ | 2 | $ | (2 | ) | $ | — | ||||||||
Customer relationships | 7.9 | 228 | (80 | ) | 148 | |||||||||||
Trade names | 14.3 | 68 | (12 | ) | 56 | |||||||||||
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Total | $ | 298 | $ | (94 | ) | $ | 204 | |||||||||
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| December 31, 2017 | ||||||||||||||||
| Weighted- | ||||||||||||||||
| Average | Gross | |||||||||||||||
| Useful Lives | Carrying | Accumulated | Net Carrying | |||||||||||||
| (Years) | Amount | Amortization | Amount | |||||||||||||
Amortized intangibles: | ||||||||||||||||
Backlog intangibles | 2.6 | $ | 13 | $ | (8 | ) | $ | 5 | ||||||||
Customer relationships | 9.2 | 143 | (54 | ) | 89 | |||||||||||
Trade names | 12.2 | 56 | (14 | ) | 42 | |||||||||||
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Total | $ | 212 | $ | (76 | ) | $ | 136 | |||||||||
|
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Approximate annual aggregate amortization expense of the intangibles for the five years subsequent to December 31, 2018, is as follows:
Years ending December 31: | ||||
2019 | $ | 35 | ||
2020 | 35 | |||
2021 | 35 | |||
2022 | 33 | |||
2023 | 20 | |||
Thereafter | 46 | |||
|
| |||
Total amortization | $ | 204 | ||
|
|
Amortization expense recognized on all intangibles totaled $49 and $31 for the years ended December 31, 2018 and 2017, respectively.
F-41
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 4. | Fair Value of Financial Instruments |
The following table summarizes the fair values, and levels within the fair value hierarchy in which the measurements fall, for assets and liabilities measured on a recurring basis as of December 31, 2018 and 2017:
| Fair Value Measurements at December 31, 2018 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Contingent earn-out obligations | $ | — | $ | — | $ | 49 | $ | 49 | ||||||||
|
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| |||||||||
| Fair Value Measurements at December 31, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Contingent earn-out obligations | $ | — | $ | — | $ | 25 | $ | 25 | ||||||||
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The value of the contingent consideration obligations is determined using a probability-weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., potential payment amounts, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. The contingent consideration obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
The table below presents a reconciliation of the fair value of APi Group’s contingent consideration obligations that use significant unobservable inputs (Level 3):
| December 31 | ||||||||
| 2018 | 2017 | |||||||
Balances at beginning of year | $ | 25 | $ | 35 | ||||
Issuances | 41 | 15 | ||||||
Settlements | (17 | ) | (16 | ) | ||||
Adjustments to fair value | — | (9 | ) | |||||
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Balance at end of year | $ | 49 | $ | 25 | ||||
|
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APi Group measures certain assets at fair value on a nonrecurring basis. No goodwill or other intangible asset impairments were recorded during the year ended December 31, 2018. During the year ended December 31, 2017, APi Group recorded a goodwill impairment charge of $17 based on Level 3 measurements. APi Group did not recognize any other impairments on those assets required to be measured at fair value on a nonrecurring basis. See Note 3 for further discussion.
F-42
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 5. | Property and Equipment, Net |
The components of property and equipment follows:
| Estimated | ||||||||||||
| Useful Lives | ||||||||||||
| (In Years) | 2018 | 2017 | ||||||||||
Land* | N/A | $ | 15 | $ | 15 | |||||||
Building | 40 | 64 | 63 | |||||||||
Machinery and equipment | 3–15 | 274 | 207 | |||||||||
Autos and trucks | 5 | 106 | 53 | |||||||||
Office equipment | 3–7 | 76 | 72 | |||||||||
Leasehold improvements | 2–10 | 39 | 35 | |||||||||
|
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| |||||||||
Total cost | 574 | 445 | ||||||||||
Accumulated depreciation | (246 | ) | (202 | ) | ||||||||
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Property and equipment, net | $ | 328 | $ | 243 | ||||||||
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| * | Land is not a depreciable asset |
Depreciation related to property and equipment, including capital leases, was $60 and $38 for the years ended December 31, 2018 and 2017, respectively.
| Note 6. | Financing Arrangements |
APi Group’s financing arrangements consist of the following at December 31, 2018 and 2017:
| 2018 | 2017 | |||||||
Term loan | $ | 318 | $ | 134 | ||||
Revolving line of credit | 261 | 117 | ||||||
Capital leases | 5 | 2 | ||||||
Other debt | 16 | 3 | ||||||
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Total debt | 600 | 256 | ||||||
Less: | ||||||||
Current maturities | 34 | 13 | ||||||
Line of credit | 261 | 117 | ||||||
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Total long-term debt | $ | 305 | $ | 126 | ||||
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On January 30, 2018, APi Group entered into an unsecured financing agreement consisting of a $330 term loan and a revolving credit facility of $500. The agreement contains certain financial covenants, including requirements as to fixed-charge coverage ratio and total leverage ratio.
F-43
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 6. | Financing Arrangements (Continued) |
In connection with the unsecured financing agreement, APi Group incurred $1 of financing costs related primarily to the revolving line of credit, which have been recorded in other assets in the consolidated balance sheet. These costs are amortized on a straight-line basis over the term of the line of credit (five years). For the year ended December 31, 2018, APi Group recognized $1 of amortization expense in the consolidated statement of operations, which includes $1 of financing costs related to the prior financing arrangement that was written off upon termination of that arrangement in connection with the January 30, 2018, financing agreement.
Advances under the credit agreement bear interest under the following options:
Base rate advance: The base rate advance is equal to the base rate plus 0.00% to 0.75%, depending on the total leverage ratio. The base rate is defined as the rate per annum equal to the higher of (a) the federal funds rate plus 0.50% (the federal funds rate at December 31, 2018, was 2.40%), (b) prime rate as publicly announced by the lender (the prime rate at December 31, 2018, was 5.50%) and (c) the Eurodollar rate for that day plus 1.50% (the Eurodollar rate at December 31, 2018, was 2.46%).
Eurodollar rate advance: The Eurodollar rate advance is equal to the applicable LIBOR, which was 2.46% as of December 31, 2018, plus 1.00% to 2.25%, depending on total leverage ratio.
At December 31, 2018, APi Group has $261 outstanding under this revolving line of credit and $177 was available after giving effect to $62 of outstanding letters of credit, which reduced availability. The weighted-average interest rate on the revolving line of credit was 3.92% and 2.72% as of December 31, 2018 and 2017, respectively.
In addition, one of APi Group’s subsidiaries had outstanding letters of credit of $0 and $19 at December 31, 2018 and 2017, respectively.
One of APi Group’s Canadian subsidiaries has a $20 unsecured line-of-credit agreement with a variable-interest rate based upon the prime rate. APi Group has $1 and $0 outstanding under the line of credit at December 31, 2018 and 2017, respectively.
At December 31, 2018 and 2017, APi Group has $5 and $2, respectively, in obligations under capital lease, which represent the present value of the future minimum lease payments. The net amount of assets held under capital lease classified within property, plant and equipment totaled $5 and $2 as of December 31, 2018 and 2017, respectively. Amounts for obligations under capital leases included in the table below at December 31, 2018, total $5, comprising $2 in 2019, $1 in 2020, $1 in 2021, and $1 in 2022.
At December 31, 2018 and 2017, APi Group has $16 and $3 in notes outstanding for the acquisition of construction equipment and vehicles. The net amount of assets held under notes payable and classified within property, plant and equipment totaled $28 and $5 as of December 31, 2018 and 2017, respectively. Amounts for obligations under notes payable included in the table below at December 31, 2018, total $16, comprising $8 in 2019, $5 in 2020, $2 in 2021, $0 in 2022, $0 in 2023, and $0 after 2023.
F-44
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 6. | Financing Arrangements (Continued) |
Approximate annual maturities of APi Group’s financing arrangements for years subsequent to December 31, 2018, are as follows:
Years ending December 31: | ||||
2019 | $ | 295 | ||
2020 | 31 | |||
2021 | 34 | |||
2022 | 34 | |||
2023 | 206 | |||
Thereafter | — | |||
|
| |||
Total maturities | $ | 600 | ||
|
|
| Note 7. | Income Taxes |
The components of the provision for income tax for the years ended December 31, 2018 and 2017, are as follows:
| 2018 | 2017 | |||||||
Current: | ||||||||
State | $ | 3 | $ | 2 | ||||
Foreign | 8 | 6 | ||||||
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| 11 | 8 | |||||||
Deferred tax (benefit) expense: | ||||||||
Foreign | (1 | ) | — | |||||
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Provision for income taxes | $ | 10 | $ | 8 | ||||
|
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For the years ended December 31, 2018 and 2017, the income tax provision consisted of expense related to APi Group’s Canadian and international subsidiaries, along with certain states that do not recognize Subchapter S corporation status. APi Group had recorded net deferred tax liabilities primarily relating to their Canadian subsidiaries of $1 as of December 31, 2018 and 2017.
APi Group has not accrued for withholding taxes on the undistributed earnings of certain non-U.S. subsidiaries because those subsidiaries have invested or will invest the undistributed earnings indefinitely. APi Group has no intentions of remitting the undistributed earnings of certain non-U.S. subsidiaries aggregating $135 and $121 as of December 31, 2018 and 2017, respectively. Deferred taxes are recorded for earnings of non-U.S. subsidiaries when APi Group determines that such earnings are no longer permanently reinvested.
As of December 31, 2018, unrecognized tax benefits totaled $4 gross. The gross reserve includes interest of $1. As of December 31, 2017, unrecognized tax benefits totaled $5 gross. The gross reserve includes interest of $1. During 2018, there was a net decrease of $0 to the gross tax contingency liability due to change in foreign currency translation adjustment. Interest expense recognized related to uncertain tax positions amounted to $0 and $0 during 2018 and 2017, respectively.
APi Group, including its domestic subsidiaries, files state income tax returns for those states that do not recognize Subchapter S corporations. For years before 2013, APi Group is no longer subject to state income tax examinations or examination by Canadian or United Kingdom taxing authorities for APi Group’s subsidiaries in those jurisdictions.
F-45
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 7. | Income Taxes (Continued) |
On December 22, 2017, H.R.1, more commonly referred to as the Tax Cuts and Jobs Act, was signed into law. The new tax legislation contains significant changes to the Internal Revenue Code, which are generally effective January 1, 2018, and include corporate rate reductions as well as modifying or repealing certain business deductions and credits. APi Group determined that the Tax Cuts and Jobs Act and mandatory repatriation provisions for multinational companies has no material impact on the current-year consolidated financial statements due to its status as an S corporation for federal income tax purposes.
| Note 8. | Employee Benefit Plans |
APi Group has 401(k) plans and an employee stock ownership plan (ESOP) that provide for annual contributions not to exceed the maximum amount allowed by the Internal Revenue Code. The plans are qualified and cover employees meeting certain eligibility requirements who are not covered by collective bargaining agreements. The amounts contributed each year are discretionary and are determined annually by management. APi Group recognized $12 and $10 in ESOP compensation expense and $13 and $9 in 401(k) expense during 2018 and 2017, respectively.
There were 3,893 shares held by the ESOP at December 31, 2018 and 2017.
APi Group has an obligation to repurchase the stock in the plan, as set forth in the plan document, based upon the fair value of the shares, which is determined by an annual independent appraisal. No repurchases were made during 2018 or 2017. Based on a valuation from a third-party appraiser, APi Group’s total potential repurchase obligation at December 31, 2018 and 2017, was $432 and $420, respectively. APi Group has created a retirement compensation arrangement for employees of APi Group’s Canadian subsidiary, Vipond, Inc. The arrangement covers employees meeting certain eligibility requirements but who are not covered by collective bargaining agreements. The arrangement is funded entirely by APi Group’s contributions. The amounts contributed to the Plan are based on the net income before tax, as set forth in the arrangement documents. APi Group recognized $1 and $2 of expense for contributions under this arrangement for the years ended December 31, 2018 and 2017, respectively.
APi Group participates in several multiemployer pension plans (MEPPs) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (CBAs). As one of many participating employers in these MEPPs, APi Group may be responsible with the other participating employers for any plan underfunding. APi Group’s contributions to a particular MEPP are established by the applicable CBAs; however, its required contributions may increase based on the funded status of the MEPP and the legal requirements of the Pension Protection Act of 2006 (the PPA), which requires substantially underfunded MEPPs to implement a funding improvement plant (FIP) or a rehabilitation plan (RP) to improve their funded status. Factors that could impact the funded status of the MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions, and the utilization of extended amortization provisions.
F-46
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 8. | Employee Benefit Plans (Continued) |
APi Group believes that certain of the MEPPs in which APi Group participates may have underfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, as well as the absence of specific information regarding the MEPPs current financial situation, APi Group is unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether APi Group’s participation in these MEPPs could have a material adverse impact on APi Group’s consolidated financial position, results of operations, or liquidity. APi Group did not record any withdrawal liability for the years ended December 31, 2018 or 2017.
APi Group’s participation in MEPPs for the year ended December 31, 2018, is outlined in the table below. The EIN/PN column provides the Employer Identification Number (EIN) and the three-digit plan number (PN). The most recent PPA zone status available for 2018 and 2017 is for the plan year ends, as indicated below. The zone status is based on information that APi Group received from the plans and is certified by the plans’ actuaries. Among other factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are between 65% and 80% funded, and plans in the green zone are at least 80% funded. The FIP/RP status pending/implemented column indicates plans for which an FIP or an RP either is pending or has been implemented. In addition, APi Group may be subject to a surcharge if the Plan is in the red zone. The Surcharge imposed column indicates whether a surcharge has been imposed on contributions to the Plan. The last column lists the expiration date(s) of the collective bargaining agreement(s) to which the plans are subject.
| FIP/RP | ||||||||||||||||||||||||||||
| Status | Contributions | More | Expiration | |||||||||||||||||||||||||
| Plan | PPA Zone Status(1) | Pending/ | (In Millions) | Than | Surcharge | Date of | ||||||||||||||||||||||
Pension Fund | EIN/PN | Year-End | 2018 | 2017 | Implement | 2018 | 2017 | 5%(2) | Imposed | CBA | ||||||||||||||||||
National Automatic Sprinkler Industry Pension Fund | 52-6054620-001 | 12/31/2017 | Red | Red | Yes | $ | 23 | $ | 23 | Yes | No | 03/31/2021 | ||||||||||||||||
Boilermaker-Blacksmith National Pension Trust | 48-6168020-001 | 12/31/2017 | Yellow | Red | Yes | 8 | 7 | No | No | 12/31/2019 | ||||||||||||||||||
Twin City Pipe Trades Pension Plan | 41-6131800-001 | 04/30/2018 | Green | Green | No | 7 | 8 | Yes | No | 04/30/2021 | ||||||||||||||||||
Heavy and General Laborers Local Unions 472 and 172 of New Jersey Pension Fund | 22-6032103-001 | 03/31/2018 | Green | Green | No | 6 | 6 | Yes | No | 02/28/2021 | ||||||||||||||||||
Sheet Metal Workers’ Local 10 Pension Fund | 41-1562581-001 | 12/31/2017 | Green | Green | No | 5 | 2 | Yes | No | 04/30/2020 | ||||||||||||||||||
Central Pension Fund of the IUOE and Participating Employers | 36-6052390-001 | 01/31/2018 | Green | Green | No | 4 | 3 | No | No | 05/31/2022 | ||||||||||||||||||
Building Trades United Pension Trust Fund | ||||||||||||||||||||||||||||
Milwaukee and Vicinity | 51-6049409-001 | 05/31/2018 | Green | Green | No | 4 | 4 | No | No | 05/31/2019 | ||||||||||||||||||
Plumbers and Pipefitters National Pension Fund | 52-6152779-001 | 06/30/2017 | Yellow | Yellow | Yes | 3 | 2 | No | No | 05/03/2020 | ||||||||||||||||||
Sheet Metal Workers’ National Pension Fund | 52-6112463-001 | 12/31/2017 | Yellow | Yellow | Yes | 3 | 4 | No | No | 05/31/2023 | ||||||||||||||||||
Minnesota Laborers Pension Fund | 41-6159599-001 | 12/31/2017 | Green | Green | No | 2 | 2 | No | No | 04/30/2020 | ||||||||||||||||||
Total other | 18 | 16 | ||||||||||||||||||||||||||
|
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|
| |||||||||||||||||||||||||
Total | $ | 83 | $ | 77 | ||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||
| (1) | The zone status represents the most recent available information for the respective MEPP, which may be 2017 or earlier for the 2018 year and 2016 or earlier for the 2017 year. |
| (2) | This information was obtained from the respective plan’s Form 5500 (Forms) for the most current available filing. These dates may not correspond with APi Group’s fiscal year contributions. The above-noted percentages of contributions are based upon disclosures contained in the plans’ Forms. Those Forms, among other things, disclose the names of individual participating employers whose annual contributions account for more than 5% of the aggregate annual amount contributed by all participating employers for a plan year. Accordingly, if the annual contribution of two or more of APi Group’s subsidiaries each accounted for less than 5% of such contributions, but in the aggregate accounted for in excess of 5% of such contributions, that greater percentage is not available and accordingly is not disclosed. |
F-47
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 8. | Employee Benefit Plans (Continued) |
The nature and diversity of APi Group’s business may result in volatility in the amount of its contributions to a particular MEPP for any given period. That is because, in any given market, APi Group could be working on a significant project and/or projects, which could result in an increase in its direct labor force and a corresponding increase in its contributions to the MEPP(s) dictated by the applicable CBA. When that particular project(s) finishes and is not replaced, the number of participants in the MEPP(s) who are employed by APi Group would also decrease, as would its level of contributions to the particular MEPP(s). Additionally, the amount of contributions to a particular MEPP could also be affected by the terms of the CBA, which could require, at a particular time, an increase in the contribution rate and/or surcharges. APi Group’s contributions to various MEPPs did not significantly increase as a result of acquisitions made since 2017.
| Note 9. | Related-Party Transactions and Investments |
Operating leases: APi Group and certain subsidiaries lease office and operating facilities through December 2026 from an entity related by common ownership. The leases provide that all taxes and operating costs are to be paid by the lessee. Rent expense, including real estate taxes and operating costs, incurred by APi Group and its subsidiaries under these lease agreements was $1 for each of the years ended December 31, 2018 and 2017.
Related-party notes receivable: During 2011, APi Group loaned $4 to a related party under an interest-bearing note receivable due on demand. The note is unsecured and interest accrues at an annual rate of one-month LIBOR plus 1.75%. The outstanding balance at December 31, 2018 and 2017, was $0 and $3, respectively.
APi Group loaned $12 and $15 in 2018 and 2017, respectively, to a related party under an interest-bearing note receivable due on demand. The note was unsecured and interest accrued at an annual rate of 2.25%. APi Group received payments of $12 and $22 in 2018 and 2017, respectively. The outstanding balance on December 31, 2018 and 2017, was $0.
APi Group has a 15% ownership in Trey Aviation, and during 2012, APi Group loaned $4 to Trey Aviation. APi Group made two additional loans to Trey Aviation during 2013 for a total of $2. All three loans are interest-bearing notes receivable due on demand. The notes are unsecured, and interest accrues at an annual rate of 2.25%. The outstanding balance at December 31, 2018 and 2017, was $5 for both years. APi Group also incurred expense of $4 in both 2018 and 2017, related to the rental of Trey Aviation aircraft.
During 2018, APi Group loaned $6 to a related party under a non-interest-bearing note receivable due on demand. The note is secured by certain of the related-party’s assets and is due in full on June 30, 2019. The outstanding balance at December 31, 2018, was $3.
APi Group also had other notes receivable from related parties totaling $1 as of December 31, 2018 and 2017.
F-48
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 9. | Related-Party Transactions and Investments (Continued) |
Amounts due to related-parties associated with acquired entities: Related to APi Group’s acquisitions, the purchase agreements typically include earn-out and holdback provisions to the former owners, who are now employees of APi Group. These provisions are recorded as additional consideration at the time of the acquisition and as earned in the earn-out period and are typically paid over a three- to five-year period. At December 31, 2018 and 2017, APi Group had accrued $84 and $45, respectively, relating to earn-outs and holdbacks. Management anticipates it will incur future earn-out expense of $16, $15, $4 and $1 in 2019, 2020, 2021 and 2022, respectively, related to acquisitions closed as of December 31, 2018.
Related-party investment: APi Group has a related-party investment which has a carrying value of $3 and $6 as of December 31, 2018 and 2017, respectively.
Other: APi Group performs contract work for entities related through common ownership. Contract revenue earned was approximately $1 for each of the years ended December 31, 2018 and 2017. Trade accounts receivable outstanding under these contracts were less than $1 at both December 31, 2018 and 2017.
APi Group leases rental equipment from an entity related through common ownership. Rental expense was approximately $2 for each of the years ended December 31, 2018 and 2017. Trade accounts payable outstanding under these contracts were less than $1 at both December 31, 2018 and 2017.
In December 2013, APi Group entered into a stock purchase agreement with an officer of APi Group to sell 248 thousand common shares for $10. In exchange for these shares, APi Group received a promissory note due in annual installments of $1 from 2015 through 2022. The promissory note is secured by the underlying common shares. APi Group has an obligation to repurchase the shares at the end of the officer’s employment with APi Group based upon the fair value of the shares at the time of the repurchase, which is determined by an annual independent appraisal. APi Group’s total potential repurchase obligation at December 31, 2018, was $28.
APi Group has a bonus agreement with an officer that provides for annual bonus payments through 2021 subject to the officer’s continued employment with APi Group.
APi Group had other payables to related parties totaling $6 and $3, which were recorded as noncurrent related-party liabilities in the consolidated balance sheets as of December 31, 2018 and 2017, respectively.
| Note 10. | Commitments |
APi Group leases various facilities, equipment and vehicles under operating leases from unrelated parties. The facility leases are primarily for office space, and the terms of the agreements range from 1 to 10 years. The equipment leases are primarily related to heavy equipment utilized in the completion of construction jobs, and the terms of the agreements range from 1 to 5 years. Vehicle leases are primarily managed through a master lease agreement and have a minimum lease term of 12 months. The vehicle master agreement also includes guaranteed residual value provisions with a total potential residual value guarantee of $15 as of December 31, 2018. Rent expense incurred under these lease agreements was approximately $38 and $37 for the years ended December 31, 2018 and 2017, respectively.
F-49
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 10. | Commitments (Continued) |
At December 31, 2018, future noncancelable minimum rental commitments under operating leases, including those with related parties, with remaining terms exceeding one year are as follows:
Years ending December 31: | ||||
2019 | $ | 37 | ||
2020 | 30 | |||
2021 | 21 | |||
2022 | 15 | |||
2023 | 11 | |||
Thereafter | 15 | |||
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| |||
Total future noncancelable minimum rental commitments under operating leases | $ | 129 | ||
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Other noncurrent liabilities: In January 2005, APi, Inc., a wholly owned subsidiary of APi Group, filed for protection under Chapter 11 of the Bankruptcy Code resulting from numerous personal injury lawsuits by individuals asserting injury from asbestos exposure. As a result of this action, obligations arising from both current and future asbestos claims have been channeled to a trust providing a pool of funds and a mechanism for a resolution of all existing and future claims along with a court order that effectively bars all further claims against APi, Inc. and its parent, APi Group, Inc. As part of the agreement, APi, Inc. is obligated to make 80 quarterly payments of $325 thousand with the final payment scheduled for 2027. The promissory note is secured by 51% of the voting shares of APi, Inc. and substantially all of the assets of API, Inc. The payments have been discounted using APi, Inc.’s effective borrowing rate, resulting in consolidated liability of $9 and $10 at December 31, 2018 and 2017, respectively, of which $1 is classified as current and recorded in accrued liabilities at December 31, 2018 and 2017.
| Note 11. | Contingencies |
APi Group is involved in various litigation matters and is subject to claims from time to time from customers and various government entities. While it is not feasible to determine the outcome of any of these uncertainties, it is the opinion of management that their outcomes will not have a material adverse effect on the consolidated financial position, results of operations, or cash flows of APi Group.
F-50
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 12. | Joint Ventures |
APi Group has entered into four joint ventures which are accounted for under the equity method of accounting as APi Group does not exercise control over the joint ventures.
The joint venture investments were evaluated against the criteria for consolidation, and it was determined that APi Group was not the primary beneficiary of the investments as APi Group lacks the sole power to direct the activities of the variable interest entities (VIEs) that most significantly impact their economic performance. The power to direct the activities of the above VIEs are shared with the other partner of the joint venture.
There were $7 and $6 of distributions received from the joint ventures for the years ended December 31, 2018 and 2017, respectively, and less than $1 of contributions paid to the joint ventures for each of the years ended December 31, 2018 and 2017.
These equity method investments were not significant to the consolidated financial statements for the years ended December 31, 2018 or 2017, and therefore, no summary financial information is required.
| Note 13. | Stock-Based Compensation |
APi Group maintains an equity incentive plan under which incentive stock options, nonqualified stock options and restricted stock options can be granted to officers, nonemployee directors and key employees of APi Group. Compensation expense related to stock-based transactions is measured and recognized in the consolidated financial statements based on the fair market value on the grant date. The portion of the award that is expected to vest is recognized on a straight-line basis over the requisite service or vesting period of the award and adjusted upon completion of the vesting period. Forfeitures are recognized as they occur. Stock-based compensation expense recorded in the years ended December 31, 2018 and 2017, was $3 and $10, respectively.
F-51
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 13. | Stock-Based Compensation (Continued) |
A summary of option activity under the plan as of December 31, 2018, and changes during the year then ended is presented below:
| Weighted- | ||||||||||||
| Weighted- | Average | |||||||||||
| Average | Remaining | |||||||||||
| Shares | Exercise Price | Contractual Term | ||||||||||
Options | (in Thousands) | (Whole Dollars) | (in Years) | |||||||||
Outstanding at December 31, 2017 | 464 | $ | 45.38 | |||||||||
Granted* | 5 | 107.90 | ||||||||||
Exercised | (76 | ) | 31.24 | |||||||||
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Outstanding at December 31, 2018 | 393 | $ | 48.91 | 4.2 | ||||||||
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Exercisable at December 31, 2018 | 390 | $ | 48.74 | 4.2 | ||||||||
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| * | 2018 grants relate to stock appreciation rights, which are classified as liability awards and included in other liabilities in the consolidated balance sheets. |
There were no options forfeited during the years ended December 31, 2018 or 2017. The weighted-average grant-date fair value of options granted during the years 2018 and 2017 using the intrinsic method was $0. The total intrinsic value of options exercised during the years ended December 31, 2018 and 2017, was $6 and $5, respectively.
| Note 14. | Notes Receivable |
APi Group has a loan to an unrelated third-party under interest-bearing note receivable. The note is unsecured but contain certain covenants. The note is personally guaranteed by certain shareholders and officers of the borrower. During the year ended December 31, 2018, APi Group received payments of $1 and recorded an immaterial foreign currency translation adjustment. The total net balance at December 31, 2018 and 2017, was $0 and $1, respectively.
| Note 15. | Segment Information |
APi Group manages its operations under three operating segments, which represent APi Group’s three reportable segments: (1) Safety Solutions (2) Specialty Services and (3) Industrial Solutions. This structure is generally focused on various businesses related to the construction industry and certain service and maintenance of industrial and commercial facilities. All three reportable segments derive their revenue from distribution, fabrication and various types of construction contracts, primarily in the United States as well as Canada and the United Kingdom.
The Safety Solutions segment focuses on end-to-end integrated occupancy systems (fire protection solutions, HVAC, and entry systems) including design, installation, inspection and service of these integrated systems. This segment also provides mission critical services, including life safety, emergency communication systems and specialized mechanical services. The work performed within this segment spans across industries and facilities and includes commercial, industrial, residential, medical and special-hazard settings.
F-52
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
APi Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Amounts in Millions, Except Where Noted Otherwise)
| Note 15. | Segment Information (Continued) |
The Specialty Services segment provides infrastructure services and specialized industrial plant solutions including maintenance and repair of water, sewer and telecom infrastructure. Customers within this segment vary from public and private utility, communications, industrial plants and governmental agencies throughout the United States.
The Industrial Solutions segment provides a variety of specialty contracting services and solutions to the energy industry focused on transmission and distribution. Services within this segment include oil and gas pipeline infrastructure, access and road construction, supporting facilities, and performing ongoing integrity management and maintenance.
The accounting policies of the reportable segments are the same as those described in Note 1. All intercompany transactions and balances are eliminated in consolidation. Intercompany revenue and costs between entities within a reportable segment are eliminated to arrive at segment totals, and eliminations between segments are separately presented. Corporate results include amounts related to corporate functions such as administrative costs, professional fees, acquisition-related transaction costs (exclusive of acquisition integration costs, which are included within the segment results of the acquired businesses), and other discrete items.
Summarized financial information for APi Group’s reportable segments is presented and reconciled to consolidated financial information for total Company in the following tables for the respective years ended:
| December 31, 2018 | ||||||||||||||||||||
| Safety | Specialty | Industrial | Corporate and | |||||||||||||||||
| Solutions | Services | Solutions | Eliminations | Consolidated | ||||||||||||||||
Net revenues | $ | 1,705 | $ | 1,359 | $ | 723 | $ | (59 | ) | $ | 3,728 | |||||||||
Operating income (loss) | 178 | 57 | 13 | (86 | ) | 162 | ||||||||||||||
Depreciation and amortization | 18 | 63 | 24 | 4 | 109 | |||||||||||||||
Total assets | 716 | 761 | 366 | 198 | 2,041 | |||||||||||||||
Capital expenditures | 9 | 41 | 23 | 1 | 74 | |||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Safety | Specialty | Industrial | Corporate and | |||||||||||||||||
| Solutions | Services | Solutions | Eliminations | Consolidated | ||||||||||||||||
Net revenues | $ | 1,601 | $ | 1,063 | $ | 439 | $ | (57 | ) | $ | 3,046 | |||||||||
Operating income (loss) | 151 | 61 | 0 | (89 | ) | 123 | ||||||||||||||
Depreciation and amortization | 12 | 31 | 24 | 2 | 69 | |||||||||||||||
Total assets | 624 | 449 | 261 | 182 | 1,516 | |||||||||||||||
Capital expenditures | 6 | 16 | 10 | 7 | 39 | |||||||||||||||
| Note 16. | Subsequent Events |
On October 1, 2019, APi Group was acquired by APi Group Corporation (APG) (f/k/a J2 Acquisition Limited), a London Stock Exchange Group PLC (LSE) listed acquisition vehicle, for approximately $2.9 billion. The transaction was funded through a combination of APG’s cash on hand, $1.2 billion from a new secured term debt financing, and the issuance of APG shares.
F-53
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 102(b)(7) of the DGCL permits a Delaware corporation, in its certificate of incorporation, to limit or eliminate the personal liability of a director to the corporation or its stockholders for monetary damages for breaches of fiduciary duty as a director, except for liability (a) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL or (d) for any transaction from which the director derived an improper personal benefit.
Under Section 145 of the DGCL, a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation (or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. In the case of an action brought by or in the right of a corporation, the corporation may indemnify any person who was or is a party or is threatened to be made a party to any such threatened, pending or completed action by reason of the fact that the person is or was a director, officer, employee or agent of the corporation (or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) only against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent the appropriate court finds that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper.
As permitted by Section 102(b)(7) of the DGCL, the new APG Delaware certificate of incorporation will provide that no director of APG Delaware shall be liable to APG Delaware or its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that such exemption from liability or limitation thereof is not permitted under the DGCL as currently in effect or as the same may be amended. This provision in the APG Delaware certificate of incorporation will not eliminate the directors’ fiduciary duties, and in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director of APG Delaware may be subject to personal liability for breach of the director’s duty of loyalty to APG Delaware, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also will not affect a director’s responsibilities under any other applicable law, such as the United States federal securities laws or state or federal environmental laws.
The new APG Delaware bylaws will also provide that APG Delaware is required to indemnify and advance expenses to its present and former officers and directors to the fullest extent permitted by applicable law. For purposes of the indemnification and advancement rights described in this paragraph, references to APG Delaware include APi Group Corporation as incorporated under British Virgin Islands law prior to the continuance of its existence under Delaware law as APG Delaware.
Further, effective October 1, 2019, we entered into director and officer indemnification agreements, which were further amended and restated, pursuant to which we agreed to additional indemnification and advancement procedures and protections for our directors and certain of our executive officers.
II-1
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Item 21. Exhibits and Financial Statement Schedules
Exhibit | Description | |
| 2.1*# | Business Combination Agreement, dated as of September 2, 2019, by and among J2 Acquisition Limited, APi Group, Inc., the shareholders listed on the signature pages thereto, Lee R. Anderson, Sr. and Shareholder Representative Services LLC, as shareholder representative. | |
| 2.2* | Amendment Number One to Business Combination Agreement, dated as of October 1, 2019, by and among J2 Acquisition Limited, APi Group, Inc., the shareholders listed on the signature pages thereto, Lee R. Anderson, Sr. and Shareholder Representative Services LLC, as shareholder representative. | |
| 3.1** | Form of Certificate of Incorporation of APi Group Corporation. | |
| 3.2** | Form of Bylaws of APi Group Corporation. | |
| 4.1** | Specimen Common Stock certificate. | |
| 4.2** | Specimen Series A Preferred Stock certificate. | |
| 4.3** | Amended and Restated Warrant Instrument, dated as of [●], 2020, executed by APi Group Corporation (form of Warrant contained in Schedule 1 thereto). | |
| 5.1** | Opinion of Greenberg Traurig. | |
| 8.1** | Tax opinion of Greenberg Traurig. | |
| 10.1*† | Executive Employment Agreement, dated as of September 2, 2019, by and among APi Group, Inc., J2 Acquisition Limited and Russell Becker. | |
| 10.2*† | Executive Employment Agreement, dated as of September 2, 2019, by and among APi Group, Inc., J2 Acquisition Limited and Thomas Lydon. | |
| 10.3*† | Offer of Employment, dated as of September 2, 2019, by and among APi Group, Inc., J2 Acquisition Limited and Paul Grunau. | |
| 10.4*† | APi Group Corporation 2019 Equity Incentive Plan. | |
| 10.5*† | Form of Restricted Stock Unit Agreement (Non-Employee Directors) – APi Group Corporation 2019 Equity Incentive Plan. | |
| 10.6*† | Form of Restricted Stock Unit Agreement (Employees) – APi Group Corporation 2019 Equity Incentive Plan. | |
| 10.7*† | Form of Amended and Restated Director and Officer Indemnification Agreement. | |
| 10.8* | Credit Agreement, dated as of October 1, 2019, by and among APi Group DE, Inc., as borrower, J2 Acquisition Limited, the guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative agent and as collateral agent. | |
| 10.9* | Pledge and Security Agreement, dated as of October 1, 2019, by and among APi Group DE, Inc., as borrower, J2 Acquisition Limited, the grantors from time to time party thereto, and Citibank, N.A., as administrative agent and as collateral agent. | |
II-2
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Exhibit | Description | |
| 10.10* | Advisory Services Agreement, dated October 1, 2019, by and between APi Group Corporation and Mariposa Capital, LLC. | |
| 10.11* | Placing Agreement, dated October 5, 2017, by and between the Company, certain of its directors, Mariposa Acquisition IV, LLC, Mariposa Acquisition, LLC, and Citigroup Global Markets Limited and UBS Limited as placing agents. | |
| 10.12**† | Form of Option Deeds. | |
| 16.1* | Letter from PricewaterhouseCoopers LLP, dated December 20, 2019, regarding change in certifying accountant. | |
| 21.1** | List of subsidiaries of the registrant. | |
| 23.1** | Consent of KPMG LLP (APi Group Corporation). | |
| 23.2** | Consent of KPMG LLP (APi Group, Inc.). | |
| 23.3** | Consent of Greenberg Traurig. (included in Exhibit 5.1). | |
| 24.1** | Powers of Attorney (included in signature pages hereto). | |
| * | Previously filed. | |
| ** | To be filed by amendment. | |
| † | Management contract or compensatory plan or arrangement. | |
| # | The schedules to these agreements have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a copy of any schedule omitted from the agreements to the SEC upon request. | |
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
II-3
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of the registration statement, other than registration statements relying on Rule 430B or other than prospectus filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness; provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
(5) The undersigned registrant hereby undertakes to supply, by means of a post-effective amendment, all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
(6) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, if a primary offering of securities of the undersigned registrant is deemed to occur pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, and if the securities are deemed to be offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
II-4
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New Brighton, State of Minnesota, on , 20__.
APi GROUP CORPORATION
| ||
| By: |
| |
| Name: | Russell Becker | |
| Title: | President and Chief Executive Officer | |
Each of the undersigned hereby constitutes and appoints Russell Becker, Thomas Lydon and Desiree DeStefano, and each of them his or her true and lawful attorneys-in-fact and agents, 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 and all amendments (including post-effective amendments) to this registration statement and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite, necessary or advisable 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 attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
Russell Becker | President and Chief Executive Officer (principal executive officer) | , 20__ | ||
Thomas Lydon | Chief Financial Officer (principal financial officer) | , 20__ | ||
Mark Polovitz | Vice President and Controller (principal accounting officer) | , 20__ | ||
Sir Martin E. Franklin | Co-Chairman of the Board | , 20__ | ||
James E. Lillie | Co-Chairman of the Board | , 20__ | ||
Ian G. H. Ashken | Director | , 20__ | ||
Lord Paul Myners | Director | , 20__ | ||
Thomas V. Milroy | Director | , 20__ | ||
Anthony E. Malkin | Director | , 20__ | ||
Confidential Treatment Requested by APi Group Corporation
Pursuant to 17 C.F.R. Section 200.83 (Rule 83)
Cyrus D. Walker | Director | , 20__ | ||
Carrie A. Wheeler | Director | , 20__ |
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, as amended, this registration statement on Form S-4 has been signed on behalf of the registrant by the undersigned, solely in her capacity as the duly authorized representative of the registrant in the United States, on , 20__.
| By: |
| |
| Name: Desiree DeStefano |
