Form 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] AMENDMENT TO THE QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-28490
GUARDIAN INTERNATIONAL, INC.
(Formerly Everest Security Systems Corporation,
formerly Everest Funding Corporation,
formerly Burningham Enterprises, Inc.)
(Exact name of Registrant as specified in its charter)
State of Nevada 58-2201633
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Guardian International, Inc.
3880 N. 28 Terrace
Hollywood, Florida 33020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954)926-1800
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
The number of shares outstanding of the Registrant's Common Stock, par value
$.001 per share, at October 16, 1996, was 6,453,804 shares.
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PART I
Item 1. Financial Statements
GUARDIAN INTERNATIONAL, INC.
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996
[unaudited]
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
ASSETS
September 30, December 31,
1996 1995
(Unaudited)
CURRENT ASSETS:
Cash $ 1,175,129 $ 14,263
Accounts receivable, less allowance
for doubtful accounts of $68,147 553,052 146,285
and $15,000
Other current assets 146,274 7,943
-------------- -----------
Total current assets 1,874,455 168,491
------------- ------------
PROPERTY & EQUIPMENT:
Station equipment 521,401 287,055
Furniture and office equipment 44,636 31,859
Leasehold improvements 112,429 103,217
-------------- -----------
678,466 422,131
Accumulated depreciation and amortization (278,977) (212,184)
-------------- ------------
399,489 209,947
-------------- -------------
CUSTOMER ACCOUNTS, net 4,835,415 2,075,671
INTANGIBLE ASSETS, net 1,330,338 41,165
OTHER 18,043 138,492
------------- -----------
Total Assets $ 8,457,740 $ 2,633,766
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expense $ 420,093 $ 185,067
Unearned revenue 123,705 60,880
Current portion of debt 45,241 44,947
-------------- --------------
Total current liabilities 589,039 290,894
------------- -------------
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DEFERRED INCOME TAX LIABILITY 63,000 -
LONG TERM DEBT:
Equipment installment notes payable 144,044 61,970
Notes and loans payable to shareholders - 198,887
Note payable to financial institution 4,598,669 1,895,299
----------- -----------
Total long term debt 4,742,713 2,156,156
-----------
SHAREHOLDERS' EQUITY:
Common stock, 100,000,000 shares
authorized, $.001 par value, 6,454 3,227
6,453,804 shares issued and
6,443,726 outstanding
Additional paid-in capital 4,355,494 1,060,903
Accumulated deficit (1,097,400) ( 877,414)
Stock subscriptions receivable (201,358) -
Treasury stock, at cost (202) -
------------ --------------
3,062,988 186,716
------------ -------------
Total Liabilities and Shareholders' Equity $ 8,457,740 $ 2,633,766
============== ===========
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
<S> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Monitoring $ 679,304 $269,980 $1,894,290 $ 659,307
Installation 203,391 7,858 382,246 121,589
Other 42,208 687 68,083 6,809
---------- ------------ ------------
924,903 278,525 2,344,619 787,705
--------- -------- ---------- -----------
OPERATING EXPENSES:
Monitoring - primarily salaries 92,441 50,214 270,552 154,058
Installation 125,362 14,604 182,185 127,667
General and administrative 449,963 158,808 1,093,319 459,921
--------- -----------
667,766 223,626 1,546,056 741,646
-------- -------- --------- -----------
Operating income before interest,
amortization and depreciation and 257,137 54,899 798,563 46,059
provision for income taxes
INTEREST EXPENSE, AMORTIZATION
AND DEPRECIATION:
Interest expense 151,631 36,811 400,051 83,147
Amortization of customer contracts 184,889 36,555 438,998 84,978
Depreciation and amortization 35,477 23,693 116,500 71,079
--------- ------------
371,997 97,059 955,549 239,204
-------- --------- -------- -----------
Loss before provision for income taxes (114,860) (42,160) (156,986) (193,145)
PROVISION FOR INCOME TAXES
upon change in tax status (63.000) - (63,000) -
----------- ------------
Net loss $(177,860) $(42,160) $(219,986) $ (193,145)
========= ======== ========= ==========
Loss per share $ (.03) $ (.01) $ (.03) (.03)
=========== ======== =========== ===========
Weighted average number of common
shares outstanding 6,453,804 6,453,804 6,453,804 6,453,804
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Common Stock Additional Accumulated
Shares Amount Paid in Capital Deficit
Balance,
December 31, 1995 3,226,902 3,227 1,060,903 $ (877,414)
Issuance of stock
in connection with
Everest acquisition 3,226,902 3,227 4,962,429 -
Distribution to
Shareholder - - (1,667,838) -
Net loss for period - - - (219,986)
Balance, September _________ _________ ___________ ____________
30, 1996 6,453,804 $6,454 $4,355,494 $(1,097,400)
--------- ------ ---------- ------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996,
CONTINUED
Stock Treasury
Subscription Stock Total
Receivable
Balance,
December 31, 1995 $ - $- $186,716
Issuance of stock
in connection with
Everest acquisition (201,358) (202) 4,663,491
Distribution to
Shareholder - - (1,667,838)
Net loss for period - - (219,986)
Balance, September _________ _________ ___________
30, 1996 (201,358) $(202) $ 3,062,988
See Notes to consolidated financial statements.
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GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
CASH FLOW FROM OPERATING ACTIVITIES: 1996 1995
Net loss $(219,986) $(193,145)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 116,500 71,079
Amortization of customer accounts 438,998 84,978
Provision for doubtful accounts 24,047 9,140
Changes in assets and liabilities:
Accounts receivable (233,778) (28,341)
Other Assets (16,637) 17,034
Accounts payable and accrued liabilities (6,319) (36,630)
Acquisition contracts payable (33,765) (53,058)
Unearned revenue 62,825 107,414
Deferred income tax liability 63,000 ---
------ ---
Net cash provided by 194,885 (21,529)
(used in) operating activities -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (179,402) (25,226)
Acquisition of customer accounts (2,846,742) (896,109)
Advances from Everest 3, 115,619 ----
Cash acquired in acquisition 37,711 ----
------------- ----
Net cash provided by 127,186 (921,335)
(used in) investing activities ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of long-term debt (1,274,129) (936,124)
Net proceeds from line of credit 3,979,649 1,958,652
Payment of shareholder loans (198,887) ----
Distribution to shareholder (1,667,838) ----
----------- ----
Net cash provided by 838,795 1,022,528
financing activities ----------- ---------
Increase in cash 1,160,866 79,664
CASH, BEGINNING OF PERIOD 14,263 14,011
----------- -----------
CASH, END OF PERIOD $1,175,129 93,675
NONCASH INVESTING AND FINANCING ACTIVITY:
Financed acquisition of property $ 58,250 14,362
---------- -----------
Fair value of Everest net assets acquired:
Subscriber accounts acquired $ 352,000 ----
Goodwill $ 1,223,000 ----
Other assets acquired $ 332,743
Purchase price of assumed liabilities $(1,870,032) ----
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 345,957 356,776
----------- ----------
See Notes to consolidated financial statements.
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GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BUSINESS COMBINATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (consisting of
normal recurring accruals or adjustments only) necessary to present fairly
the financial position at September 30, 1996, and the results of operations
and the cash flows for the periods presented. The results of operations for
the interim periods are not necessarily indicative of the results to be
obtained for the entire year.
Business Combination
On August 28, 1996, Everest Security Systems Corporation ("Everest", or
"the predecessor company") acquired all of the outstanding common stock of
Guardian International, Inc. ("Guardian"), a non-public company, by issuing
3,226,902 shares of Everest. In addition, $1,750,000 was paid to the
principal shareholder of Guardian as consideration for consummating the
transaction (including repayments of shareholder loans of $82,162).
Guardian was merged into Everest, and the name of the surviving entity was
changed from Everest to Guardian (" the Company"). The transaction has been
accounted for under the purchase method as a reverse acquisition with
Guardian being deemed the acquirer.
In connection with the acquisition, the Company will issue 484,035
shares of non-voting class B common stock to a financial institution as
consideration for their consent to the merger and to amend certain
covenants of the loan agreement. These shares will be valued at $217,358.
The historical financial statements are those of Guardian. The results
of operations reflect the operations of Guardian prior to the merger, and
thereafter Guardian's consolidated results of operations with Specialty
Device Installers, Inc. ("SDI"), a wholly-owned subsidiary acquired from
the predecessor company. The balance sheet at December 31, 1995 is
Guardian's; the consolidated balance sheet at September 30, 1996 includes
the accounts of the surviving entity and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated.
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Unaudited proforma information giving effect to the acquisition as if
it had occurred at the beginning of the periods reflected below is as
follows:
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ------ ----
Revenues, net $1,143,000 $ 584,000 $3,212,000 $1,703,000
Net loss before income
tax provision $ (206,000) $ (143,000) $ (518,000) $ (497,000)
Income tax credit, net $ 7,000 $ 27,000 $ 113,000 $ 149,000
Net loss $ (199,000) $ (116,000) $ (405,000) $ (348,000)
Net loss per share $ (.03) (.02) $ (.06) $ (.05)
Weighted average number
of shares outstanding 6,453,804 6,453,804 6,453,804 6,453,804
Description of Business
The Company operates a central monitoring alarm station and sells and
installs alarm systems for residential and commercial customers in Florida
.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of
three months or less at the date acquired are considered cash equivalents.
Customer Accounts and Intangible Assets
Customer accounts purchased from alarm dealers and intangible assets
are reflected at cost. Substantially all costs associated with purchasing
an alarm account are capitalized and included in the "customer accounts" in
the accompanying balance sheet. Costs related to marketing and installation
of systems for internally generated customer accounts are expensed as
incurred. Customer accounts are amortized on a straight-line basis over a
10 year period. It is the Company's policy to perform monthly evaluations
of acquired customer account attrition and, if necessary, adjust the
remaining useful lives. The Company periodically estimates future cash
flows from customer accounts. Because expected cash flows have exceeded the
unamortized cost of customer accounts the Company has not recorded an
impairment loss.
Intangible assets are recorded at cost and amortized over their
estimated useful lives. The carrying value of intangible assets is
periodically reviewed and impairments are recognized when expected
operating cash flows derived from such intangibles is less than their
carrying value.
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Property and Equipment
Property and equipment are stated at cost and are depreciated using
accelerated methods over their estimated useful lives.
Revenues
Revenues are recognized when installation of security alarm systems has
been performed and when monitoring services are provided. Customers are
billed for monitoring services on a monthly, quarterly or annual basis in
advance of the period in which such services are provided. Deferred
revenues result from billings in advance of performance of monitoring.
Costs of providing installations, including inventory, are charged to
income in the period when the installation occurs. Losses on contracts for
which future costs are anticipated to exceed revenues are recognized in the
period such losses are identified. Contracts for monitoring services are
generally for an initial non-cancelable term of five years with automatic
renewal on an annual basis thereafter unless terminated by either party. A
substantial number of contracts are on an automatic renewal basis.
Income taxes
Everest, the predecessor company, is a C Corporation subject to income
taxes at the corporate level. Prior to the merger, Guardian was an S
Corporation and subject to tax at the shareholder level. As a result of the
merger on August 28, 1996, Guardian's S Corporation status was terminated
and any future earnings will be subject to income taxes at the corporate
level.
As result of the change in tax status, the Company has established
deferred tax assets and liabilities for temporary differences between
financial statement and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from
large number of customers, including both residential and commercial. The
Company extends credit to its customers in the normal course of business,
performs periodic credit evaluations and maintains allowances for potential
credit losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting
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principles 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 revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. PURCHASED CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer accounts
for the nine months ended September 30, 1996:
Balance, December 31, 1995 $2,075,671
Purchase of customer accounts 2,846,742
Customer accounts acquired in merger 352,000
----------
5,274,413
Amortization and write-off of customer
accounts (438,998)
-----------
Balance, September 30, 1996 $4,835,415
==========
In conjunction with certain purchases of customer accounts, the Company
withholds a portion of the price as a credit to offset qualifying attrition of
the acquired customer accounts and for purchase price settlements of assets
acquired and liabilities assumed. At September 30, 1996, the amounts withheld in
connection with the acquisition of customer accounts aggregated $68,719, and are
included in accounts payable in the accompanying consolidated balance sheet.
3. INTANGIBLE ASSETS
Intangible assets consist of the following at September 30, 1996:
Estimated
Lives Amount
Excess of acquisition cost over
the net assets acquired 10 years $ 1,223,000
Covenant not to compete, organization costs
and other Various 193,455
1,416,455
Less accumulated amortization ( 86,117)
-----------
$1,330,338
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4. NOTES PAYABLE TO FINANCIAL INSTITUTION
The Company has a $7 million line of credit with a financial institution
for the purpose of borrowing funds to acquire customer alarm accounts.
Borrowings under the agreement ($4,598,669 at September 30, 1996) bear interest
at 3% above prime. The loan is collateralized by the Company's assets and
matures on November 30, 1999. The principal shareholders of the Company have
personally guaranteed $700,000 of the loan and pledged their stock as
collateral. The agreement contains certain conditions including, but not limited
to, restrictions related to indebtedness, net worth and distribution payments to
shareholders other than $1,750,000 which was paid to a shareholder in connection
with the acquisition as described in Note 1.
5. RELATED PARTY TRANSACTIONS
Leased Facilities
The Company leases its monitoring facilities from an affiliate which is
owned by the principal shareholders of the Company at an annual rental of
approximately $51,000 (plus annual increases not to exceed 3%) through December
31, 1999 with an option to renew for an additional 5 years under the same terms.
6. INCOME TAXES
The conversion of Guardian from an S Corporation to C Corporation resulted
in recognition of a net deferred tax liability. The components of deferred tax
assets and liabilities at September 30, 1996 are as follows:
Deferred Tax Assets -
Net operating loss carry forwards $ 48,500
Allowance for doubtful accounts 22,500
Total deferred tax assets 71,000
Deferred Tax Liabilities -
Difference in amortization of customer
contracts 120,200
Other 13,800
Total deferred tax liabilities 134,000
Net deferred tax liability $ 63,000
At September 30, 1996, the Company has net operating loss carry forwards
for federal income tax purposes of approximately $143,000 which expire in 2010.
These net operating loss carry forwards will be subject to significant annual
limitations on utilization in future years as a result of the merger and related
change in ownership control of the company.
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7. PRO FORMA DATA
Pro Forma Income Tax Provision (Credit) -
Pro forma net losses do not include a pro forma income tax provision or
benefit for periods prior to the acquisition, as the Company has had net losses
since its inception. The income tax provision in the pro forma data represents
the estimated deferred income tax liability had the Company terminated its S
Corporation status at the end of the period presented.
Pro Forma Net Loss Per Share -
Pro forma net loss per share is computed by dividing the pro forma net
loss by the pro forma number of shares of common stock outstanding during the
periods.
Pro Forma Shares Outstanding -
Pro forma shares outstanding represent the number of shares of common
stock outstanding after giving retroactive effect to the 3,226,902 shares issued
in connection with the merger. Accordingly the calculation of the pro forma
weighted average number of shares of common stock outstanding would be 6,453,804
shares for the nine months ended September 30, 1996 and 1995, respectively.
8. STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has authorized the issuance of up to 100,000,000 shares of
common stock with a par value of $.001. At September 30, 1996, there were
6,453,804 shares of common stock issued and outstanding. Treasury stock is shown
at cost, and as of September 30, 1996, consisted of 10,078 shares.
(b) Stock Subscription Notes Receivable
In December 1995, the Company issued 285,000 shares of common stock at $2
per share ($570,000 in the aggregate). The proceeds from the sale of the common
stock were evidenced by an 8% stock subscription note receivable due in January
1996 and collateralized by the common stock. As of September 30, 1996, there
remains an outstanding balance of $201,358 ($179,760 of principal and $21,598 of
interest) under the notes receivable. The $201,358 has been reflected as "stock
subscriptions receivable" and a reduction of stockholder's equity in the
accompanying consolidated balance sheet. Management is in the process of
attempting to collect the outstanding amounts or have the applicable common
shares returned.
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9. STOCK OPTION PLAN
The Company has issued stock options to various key employees to purchase
100,000 and 10,000 shares of common stock at $2 and $3 per share, respectively.
The Company also issued options to purchase 74,720 shares at $2 per share to an
investment banker. All options expire on December 31, 2000. As of September 30,
1996, none of these options had been exercised.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123. "Accounting for Stock Based Compensation", which establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for the issuance of equity instruments to acquire goods and services from
nonemployees. The Company plans to adopt SFAS No. 123 for its stockbased
employee compensation plans in fiscal 1997 through pro forma disclosure only.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 (the
"Reform Act") provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about their companies, so
long as those statements are identified as forward-looking and are accompanied
by meaningful cautionary statements identifying important factors that would
cause actual results to differ materially from those discussed in the statement.
The Company desires to take advantage of the "safe harbor" provisions of the
Reform Act. Except for the historical information contained herein, the matters
discussed in this Form 10QSB quarterly report are forward-looking statements
which involve risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Important factors that could cause actual results to differ materially
from the Company's expectations are disclosed in conjunction with the forward
looking statements or elsewhere herein.
Overview
The services offered by the Guardian Companies (Guardian
Monitoring, Gibraltar Security, and Specialty Device Installers) include the
design, sales/lease, installation and maintenance of security and fire systems,
and the ongoing monitoring and service of these systems. Over seventy five
percent (75%) of all the systems the company services generate some sort of
Monthly Recurring Revenue ("MRR").
A majority of the Company's revenues are derived from
recurring payments for the monitoring and maintenance of security systems. The
Company also generates revenue from billable
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service charges and revenues from the sale and installation of security systems,
add on and upgrades. The installation work is done mostly through the Company's
wholly owned subsidiary Specialty Device Installers, Inc. ("SDI"). Revenue is
provided from monitoring contracts with initial terms ranging from one to five
years. Payment for monitoring services is typically required in advance, and
monitoring revenue is recognized as the service is provided. Installation, add
on and upgrade revenue is recognized when the required work is completed. All
direct installation costs, which include materials, labor and installation
overhead, and selling and marketing costs are expensed in the period incurred.
The heart of Guardian's operation is its state of the art
Central Monitoring Station. The monitoring facility is one of the most advanced
and well equipped facilities of its kind in the United States. The Company has
recently upgraded the system software which has made the facility even faster
and more efficient. The Guardian monitoring station currently monitors 24,500
subscribers, and with a minimal capital expenditure can be expanded to monitor
up to 200,000 subscribers. This well designed and efficient monitoring facility
is the foundation for future growth of MRR. With the efficiency of the Central
Monitoring Station, alarm monitoring services generate a significantly higher
gross margin than do the other services provided by the Company. While sales and
installation services contribute to the Company's gross profits, the total
expenses associated with alarm system installations (including not only the
direct costs of providing such services but also the expenses associated with
sales and marketing of alarm systems) also exceed the revenues generated by such
services. The Company's strategy, however, is to invest in system sales and
installation because the Company believes that such services and products
contribute to the generation and retention of alarm monitoring subscribers.
Plan of Operation
The Company's strategy for growth has been through the
acquisition of other security companies and security monitoring contracts, and
internal growth with aggressive marketing and superior customer service. The
security industry is experiencing dramatic growth and increased consolidation
among smaller, fragmented "mom and pop" type companies. Guardian's strategy is
to identify these consolidation opportunities and creating efficient economies
of scale through technical and managerial efficiency. From 1994 to 1996, the
Company made twelve security alarm business account portfolio acquisitions
including All American Security and Gibraltar Alarm Systems. The Company has
successfully incorporated these businesses and molded these accounts into its
operation and created economies of scale and improved margins. Guardian's
strategy of growth has increased the Company's current and future MRR.
The Company can continue to purchase additional accounts
through internally generated cash flow. However, to implement its growth
strategy the Company is currently undertaking expansion of its credit facilities
as well as contemplating equity funding.
During the first quarter of 1996 Guardian completed hardware
and software upgrades
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to its security monitoring system. These improvements included the addition of
increased memory on the Data General/Avion machines, enhancements to the Company
system in a more client/server aspect (as opposed to text terminals), and
additional automation enhancements that will increase efficiency while reducing
cost. Guardian is currently operating under the MAS 5.50.11 version for its
automation, service, and billing system.
Results of Operations
Subscriber Attrition. Subscriber attrition has a direct impact
on the Company's results of operations, since it affects both the Company's
revenues and its amortization expense. Attrition can be measured in terms of
decreased MRR resulting from canceled subscriber accounts net of sales of
certain services to existing subscribers, and can also be measured in terms of
canceled subscriber accounts. Guardian has developed an in-house system for
identifying and decreasing account attrition. The Program has been dubbed the
"No-Tolerance Attrition Policy."
Guardian has developed specific procedures for identifying possible account
attrition at various stages and preventing lost accounts or replacing lost
accounts in a fast manner. This program is a critical part of Guardian's
business strategy to increase and maintain MRR.
The No-Tolerance Attrition Policy includes the following:
a) Identification of possible lost accounts via daily test.
b) False alarm fines tracking and cause identification
c) Early, account delinquent procedures
d) Superb Customer Service
e) Control Lockout
f) Early identification of new tenants/residences in Guardian
alarmed homes
Year Gross Net Attrition Non-Tolerance
Attrition (after saves) Program Results*
1993 7.2% 6.7% .05%
1994 7.9% 7.2% .07%
1995 10.1% 7.5% 2.6%
* This is the difference as a result of Guardian's
NO-Tolerance Attrition Program
The following table sets forth, for the periods indicated, the percentage of net
sales of certain items in the Company's consolidated statements of operations
and other data, and the percentage change in each item from the prior period.
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Percentage of Percentage of Nine Months Percentage of Percentage of Three Months
Total Revenues Total Revenues Ended Sept. Total Revenues Total Revenues Ended Sept. 30,
Nine Months Nine Months 30, 1996 as Three Months Three Months 1996 Compared
Ended Sept. Ended Sept. compared to Ended Sept. Ended Sept. to Three Months
30, 1996 30, 1995 Nine Months 30, 1996 30, 1995 Ended Sept. 30,
Ended Sept. 1995
30, 1995
Revenues:
Monitoring 80.8% 82.7% 187% 73.4% 96.9% 152%
Installation 16.3 15.4 214 22.0 2.8 2488
Other 2.9 0.9 900 4.6 0.3 6035
Total Revenues 100 100 198 100 100 232
Operating
Expenses
Monitoring 11.5 19.6 76 9.9 5.4 84
Installation 7.8 16.2 43 13.6 5.2 758
General and 46.6 58.4 138 48.6 57.0 183
Administrative
Total 65.9 94.2 108 72.1 80.3 199
Operating
Expenses
Operating 34.1 5.8 1634 27.9 19.7 368
Income (*1)
Interest 17.1 10.6 381 16.4 13.2 312
Expense
Amortization 18.7 10.8 417 20.0 13.1 406
of Customer
Contracts
Depreciation & 4.7 9.0 56 3.3 8.5 27
Amortization
Loss Before (6.7) (24.5) 160 (12.4) (15.1) 21.5
provision for
Taxes
Provision for (2.7) - - (6.8) -
Income Taxes
Net Profit (9.4%) (24.5%) (11%) (19.2%) (15.1%) (309%)
(loss)
- -----------------------------------------------------------------------------------------------
<FN>
*(1) Before Interest, Amortization and Depreciation and Provision for Income Taxes
Nine Months Ended September 30, 1996 Compared to
Nine Months Ended September 30, 1995
</FN>
</TABLE>
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Revenues for the nine months ended September 30, 1996
increased by $1,556,914, or 198%, to $2,344,619 from $787,705 for the
comparable period in 1995. Monitoring revenues increased by $1,234,983,
or 187%, to $1,894,290 from $659,307 for the comparable period in 1995,
primarily because of a net increase in the number of subscribers to the
Company's alarm services resulting from acquisitions. Installation revenues
increase by $260,657 or 214%, to $382,246 from $121,589 for the comparable
period in 1995, mainly because of the acquisition of SDI.
Operating expenses for the nine months ended September 30,
1996 increased by $804,410, or 108%, to $1,546,056 from $741,646 for the
comparable period in 1995, and decreased as a percentage of revenues from 58.4%
to 46.6%. Monitoring expenses increased by $116,494 or 76%, to $270,552 from
$154,058 for the comparable period in 1995, primarily because of addition of new
employees to handle the additional monitoring acquired through acquisitions.
Monitoring expenses include telephone, labor, rent and depreciation expenses
associated with monitoring of subscriber accounts, as well as billing and
collection expenses. Installation expenses increased by $54,518, or 43%, to
$182,185 from $127,667 in the comparable period in 1995, primarily as a result
of the additional installation revenue generated by the acquisition of SDI.
Selling, general and administrative expenses for the nine months ended September
30, 1996 increased by $633,398, or 138%, to 1,093,319 from $459,921 during the
comparable period in 1995. As a percentage of total revenues, general and
administrative expenses decreased to 46.6% from 58.4%. The increase in general
and administrative expenses resulted from the Company's growth in revenue as
well as the merger of Everest Security Systems Corporation and Guardian
International, Inc. The Company expects that the aggregate amount of general and
administrative expenses will increase in the future as the Company's subscriber
base continues to grow but will decrease as a percentage of total revenue.
Interest expense, including amortization of debt issuance
costs, for the nine months ended September 30, 1996, increased approximately
$316,904, or 381% to $400,051 from $83,147 during the comparable 1995 period.
The expense increase primarily as a result of higher outstanding principal
balances during fiscal 1996 created by the increase in customer accounts during
the year.
Amortization of customer contracts for the nine months ended
September 30, 1996 increased by $354,020, or 417%, to $438,988 from $84,978 for
the comparable 1995 period, as a result of the acquisition of additional
subscriber accounts.
Depreciation and amortization for the nine months ended
September 30, 1996 increased by $45,421 or 63.9%, to $116,500 from $71,079
during the comparable period in 1995, due to the addition of property and
equipment during the 1996 period.
Net loss for the nine months ended September 30, 1996 was
$(219,986), compared to a net loss of $(193,145) in the comparable period in
1995.
Liquidity and Capital Resources
General. The Company has financed its operations and acquisitions from
a combination of
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borrowing, sales of stock and internally generated funds. The Company's
principal uses of cash are acquisitions of subscriber accounts, interest and
principal payments on long-term debt and capital expenditures. Future
acquisitions of subscriber accounts will likely require additional financing.
For the nine months ended September 30, 1996, the Company's net cash provided by
operating activities was $194,885, compared to $(21,529) net cash used in
operating activities for the comparable period in 1995.
For the nine months ended September 30, 1996, the Company's net cash provided by
investing activities was $127,186, compared to $(921,335) net cash used in
investing activities during the same period in 1995, primarily as a result of
the funds advanced by Everest Security Systems Corporation in the form of equity
investment.
For the nine months ended September 30, 1996, the Company's net cash provided by
financing activities was $838,795, compared to $1,022,528 in the comparable
period in 1995. Financing activities were primarily associated with the
retirement of long-term debt in fiscal 1996, and repayment of shareholder's
loans.
Heller Financial. Revolving Credit Facility. On November 16, 1994 , the
Company entered into an agreement with Heller Financial, Inc. ("Heller') that
established the Revolving Credit Facility. The Revolving Credit Facility matures
in November 30, 1999, subject to earlier termination. The Company had $4,598,669
million and $1,028,634 million outstanding at September 30, 1996 and September
30, 1995, respectively, under the credit facility. Availability under the
Revolving Credit Facility is a function of a series of factors including,
the amount of unbilled revenue of Guardian's account portfolio and the
multiple of Monthly Recurring Income for which Guardian is borrowing. At
September 30, 1996, and September 30, 1995, the most restrictive of these
availability tests resulted in total remaining availability of
approximately $2,401,331 million and $5,971,366 million, respectively.
Under the Revolving Credit Facility, the applicable interest rate is the prime
interest rate plus 3%. The Company has paid Heller a initial funding fee of
$25,000 for the initial $2,500,000 of borrowing, and continues to pay Heller a
transaction fee of 1% of the amount it is borrowing at the time of funding. As a
result of exchanging the Capital Appreciation rights of Heller for Common Class
B shares, the Company is no longer responsible for any additional Capital
Appreciation Rights .
The Revolving Credit Facility contains customary covenants including, among
others, restrictions on the incurrence of debt, encumbrances on or sates of
assets, mergers and acquisitions, dividends and transactions with affiliates.
Financial covenants include the maintenance of (i) a minimum EBITDA; (ii) a
minimum ratio of EBITDA less capital expenditures to senior interest; (iii) a
minimum ratio of EBITDA less capital expenditures to fixed charges; (iv) a
maximum annual rate of MRR attrition; and (v) maximum annual capital
expenditures. The Revolving Credit Facility provides that a "change of control"
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<PAGE>
(as defined therein) constitutes an event of default.
The Revolving Credit Facility contain certain restrictions on transfers of funds
such as loans and advances to the Company from its subsidiaries, but not on cash
dividends to the Company by its subsidiaries. The Company believes that such
restrictions have not had and will not have a significant impact on the
Company's ability to meet its cash obligations.
Capital Expenditures. The Company anticipates making additional capital
expenditures in the remainder of fiscal 1996 of approximately $10,000 to upgrade
its telecommunications capabilities and for routine replacement and upgrading of
other capital items. In addition, the Company anticipates making additional
capital expenditures of approximately $5,000 for facility improvements in the
remainder of fiscal 1996. The Company has no other material commitments for
capital expenditures. the Company does not foresee the need for any significant
investment in new technology in the near future and believes that no new
technology expenditures are currently required in order to sustain market share.
PART II
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Dated this _____ day of December, 1996.
GUARDIAN INTERNATIONAL, INC.
(the "Registrant")
By:_________________________________
RICHARD GINSBURG, PRESIDENT
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