U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF
SMALL BUSINESS ISSUER
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
EVEREST SECURITY SYSTEMS CORPORATION
(Formerly Everest Funding Corporation, formerly Burningham Enterprises, Inc.)
(Name of Small Business Issuer in its Charter)
Nevada 58-2201633
(State of Incorporation) (I.R.S. Employer
Identification Number)
823 NW 57th Street
Fort Lauderdale, Florida 33309
(Address of Principal Executive Offices)
Telephone: (305) 772-0330
Securities to be Registered Under Section 12(b) of the Act:
None
Securities to be Registered Under Section 12(g) of the Act:
Common Stock, Par Value $.001
(Title of Class)
This is one of 124 pages.
Exhibit Index on Page 21.
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EVEREST SECURITY SYSTEMS CORPORATION
Form 10SB
Table of Contents
PART I
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Page No.
<S> <C> <C>
Item 1. Description of Business..............................................
Item 2. Management's Discussion and Analysis or Plan of Operations...........
Item 3. Description of Property..............................................
Item 4. Security Ownership of Certain Beneficial Owners and Management.....
Item 5. Directors, Executive Officers, Promoters and Control Persons.........
Item 6. Executive Compensation...............................................
Item 7. Certain Relationships and Related Transactions.......................
Item 8. Description of Securities............................................
PART II
Item 1. Market Price of and Dividends on the registrant's Common Equity
And Other Stockholder Matters...............................
Item 2. Legal Proceedings....................................................
Item 3. Changes in and Disagreements with Accountants........................
Item 4. Recent Sales of Unregistered Securities..............................
Item 5. Indemnification of Directors and Officers............................
PART F/S
Item 1. Financial Statements.................................................
PART III
Item 1. Exhibits.............................................................
</TABLE>
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PART I
Item 1. Business
Business Development
Everest Security Systems Corporation ("Company") was incorporated under
the laws of the State of Nevada on October 30, 1986 as Burningham Enterprises,
Inc. ("Burningham"). The Company's executive offices are located at 823 NW 57th
Street, Fort Lauderdale, Florida 33309 and its telephone number is (305)
772-0330. The Company initiated a public offering on a form S-18 Registration
Statement which was declared effective on March 1987 when it completed its
initial "blank check/blind pool" public offering raising one hundred thousand
dollars ($100,000).
Burningham had no operations and did not acquire any business from
October 1986 until February 1988. On February 25, 1988 Burningham changed its
name to Everest Funding Corporation ("Everest"). In February 1988, Burningham
completed a reverse merger with Everest Mortgage Corporation whereby Everest
Mortgage Corporation ("EMC") became a wholly owned subsidiary of Burningham. EMC
was in the mortgage origination business. In late 1993 EMC ceased operations.
Subsequently EMC was dissolved on July 5, 1995.
Everest was inactive until June 1995 when it changed control. Pursuant
to this change in control new directors were elected to the Board and in July
1995, the Board and a majority of shareholders approved a one for twenty reverse
split. The reverse split became effective on July 24, 1995. On November 27,
1995, Everest changed its name to Everest Security Systems Corporation. The
Company is a home alarm service and installation company.
On October 9, 1995, the Company entered into a Purchase Agreement with
Specialty Device Installers, Inc. ("SDI"). Under the terms of the Purchase
Agreement the Company was to purchase all of the shares of SDI in exchange for
100,000 shares of common stock of the Company. The Purchase Agreement also
called for the Company to enter into an employment contract with Frank Bauer
whereby the Company would pay a salary to him in the amount of fifty-two
thousand dollars ($52,000) per annum plus bonuses based on the performance of
SDI. The bonus structure is yet to be determined by the Board of Directors. In
November 1995, Frank Bauer was elected to the Board of Directors of the Company.
SDI was incorporated under the laws of the State of Florida on August
1991. SDI is a provider of quality installation and systems service to
developers, builders, and operating companies in the cable television and
burglar alarm industry. SDI also offers management programs which allow
developer/builder participation in ongoing security and cable programs, offering
custom tailored programs to fit any development from zero to 100% ownership.
On January 15, 1996, the Company formed Federal Alarm Systems, Inc.
("FASI"), a wholly owned subsidiary organized under the laws of the State of
Florida. FASI was formed to
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monitor burglar alarm contracts installed by SDI as well as to monitor and
service purchased burglar alarm contracts.
The Company's Services
The Company through its wholly owned subsidiary SDI, is a provider of
quality installation and maintenance contracts to developers, builders, and
operating companies in the cable television and burglar alarm industry
throughout the State of Florida.
Many of the SDI's customers are the large well established security
alarm companies. These customers, based on management's experience, generally
outsource approximately fifty percent (50%) of their installation business to
subcontractors. As the large customers are markets throughout the United States,
they tend to have their own core installation segment to handle business in each
market. As their business grows or fluctuates they contract out the balance of
the work. For the fiscal year ended December 31, 1995, ninety percent (90%) of
SDI's business came from contract installation work.
Typically, SDI's customers are involved in ongoing marketing to acquire
new burglar alarm monitoring customers through both an independent dealer
network and direct marketing by their sales people. The new alarm monitoring
contracts that are generated typically need burglar alarm systems installed.
SDI's customers subcontract this work to SDI either on a labor only or turnkey
basis.
Currently SDI has approximately eighteen (18) customers. Two of its
customers for the fiscal year ended December 31, 1995 made up approximately 63%
of SDI's business (ADT Limited - 38%, Alert Center - 25%). For the period ended
March 31, 1996, the following customers made up forty three percent (43%) of
SDI's business: ADT Limited, twenty three percent (23%); Alert Center, twelve
percent (12%); and Avitar Development Corp., eight percent (8%). Ten percent
(10%) of SDI's revenue came from SDI's own monitoring contracts for this same
period ended March 31, 1996.
The Company continues to try and expand its customer base through both
acquiring monitoring contracts and adding additional installation business. As
of April 30, 1996 the major customers were ADT Security Systems which made up
twenty three percent (23%) of SDI's business, Alert Centre, Inc. which made up
twenty five percent of SDI's business, CTS Construction Corp. which made up
eleven percent (11%) of SDI's business, Oriole Homes Corp. making up ten percent
(10%) of SDI's business and eleven percent (11%) of SDI's revenue came from its
own monitoring contracts.
The increase in revenue for the Company through the ownership of its
own contracts is the main direction upon which the Company to focus. The
products and services provided are similar to existing systems provided by SDI's
major customers. As the monitoring business of the Company grows, the Company
will rely less and less on its contract installation business.
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There are two main reasons for this shift away from contract installation.
First, it is anticipated that the Company will have enough installation work of
its own for new installations and secondly, as the Company grows, the
competition is less likely to use the services of the Company.
The Company anticipates that its fastest growth sector will be in the
purchasing and servicing of existing security monitoring contracts. This
expectation is based on the fact that the monitoring of electronic security
services has high fixed costs but has comparatively low marginal costs
associated with servicing additional customers. The Company, through its wholly
owned subsidiary FASI, will buy the contracts from small and mid-size alarm and
installation companies at the present discounted value.
Monthly Recurring Revenues
The Company's monthly recurring revenue for the months of January,
February and March in 1996, were thirty two thousand two hundred sixty five
dollars ($32,265). For the month of April, 1996 the Company's monthly recurring
revenue was eleven thousand nine hundred ninety five dollars ($11,995). In May,
1996 the monthly recurring revenue for the Company was twelve thousand eight
hundred eighty one dollars ($12,881).
Business Strategy
Based on reports in trade magazines such as Security Sales, management
believes that there are a large number of small and mid-sized companies in the
alarm services industry which are undercapitalized. It is management's
experience that this type of market condition makes it an ideal time for the
purchase and consolidation of these companies. In order to take advantage of the
state of the security industry by purchasing and consolidating these companies
into the Company, FASI has developed a disciplined acquisition program which
management believes will enable the Company to optimize monthly recurring
revenue potential, derive high incremental margins by reducing its operating and
overhead costs, as well as maintain high subscriber satisfaction and low
attrition rates. The program essentially consists of the following stages:
1. Identification and negotiation: FASI's in-house acquisition team identifies
target companies and/or blocks of contracts through trade shows, alarm
organization membership lists, and industry contacts. FASI typically pays 20 to
27 times monthly recurring revenues. Monthly recurring revenues are the
valuation approach most commonly used in the security industry. The variance in
valuation depends on size, quality and geographic density of the customer list,
and the proximity to FASI's existing operations. Once FASI acquires a company,
management believes that it will be able to immediately eliminate duplicative
overhead and monitoring costs. FASI is, in effect, paying less than four times
pro forma operating cash flow while realizing
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incremental gross margins of more than 50% on acquired monitoring revenues. To
guard against future subscriber cancellations, FASI negotiates purchase
holdbacks, usually around 15% of the acquisition price, or requires sellers to
guarantee and service the account for 12 to 18 months.
2. Due Diligence: FASI's management then conducts in depth reviews of potential
acquisitions, including selective field equipment inspections, individual review
of substantially all of the subscriber contracts, and an analysis of the rights
and obligations under such contracts. FASI's management is able to estimate,
fairly accurately, future maintenance and monitoring expenses associated with
the acquisition. FASI's management does this by checking the service history of
selected accounts and inspecting signal activity at the acquired company's
monitoring station, noting incidences of false alarms.
3. Integration: FASI aims to integrate acquisitions quickly and minimize
subscriber attrition. First the acquired company sends a letter to its
subscribers explaining the sale and transition. This letter is followed by one
or more other letters that include FASI's service brochures and window decals.
Within a month of acquisition, each new customer is contacted by FASI's customer
service group which answers any questions and concerns the customer may have.
The customer is then visited by a FASI employee who installs a new FASI yard
sign on the customer's premises. Approximately six months later, subscribers
receive a follow-up telephone call.
SDI also developed an installation program. It has gained access to a
continuous stream of installation contracts by aligning itself with major real
estate developers such as the Malco Development Group ("Malco"). Malco's
president is also the president of the Company. SDI does contract work for other
monitoring companies who contract out their installation work, as well.
Marketing
A large portion of the Company's marketing activities have been through
referrals and a limited amount of advertising. The Company recognizes the need
for a full blown marketing and sales strategy to maximize its market penetration
as well as to maintain customer service. The Company's approach will be to
continue to rely on customer referrals but its main focus will be on the
implementation of an independent dealer network and a direct sales force aided
by telemarketing.
Competition
In South Florida as in the rest of the United States, the alarm service
industry is very competitive and extremely fragmented. Although new competitors
are continually entering the field, the major competition in the alarm services
market in South Florida as in the United States in general comes from large
companies such as ADT Security Systems, The Alert Center, Inc.,
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Brink's Home Security, Honeywell, Inc., Protection One, Rollins Protective
Services, Inc., and Westinghouse Security Systems. These companies charge
competitive prices and provide quality service. The national competitors have
superior financial, marketing, and other resources. Another source of
competition that is in use in South Florida as well as in the United States in
general, although to a much smaller degree, are systems directly connected to
police and fire departments and alternative methods of protection, such as
locks, gates, and manned guarding.
The average monthly monitoring contract is approximately twenty five
dollars ($25) per month nationwide and from management's experience and market
research, average monthly monitoring revenue is approximately twenty nine
dollars ($29) per month in South Florida. It is also management's experience
that installation fees range between $400 per installation to free installation
throughout the United States including South Florida, depending on the
geographical location and the degree of competition in the region.
Generally, in South Florida and throughout the United States, the large
companies utilize both their own installers and sub-contractors to install their
systems. However, they usually maintain their own monitoring and service
contracts. The following chart illustrates the revenue and size of the largest
home security companies. The information is derived from Home Security magazine,
August 1995.
<TABLE>
<CAPTION>
Company 1994 Revenue All(Accounts 1994 Home Employees
million) Installations
<S> <C> <C> <C> <C>
ADT Security $725 850,000 170,000 8,600
Alert Centre $57 152,000 3,400 670
Brink's Home $110 340,000 75,000 1,400
Honeywell $233 190,000 N/A 2,000
National $213 275,000 3,700 2,050
Guardian
Protection One $34 133,000 1,800 531
Rollins $66 121,000 11,000 671
Protective
Wells Fargo $219 124,000 12,000 2,440
Alarm
Westinghouse $115 215,000 60,000 1,800
Security
</TABLE>
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The Company's subsidiaries do not rely on any of the customers of the large
companies, as the thrust of its business will be to purchase alarm monitoring
contracts from individual home owners. Major suppliers of alarm products (over
10%) to SDI are: A-1 Alarm Supply in Hollywood, Florida, ADI Ltd. in Clearwater,
Florida, and King Alarm Distribution, Inc. in Deerfield Beach, Florida. Alarm
and fire product distributors are readily available throughout the United
States. Therefore, other sources are available to the Company. However, it would
take time to establish credit terms if the need arose. The Company does not have
long term contracts with its suppliers but feels it has a good working
relationship with them and receives volume discounts on certain products.
Government Regulations
SDI and FASI are operating in the home security industry. The Company
is therefore, subject to federal, state, county and municipal laws, regulations
and licensing requirements. The Company is currently under the regulation of the
Florida State Government. SDI has an unlimited electrical contractor license as
required by the State of Florida. It also has all municipal and city licenses
required to work in Dade, Broward, and Palm Beach Counties. The Company believes
that it holds the necessary licenses and is in substantial compliance with all
licensing and regulatory requirements in each jurisdiction in which it operates
to date.
The Company relies on the use of telephone lines and radio frequencies
to transmit signals and relay alarm calls. The cost and type of equipment that
may be employed for telephone lines is regulated by the federal and state
governments. The use and operation of radio frequencies is regulated by the
Federal Communications Commission and the state public utilities commissions.
Employees
There are a total of thirty-six (36) employees in the Company. All
employees are full time except one. All new employees are subject to an in-depth
interview process initiated by the department head. All employees are covered by
worker's compensation and basic health insurance is provided. The employee
breakdown is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Everest Security Systems 2 Administration Lester Colodny, President
Specialty Device Installers 5 Administration
2 Supervisory
21 Installers/Technicians
Federal Alarm Services 5 Administration
1 Salesperson
</TABLE>
Any increase in the number of employees will be determined by an
increase in the level of business. The Company does not expect any significant
changes in the number of employees, at this time. Management believes that
relations with its employees are satisfactory.
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The Company does not conduct any Research and Development activity.
Also there are no environmental issues concerning the Company.
Item 2. Management's Discussion and Analysis
The following discussion considers the operation of the Company for the
fiscal period ending December 31, 1995 (audited) on a pro forma basis with
comparison figures for the fiscal period ending December 31, 1994 (unaudited).
SDI was not acquired until October 1995. The following discussion should be read
in conjunction with the audited financial statements for the fiscal year ending
December 31, 1995. These are included as Financial Statements in Item 15 of this
Form 10-SB.
Results of Operation
The Results of Operation are for the fiscal period ended December 31,
1995 compared to the fiscal period ended December 31, 1994 and for the three (3)
month period ended March 31, 1996 compared to the three month period ended March
31, 1995. The following information is derived from the attached financial
statements and sets forth, for the periods indicated, the relative percentage
that certain income and expense items bear to net sales.
In June, 1995 new management took control over the inactive Company. In
October, 1995 the Company made its first acquisition by acquiring SDI, a company
involved in the installation and contract alarm business. The results of
operation of the audited financial statements only include the last quarter
ending December 31, 1995's operating results of SDI on a consolidated basis.
Sales for the quarter were two hundred seventy three thousand twenty eight
dollars ($273,028) for the Company as compared to no revenue for the fiscal year
ended December 31, 1994.
General and Administrative ("G&A") expenses were seventy eight percent
(78%) of sales for the fiscal year ended December 31, 1995 compared to no G&A
expenses for the corresponding period in 1994. G&A is a significant percentage
of sales as only the last quarter sales of SDI are included in the financial
statements compared to G&A expenses of the Company being incurred since June
1995.
On a pro forma basis, including SDI for the fiscal year ended December
31, 1995, SDI had sales of one million two hundred twenty thousand two hundred
eighty two dollars ($1,220,282) compared to one million one hundred twenty seven
thousand six hundred eighty four dollars (1,127,684) for the same period 1994.
Cost of sales for the fiscal period ended December 31, 1995 were seventy seven
percent (77%) of sales compared to sixty nine percent (69%) for the
corresponding period 1994. The large increase in the cost of sales can be
attributed to SDI changing its thrust of business into contract monitoring from
installation and incurring the additional corresponding set up costs of making
such change.
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General and Administrative costs for the fiscal period ended December
31, 1995 were forty five percent (45%) of sales compared to thirty three percent
(33%) for the corresponding period 1994. The large increase in G&A can be
attributed to the inclusion of the G&A expenses of the Company and the
associated costs of the acquisition of SDI.
The Company, on a pro forma basis, for the fiscal period ended December
31, 1995 had a net loss of two hundred eighty three thousand five hundred thirty
seven dollars ($283,537) compared to a net loss for SDI for the fiscal period
ended December 31, 1994 of nineteen thousand thirty six dollars ($19,036).
For the three month period ended March 31, 1996 the Company had net
sales of three hundred twenty seven thousand one hundred thirty eight dollars
($327,138) on a consolidated basis compared to no sales for the Company in the
corresponding period in 1995.
The cost of sales for the three month period ended March 31, 1996 were
two hundred eleven thousand nine hundred twenty six dollars ($211,926) of sixty
five percent (65%) of total sales. As the Company was inactive until June 1995,
there were no corresponding figures.
General and administrative expenses for the three month period ended
March 31, 1996 was sixty nine percent (69%) of net sales generating a loss from
operations of one hundred ten thousand one hundred twenty six dollars
($110,126). Again, this large G&A expense as a percentage of sales can be
attributed to the Company's change in corporate direction from installation
business to monitoring business. As well, the Company has incurred additional
costs as it is actively seeking new acquisitions.
Doubtful Accounts
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review of
uncollectible accounts receivable. At December 31, 1995, allowance had been
provided for potentially uncollectible accounts receivable in the amount of ten
thousand dollars ($10,000). The Company also experiences an attrition rate of
approximately six and seven tenths percent (6.7%) per annum on monitored
accounts. This attrition rate is comparable to industry average. The source of
this information is management's seventeen years of experience in the alarm
industry.
Plan of Operation
The Company provides security alarm installation, security maintenance
contracts, and security monitoring contracts to developers, builders, and
operating companies in the burglar alarm industry. The Company's future focus
will be to offer new services such as upgraded monitoring packages, cable and
cellular technologies to its customers currently being monitored by the Company
as well as to acquire other security companies or security monitoring contracts
in the Southeast, Southwest, and Pacific Northwest.
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These are regions that are experiencing a significant influx in population. The
Company anticipates that the population growth will spur the demand for security
services. There is no time table for expanding into the Southeast, Southwest and
Pacific Northwest.
The Company expects its fastest growth sector to be in the purchasing
and servicing of security monitoring contracts through its wholly owned
subsidiary FASI. The Company must raise significant capital before it can
purchase contracts. To date the Company has raised approximately one million
dollars ($1,000,000) through an offering pursuant to Rule 504 of Regulation D,
promulgated under the Securities Act of 1933, as amended. The Company completed
its private offering on December 15, 1995. Approximately 60% of the funding will
be used to purchase monitoring contracts. The remaining forty percent (40%) will
be used to repay debt and for general costs such as legal and accounting fees.
To reach its goal of acquiring five-thousand (5,000) contracts in 1996, the
Company would be required to raise three million dollars ($3,000,000). The
certainty of raising this amount of capital cannot be guaranteed. Raising less
capital would require the Company to reduce its goals proportionately.
At present, the Company has no commitments to raise future capital and
cannot guarantee the ability to do so. If the Company cannot raise the
additional capital, it will have to use the cash flow from its operations to
purchase contracts. The Company is cash flow positive and believes that during
the next twelve months it will be able to continue its operations and expand its
monitoring business, albeit, at a far slower rate than would be projected if it
was able to raise the additional capital.
Research of Industry Trends
The United States security alarm service industry, according
to independent research done by Security Sales, a publication servicing the
alarm industry, is an $11.7 billion market growing at a pace of 8 - 10% per
year. The same research shows that the security industry is fragmented, there
are currently more than ten thousand (10,000) companies engaged in alarm
services. It is the opinion of the Company's management that many of the
security installation companies that now exist are undercapitalized and are
therefore unable to install systems and maintain home security contracts. By
acquiring these contracts the Company believes it will be able to bring about
the benefit of economies of scale due to its potentially greater access to
capital, management, and monitoring stations.
The residential segment is particularly attractive to the Company
because only about 10% of United States' households in major metropolitan areas
presently have alarm systems. Security Sales is forecasting a 10 - 15% per year
growth rate in the demand for residential household installations of security
systems.
Independent research done by the trade magazine Security Sales projects
a nationwide market for home security to be approximately eighteen billion eight
hundred million dollars ($18,800,000,000) by the end of the year 2000.
Conservative estimates by management suggest
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FASI's market share, with our intensified and accelerated marketing plan,
product and service development, and customer service would be about .1%,
generating eighteen million dollars ($18,000,000) by the end of the year 2000.
Currently the Company monitors five hundred fifty (550) contracts. In order to
meet management's projections approximately forty eight thousand (48,000) new
contracts must be acquired by the year 2000. These projections are based on the
total revenue projected by management for FASI divided by the projected total
market value of the industry done by Security Sales. Presently, the Company does
not have the commitments to raise the needed capital.
Sales
The Company has been in the organization and start-up phase. The
Company does have sales in the installation business. Sales for 1995 were one
million two hundred twenty thousand two hundred eighty two dollars ($1,220,282)
compared to the same period for 1994 when sales were one million one hundred
twenty seven thousand six hundred eighty four dollars ($1,127,684). This
represents an 8% increase over the 1994 period. This eight percent (8%) increase
in sales can attributed to both a growth in the industry as well as a growth in
SDI's market share. Subsequent to the year end, the Company is actively
acquiring monitoring contracts. As of May 31, 1996 the Company has five hundred
fifty (550) monitoring contracts at an average monthly revenue of twenty-six
dollars ($26) per contract.
Revenues throughout the discussed period reflect primarily installation
revenue. The main thrust of the Company will be in monitoring contracts from
which the Company has generated little revenue to date.
The cost of sales for the Company is higher than the cost of sales for
the larger companies in the industry. The Company believes that as the Company
grows and economies of scale take effect, cost of sales will come in line with
industry averages. The cost of sales for the fiscal period ending December 31,
1995 were nine hundred thirty one thousand three hundred eight dollars
($931,308) compared to seven hundred seventy six thousand two hundred thirty
dollars ($776,230) for the fiscal period ending December 31, 1994. This was an
increase of 20% over the previous period.
Operating expenses, as a percentage of total sales, are high for the
fiscal periods December 31, 1995 and 1994 as a result of the corporate
structure. The Company is gearing itself up for expansion and must assume some
higher operating costs to facilitate that expansion. As the Company grows, the
operating cost should come into line with industry averages. Operating expenses
for the fiscal period ending December 31, 1995 were five hundred eighty five
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thousand two hundred thirteen dollars ($585,213) compared to the same fiscal
period for 1994 of four hundred twelve thousand three hundred eighty two dollars
($412,382). This was a increase of 42%for the 1995 period over the 1994 period.
Liquidity and Capital Resources
The Company was inactive until June, 1995 and had no expenditures of
any consequence. In June, 1995, the new management took control of the Company
and began to look for suitable acquisitions in the alarm monitoring business,
The Company, during the latter half of fiscal 1995 principally provided for its
cash needs through equity financing from its Regulation D Rule 504 offering. The
acquisition of SDI was completed through the issuance of one hundred thousand
(100,000) common shares par value $0.001 of the Company and from funds from the
above noted private placement. The day to day operations of SDI for both the
fiscal year ended December 31, 1995 and the three month period ended March 31,
1996 were funded from internally generated cash flow. SDI's expansion and
program of purchasing monitoring contracts was funded from the private placement
mentioned above.
The subsidiary, SDI lost money for the fiscal period ended December 31,
1995. Its cash short fall was funded by the Company. SDI also lost money for the
three month period ended March 31, 1996. Again this short fall was financed by
the parent Company. Much of the loss can be attributed to the entry into the
alarm monitoring business and the associated start up costs to enter into this
business.
Historically, SDI has been run as a profitable business with net
profits of four and four-tenths percent (4.4%) of total sales in fiscal year
ended December 31, 1994 and net profits of one and seven-tenths percent (1.7%)
of total sales in the fiscal year ended December 31, 1993. The cash flow from
operations was sufficient to maintain the business and allow it to grow by
thirty percent (30%) for the fiscal period of 1994 over 1993 and to grow by ten
percent (10%) for the fiscal period of 1995 over the fiscal period 1994.
It is anticipated that the Company will continue to grow its alarm
monitoring business and to continue to look for new opportunities in this area.
It is the Company's goal to acquire additional monitoring contracts so as to
have five thousand (5,000) contracts under management by the fiscal year end
December 31, 1996. To meet its business plan, the Company would have to raise an
additional two million five hundred thousand dollars ($2,500,000). To date the
Company has not entered into any agreements with any companies to fulfill its
business strategy. The Company has not entered into any understanding with any
underwriters to provide any additional funds to the Company to be able to
purchase more contracts or new business prospects if the Company found such
business prospects. There is no guarantee that the Company will be able to raise
the necessary funds to meet its cash requirements for expansion. In the event
the Company could not raise the required funding either from the debt or equity
markets, it would
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not be able to meet its projection of acquiring five thousand (5,000) monitoring
contracts in the fiscal year ending December 31, 1996. At its current rate of
acquisition from cash flow and with the initial funding provided by the private
placement, assuming an average cost of six hundred dollars ($600) per contract
and assuming no additional funds are raised, the Company would have
approximately one thousand two hundred (1,200) monitoring contracts by the
fiscal year end December 31, 1996.
Management has forecasted that the break-even point for monitoring
contracts alone is two thousand five hundred (2,500) contracts at an average of
twenty six dollars ($26) per month per contract. If the Company did not raise
any additional funds to purchase the necessary contracts to break the two
thousand five hundred (2,500) contract threshold, then the negative cash flow
from monitoring contracts would have to be financed from the installation
operations of SDI. The operating profit of SDI is sufficient to offset the
operating loss from monitoring contracts assuming SDI's business maintains its
position at this current level.
As well, there are some capital requirements in setting up the alarm
monitoring side of the business. Additional expenditures include the purchase of
the necessary computer hardware and software to run an efficient system. This
expenditure has been provided for from the funds raised in the private placement
and total approximately ten thousand dollars ($10,000).
Outlook
SDI and FASI have several strategies for growth. The companies plan to
acquire smaller, under capitalized alarm companies and to consolidate those
entities into one corporate structure. FASI's initial projected plan is to
purchase five thousand (5,000) contracts prior to the fiscal year end December
31, 1996.. The Company will obtain these five thousand (5,000) contracts through
three methods. The first method will be the purchase of wholesale accounts from
companies selling existing monitoring accounts and through an independent dealer
network. Currently, all of the account base is coming from this method. The
second method will be through the companies own marketing means such as
referrals and direct sales. The third method will be the acquisition of small
companies that already have a customer account base. This will give the Company
a good presence in the market place with revenues in the one million eight
hundred thousand dollars ($1,800,000) per year range in contract monitoring and
approximately one million five hundred thousand dollars ($1,500,000) in
installation business. The Company approximates that it will take three million
dollars ($3,000,000) to purchase five thousand (5,000) contracts. This cost is
derived by multiplying the average cost of wholesale accounts ($600) times the
5,000 accounts the Company intends to acquire. To date, the Company does not
have the necessary financing to purchase five thousand (5,000) contracts. Nor
does the Company currently have any commitments for the funding that is required
to achieve its goals.
The Company projects that through FASI, its wholly owned subsidiary, it
will continue to acquire contracts, doubling the number of purchased contracts
each year until it has fourty
14
<PAGE>
thousand (40,000) contracts under management. The Company believes it will have
forty thousand (40,000) contracts under management by the fiscal year ended
December 31, 1999. To achieve such significant growth the Company must raise
additional capital. At present, the Company does not have any commitments for
such additional capital and cannot guarantee its ability to raise the additional
capital in the future. If the Company is able to raise the necessary capital and
reach its goal of obtaining forty thousand contracts under management, then
Company's future growth through acquisitions at a rate of approximately 20% per
annum is anticipated. If the Company realizes its goals, the forty eight
thousand (48,000) contracts under management by the year 2000 should reflect
approximately eighteen million dollars ($18,000,000) in recurring revenue.
Installation revenue by SDI will also grow. Management expects that SDI's sales
will increase from one million two hundred thousand dollars ($1,200,000) to
three million dollars ($3,000,000) by the year 2000 based on management's pro
forma projections for which no certainty of achievement can be guaranteed. The
growth will be a result of both additional sub-contracted installation business
and from the Company's growth in monitoring contracts. Intense competition from
companies much larger than the Company could negatively effect the above
projections by driving the recurring revenue below twenty five dollars ($25) per
month.
Second, it is anticipated that FASI and SDI will generate subscribers
through internally produced growth. The Company currently uses an independent
dealer network to generate subscribers. It is the Company's plan in the future
to use a combination of both dealer networks and direct marketing by the
Company. The Company expects that by selling additional services, monthly
recurring revenues per subscriber will increase by about 5% per year to
approximately thirty two dollars ($32) per month. The additional services the
Company plans to provide include, two way voice, pager service, and cellular
phone backup. These projections will be negatively impacted if competitive
pricing reduces the Companies ability to charge higher monthly rates.
Third, FASI may experience better gross profit as it acquires more
contracts. As revenues increase, the corresponding operating costs increase at a
lower corresponding rate. The more contracts that are under management, the more
the cost of operations is spread over a greater number of accounts. Profit
margins will increase because of the benefits of economies of scale. Margin
expansion will be further enhanced by the operating leverage SDI and FASI will
attain by adding new subscribers to its central monitoring station and field
service operations. The incremental margins from economies of scale will not be
met if the Company does not meet its projections or raise the necessary capital
to fund its acquisition strategy.
Elements of Income or Loss From Outside Sources
There have been no significant elements of income or loss from sources
outside the Company.
15
<PAGE>
Seasonal Aspects
The Company's business is not materially effected by seasonal changes.
Objectives
The Company's objective is to move into a prominent market position.
This expansion will be accomplished by either a large secondary public offering
or a major profitable acquisition. To further this goal the Company will pursue
the development of a comprehensive plan to intensify and accelerate its
marketing and sales activities, product development, services expansion,
distribution and customer service. To date, no commitment for future funding has
been secured, nor is there any guarantee that the Company will be able to meet
its upcoming financial needs.
Item 3. Description of Property
The Company leases a three thousnad four hundred (3,400) square foot
office/warehouse facility at 823 NW 57th Street, Fort Lauderdale, Florida 33309.
The telephone number is (305) 772-0330. It is a one year lease which expires on
May 30, 1996. The rent is one thousand five hundred twenty two dollars ($1,522)
per month.
Ownership of Real Estate
The Company does not own any real estate at this time.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1996, information with
respect to any person known by the Company to own beneficially more than five
percent (5%) of the Company's Common Stock, the shares of the Common Stock
beneficially owned by each officer and director of the Company, and the total of
the Company's Common Stock beneficially owned by the Company's officers and
directors as a group.
<TABLE>
<CAPTION>
Stockholder Shares Beneficially Owned *(1) Percent of Class *(1)
<S> <C> <C>
Lester Colodny 0 0%
2500 N. Military Trail
Suite 175
Boca Raton, Florida 33431
Frank Bauer 210,000 *(2) 5.1%
4090 122 Drive North
Royal Palm Beach, Florida
16
<PAGE>
Robert W. Knight *(3) 66,250 3.1%
34A-2755 Lougheed Hwy.
Suite 522
Port Coquitlam, B.C.
V3B 5Y9 Canada
Steven A. Sanders 66,250 3.1%
50 Broad Street
Suite 437
New York, New York 10004
Karl Gelbard 10,000 .46%
4001 South Ocean Drive
Hollywood, Florida 33019
International Treasury 1,075,000 50%
& Investments Ltd. *(4)
Hirzel House, Smith Street
St. Peter, Guernsy
All Directors and Officers
as a Group (5 persons) 352,500 16%
------- ---
- ----------------------
</TABLE>
*(1) Calculation based on 2,151,902 shares outstanding (including shares that
have been paid for in full, but not issued) as of March 31, 1996. Information
derived from the transfer agent, security holders, and/or company records.
*(2) This figure includes options to purchase 100,000 shares.
*(3) Represents shares owned by a private corporation controlled by Robert
Knight.
*(4) The beneficial owner of International Treasury & Investments Ltd. Is
Warwick Nominees, Ltd. Their North American Business Agent is Mr. J.A.Michie.
Item 5. Directors, Executive Officers, Promoters and Control Persons
Directors and Officers
Each director shall hold office for a period of one year, at which time
an annual meeting is held in accordance with the Company's Bylaws. The directors
hold office until a successor is elected and qualified.
17
<PAGE>
The directors and officers of the Company are as follows:
Name Age Position
Lester Colodny 58 Chief Executive Officer/President
Chairman of the Board
Frank Bauer 51 Chief Operating Officer, Director
Robert W. Knight 39 Secretary/Treasurer, Director
Steven A. Sanders 50 Director
Karl Gelbard 72 Director
Lester Colodny
Lester Colodny was elected to the Board of Directors and appointed
President, C.E.O. of the Company in November 1995. Mr. Colodny also holds the
position of Chairman of the Board and C.E.O. of Malco Development Group. Malco
Development Group is currently involved in both single and multi developments in
Florida, Georgia, and Colorado. Over the last decade Malco Development Group has
been primarily specializing in the residential housing market and rental
communities in California, Florida, Colorado and Georgia. Concurrently it's
affiliates and associates have designed and engineered numerous golf courses and
vacation resorts throughout the country.
Mr. Colodny is a graduate of the University of Miami with a B.S. degree
in Architectural and Structural Engineering. Mr. Colodny also holds a degree in
Architecture and Civil Engineering from the Georgia Institute of Technology. Mr.
Colodny has over 30 years of international experience in real estate
development, construction, and property management. Since the late 1980's Mr.
Colodny's company has invested heavily in the United States, purchasing many
properties and initiating a string building program. Included in the building
program were both commercial and residential projects, of which in excess of one
hundred thousand (100,000) units have been completed along with a number of
office and commercial structures.
Frank Bauer
Mr. Bauer was named President and Director of SDI as well as a Director
of Everest Security Systems in November 1995. From January 1993 to November
1995, Mr. Bauer served as Vice President and Secretary of SDI. From 1988 to
December 1992 Mr. Bauer served as
18
<PAGE>
President and Director of SDI. He also served as Vice President and Director of
Corrections Services, Inc. during the same time period.
Steven A. Sanders
Mr. Sanders has been a Director of the Company since June 1995. Mr.
Sanders has been a Director of OP-TECH Environmental Services, Inc. since
October 31, 1991. OP-TECH Environmental Services, Inc. is a reporting company
under Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"). Mr.
Sanders has been a Director of Juno Acquisition, Inc. since June 1994. Juno
Acquisition, Inc., a public reporting company, completed a "blank check" public
offering in 1995 raising fifty thousand dollars ($50,000). From June 1, 1988
until October 1, 1992, Mr. Sanders was Of Counsel to the law firm of Jacobs
Persinger & Parker. For more than five years prior thereto, he was a senior
partner of Sanders & Sierchio, a law firm. Since October 1, 1992, Mr. Sanders
has been President of the Law Office of Steven A. Sanders, P.C.
Robert W. Knight
Mr. Knight has been Secretary/Treasurer, and a Director of the Company
since June 1995. He was President of the Company from June 1995 until October
1995. He is currently President and Director of J.A. Industries, Inc. and he has
been since July 1992. J.A. Industries, Inc. is a reporting company under Section
12(g) of the Exchange Act. From 1991 to July 1992, he was an independent
financial consultant. Mr. Knight has ten years of experience in the public
company and corporate finance arenas.
Karl Gelbard
Mr. Gelbard has been a director of the Company since September 6, 1995.
Mr. Gelbard is also a director of J.A. Industries, Inc. J.A. Industries, Inc. is
a reporting company under Section 12(g) of the Exchange Act. Mr. Gelbard has
been retired since 1988. In January of 1978 he was appointed Regional Director
of the Asian/Pacific Region and manager of the Hong Kong office of Merrill
Lynch.
Item 6. Executive Compensation
The following table shows all the cash compensation paid or to be paid
by the Company or any of its subsidiaries, as well as certain other compensation
paid or accrued, during the fiscal years indicated, to the Chief Executive
Officer for such period in all capacities in which he served. No other Executive
received total annual salary and bonus in excess of one hundred thousand dollars
($100,000).
Summary Compensation Table
19
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Year Salary Bonus Other (Awards) (Awards) (Payouts) All Other
- -------- ---- ------ ----- ----- -------- -------- --------- ---------
Principal Annual restricted Options/ LTIP Compens
- --------- ------ ---------- -------- ---- -------
Position Compens stock SARs ation
- -------- ------- ----- ---- -----
ation award
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lester 1995 $0 $0 $0 $0 0 $0 0
Colodny
President/ 1994 N/A
CEO
1993 N/A
Frank 1995 $52,000 $0 $0 $0 100,000 $0 0
Bauer
COO 1994 N/A
1993 N/A
Robert 1995 $12,000 $0 $0 $13,600 0 $0 0
Knight
V.P. 1994 N/A
Admin
1993 N/A
- ------------- ------------ ------------ ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Name Number of Percent of Total Exercise or Base Expiration Date
- ---- --------- ---------------- ---------------- ---------------
Securities Options/SARs Price
---------- ------------ -----
Underlying Granted to ($/share)
---------- ---------- ---------
Options/SARs Employees in
------------ ------------
Granted Fiscal Year
------- -----------
<S> <C> <C> <C> <C>
Lester Colodny 0 0 0 n/a
</TABLE>
20
<PAGE>
The following table sets forth information with respect to the Chief
Executive Officer concerning the exercise of options during the last fiscal year
and unexercised options and SARs held as of the end of the fiscal year:
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
Name Shares Acquired Value Realized Number of Value of
on Exercise (#) ($) Securities Unexercised in-
Underlying the-money
Unexercised Options/SARs at
Options/SARs at Fiscal Year-End
Fiscal Year-End ($)
(#) Exercisable/ Exercisable/
Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Lester Colodny 0.00 0.00 0 0.00
</TABLE>
The following table sets forth information with respect to the Chief
Executive Officer concerning the grants of options and Stock Appreciation Rights
("SAR") during the past fiscal year:
Long Term Incentive Plan Table
<TABLE>
<CAPTION>
Awards in Last Fiscal Year
Name Number of Performance or Threshold Target Maximum
- ---- --------- ----------- -- --------- ------ -------
Shares, Units or Other Period ($ or #) ($ or #) ($ or #)
---------------- ------------ -------- -------- --------
Other Rights (#) Until
----- ---------- -----
Maturation Or
Payout
<S> <C> <C> <C> <C> <C>
0 0 N/A N/A N/A
Lester Colodny
</TABLE>
21
<PAGE>
Item 7. Certain Relationships and Related Transactions
On June 1, 1995, the Company and Robert Knight of Knight Financial
Limited entered into a Management Agreement. According to the terms of this
Agreement Mr. Knight agreed to become President and Chief Executive Officer of
the Company. The term of the Agreement was one year with an option for renewal
upon the mutual agreement of Mr. Knight and the Company. Compensation included a
salary of thirty six thousand dollars ($36,000) per year and stock options in
the amount of one hundred thousand (100,000) shares of the common stock of the
Company. This Agreement was not renewed. The new Chief Executive Officer and
President is Lester Colodny.
Robert Knight, a director of the Company is President and director of
J.A.Industries, Inc.
Item 8. Description of Securities
Common Stock
The holders of Common Stock (i) have equal ratable rights to dividends
from funds legally available therefor, when and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock upon
liquidation, dissolution, or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription, or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
non-cumulative vote per share, either in person or by proxy, on all matters on
which stockholders may vote at all meetings of stockholders.
The holders of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 50% of such outstanding
shares, voting for the election of directors, can elect all of the directors of
the Company if they so chose. If such action was to occur, the holders of the
remaining shares would not be able to elect any of the Company's directors.
PART II
Item 1. Market for Common Equity and Related Stockholder Matters
Common Stock
The Company's Common Stock is quoted on the NASDAQ OTC Bulletin Board
under
22
<PAGE>
the symbol EVST.
To the best of the Company's knowledge there are presently six (6)
market-makers. A public trading market having the characteristics of depth,
liquidity and orderliness, depends on the existence of market-makers as well as
the presence of willing buyers and sellers. There can be no guarantee that these
market-makers will continue to make a market. If the market-makers discontinue
making a market for the Company there will be virtually no liquidity.
The following chart sets forth the range of high and low bid prices for
the Company's Common Stock based on closing transactions during each specified
period as reported by the National Quotation Bureau, Incorporated. The prices
reflect inter-dealer prices without retail mark-up, mark-down, quotation, or
commission. The figures do not necessarily represent actual transactions.
1994 High Low
---- ---- ---
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter $.01 $.01
1995
First Quarter $.011 $.01
Second Quarter $.06 $.05
Third Quarter $2 9/16* $1/2*
Fourth Quarter $3 $2
1996
First Quarter $3 9/16 $3
* Following a 1-for-20 reverse split of the Company's Common Stock,
effective July 24, 1995.
There are approximately one hundred (100) shareholders in the Company
as of March 31, 1996.
The Company is authorized to issue one hundred million (100,000,000)
shares of Common Stock at $0.001 par value per share, of which two million one
hundred fifty one thousand nine hundred two (2,151,902) shares were issued and
outstanding as of March 31, 1996.
Dividends
The Company has not declared any cash dividends since its inception,
and does not
23
<PAGE>
anticipate paying such dividends in the foreseeable future. The Company plans on
retaining any future earnings for use in the Company's business. The payment of
any future dividends rests within the discretion of its Board of Directors in
light of the conditions then existing, including the Company's earnings, capital
requirements, and financial condition, as well as other relevant factors.
Transfer Agent
The transfer agent for the Common Stock of the Company is Interwest
Transfer Company, 1981 E. Murray Holladay Road, Suite 100, Salt Lake City, Utah
84117.
Item 2. Legal Proceedings
There are no material pending legal proceedings as defined in Item 103
of Regulation S-B.
Item 3. Changes in or Disagreements With Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with accountants on
accounting and financial disclosure.
Item 4. Recent Sales of Unregistered Securities
On June 7, 1995 the Company issued twenty million (20,000,000) shares
for one hundred thousand (100,000) shares of J.A. Industries, Inc. valued at one
hundred thousand dollars ($100,000). The shares were issued in reliance upon the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended. The shares were issued in a private placement to International
Treasury & Investments Ltd.
<TABLE>
<CAPTION>
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
<S> <C> <C> <C>
International Treasury
& Investments Ltd. 6/7/95 20,000,000 (before $100,000 in
the 1 for 20 roll back) J.A. Industries
Inc. Stock
</TABLE>
On July 5, 1995 the Company issued 3,975,000 shares to three
individuals for par value.
24
<PAGE>
Two of the individuals were officers and directors of the Company. The issuance
was exempt from registration in accordance with Rule 701 of the Securities Act
of 1933. The shares were issued as compensation for services rendered or to be
rendered.
<TABLE>
<CAPTION>
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
<S> <C> <C> <C>
427968 B.C. Ltd.*(1) 7/5/95 1,325,000 $1,325
- -------------------- ------ --------- ------
Knight Financial Corporation 7/5/95 1,325,000 $1,325
- ---------------------------- ------ --------- ------
Steven A. Sanders, P.C. 7/5/95 1,325,000 $1,325
- ----------------------- ------ --------- ------
</TABLE>
In October 1995 the Company issued 500,000 shares at $2.00 per share.
The issuance was exempt from registration pursuant to Rule 504 of Regulation D
promulgated under the Securities Act of 1933. These shares were issued in a
private placement to accredited investors.
<TABLE>
<CAPTION>
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
<S> <C> <C> <C>
427968 B.C. Ltd. 10/13/95 50,000 $100,000
- ---------------- -------- ------ --------
427968 B.C. Ltd. 10/17/95 10,000 $20,000
- ---------------- -------- ------ -------
Royal Bank of Scotland 10/30/95 100,000 $200,000
- ---------------------- -------- ------- --------
Anne Huber 10/31/95 15,000 $30,000
- ---------- -------- ------ -------
Rodney Adler 12/04/95 100,000 $200,000
- ------------ -------- ------- --------
Tiger Eye Investments
[Cayman] Ltd. 12/15/95 75,000 $150,000
- -------------- -------- ------ --------
International Treasury &
Investments Ltd. 12/15/95 75,000 $150,000
- ---------------- -------- ------ --------
Langara Capital
Foundation 12/15/95 75,000 $150,000
- ----------- -------- ------ --------
</TABLE>
25
<PAGE>
In November 1995 the Company issued one hundred thousand (100,000)
shares to Frank Bauer in accordance with the terms of the purchase agreement of
SDI. These shares were issued in reliance upon the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
<S> <C> <C> <C>
Frank Bauer 11/95 100,000 $100
- ----------- ----- ------- ----
</TABLE>
On March 4, 1995 the Company issued two hundred twenty thousand
(220,000) shares to employees and directors of the Company as payment for their
services. The issuance was exempt from registration under Rule 701 of the
Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
Purchaser Dates of Purchases Number of Common Aggregate
Shares Consideration
Paid
<S> <C> <C> <C>
Frank Bauer 3/4/96 10,000 $10
- ----------- ------ ------ ---
Gary Liscio 3/4/96 100,000 $100
- ----------- ------ ------- ----
Harvey Dolschen 3/4/96 100,000 $100
- --------------- ------ ------- ----
Karl Gelbard 3/4/96 10,000 $10
- ------------ ------ ------ ---
</TABLE>
Item 5. Indemnification of Directors and Officers
Section 78.751 of the General Corporation Law of the State of Nevada
contains provisions entitling directors and officers of the Company to
indemnification from judgements, fines, amounts paid in settlement, and
reasonable expenses, including attorney's fees, as the result of an action or
proceeding in which they may be involved by reason of being or having been a
director or officer of the Company, provided such officers or directors acted in
good faith. There is no provision in the bylaws or the certificate of
incorporation of the Company for indemnification of Officers and Directors.
PART F/S
26
<PAGE>
Item 1. Financial Statements
<PAGE>
EVEREST SECURITY SYSTEMS
CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For The Year Ended
December 31, 1995
<PAGE>
[SEMPLE & COOPER LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Everest Security Systems Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Everest Security
Systems Corporation and Subsidiary as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Everest Security
Systems Corporation and Subsidiary as of December 31, 1995, and the results of
their operations, changes in stockholders' equity, and their cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ SEMPLE & COOPER, P.L.C.
Certified Public Accountants
Phoenix, Arizona
February 23, 1996
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1995
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) $ 8,114
Accounts receivable - trade, net of allowance for
doubtful accounts (Notes 1, 6 and 8) 151,425
Available for sale securities (Notes 1, 3 and 5) 65,600
Prepaid expenses 7,033
Inventory (Notes 1 and 6) 50,742
--------
Total Current Assets 282,914
--------
Property and Equipment, net (Notes 1, 4, 6 and 7) 15,076
--------
Other Assets:
Loan receivable - related entity (Note 5) 20,500
Deferred contract costs, net (Note 1) 47,043
Refundable deposits 2,410
Goodwill, net (Notes 1 and 2) 211,124
--------
281,077
--------
Total Assets $579,067
========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-2-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable
- current (Note 6) $ 61,666
- related parties (Note 5) 33,387
Obligation under capital lease - current portion
(Notes 1 and 7) 1,978
Accounts payable 99,362
Accrued liabilities 36,111
Accrued interest payable (Note 5) 7,311
-----------
Total Current Liabilities 239,815
-----------
Long-Term Liabilities:
Obligation under capital lease - long-term portion
(Notes 1 and 7) 7,410
-----------
Commitments and Contingencies (Notes 5 and 8) --
Stockholders' Equity: (Notes 9 and 10)
Common stock 2,030
Additional paid-in capital 1,976,130
Accumulated deficit (1,053,577)
-----------
924,583
Stock subscriptions receivable (570,000)
Cumulative translation adjustment (Note 1) 11,861
Treasury stock (202)
Unrealized loss on available for sale
securities (Notes 1 and 3) (34,400)
-----------
Total Stockholders' Equity 331,842
-----------
Total Liabilities and Stockholders' Equity $ 579,067
===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-3-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1995
Revenues $ 273,028
Cost of Revenues 265,365
---------
Gross Profit 7,663
General and Administrative Expenses 211,163
---------
Loss from Operations (203,500)
---------
Interest Expense 1,994
---------
Net Loss $(205,494)
=========
Net Loss per Share (Note 1) $ (.21)
=========
Weighted Average Shares Outstanding 981,529
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-4-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1995
<TABLE>
<CAPTION>
Additional Stock Cumulative
Common Stock Paid-in Accumulated Subscriptions Translation Treasury
Shares Amount Capital Deficit Receivable Adjustment Stock
<S> <C>
Balance, beginning
of year 326,152 $ 326 $ 847,959 $ (848,083) $ -- $ -- $ (202)
Issued for available
for sale securities 1,000,000 1,000 99,000 -- -- -- --
Issued for consulting
services 218,750 219 59,656 -- -- -- --
Issued for shares of
Specialty Device
Installers, Inc. 100,000 100 199,900 -- -- -- --
Issued for cash 100,000 100 199,900 -- -- -- --
Issued and unpaid 285,000 285 569,715 -- (570,000) -- --
Aggregate adjustment
from foreign
currency translation -- -- -- -- -- 11,861 --
Net unrealized losses
on available for
sale securities -- -- -- -- -- -- --
Net loss -- -- -- (205,494) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 2,029,902 $ 2,030 $ 1,976,130 $(1,053,577) $ (570,000) $ 11,861 $ (202)
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
Unrealized
Loss on
Available Total
for Sale Stockholders'
Securities Equity
<S> <C>
Balance, beginning
of year $ -- $ --
Issued for available
for sale securities -- 100,000
Issued for consulting
services -- 59,875
Issued for shares of
Specialty Device
Installers, Inc. -- 200,000
Issued for cash -- 200,000
Issued and unpaid -- --
Aggregate adjustment
from foreign
currency translation -- 11,861
Net unrealized losses
on available for
sale securities (34,400) (34,400)
Net loss -- (205,494)
--------- ---------
Balance, end of year $ (34,400) $ 331,842
========= =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-5-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1995
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 246,278
Cash paid to suppliers and employees (360,459)
Interest paid (1,994)
---------
Net cash used by operating activities (116,175)
---------
Cash flows from investing activities:
Loan receivable - related entity (20,500)
Purchase of property and equipment (1,268)
Purchase of monitoring contracts (46,498)
---------
Net cash used by investing activities (68,266)
---------
Cash flows from financing activities:
Proceeds from notes payable 46,029
Repayment of notes payable (41,340)
Proceeds from notes payable - related parties 78,159
Repayment of notes payable - related parties (106,018)
Repayment of obligation under capital lease (173)
Proceeds from sale of common stock 200,000
---------
Net cash provided by financing activities 176,657
---------
Effect of exchange rate changes 11,861
---------
Net increase in cash and cash equivalents 4,077
Cash and cash equivalents at beginning of year 4,037
---------
Cash and cash equivalents at end of year $ 8,114
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-6-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Year Ended December 31, 1995
Reconciliation of Net Loss to Net Cash Used
by Operating Activities:
Net loss $(205,494)
---------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 13,581
Issuance of stock for services 59,875
Changes in Assets and Liabilities:
Accounts receivable - trade (26,749)
Prepaid expenses (2,210)
Inventory (577)
Refundable deposits 211
Accounts payable 55,498
Accrued liabilities (10,310)
---------
89,319
---------
Net cash used by operating activities $(116,175)
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
-7-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Everest Security Systems Corporation is a Corporation organized under
the laws of the State of Nevada. The Company was organized in 1986 as
Burningham Enterprises, Inc. In February, 1988, the Company changed its
name to Everest Funding Corporation and acquired Everest Mortgage
Corporation, Inc. The acquisition was accounted for under the purchase
method of accounting as a reverse acquisition, whereby Everest Mortgage
Corporation, Inc. was deemed to have acquired Everest Funding
Corporation.
During 1992, Everest Mortgage Corporation, Inc. ceased operations.
Everest Funding Corporation was inactive until April, 1995, when the
Company was reinstated in the State of Nevada. On September 30, 1995,
the Company acquired all of the issued and outstanding stock of
Specialty Device Installers, Inc. (Note 2). In October, 1995, the
Company conducted a private offering of their common stock. In October,
1995, the Company's Board of Directors resolved to change the name of
the Corporation to Everest Security Systems Corporation.
The principal purpose of the Corporation is to act as the holding
company of Specialty Device Installers, Inc., a Florida Corporation,
which is primarily engaged in the sale, installation and monitoring of
security device systems to private and commercial customers in southern
Florida.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting 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.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Specialty Device
Installers, Inc. (SDI, Inc.) from the date of its acquisition, October
1, 1995. Intercompany transactions and balances have been eliminated in
consolidation.
Revenue Recognition:
System Sales:
Revenues from security system installation services and security system
sales are recognized when the services are rendered or product
installations made. Upon installation of the security system, the title
on the equipment is passed to the customer.
-8-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Revenue Recognition: (Continued)
Monitoring Services:
Revenues from contract monitoring services, which are normally pre-
billed, are deferred and taken into income on a prorata basis as earned
over the life of the contract. Costs of monitoring contracts purchased
from third-parties are capitalized and amortized over the life of the
contract, and are reviewed periodically for impairment.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments
purchased with an initial maturity of three (3) months or less.
Available for Sale Securities:
Available for sale securities are equity securities that the Company
purchased and held for the purpose of selling over an undetermined
period, and are reported at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity.
Accounts Receivable - Trade:
Accounts receivable - trade primarily represent amounts billed but
uncollected on completed installations and monitoring contracts. The
receivables are principally unsecured.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectible accounts receivable. At December 31, 1995, an allowance
has been provided for potentially uncollectible accounts receivable in
the amount of $10,000.
Inventory:
Inventory quantities and valuations are determined on an annual basis by
a physical count and pricing of same. Inventory is stated at the lower
of cost, first-in, first-out method, or market.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets. The average lives range from five (5) to seven (7) years.
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred.
Depreciation expense was $628 for the year ended December 31, 1995.
The Company is the lessee of office equipment under a capital lease
agreement expiring November, 1999. The asset is being depreciated over
its estimated productive life. Amortization of the equipment is included
in depreciation expense, as noted above.
-9-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Goodwill:
Goodwill represents the excess of the cost of acquiring Specialty Device
Installers, Inc. over the fair value of their net assets at the date of
acquisition, and is being amortized on the straight-line method over
five (5) years. Amortization expense charged to operations for the
period from the date of acquisition, September 30, 1995 through December
31, 1995 was $11,110. The carrying value of goodwill will be
periodically reviewed by the Company and impairments, if any, will be
recognized when expected future operating cash flows derived from
goodwill are less than their carrying value.
Deferred Contract Costs:
Deferred contract costs represent the cost of purchasing long-term
monitoring contracts and are being amortized on the straight-line method
over the life of the contracts. Amortization expense charged to
operations for the period from the date of acquisition, September 30,
1995 through December 31, 1995 was $1,843. The carrying value of
deferred contract costs will be periodically reviewed by the Company and
impairments, if any, will be recognized when expected future operating
cash flows derived from the monitoring contracts are less than the
deferred contract cost.
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Assets and liabilities at the rates of exchange
prevailing at the balance sheet date;
Revenue and expenses at average exchange rates for the
period in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of the
Corporation's foreign operations are deferred and included as a
separate component of stockholders' equity.
Income Taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis, and the utilization of the net operating loss carryforward.
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.
-10-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Loss Per Share:
The loss per share amount is based on the weighted average number of
shares outstanding of 991,607 at December 31, 1995. A fully diluted loss
per share amount is not presented for 1995 as it is anti-dilutive.
2. Business Combinations:
On October 1, 1995, the Company purchased all of the outstanding shares
of Specialty Device Installers, Inc. for common share consideration. The
acquisition was accounted for by the purchase method. The results of
operations are included in the accounts from the effective date of the
acquisition. Details of the purchase are as follows:
Fair market value of assets acquired:
Working capital $ 86,104
Fixed assets 4,875
Other assets 5,009
Debt (118,222)
Goodwill 222,234
----------
Consideration given $ 200,000
==========
Common shares issued 200,000
==========
3. Investments:
Available for Sale Securities:
As of December 31, 1995, the Company had securities classified as
available for sale as follows:
Aggregate Unrealized
Fair Value Cost Holding Loss
Equity Securities:
J.A. Industries,
Inc., 100,000
shares $ 65,600 $ 100,000 $ 34,400
========== ========== ==========
Stockholders' equity for the year ended December 31, 1995 includes an
unrecognized holding loss on available for sale securities of $34,400.
Realized gains and losses are determined on the specific identification
basis. During the year ended December 31, 1995, there were no sales
proceeds or gross realized gains on securities classified as available
for sale.
-11-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments: (Continued)
Available for Sale Securities: (Continued)
Subsequent to the date of these financial statements, J.A. Industries,
Inc.'s common stock was trading at approximately $.42 per share. The
Company's management believes this is a temporary devaluation of J.A.
Industries, Inc.'s market price. The investment in J.A. Industries,
Inc.'s common stock is recorded at the fair market value of the stock
at December 31, 1995.
4. Property and Equipment:
As of December 31, 1995, property and equipment consist of the
following:
Furniture $ 3,000
Equipment 14,244
----------
17,244
Less: accumulated
depreciation (2,168)
----------
$ 15,076
==========
5. Related Party Transactions:
Loan Receivable - Related Entity:
As of December 31, 1995, the loan receivable from a related entity
consists of a loan receivable from J.A. Industries, Inc., in the amount
of $20,500, due on demand with no stated interest.
Notes Payable - Related Parties:
As of December 31, 1995, notes payable - related parties consist of the
following:
Note payable to J.A. Industries, Inc., due
on demand with no stated interest. $ 15,000
Note payable to Knight Financial, due on
demand with no stated interest. 5,000
Note payable to an individual, due on
demand with no stated interest. 13,387
----------
$ 33,387
==========
-12-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions: (Continued)
Notes Payable - Related Parties:
The Company has accrued interest payable of $7,311 at December 31, 1995
related to the above note payable to an individual. The interest was
accrued through the date of acquisition, September 30, 1995, at which
time further interest accrual was suspended.
Other Transactions:
The Company has a management agreement with Knight Financial Limited, a
company owned by an officer and stockholder of the Company. The
agreement is effective through May 30, 1996, and provides for
compensation of $24,000 per year plus stock options for 100,000 shares
under an Incentive Stock Option Plan, exercisable at a price of $2 per
share. None of the options have been exercised to date. Included in
accounts payable as of December 31, 1995, is $1,474 of compensation
accrued under the above agreement.
The Company has an employment agreement with the president of the
Company's wholly-owned subsidiary. The agreement was effective through
December 31, 1995, and has been extended for one (1) additional year.
The agreement is for a base salary of $52,000 plus a ten percent (10%)
incentive based on the year end adjusted net profits of the subsidiary.
The net profits of the Company will be adjusted to exclude any incentive
salary paid pursuant to this agreement, any contributions to the pension
or profit sharing plans, any extraordinary gains or losses (including
but not limited to gains or losses on disposition of assets) and any
provisions or refunds for state or federal income taxes.
The Company is holding 100,000 common shares of J.A. Industries, Inc. as
available for sale securities. An officer and stockholder of the Company
is also an officer and stockholder of J.A. Industries, Inc.
6. Notes Payable:
As of December 31, 1995, notes payable consist of the following:
$50,000 revolving line of credit with Barnett Bank,
interest at prime plus 4%, due on demand; collateralized
by substantially all of the Company's assets. $ 47,139
10% note payable to High Tech, monthly
installments of $879, including principal and
interest, due May, 1995; unsecured. 9,204
-13-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Notes Payable: (Continued)
Loan payable to J.A. (Canada), Inc., non-interest
bearing, due on demand; unsecured. J.A. (Canada), Inc.
is a former subsidiary of J.A. Industries, Inc., a
related entity. 5,323
----------
$ 61,666
==========
7. Obligation Under Capital Lease:
The Company is the lessee of office equipment with a cost of $9,561
under a capital lease agreement which expires in November, 1999. At
December 31, 1995, future minimum lease payments due under the capital
lease agreement are as follows:
Year Ended
December 31, Amount
1996 $ 3,063
1997 3,063
1998 3,063
1999 2,807
----------
Total minimum lease payments 11,996
Less: amount representing interest (2,608)
----------
Present value of net minimum lease
payments 9,388
Less: current maturities of capital
lease obligations (1,978)
----------
Non-current maturities of capital
lease obligations $ 7,410
==========
The interest rate under the capital lease agreement is based on the
lessor's implicit rate of return at the inception of the lease.
-14-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies:
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of accounts
receivable. The Company's accounts receivable primarily result from its
electronic security installation and monitoring, and reflects a customer
base throughout south Florida. The Company's contracts receivable
consist primarily of three (3) to five (5) year monitoring contracts in
south Florida. The contracts are non-cancellable and secured by the
monitoring equipment. Credit limits, ongoing credit evaluation and
account monitoring procedures are utilized to minimize the risk of loss.
Operating Lease:
The Company is currently leasing office space in Fort Lauderdale,
Florida under a non-cancellable operating lease agreement which expires
May 30, 1996. Payments are approximately $1,600 per month.
9. Stockholders' Equity:
Reverse Stock Split:
On July 24, 1995, the Company declared a 1 for 20 reverse split of the
Company's common stock. The reverse stock split did not affect the par
value of the common stock. The accompanying financial statements give
retroactive effect to the stock split.
Common Stock:
The Company has authorized the issuance of 100,000,000 shares of the
Company's common stock with a par value of $.001 each. At December 31,
1995, there were 2,029,902 shares issued and 2,019,824 shares
outstanding.
Treasury Stock:
Treasury stock is shown at cost, and as of December 31, 1995, consists
of 10,078 shares.
10. Stock Option Plan:
The Company has issued stock options to various key employees and an
outside consulting firm. As of December 31, 1995, the Company has
granted options to purchase 174,720 shares of common stock at $2.00 per
share. On December 31, 2000, options expire. As of December 31, 1995,
none of these options have been exercised.
-15-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock Option Plan: (Continued)
In October, 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock Based Compensation", effective
for years beginning in 1996. As of December 31, 1995, the Company has
not yet adopted this standard.
11. Deferred Income Taxes:
The timing differences that give rise to the deferred tax asset at
December 31, 1995, are presented below:
Net operating loss carryforward $ 48,500
Unrecognized holding loss on
available for sale securities 8,600
Allowance for doubtful accounts 2,500
----------
59,600
Less: valuation allowance (59,600)
----------
Net deferred tax asset $ -
==========
At December 31, 1995, the Company has a net operating loss carryforward
for federal purposes of approximately $194,000, which expires in 2010.
12. Monitoring Contracts:
The Company has contracts to perform monitoring services on various
security alarm installations. As of December 31, 1995, the minimum
annual payments receivable under non-cancellable monitoring contracts,
are as follows:
Year Ended
December 31, Amount
1996 $ 37,856
1997 33,807
1998 32,246
1999 28,794
2000 22,881
----------
$ 155,584
==========
-16-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the year ended December 31, 1995, the Company recognized
investing and financing activities that affected assets, liabilities and
equity, but did not result in cash receipts or payments. These non-cash
activities consist of the following:
The Company issued 100,000 shares of common stock to
acquire all of the outstanding common stock of Specialty
Device Installers, Inc. The stock was valued at $2 per
share.
The Company issued 1,000,000 shares of common stock to
acquire 100,000 shares of J.A. Industries, Inc. from an
investment company. The investment was valued at
$100,000.
The Company issued 218,750 shares of common stock for
consulting services valued at $58,875.
The Company issued 285,000 shares of common stock for
notes receivable in the amount of $570,000. As of
December 31, 1995, the Company had not been paid for
the common stock subscribed.
The Company financed the purchase of office equipment
in the amount of $9,651 under a capital lease agreement.
14. Major Customers:
For the year ended December 31, 1995, two (2) customers make up
approximately 38% and 25% of the Company's sales, respectively.
-17-
<PAGE>
[SEMPLE & COOPER LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Specialty Device Installers, Inc.
We have audited the accompanying statements of operations, retained earnings
(deficit), and cash flows for the year ended December 31, 1994 of Specialty
Device Installers, Inc. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Specialty
Device Installers, Inc. for the year ended December 31, 1994, in conformity with
generally accepted accounting principles.
/s/ SEMPLE & COOPER, P.L.C.
Certified Public Accountants
Phoenix, Arizona
February 23, 1996
-18-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF OPERATIONS
For The Nine Month Period Ended September 30, 1995 (Unaudited)
and For The Year Ended December 31, 1994
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1995 1994
<S> <C>
Sales $ 947,254 $1,127,684
Cost of Sales 665,943 776,230
---------- ----------
Gross Profit 281,311 351,454
General and Administrative Expenses 340,715 367,935
---------- ----------
Loss from Operations (59,404) (16,481)
---------- ----------
Other Income (Expenses):
Interest income - 7
Interest expense (7,030) (6,737)
Loss on trading securities (2,494) (736)
Gain on trading securities - 4,911
Loss on sale of assets (9,115) -
---------- ----------
(18,639) (2,555)
---------- ----------
Net Loss $ (78,043) $ (19,036)
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
-19-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
For The Nine Month Period Ended September 30, 1995 (Unaudited)
and For The Year Ended December 31, 1994
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1995 1994
<S> <C>
Retained earnings, beginning
of period $ 51,852 $ 75,424
Distribution to stockholders (13,620) (4,536)
Net loss (78,043) (19,036)
---------- ----------
Retained earnings (deficit),
end of period $ (39,811) $ 51,852
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
-20-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF CASH FLOWS
For The Nine Month Period Ended September 30, 1995 (Unaudited)
and For The Year Ended December 31, 1994
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1995 1994
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash flows from operating activities:
Cash received from customers $ 959,296 $1,071,132
Cash paid to suppliers and employees (985,376) (1,130,740)
Interest paid (4,185) (2,272)
Interest received - 7
---------- ----------
Net cash used by operating
activities (30,265) (61,873)
---------- ----------
Cash flows from investing activities:
Sale of property and equipment 3,000 -
Purchase of property and equipment (2,037) (4,952)
Purchase of trading securities - (8,813)
Sale of trading securities - 9,906
Purchase of monitoring contracts (2,388) -
---------- ----------
Net cash used by investing
activities (1,425) (3,859)
---------- ----------
Cash flows from financing activities:
Proceeds from debt 41,653 30,000
Repayment of debt (13,662) (9,198)
Proceeds from note from stockholder 9,222 43,965
Repayment of note from stockholder - (4,396)
Distribution to stockholder (2,535) (4,536)
---------- ----------
Net cash provided by financing
activities 34,678 55,835
---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,988 (9,897)
Cash and cash equivalents at beginning
of period 1,049 10,946
---------- ----------
Cash and cash equivalents at end
of period $ 4,037 $ 1,049
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
-21-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
STATEMENTS OF CASH FLOWS (Continued)
For The Nine Month Period Ended September 30, 1995 (Unaudited)
and For The Year Ended December 31, 1994
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1995 1994
<S> <C>
Reconciliation of Net Loss to Net Cash
Used by Operating Activities:
Net Loss $ (78,043) $ (19,036)
---------- ----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,292 3,306
Loss on sale of property and
equipment 9,115 -
Loss on trading securities 2,494 736
Gain on trading securities - (4,911)
Changes in Assets and Liabilities:
Accounts receivable 12,042 (56,552)
Inventory (7,610) (7,802)
Prepaid expenses 498 (1,026)
Refundable deposits - (960)
Accounts payable 7,420 31,189
Accrued liabilities 19,682 (11,282)
Interest payable to stockholder 2,845 4,465
---------- ----------
47,778 (42,837)
---------- ----------
Net cash used by operating activities $ (30,265) $ (61,873)
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
-22-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Specialty Device Installers, Inc. (SDI, Inc.), is a Florida
corporation, incorporated on August 20, 1991. SDI, Inc.'s primary
business is the sale, installation and monitoring of security device
systems to private and commercial customers in southern Florida.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting 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.
Unaudited Financial Statements:
The unaudited financial statements include all adjustments (consisting
of normal recurring accruals) which the Company considers necessary for
a fair presentation of the results of operations for the interim
period. Operating results for the nine month period ended September 30,
1995 are not necessarily indicative of the results that may be expected
for the entire fiscal year ended December 31, 1995.
Revenue Recognition:
Revenue from services and product sales is recognized in the
consolidated statements of income as services are rendered or product
installations made. Service revenues, which consist of subscriber
billings for services not yet rendered, are deferred and taken into
income as earned. Revenue from the installation of electronic security
systems is recognized when installations are completed.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments
purchased with an initial maturity of three (3) months or less.
Trading Securities:
Trading securities are equity securities that the Company purchased
with the intent of selling short-term and are stated at fair value.
-23-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies:
Accounts Receivable:
Accounts receivable primarily represent amounts billed but uncollected
on completed installations, as well as charges for contract monitoring
services. The receivables are principally unsecured.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectible accounts receivable. At September 30, 1995, an allowance
has been provided for potentially uncollectible accounts receivable in
the amount of $10,000 (unaudited).
Inventory:
Inventory quantities and valuations are determined on an annual basis by
a physical count and pricing of same. Inventory is stated at the lower
of cost, first-in, first-out method, or market.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method over the estimated useful lives of the
assets. The average lives range from five (5) to seven (7) years.
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred.
Depreciation expense was $1,292 and $3,306 for the nine month period
ended September 30, 1995 (unaudited) and the year ended December 31,
1994, respectively.
Income Taxes:
For federal tax reporting purposes, the Company was operating as a
Subchapter S Corporation through September 30, 1995. As such, all
taxable income and available tax credits were passed from the corporate
entity to the individual stockholder. It was the responsibility of the
individual stockholder to report the taxable income or loss and tax
credits, and to pay any resulting income taxes. On a proforma basis,
there would be no tax expense or benefit due to the net operating losses
incurred.
2. Business Combinations:
On October 1, 1995, the stockholder of the Company entered into a Stock
Purchase Agreement under which he agreed to sell one hundred percent
(100%) of the outstanding stock of the Company to Everest Security
Systems Corporation for 100,000 shares of common stock of Everest
Security Systems Corporation.
-24-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Related Party Transactions:
Note Payable to Stockholder:
As of September 30, 1995 (unaudited), note payable to stockholder
consists of the following:
Note payable to an individual, due on demand
with a stated interest rate of 8%. $ 66,568
Less: current portion (66,568)
----------
$ -
==========
The Company has accrued interest payable of $7,311 at December 31, 1995
related to the above note payable. Interest expense on this note payable
was $2,846 and $4,580 for the nine month period ended September 30, 1995
(unaudited), and for the year ended December 31, 1994, respectively.
4. Contingencies:
Major Customers:
For the nine month period ended September 30, 1995 (unaudited), two (2)
customers make up approximately 38% and 25% of the Company's sales.
For the year ended December 31, 1994, three (3) customers made up
approximately 48%, 13% and 10% of the Company's sales.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk principally consist of accounts
receivable. The Company's accounts receivable primarily result from its
electronic security installation and monitoring, and reflects a customer
base throughout south Florida. The Company's contracts receivable
consist primarily of three to five year monitoring contracts in south
Florida. The contracts are non-cancellable and secured by the monitoring
equipment. Credit limits, ongoing credit evaluation and account
monitoring procedures are utilized to minimize the risk of loss.
5. Stockholders' Equity:
Common Stock:
The Company has authorized the issuance of 1,000 shares of the Company's
common stock with a par value of $1.00 each. At September 30, 1995
(unaudited), there were 200 shares issued and outstanding.
-25-
<PAGE>
SPECIALTY DEVICE INSTALLERS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the nine month period ended September 30, 1995 (unaudited), the
Company recognized investing and financing activities that affected
assets, liabilities and equity, but did not result in cash receipts or
payments. These non-cash activities consist of the following:
The Company distributed property to the stockholder with
a value of $11,085.
The Company's insurance carrier paid off an outstanding
note payable in the amount of $7,981, as part of a
settlement on a vehicle destroyed in an accident.
-26-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited proforma condensed consolidated financial statements
give effect to the acquisition by Everest Security Systems Corporation of
Specialty Device Installers, Inc. pursuant to the Stock Purchase Agreement
between the parties, and are based on the estimates and assumptions set forth
herein and in the notes to such statements. This proforma information has been
prepared utilizing the historical financial statements and notes thereto, which
are incorporated by reference herein. The proforma financial data does not
purport to be indicative of the results which actually would have been obtained
had the purchase been effected on the dates indicated or of the results which
may be obtained in the future.
The proforma financial information is based on the purchase method of accounting
for the acquisition of Specialty Device Installers, Inc. The proforma entries
are described in the accompanying footnotes to the unaudited proforma condensed
consolidated financial statements. The proforma unaudited condensed consolidated
statements of operations assume the acquisition took place on the first day of
the period presented.
ACQUISITION
On October 1, 1995, Everest Security Systems Corporation purchased all of the
outstanding shares of Specialty Device Installers, Inc. for common share
consideration. The acquisition was accounted for by the purchase method. In the
agreement, 100,000 shares of common stock of Everest Security Systems
Corporation valued at $200,000, was issued for all of the outstanding stock of
SDI, Inc.
-27-
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Year Ended December 31, 1994
UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS:
The following represents unaudited proforma consolidated statements of
operations for the year ended December 31, 1994, assuming the following
transaction was consummated as of January 1, 1994:
- Acquisition of Specialty Device Installers, Inc.
for 100,000 shares of common stock
In addition, the proforma consolidated net income per share gives retroactive
effect to the same events which were given retroactive effect in the
accompanying consolidated financial statements.
<TABLE>
<CAPTION>
Everest
Security
Systems Specialty
Corporation Device Proforma
and Installers, Proforma Consolidated
Subsidiary Inc. Adjustment Amounts
<S> <C>
Revenue $ - $1,127,684 $ - $1,127,684
Cost of Revenue - 776,230 - 776,230
---------- ---------- ----------
Gross Profit - 351,454 - 351,454
General and
Administrative - 367,935 44,447(1) 412,382
---------- ---------- ----------
Loss from
Operations - (16,481) - (60,928)
Other Income
(Expense) - (2,555) - (2,555)
---------- ---------- ----------
Net Loss $ - $ (19,036) - $ (63,483)
========== ========== ==========
Net Loss per
Share N/A $ (.15)
========== ==========
Weighted Average
Number of Shares
Outstanding 316,074 416,074
========== ==========
</TABLE>
(1) To amortize goodwill recorded in connection with the purchase of
Specialty Device Installers, Inc. on a straight-line basis over five
(5) years.
-28-
For information regarding this item, reference is made to the "Index of
Financial Statements."
PART III
Item 1. Exhibits
For information regarding this item reference is made to the "Index of
Exhibits."
INDEX
The following documents are filed as part of this Registration
Statement:
27
<PAGE>
Financial Statements
Page
Description No.
Certified Public Accountant Audit Report
for Everest Security Systems Corp.
Balance Sheet of the Company at December 31, 1995
Statement of Operations for Year Ended December 31, 1995
Statement of Operations Stockholders Equity for Year Ended
December 31, 1995
Statement of Cash Flows
Notes to Consolidated Financial Statements
Certified Public Accountant Audit Report for SDI
Statementof Operations for SDI for the Period September 30,
1995 and Year Ended December 31, 1994
Statementof Retained Earnings of SDI for the Period September
30, 1995 and Year Ended December 31, 1994
Statements of Cash Flows for the Period
September 30, 1995 and Year Ended December 31, 1995
Notes to Financial Statements
Everest Security Systems Corp. and SDI Unaudited
Proforma Condensed Consolidated Financial Statements
28
<PAGE>
Exhibits
Exhibit Page
No. Description No.
- --------- ----------- -----
3 (i) Articles of Incorporation dated October 30, 1986
3 (i)(a) Amendment to the Articles of Incorporation
3 (i)(b) Amendment to the Articles of Incorporation
3 (ii) Bylaws
4 Specimen Stock Certificate
10 (a) Management Agreement between Everest Funding Corporation
and Knight Financial Limited
10 (b) Share Purchase Agreement dated October 9, 1995 between Security
Device Installers Inc. and Everest Security Systems Corporation
10 (b)(1) Amendment to October 9, 1995 Share Purchase Agreement
10 (c) Executive Employment Agreement between Everest Funding
Corporation and Frank Bauer
10 (d) Consulting Agreement between G.M. Capital Partners, Ltd. and
Everest Funding Corporation
10 (e) Everest Security Systems Corp. Employee Stock Option
Agreement with G.M. Capital Partners, Ltd.
10 (f) Everest Security Systems Corp. Employee Stock Option
Agreement with Frank Bauer
21 Specialty Device Installers, Inc. and Federal Alarm Systems, Inc.,
companies duly incorporated under the laws of the State of Florida,
are wholly owned subsidiaries of the Registrant.
28 Everest Security Systems Corp. Incentive Stock Option Plan
29
