SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
COMMISSION FILE NUMBER 0-28490
GUARDIAN INTERNATIONAL, INC.
(Formerly Everest Security Systems Corporation, formerly Everest
Funding Corporation, formerly Burningham Enterprises, Inc.)
(Exact name of registrant as specified in its charter)
NEVADA 58-1799634
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3880 N. 28 TERRACE (954) 926-5200
HOLLYWOOD, FLORIDA 33020 (The Company's telephone number,
(Address of principal offices) including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X___ NO _____
As of August 14, 1997, there are 6,503,802 shares of Class A Voting
Common Stock and 484,035 shares of Class B Nonvoting Common Stock of the issuer
outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
YES ____ NO X____
<PAGE>
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Balance Sheets
As of June 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations For the Three and
Six Month Periods Ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows For the
Six Month Periods Ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
The Company's 10-QSB for the quarterly period ended June 30, 1997 is hereby
amended and restated in its entirety as follows:
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
1
<PAGE>
FORM 10-QSB/A
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
JUNE 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED) *
-----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $381,145 $1,037,861
Accounts receivable, net of allowance for doubtful accounts of
$163,560 at June 30, 1997 and $166,315 at December 31, 1996 706,064 569,180
Other 73,459 20,736
----------- ----------
Total current assets 1,160,668 1,627,777
----------- ----------
Property and equipment, net 672,145 484,859
Customer accounts, net 7,801,288 5,124,449
Intangible assets, net 1,824,088 1,718,377
Deposits and other assets 118,641 26,517
----------- ----------
Total assets $11,576,830 $8,981,979
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 707,935 $ 578,592
Unearned revenue 251,869 123,961
Current portion of long term obligations 161,606 84,004
----------- ----------
Total current liabilities 1,121,410 786,557
----------- ----------
Long term obligations, less current portion 7,662,176 5,079,832
Shareholders' equity:
Class A voting common stock, $.001 par value, 100,000,000 Shares authorized,
6,503,802 and 6,453,802 Shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 6,504 6,454
Class B non voting common stock, $.001 par value, 484,035 Shares authorized,
484,035 issued and outstanding at June 30, 1997 and December 31, 1996 484 484
Additional paid-in capital 4,745,714 4,777,772
Accumulated deficit (1,953,020) (1,467,762)
Treasury stock (6,438) -
Notes receivable from sale of stock - (201,358)
----------- ----------
2,793,244 3,115,590
----------- ----------
Total Liabilities and Shareholders' Equity $11,576,830 $8,981,979
=========== ==========
</TABLE>
*Excerpted from audited Financial Statements filed with the Company's Form
10-KSB for the period ended December 31, 1996.
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2
<PAGE>
FORM 10-QSB/A
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Monitoring $1,006,509 $ 639,297 $1,819,355 $ 1,213,646
Installation and service 325,672 84,646 735,313 176,594
------- ------ ------- -------
Total revenue 1,332,181 723,943 2,554,668 1,390,240
Operating expenses:
Monitoring 201,870 144,163 353,429 257,977
Installation and service 481,475 105,480 884,973 173,230
General and administrative 385,659 195,162 786,013 377,166
Amortization of customer contracts 224,011 80,847 417,827 249,933
Depreciation and amortization 79,199 57,109 157,564 81,022
------ ------ ------- ------
Total operating expenses 1,372,214 582,761 2,599,806 1,139,328
Income (loss) from operations (40,033) 141,182 (45,138) 250,912
Interest expense 243,181 137,231 440,120 248,420
------- ------- ------- -------
Net income (loss) $(283,214) $ 3,951 $(485,258) $2,492
========= ======= ========= ======
Income (Loss) per share $ (0.04) $ 0.00 $ (0.08) $ 0.00
========= ========== ========= ===========
Average number of shares outstanding 6,557,691 2,126,902 6,455,746 2,077,796
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
FORM 10-QSB/A
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (485,258) $2,492
Adjustments to reconcile net loss to net cash provided by (used in)
Operating activities:
Depreciation and amortization 157,564 81,022
Amortization of customer accounts 417,827 249,933
Amortization of deferred financing costs 70,460 -
Provision for doubtful accounts 62,870 8,494
Changes in assets and liabilities:
Accounts receivable (199,754) (196,165)
Intangibles and other assets (175,710) 43,962
Accounts payable and accrued liabilities 16,693 94,327
Unearned revenue 127,908 45,230
----------- ----------
Net cash (used in) provided by operating activities (7,400) 329,295
--------- --------
Cash flows from investing activities:
Purchase of fixed assets (80,989) (172,138)
Acquisition of customer accounts (3,055,666) (2,688,479)
---------- ----------
Net cash used in investing activities (3,136,655) (2,860,617)
----------- ----------
Cash flows from financing activities:
Payments of long term obligations (1,351,372) (943,345)
Proceeds from line of credit 3,845,149 3,488,570
Purchase of treasury stock (6,438) -
-----
Net cash provided by financing activities 2,487,339 2,545,225
Net change in cash and cash equivalents (656,716) 13,903
Cash and cash equivalents, beginning of period 1,037,861 14,263
---------- ----------
Cash and cash equivalents, end of period $381,145 $ 28,166
======== ==========
Noncash investing and financing activities:
Financed acquisition of property and equipment 166,168 31,939
Recognition of Class B common stock to be issued 130,500 -
Accrue commitment fee to senior lender 112,500 -
Issuance of common stock to purchase customer contracts 39,000 -
Write-off of note receivable from sale of stock 201,358 -
Supplemental disclosures:
Interest paid $ 364,770 $ 248,420
=========== =========
Income taxes paid $ - $ -
=========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
4
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The accounting policies followed by the Company are described in Guardian
International, Inc.'s (the "Company's") Form 10-KSB for the fiscal year
ended December 31, 1996.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain adjustments (consisting only of normal and
recurring adjustments) necessary to present fairly the Company's
consolidated balance sheets as of June 30, 1997 and December 31, 1996, the
consolidated statements of operations for the three and six month periods
ended June 30, 1997 and 1996, and the consolidated statements of cash flows
for the six month periods ended June 30, 1997 and 1996.
The results of operations for the three and six month periods ended June
30, 1997 are not necessarily indicative of the results to be expected for
the full year.
2. ACQUISITIONS
On August 28, 1996, Everest Security Systems Corporation ("Everest")
acquired all of the outstanding common stock of Guardian International,
Inc. ("Guardian"), a non public company, by issuing to Guardian's
shareholders 3,226,902 authorized but unissued shares of Everest,
representing 50% of Everest at August 28, 1996. In addition, the merger
agreement required that $1,750,000 be paid to the principal shareholder of
Guardian as consideration for consummating the transaction as a return of
capital (including repayment of remaining shareholder loans of $82,162 at
the merger date). The transaction has been accounted for under the purchase
method of accounting as a reverse acquisition with Guardian being deemed
the acquirer. The fair value of the acquired company, Everest, was
$1,948,539, not including net cash of approximately $3,100,000 from a
private placement conducted by Everest on August 14, 1996. The excess of
the cost over the fair value of the net assets acquired was $1,223,000 and
is being amortized on a straight-line basis over 10 years. The name of the
surviving entity was changed from Everest to Guardian. The consolidated
balance sheets at June 30, 1997 and December 31, 1996, the consolidated
statements of operations for the three and six month periods ended June 30,
1997, and the consolidated statement of cash flows for the six month
periods ended June 30, 1997 include the accounts and activity of the
surviving entity and its wholly-owned subsidiary (Specialty Device
Installers, Inc.). The consolidated statements of operations for the three
and six month periods ended June 30, 1996, and the consolidated statement
of cash flows for the six month period ended June 30, 1996 include the
accounts and activity strictly of Guardian.
In addition, pursuant to the merger, the Company issued 484,035 shares of
Class B non voting common stock to the Company's senior lender, Heller
Financial, Inc. ("Heller") or ("the Senior Lender") for cancellation of
their existing Capital Appreciation Rights, as defined in the loan
agreement. Also, in accordance with the terms of an agreement, Heller is
entitled to receive an additional 150,000 shares of Class B non voting
common stock. It was not determined until the quarter ended June 30, 1997
whether the additional 150,000 Class B shares would be transferred by the
former Guardian shareholders from their personal shares, or whether such
shares would be issued by the Company. Initial discussions indicated the
former shareholders would transfer personal shares to fulfill this
obligation. During the quarter ended June 30, 1997 it was decided the
Company will
5
<PAGE>
issue the shares. The shares will be valued at $0.87 per share, capitalized
as a cost of the acquisition of Everest and amortized over the remaining
life of the debt expiring in May 1999 (see Note 4). The Company has accrued
for the deferred cost of $130,500 (150,000 shares at $0.87 per share),
recorded an increase in paid in capital of $130,350 to recognize the shares
to be issued, and recorded $150 in accrued expense to recognize the par
value of the shares to be issued - such amount will be reclassified to
Class B common stock upon issuance of the shares, which is expected to
occur during the third quarter of fiscal 1997.
In May 1997 the Company completed the acquisition of the customer contracts
as well as certain other assets of Alarm Control, Inc. ("Alarm Control" or
"the Seller"). A total of approximately two thousand two hundred (2,200)
customer contracts were acquired, which is expected to increase monthly
revenue by over $60,000 per month. The purchase price consisted of $2.2
million in cash, 50,000 shares of common stock, and an option to the Seller
to purchase 100,000 additional shares of common stock at $2.50 per share
(the market price of the Company's stock on the date of the transaction was
$.78)
3. WRITE-OFF OF NOTES RECEIVABLE FROM SALE OF STOCK
During the time period between fiscal 1995 and the eight month period
ended August 31, 1996, and prior to its merger with Guardian
International, Inc., Everest Security Systems Corporation issued, among
other issuances of common stock, 485,000 shares of Common Stock at $2.00
per share. The issuance was exempt from registration pursuant to Rule 504
of Regulation D promulgated under the Securities Act. These shares were
issued in a private placement to accredited investors. As consideration
for 285,000 of the shares issued pursuant to such offering, Everest
received notes with original balances totaling $570,000. As of the date of
the merger of Guardian and Everest, the balances outstanding on the notes
was $201,358, which was recorded by Guardian. After exhaustive collection
efforts by the Company subsequent to the merger, no further monies have
been received, nor are any additional collections anticipated. In light of
the above factors, during the quarter ended June 30, 1997 the Company
wrote off the $201,358 as a direct reduction to equity (paid in capital).
4. RENEWED CREDIT FACILITY
In May 1997 the Company refinanced its existing credit facility (the
"Renewed Credit Facility") with Heller. Under the Renewed Credit Facility,
the maximum credit facility available to the Company was increased from $7
million available under the existing agreement to $15 million, and will be
further increased to $20 million at such time as the Company achieves a
Tangible Net Worth (as defined under the terms of the New Credit Facility)
of $5 million, provided that there have been no defaults under the Renewed
Credit Facility. There can be no assurances that the Company will achieve
a Tangible Net Worth (as defined) of $5 million. Interest under the
Renewed Credit Facility is based on the 90 day LIBOR plus an additional
percentage varying from 4% to 5%, depending on the Company's outstanding
borrowings and Tangible Net Worth (as defined). The Renewed Credit
Facility expires in May 1999, and shall automatically renew from year to
year thereafter unless terminated. The loan is collateralized by the
Company's assets. Additionally, guarantees limited to potential losses,
damages, costs and expenses incurred by Heller regarding certain Company
representations have been provided by Harold and Sheilah Ginsburg, both of
whom are directors, officers, and principal shareholders of the Company.
6
<PAGE>
Availability under the Renewed Credit Facility is subject to certain
"Borrowing Base" limitations (as such term is defined). The Renewed Credit
Facility includes customary covenants, including, but not limited to,
restrictions related to the incurring of other debt (see Note 6), the
encumbrance or sale of the Company's assets, and the payment of dividends
or making of other distributions to the Company's shareholders, and other
financial performance covenants. (See Amended and Restated Loan and
Security Agreement attached as Exhibit 10(b)).
5. LOSS PER SHARE
Primary loss per share is computed for the three and six month periods
ended June 30, 1997 and 1996 by dividing net loss by the total of the
weighted average number of shares outstanding. Common stock equivalents
have not been considered in calculating loss per share because their
effect would be anti-dilutive.
6. SUBSEQUENT EVENTS
On July 15, 1997, the Company executed an Agreement and Plan of Merger with
SPS Holdings, Inc. ("SPS") which provided for the merger of SPS with and
into a wholly-owned subsidiary of Guardian; thus, after the merger, SPS
would have operated as a wholly-owned subsidiary of the Company. The
shareholders of SPS would have received, in the aggregate, approximately 6
million shares of Class A Common Stock of the Company as consideration for
the merger, which shares would have constituted approximately 46% of the
shares of Class A Common Stock of the Company outstanding after the
consummation of the merger. The SPS shareholders would have also received
registration rights in connection with the merger. In connection with the
merger, the majority shareholders of the Company, the Ginsburgs, would have
entered into a shareholders agreement with the SPS shareholders regarding
the composition of the Company's Board of Directors, and the retention of
Richard Ginsburg as President and CEO, after consummation of the merger.
The consummation of the merger was subject to and conditioned upon, among
other things, certain consents and approvals, including the consent of
Heller pursuant to the terms of the Renewed Credit Facility. Closing of the
merger transaction was expected to have occurred before the end of August
1997.
As of the filing date of this Form 10-QSB/A, the Company's agreements with
respect to the merger with SPS Holdings, Inc., described above, have been
terminated.
7
<PAGE>
GUARDIAN INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTORY NOTE
FORWARD-LOOKING STATEMENTS. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"), the Company
is hereby providing cautionary statements identifying important factors that
could cause the Company's actual results to differ materially from those
projected in forward-looking statements (as such term is defined in the Reform
Act) made by or on behalf of the Company herein or orally, whether in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to, expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, identified
through the use of words or phrases such as the Company or management
"believes," "expects," "anticipates," "hopes," words or phrases such as "will
result," "are expected to," "will continue," "is anticipated," "estimated,"
"projection" and "outlook," and words of similar import) are not historical
facts and may be forward-looking. Such forward-looking statements involve
estimates, assumptions, and uncertainties, and, accordingly, actual results
could differ materially from the those expressed in the forward-looking
statements. Such uncertainties include, among others, the following: (i) the
ability of the Company to add additional customer accounts to its account base
through acquisitions from third parties, to generate new accounts internally,
and to form strategic alliances; (ii) the level of subscriber attrition, (iii)
the availability of capital to the Company relative to certain larger companies
in the security alarm industry which have significantly greater capital and
resources, and (iv) increased false alarm fines and/or the possibility of
reduced public response to alarm signals and (v) other risk factors described in
the Company's reports filed with the Securities and Exchange Commission (the
"SEC") from time to time.
The Company cautions that the factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
OVERVIEW
The majority of the Company's revenues is derived from recurring
payments for the monitoring of security systems, pursuant to contracts with
initial terms typically ranging from one to five years. The remainder of the
Company's revenues is derived from the sale and installation of security systems
and servicing of such installed systems. Monitoring and service revenues are
recognized as the service is provided. Installation revenue is recognized when
the required work is completed. All direct installation costs, which include
equipment, labor and installation overhead, and selling and marketing costs, are
generally expensed in the period when incurred. In cases where the Company
maintains ownership of the equipment, however, the costs of such equipment is
capitalized to property and equipment and amortized over seven years.
8
<PAGE>
Alarm monitoring revenues generate significant gross margins, whereby
installation and service activity may result in direct costs exceeding revenues.
Management believes, however, that such installation and service activity is
necessary for the generation and retention of alarm monitoring subscribers.
All direct external costs associated with purchases of subscriber
accounts (primarily through the Independent Alarm Acquisition Program and Dealer
Program described in the Company's Form 10-KSB for the fiscal year ended
December 31, 1996) are capitalized and amortized over 10 years on a
straight-line basis. In contrast, the Company's costs related to the sales,
marketing and installation of new alarm monitoring systems generated by the
Company's internal sales force are generally expensed in the period in which
incurred. In cases where the Company maintains ownership of the equipment,
however, the costs of such equipment are capitalized to property and equipment
and amortized over seven years. To date, the Company has not had a large
internal sales force, and the number of subscriber accounts generated internally
during the three and six month periods ended June 30, 1997 and 1996 was not
material. In the future, if the Company expands its internal sales operations,
as anticipated, the accounting treatment for such internally generated revenues
would result in higher operating expenses in the period such revenues are
generated, but lower amortization expenses as a percentage of revenues.
The Company loses customers from time to time for various reasons,
including, primarily, the following: (i) the customer moves; (ii) a business or
commercial account closes or goes out of business; (iii) a customer is
dissatisfied with the Company's level of service; (iv) a building or home is
destroyed; or (v) the customer can no longer afford to pay for service.
Subscriber attrition has a direct impact on the Company's results of operations,
since it affects both the Company's revenues and its amortization expense.
Attrition can be measured in terms of canceled subscriber accounts and the
resulting decreased monitoring revenue. Net attrition for a given period of time
is defined as the number of accounts disconnecting service during the period in
question, net of any replacement of such subscriber by means of Dealer or
independent company replacement during the guarantee period, or by other account
replacement methods employed by the Company; these methods might include, for
example, the solicitation of monitoring contracts from new occupants (where
attrition is attributable to customer relocation). Net subscriber attrition of
the Company's own customers during the three and six month periods ended June
30, 1997 and 1996 was less than 10%.
The Company has developed an in-house system for identifying and
decreasing account attrition, which consists of the following: (1) the
identification of possible lost accounts via a daily test; (2) false alarm
tracking; (3) early account delinquent procedures; (4) quality customer service;
(5) control lockout; (6) early identification of new tenants/residences in homes
with alarms installed by the Company; and (7) aggressive problem solving by
management. The No-Tolerance Attrition Policy procedures identify possible
account attrition at various stages and attempt to prevent lost accounts or
replace lost accounts by quick and efficient intervention.
Amounts paid to independent alarm companies and Dealers are capitalized
and amortized over ten years. If a customer signed on by an independent alarm
company or Dealer is lost and not replaced, the unamortized contract amount is
written off. Such write offs are included in amortization of customer contracts
in the accompanying Statements of Operations.
MRR represents the monthly recurring revenue the Company is entitled to
receive under subscriber contracts in effect at the end of the period. Included
in MRR and the number of subscribers are amounts associated with subscribers
with past due balances. The Company maintains the policy and practice of taking
every economically feasible action to preserve the revenue stream associated
with these contractual obligations. To this end, the Company actively works both
towards the collection of amounts owed and the retention of subscribers. In
certain instances, this collection and evaluation period may
9
<PAGE>
exceed six months in length. When, in the judgment of the Company's collection
personnel, all reasonable efforts have been made to collect balances due and
certain legal steps are taken to ensure proper cancellation of the relevant
monitoring contract, nonpaying subscribers are disconnected from the Company's
monitoring center and are included in the calculation of net subscriber and MRR
attrition.
Specialty Device Installers, Inc., a wholly-owned subsidiary of the
Company ("SDI"), provides installation services to third party security alarm
companies, many of which are competitors of the Company. During the first
quarter of fiscal year 1997, the Company significantly downsized SDI, as a
result of SDI's poor operating performance and because the Company intends to
focus on its core businesses of alarm installation, monitoring, and related
services for its own customers.
RESULTS OF OPERATIONS
As discussed in Note 2 of Notes to Consolidated Financial Statements, the
Company is the surviving corporation of a merger of Guardian with the Company's
predecessor, Everest, which was consummated on August 28, 1996. The transaction
was a reverse acquisition for accounting purposes, with Guardian deemed to be
the acquirer. The consolidated balance sheets at June 30, 1997 and December 31,
1996, the consolidated statements of operations for the three and six month
periods ended June 30, 1997, and the consolidated statement of cash flows for
the six month period ended June 30, 1997 include the accounts and activity of
the surviving entity and its wholly owned subsidiary, SDI. The consolidated
statements of operations for the three and six month periods ended June 30,
1996, and the consolidated statement of cash flows for the six month period
ended June 30, 1996 include the accounts and activity strictly of Guardian.
10
<PAGE>
The following table sets forth certain operating data as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
PERCENTAGE OF TOTAL REVENUES
----------------------------
FOR THE THREE MONTH FOR THE SIX MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Monitoring 75.6% 88.3% 71.2% 87.3%
Installation and service 24.4 11.7 28.8 12.7
---- ---- ---- ----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Monitoring 15.2 19.9 13.8 18.6
Installation and service 36.2 14.6 34.6 12.5
General and administrative 28.9 27.0 30.8 27.1
Amortization of customer contracts 16.8 11.1 16.4 18.0
Depreciation and amortization 5.9 7.9 6.2 5.8
---- ---- --- ---
Total operating expenses 103.0 80.5 101.8 82.0
Income (loss) from operations (3.0) 19.5 (1.8) 18.0
Interest expense 18.3 19.0 17.2 17.9
Net income (loss) (21.3)% 0.5% (19.0)% .1%
======= ==== ======= ===
</TABLE>
Neither the Company nor the pre-merged Guardian International, Inc.
(see Note 2 of Notes to Consolidated Financial Statements) has ever had any net
income, and the Company has a history of consistent and sometimes significant
net losses. Although no assurance can be given by the Company as to when or if
the Company will realize net earnings, the Company anticipates that, based on
its strategy of continued growth and customer account expansion, and barring any
unforeseen significant changes in the nature of its business or operations
(including its method of financing customer account acquisitions through its
existing and/or any new credit facility with its Senior Lender, and the
accounting for such acquisitions), it will continue to record net losses until
such time as the Company's retail customer contract base totals more than
approximately 20,000 and it has significantly reduced its indebtedness. At June
30, 1997, the Company had approximately 10,900 retail customers, compared to
approximately 7,700 retail customer contracts at June 30, 1996. The Company
recently increased its credit availability with Heller from $7 million to $15
million (see Note 4 of Notes to Consolidated Financial Statements) which, the
Company believes, will provide sufficient capital availability for achieving a
customer contract base of 20,000 customers. There can be no assurances, however,
that the Company will achieve a customer contract base of 20,000 customers. See
Note 6 of Notes to Consolidated Financial Statements regarding the Company's
plans, terminated as of the filing date, to acquire another company pursuant to
a merger of such company with and into a wholly-owned subsidiary of the Company.
Earnings before interest, taxes, depreciation, and amortization
("EBITDA") is another important factor in considering profitability. EBITDA does
not represent cash flow from operations as defined by
11
<PAGE>
generally accepted accounting principles, should not be construed as an
alternative to net earnings and is indicative neither of the Company's operating
performance nor of cash flows available to fund all the Company's cash needs.
Items excluded from EBITDA are significant components in understanding and
assessing the Company's financial performance. Nevertheless, management believes
presentation of EBITDA enhances an understanding of the Company's financial
condition, results of operations and cash flows because EBITDA is used by the
Company to satisfy its debt service obligations and its capital expenditure and
other operational needs as well as to provide funds for growth. In addition,
EBITDA has been used by the investment community to determine the current
borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses. The following table
provides a calculation of EBITDA for the three and six month periods ended June
30, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE THREE MONTH FOR THE SIX MONTH
PERIODS ENDED PERIODS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $(283,214) $3,951 $(485,258) $2,492
Plus:
Amortization of customer contracts 224,011 80,847 417,827 249,933
Depreciation and amortization 79,199 57,109 157,564 81,022
Interest expense 243,181 137,231 440,120 248,420
------- ------- ------- -------
EBITDA $263.177 $279,138 $530,253 $581,867
======== ======== ======== ========
</TABLE>
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 COMPARED TO THREE AND
SIX MONTH PERIODS ENDED JUNE 30, 1996
Total revenues for the three and six month periods ended June 30, 1997
increased 84% and 84% to $1.3 million and $2.6 million, respectively, from
$724,000 and $1.4 million during the corresponding periods in the prior year.
Monitoring revenues for the three and six month periods ended June 30, 1997
increased by 57% and 50% to $1.0 million and $1.8 million, respectively, from
$639,000 and $1.2 million during the corresponding periods of the prior fiscal
year. Installation and service revenues for the three and six month periods
ended June 30, 1997 increased by 285% and 316% to $326,000 and $735,000,
respectively, compared to $85,000 and $177,000 during the corresponding period
of the prior fiscal year. Total retail subscribers numbered approximately 10,900
at June 30, 1997, compared to approximately 7,700 at June 30, 1996, a net
increase of 42%. The increase in revenues and number of subscribers from 1996 to
1997 is primarily attributable to the Company's ongoing Independent Alarm
Acquisition Program and Dealer Program as described in the Company's Form 10-KSB
for the fiscal year ended December 31, 1996. Additionally, in May 1997 the
Company purchased approximately 2,200 retail customers from Alarm Control, Inc
("ACI"). During the three and six month periods ended June 30, 1997 SDI
generated $123,000 and $370,000 in installation and service revenue, compared to
$0 during the respective periods of 1996. As discussed under the caption
"Overview" above, the Company significantly downsized SDI during the first
quarter of fiscal year 1997.
Total operating expenses for the three and six month periods ended June
30, 1997 increased 135% and 128% to $1.4 million and $2.6 million, respectively,
compared to $583,000 and $1.1 million during the corresponding periods of the
prior fiscal year. Monitoring expenses increased 40% and 37%
12
<PAGE>
to $202,000 and $353,000, respectively, compared to $144,000 and $258,000 during
the corresponding periods in the prior fiscal year. The increase in monitoring
costs from 1996 to 1997 was a result of the significant increase in monitoring
revenues and number of subscriber accounts (see previous paragraph). As a
percentage of monitoring revenues during the three and six month periods ended
June 30, 1997, monitoring expenses were 20% and 19%, respectively, compared to
23% and 21% during the corresponding periods of the prior fiscal year.
Installation and service costs during the three and six month periods ended June
30, 1997 increased by 356% and 411% to $481,000 and $885,000, respectively,
compared to $105,000 and $173,000 during the corresponding periods of the prior
fiscal year. Included in installation and service costs during the three and six
month periods ended June 30, 1997 is $118,000 and $328,000 incurred by SDI,
compared to $0 and $0 during the corresponding periods in 1996. The increase in
total installation and service costs from 1996 to 1997 was the result of
increases in related revenues from 1996 to 1997 (see previous paragraph). As a
percentage of installation and service revenue, installation and service costs
were 148% and 120% during the three and six month periods ended June 30, 1997,
respectively, compared to 125% and 98%, respectively, during the corresponding
periods in the prior fiscal year. The Company does not now generate, nor does it
anticipate generating in the future, any appreciable margins or profits, and may
incur future losses from such installation and service activity, but such
activity is considered necessary to the generation and retention of alarm
monitoring subscribers.
Total gross profit, defined as total revenues less monitoring and
installation and service costs, increased by 37% and 37% to $683,000 and $1.2
million, during the three and six month periods ended June 30, 1997,
respectively, compared to $250,000 and $431,000 during the corresponding periods
of the prior fiscal year. Gross profit from monitoring revenues increased by 63%
and 53% to $805,000 and $1.5 million during the three and six month periods
ended June 30, 1997, respectively, compared to $495,000 and $956,000 during the
corresponding periods of the prior fiscal year. Gross profit (loss) from
installation and service activities was $(156,000) and $(151,000) during the
three and six month periods ended June 30, 1997, respectively, compared to
$(21,000) and $3,000 during the corresponding periods of the prior fiscal year.
See the previous two paragraphs for a discussion of revenues and expenses of
such monitoring and installation and service activity.
General and administrative costs ("G&A") increased by 98% and 108% to
$386,000 and $786,000, respectively, during the three and six month periods
ended June 30, 1997, compared to $195,000 and $377,000 during the corresponding
periods of the prior fiscal year. Included in G&A costs during the three and six
month periods ended June 30, 1997 period were $26,000 and $96,000 incurred by
SDI, respectively, compared to $0 and $0 during the corresponding periods in
1996. The increase in G&A costs from 1996 to 1997 is related primarily to the
Company's growth in revenue, resulting in an increase in the Company's overhead
cost structure. As a percentage of total revenues, G&A was 29% and 31% during
the three and six month periods ended June 30, 1997 period, respectively,
compared to 27% and 27% during the corresponding periods of the prior fiscal
year.
Amortization of customer contracts increased 177% and 67% to $224,000
and $418,000 during the three and six month periods ended June 30, 1997,
respectively, compared to $81,000 and $250,000 during the corresponding periods
in the prior fiscal year. The increase in such costs from 1996 to 1997 resulted
from the increase in the amount of capitalized customer contracts, which
increased from a net balance of $4.5 million at June 30, 1996 to $7.8 million at
June 30, 1996.
Depreciation and amortization increased by 39% and 94% to $79,000 and
$158,000, during the three and six month periods ended June 30, 1997,
respectively, compared to $57,000 and $81,000 during the corresponding periods
of the prior fiscal year. Such costs include depreciation of property and
equipment (the gross balance of which increased from $597,000 at June 30, 1996
to $1.0 million at June 30, 1997 as a result of (i) the Company's continued
expansion activities and (ii) the merger of Guardian
13
<PAGE>
and Everest, which resulted in additional property and equipment being
acquired), goodwill amortization (a gross balance of $1.2 million in goodwill
was recorded in connection with the merger of Guardian and Everest, which is
being amortized over 10 years), and amortization of certain other intangible
assets.
Interest expense increased 77% and 77% to $243,000 and $440,000 during
the three and six month periods ended June 30, 1997, compared to $137,000 and
$248,000 during the corresponding periods of the prior fiscal year. The increase
in interest expense was the result of additional debt incurred primarily in
connection with the cost of acquiring subscriber accounts. The majority of such
subscriber acquisition costs were financed by Heller. Total borrowings under the
credit facility increased from $4.4 million as of June 30, 1996 to $7.4 million
as of June 30, 1997.
Net income (loss) was $(283,000), or $(.04) per share, and $(485,000),
or $(.08) per share, for the three and six month periods ended June 30, 1997,
compared to $4,000, or $.00 per share, and $2,000, or $.00 per share, during the
corresponding periods of the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
In May 1997 the Company entered into the Renewed Credit Facility with
Heller for $15 million, expiring in May 1999 with automatic yearly renewals
unless terminated. See Note 4 of Notes to Consolidated Financial Statements for
further discussion of the terms of the Renewed Credit Facility.
The Renewed Credit Facility will be used primarily for acquisitions of
subscriber accounts. The Company's continued plan of growth through acquisitions
of subscriber accounts is contingent upon its ability to borrow under the
Renewed Credit Facility.
At June 30, 1997, the Company had working capital of $36,000, and a
current ratio of 1.0 to 1. Net cash used in operating activities during the six
month period ended June 30, 1997 was $7,000; the Company incurred a net loss of
$485,000 during such period; however, included in such losses was depreciation
and amortization expenses totaling $646,000, and a cash outflow of $200,000
related to an increase in accounts receivable. Net cash used in investing
activities was $3.1 million during the six month period ended June 30, 1997,
comprised of acquisition of customer accounts of $3.1 million, including $2.2
million of contracts purchased from Alarm Control in May 1997 (see Note 2 of
Notes to Consolidated Financial Statements), and purchases of fixed assets of
$81,000. Net cash provided by financing activities was $2.4 million during the
six month period ended June 30, 1997, consisting of proceeds under borrowings
from Heller of $3.8 million (including $2.2 million relating to the Alarm
Control transaction in May 1997) less repayments to Heller and other long-term
debt of $1.3 million, and purchase of treasury stock of $6,000. The Company's
cash balance amounted to $381,000 at June 30, 1997.
Total shareholders' equity was $2.8 million as of June 30, 1997,
decreasing by a net amount of $322,000 during the six month period ended June
30, 1997, consisting of a decrease of $485,000 resulting from the net loss
incurred during the period, an increase of $39,000 resulting from the issuance
of 50,000 shares of Class A Common Stock to Alarm Control in connection with the
purchase of Alarm Control's customer contracts as well as certain other assets,
an increase of $130,000 resulting from an accrual for the additional 150,000
shares of Class B Common Stock to be issued to Heller (see Note 2 of Notes to
Consolidated Financial Statements), and a decrease of $6,000 resulting from the
purchase of treasury stock.
As more fully described in Note 6 of Notes to Consolidated Financial
Statements, in July 1997 the Company executed an Agreement and Plan of Merger
with SPS Holdings, Inc. ("SPS") which provided for the merger of SPS with and
into a wholly-owned subsidiary of Guardian; thus, after the
14
<PAGE>
merger, SPS would have operated as a wholly-owned subsidiary of the Company. The
shareholders of SPS would have received, in the aggregate, approximately 6
million shares of Class A Common Stock of the Company as consideration for the
merger, which shares would have constituted approximately 46% of the shares of
Class A Common Stock of the Company outstanding after the consummation of the
merger. Closing of the merger transaction was expected to have occurred by the
end of August 1997.
Upon consummation of the merger of the Company and SPS, the Company
would have assumed approximately $4.4 million in debt as well as all of the
other assets and liabilities of SPS. The majority of the SPS debt is owed to a
financial institution. As discussed in Note 6 of Notes to Consolidated Financial
Statements, Heller had to approve the merger transaction. Additionally, the
Company was seeking to borrow funds from Heller under the Renewed Credit
Facility to repay SPS's debt to the financial institution.
As of the filing date of this Form 10-QSB/A, the agreements with
respect to the merger with SPS, described above, have been terminated.
As of the filing date of this Form 10-QSB/A, the Company does not have
any significant commitments for capital outlays.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial customers.
The Company extends credit to its customers in the normal course of business,
performs periodic credit evaluations and maintains allowances for potential
credit losses.
15
<PAGE>
GUARDIAN INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Each of the Company and SDI experiences routine litigation in the
normal conduct of its business. Neither the Company nor SDI believes that any
such pending litigation will have, individually or in the aggregate, a material
adverse effect on its respective business or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3(i) Articles of Incorporation dated October 30, 1986 incorporated
by reference to Exhibit 3(i) of the Company's Form 10-SB
filed May 6, 1996
3(i)(a) Amendment to the Articles of Incorporation incorporated by reference to Exhibit
3(i)(a) the Company's Form 10-SB filed May 6, 1996
3(i)(b) Amendment to the Articles of Incorporation incorporated by reference to Exhibit
3(i)(b) of the Company's Form 10-SB filed May 6, 1996
3(i)(c) Amendment to the Articles of Incorporation incorporated by reference to Exhibit
3(i)(c) of the Company's Form 10-SB/A filed January 24, 1997
3(ii) Amended Bylaws of the Company incorporated by reference to
Exhibit 3(ii) of the Company's Annual Report on Form 10-KSB
filed March 31, 1997
3(ii)(a) Directors' Consent Dated August 15, 1996 adopting Amendment
to the Bylaws incorporated by reference to Exhibit 3(ii)(a)
of the Company's Annual Report on Form 10-KSB filed March 31,
1997
4 Specimen Stock Certificate incorporated by reference to Exhibit 4 of the
Company's Form 10-SB filed May 6, 1996
10(a) Letter from Heller Financial, Inc. Regarding Increase in Credit Facility
incorporated by reference to Exhibit 10(a) of the Company's Form 10-QSB filed
May 15, 1997
10(b) Amended and Restated Loan and Security Agreement dated as of
May 22, 1997 among Guardian International, Inc., the
Borrowing Subsidiaries From Time to Time Party Hereto, as
Borrowers, and Heller Financial, Inc., as Lender incorporated
by reference to Exhibit 10(b) of the Company's 10-QSB filed
August 14, 1997
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
1. Form 8-K/A filed April 22, 1997 submitting audited financial statements of
Guardian International, Inc. for the fiscal year ended December 31, 1994,
and audited financial statements of Guardian International, Inc. for the
two fiscal years ended December 31, 1995 and 1994
2. Form 8-K/A filed April 22, 1997 submitting audited financial statements of
Guardian International, Inc. for the eight month period ended August 31,
1997
3. Form 8-K filed May 5, 1997 announcing termination of previously announced
merger discussions with a privately held Florida based security company.
4. Form 8-K filed May 22, 1997 announcing the purchase of the customer
contracts as well as certain other assets from Alarm Control, Inc.; also
announcing an increase in the size of the Company's Board of Director form
three to six, and announcing the appointment of three new Board members.
5. Form 8-K filed June 19, 1997 announcing the execution of a letter of intent
to merge with SPS Holdings, Inc.
16
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of the 5th of September, 1997.
GUARDIAN INTERNATIONAL, INC.
By: /S/ RICHARD GINSBURG
--------------------------------------------
Richard Ginsburg
President and Chief Executive Officer
17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 381,145
<SECURITIES> 0
<RECEIVABLES> 869,624
<ALLOWANCES> 163,560
<INVENTORY> 0
<CURRENT-ASSETS> 1,160,668
<PP&E> 1,029,328
<DEPRECIATION> 357,183
<TOTAL-ASSETS> 11,576,830
<CURRENT-LIABILITIES> 1,121,410
<BONDS> 7,662,176
0
0
<COMMON> 6,988
<OTHER-SE> 2,786,256
<TOTAL-LIABILITY-AND-EQUITY> 11,576,830
<SALES> 2,554,668
<TOTAL-REVENUES> 2,554,668
<CGS> 1,238,402
<TOTAL-COSTS> 1,361,404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 62,870
<INTEREST-EXPENSE> 440,120
<INCOME-PRETAX> (485,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (485,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (485,258)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
