SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 12, 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]
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TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements. ......................................................1
Consolidated Balance Sheets
As of March 31, 1997 and December 31, 1996...........................1
Consolidated Statements of Operations...................................2
For the Three Month Periods Ended March 31, 1997 and 1996
Consolidated Statements of Cash Flows...................................3
For the Three Month Periods Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements..............................4
Item 2. Management's Discussion and Analysis ........................................6
PART II OTHER INFORMATION
Item 1. Legal Proceedings..........................................................14
Item 6. Exhibits and Reports on Form 8-K...........................................14
</TABLE>
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FORM 10-QSB
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED) *
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 986,872 $ 1,037,861
Accounts receivable, net of allowance for doubtful accounts of
$147,782 at March 31, 1997 and $166,315 at December 31, 1996 640,583 569,180
Other 67,446 20,736
----------- -----------
Total current assets 1,694,901 1,627,777
----------- -----------
Property and equipment, net 500,020 484,859
Customer accounts, net 5,325,582 5,124,449
Intangible assets, net 1,635,322 1,718,377
Deposits and other assets 33,489 26,517
----------- -----------
Total assets $ 9,189,314 $ 8,981,979
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 516,030 $ 578,592
Unearned revenue 142,458 123,961
Current portion of long term obligations 155,170 84,004
----------- -----------
Total current liabilities 813,658 786,557
----------- -----------
Long term obligations, less current portion 5,462,110 5,079,832
Shareholders' equity:
Class A voting common stock, $.001 par value, 100,000,000 Shares
authorized, 6,453,802 shares issued and outstanding at March 31,
1997 and December 31, 1996 6,454 6,454
Class B non voting common stock, $.001 par value, 484,035
Shares authorized, 484,035 issued and outstanding at March 31, 1997
and December 31, 1996 484 484
Additional paid-in capital 4,777,772 4,777,772
Accumulated deficit (1,669,806) (1,467,762)
Notes receivable from sale of stock (201,358) (201,358)
----------- -----------
2,913,546 3,115,590
----------- -----------
Total Liabilities and Shareholders' Equity $ 9,189,314 $ 8,981,979
=========== ===========
<FN>
- -------------
*Excerpted from audited Financial Statements filed with the Company's Form
10-KSB for the period ended December 31, 1996.
</FN>
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
FORM 10-QSB
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
Revenues:
Monitoring $ 812,846 $ 574,349
Installation and service 409,641 91,948
----------- -----------
Total revenue 1,222,487 666,297
Operating expenses:
Monitoring 151,559 113,814
Installation and service 403,498 67,750
General and administrative 400,354 182,004
Amortization of customer contracts 193,816 169,086
Depreciation and amortization 78,365 23,913
----------- -----------
Total operating expenses 1,227,592 556,567
Income (loss) from operations (5,105) 109,730
Interest expense 196,939 111,189
----------- -----------
Net loss $ (202,044) $ (1,459)
=========== ===========
Loss per share $ (0.03) $ (0.00)
=========== ===========
Average number of shares outstanding 6,453,804 3,226,902
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
FORM 10-QSB
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (202,044) $ (1,459)
Adjustments to reconcile net loss to net cash provided by (used in)
Operating activities:
Depreciation and amortization 78,365 23,913
Amortization of customer accounts 193,816 169,086
Amortization of deferred financing costs 35,230 --
Provision for doubtful accounts 20,000 --
Changes in assets and liabilities:
Accounts receivable (91,403) (138,620)
Intangibles and other assets (55,231) 57,000
Accounts payable and accrued liabilities (62,562) 86,654
Unearned revenue 18,497 33,805
----------- -----------
Net cash provided by (used in) operating activities (65,332) 230,379
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (44,152) (88,417)
Acquisition of customer accounts (394,949) (2,033,002)
----------- -----------
Net cash used in investing activities (439,101) (2,121,419)
----------- -----------
Cash flows from financing activities:
Payments of long term obligations (471,063) (508,762)
Proceeds from line of credit 924,507 2,433,786
----------- -----------
Net cash provided by financing activities 453,444 1,925,024
Net change in cash and cash equivalents (50,989) 33,984
Cash and cash equivalents, beginning of period 1,037,861 14,263
----------- -----------
Cash and cash equivalents, end of period $ 986,872 $ 48,247
=========== ===========
Supplemental disclosures:
Interest paid $ 161,709 $ 111,189
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
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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 March 31, 1997 and December 31, 1996, the
consolidated statements of operations for the three month periods ended
March 31, 1997 and 1996, and the consolidated statements of cash flows for
the three month periods ended March 31, 1997 and 1996.
The results of operations for the three month period ended March 31, 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 at the time, by issuing, 3,226,902
shares of Everest to the shareholders of Guardian. 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 name of the surviving entity was changed from Everest to
Guardian. The consolidated balance sheets at March 31, 1997 and December
31, 1996, and the consolidated statements of operations and of cash flows
for the three month periods ended March 31, 1997 include the accounts and
activity of the surviving entity and its wholly-owned subsidiary,
(Specialty Device Installers, Inc.). The consolidated statements of
operations and of cash flows for the three month periods ended March 31,
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 a financial institution for cancellation
of their existing Capital Appreciation Rights, as defined in the loan
agreement. Also, in accordance with the terms of an agreement, the
financial institution is entitled to receive an additional 150,000 shares
of Class B non voting common stock.
4
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GUARDIAN INTERNATIONAL, INC.
3. SUBSEQUENT EVENTS
In February 1997, the Company executed a non-binding letter of intent to
merge the Company with a large privately held Florida based security
company. In May 1997 the Company terminated its merger discussions with the
privately held company. Although the current letter of intent has been
terminated, the Company would consider merging with the privately held
company if different terms could be negotiated.
In May 1997, the Company purchased certain assets of a privately held
Florida corporation (the "Seller"). The assets acquired consist primarily
of approximately two thousand two hundred (2,200) customer accounts and
contracts, which, in the aggregate, will increase monthly revenue by over
$60,000 per month. The purchase price amounted to $2.2 million in cash,
50,000 shares of common stock, and an option 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) In connection with
the transaction, the Company's senior lender, Heller Financial, Inc. (the
"Senior Lender"), increased the Company's current credit facility from $7
million to $8 million in order to provide sufficient capital to fund the
purchase of the assets. (See letter from Heller Financial, Inc. regarding
increase in credit facility attached as Exhibit 10(a).)
4. LOSS PER SHARE
Primary loss per share is computed for the three month periods ended March
31, 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.
5
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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, servicing of such installed systems, and from third party subcontract
installation revenue. 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
6
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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.
Alarm monitoring revenues generate a significantly higher gross margin
than do the other services provided by the Company. During the three month
periods ended March 31, 1997 and 1996, installation and service revenues
generated only negligible gross margins. 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 month periods ended March 31, 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 month periods ended March 31, 1997
and 1996 was less than 10%.
The Company has developed an in-house system for identifying and
decreasing account attrition. The program has been dubbed the "No-Tolerance
Attrition Policy." This program consists of the following: (1) the
identification of possible lost accounts via a daily test; (2) false alarm
fines, tracking and cause identification; (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,
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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 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 business 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 March 31, 1997 and December 31,
1996, and the consolidated statements of operations and of cash flows for the
three month periods ended March 31, 1997 include the accounts and activity of
the surviving entity and its wholly owned subsidiary, SDI. The consolidated
statements of operations and of cash flows for the three month periods ended
March 31, 1996 include the accounts and activity strictly of Guardian.
8
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The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERCENTAGE OF TOTAL REVENUES
FOR THE THREE MONTH PERIODS ENDED
MARCH 31,
1997 1996
----- -----
(UNAUDITED)
Revenues:
Monitoring 66.6% 86.2%
Installation and service 33.4 13.8
----- -----
Total revenues 100.0 100.0
Operating expenses:
Monitoring 12.4 17.0
Installation and service 33.0 10.2
General and administrative 32.7 27.4
Amortization of customer contracts 15.9 25.4
Depreciation and amortization 6.5 3.6
----- -----
Total operating expenses 100.5 83.6
Income (loss) from operations (0.5) 16.4
Interest expense 16.1 16.7
----- -----
Net loss (16.6)% (0.3)%
===== =====
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 15,000. At March 31, 1997, the Company had approximately 8,300
retail customer contracts. The principal reason such a large increase in
customers is necessary to achieve net earnings is because a significant amount
of interest expense and amortization costs are incurred in connection with
account acquisitions. The Company is currently renegotiating its Credit Facility
with its Senior Lender to increase its credit availability from $7 million to
$15 million (which would be further increased to $20 million at such time as the
Company achieves a Tangible Net Worth (as defined under the contemplated terms
of the new credit facility) of $5,000,000)), which, the Company believes, would
provide sufficient capital availability for achieving a customer contract base
of 15,000 customers. There can be no assurances, however, that the Company will
obtain the new credit facility or that it will achieve a customer contract base
of 15,000 customers.
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
9
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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 month periods ended March 31,
1997 and 1996:
FOR THE THREE MONTH PERIODS ENDED
MARCH 31,
1997 1996
---- ----
(Unaudited) (Unaudited)
Net loss $(202,044) $(1,459)
Plus:
Amortization of customer contracts 193,816 169,086
Depreciation and amortization 78,365 23,913
Interest expense 196,939 111,189
------- -------
EBITDA $267,076 $302,729
======== ========
THREE MONTH PERIOD ENDED MARCH 31, 1997 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1996
Total revenues for the three month period ended March 31, 1997 ("1997
period") increased 84% to $1.2 million, from $666,000 for the three month period
ended March 31,1996 ("1996 period"). Monitoring revenues increased by 42% to
$813,000 during the 1997 period, from $574,000 during the 1996 period.
Installation and service revenues increased by 346% to $410,000 during the 1997
period, compared to $92,000 during the 1996 period. Total retail subscribers
numbered approximately 8,300 at March 31, 1997, compared to approximately 5,600
at March 31, 1996, a net increase of 48%. 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,
during the 1997 period SDI provided approximately $247,000 in installation and
service revenue. As mentioned on page 8 above, the Company downsized SDI during
the first quarter of fiscal year 1997.
Total operating expenses for the 1997 period increased 120% to $1.2
million, from $557,000 during the 1996 period. Monitoring expenses increased 33%
to $152,000 during the 1997 period, compared to $114,000 during the 1996 period.
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, monitoring
expenses were 19% during the 1997 period and 20% during the 1996 period.
Installation and service costs during the 1997
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period increased by 346% to $410,000, compared to $92,000 during the 1996
period. Included in installation and service costs during the 1997 period is
approximately $209,000 incurred by SDI. 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, such costs were 99% during the 1997 period and 74% during the
1996 period. The Company does not now generate, nor does it anticipate
generating in the future, any appreciable margins or profits from installation
and service activity, but such activity is 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 38% to $667,000 during the 1997
period, compared to $485,000 during the 1996 period. Gross profit from
monitoring revenues increased by 44% to $661,000 during the 1997 period,
compared to $461,000 during the 1996 period. Gross profit from installation and
service activities was $6,000 during the 1997 period, compared to $24,000 during
the 1996 period. See the previous two paragraphs for a discussion of revenues
and expenses of such monitoring and installation and service activity.
General and administrative ("G&A") costs increased by 120% to $400,000
during the 1997 period, compared to $182,000 during the 1996 period. Included in
G&A costs during the 1997 period was $69,000 incurred by SDI. 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 increased to 33% during the 1997 period,
compared to 27% during the 1996 period.
Amortization of customer contracts increased 13% to $194,000 during the
1997 period, compared to $169,000 during the 1996 period. 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 $4.0 million at March
31, 1996 to $5.3 million at March 31, 1996.
Depreciation and amortization increased by 228% to $78,000 during the
1997 period, compared to $24,000 during the 1996 period. Such costs include
depreciation of property and equipment (the gross balance of which increased
from $274,000 at March 31, 1996 to $500,000 at March 31, 1997 as a result of (i)
the Company's continued expansion activities and (ii) the merger of Guardian and
Everest, which resulted in additional property and equipment being acquired),
goodwill amortization of $30,000 (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% to $197,000 during the 1997 period,
compared to $111,000 during the 1996 period. 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 the Senior Lender. Total borrowings under the credit
facility increased from $3.8 million as of March 31, 1996 to $5.4 million as of
March 31, 1997.
Net loss increased to $202,000 during the 1997 period, compared to
$1,000 during the 1996 period.
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LIQUIDITY AND CAPITAL RESOURCES
On November 16, 1994, Guardian, prior to its merger into the Company,
entered into a $7 million Loan and Security Agreement with the Senior Lender
primarily for the purpose of borrowing funds to acquire customer accounts (the
"Credit Facility"). As discussed in Note 3 of Notes to Consolidated Financial
Statements, in May 1997 the Credit Facility was increased from $7 million to $8
million in connection with an acquisition of customer accounts. Borrowings under
the Credit Facility bear interest at 3% above the prime rate, and the Company is
required to pay a funding fee of 1% of any amounts borrowed. The loan is
collateralized by the Company's assets, and $800,000 of the credit facility is
secured by the personal guaranties of Harold and Sheilah Ginsburg, both of whom
are directors, officers, and principal shareholders of the Company, with their
Common Stock serving as collateral therefor. The Credit Facility has a maturity
date of November 30, 1999. Credit availability under both the Credit Facility
and the new credit facility is subject to certain "Borrowing Base" limitations
(as such term is defined in the Credit Facility and would be defined under the
contemplated new credit facility).
The Credit Facility is used primarily for acquisitions of subscribers
accounts. The Company's continued plan of growth through acquisitions of
subscriber accounts is contingent upon its ability to borrow under the Credit
Facility.
The Company must renew with the Senior Lender, on an annual basis, its
ability to draw against any remaining unfunded portion of the Credit Facility.
The Senior Lender's current commitment to fund expires on December 31, 1997. The
Company believes it presently has a very good relationship with the Senior
Lender. The Company is currently negotiating a new credit facility with the
Senior Lender to increase the maximum credit availability to $15 million. The
maximum credit availability under the new credit facility would be further
increased to $20 million at such time as the Company achieves a Tangible Net
Worth (as defined under the contemplated terms of the new credit facility) of $5
million, provided that there have been no defaults. There can be no assurances,
however, that the Company will successfully renegotiate the credit facility, or
that the Company will achieve a Tangible Net Worth (as defined) of $5 million.
The Credit Facility includes customary covenants, including, but not
limited to, restrictions related to the incurrence of other debt, 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
covenants.
As discussed in Note 2 of Notes to Consolidated Financial Statements,
the Company is the surviving company of a merger of Guardian with Everest, which
occurred on August 28, 1996. Everest conducted a private placement in August
1996 under Regulation S promulgated under the Securities Act of 1933 of
1,000,000 shares of Common Stock for $3.50 per share. Everest received proceeds
of approximately $3.0 million net of related costs of the private placement.
Subsequent to the merger of Guardian and Everest, approximately $1.8 million was
paid to Harold Ginsburg, a former shareholder of Guardian, in repayment of
certain loans to the pre-merged Guardian and as a return of capital, and
approximately $1.2 million remained within the Company for working capital
purposes.
12
<PAGE>
At March 31, 1997, the Company had working capital of $881,000, and a
current ratio of 2.1 to 1. Net cash flow used in operating activities during the
1997 period was $65,000. The Company incurred a net loss of $202,000 during the
1997 period; however, included in such losses was depreciation and amortization
expenses totaling $307,000, and a cash outflow of $91,000 related to an increase
in accounts receivable. Net cash used in investing activities was $439,000
during the 1997 period, comprised of acquisition of customer accounts of
$395,000 (such significant amount of acquisitions being consistent with the
Company's continued growth strategy) and purchases of fixed assets of $44,000.
Net cash provided by financing activities was $453,000 during the 1997 period,
consisting of proceeds under borrowings from its Senior Lender of $925,000, less
repayments to its Senior Lender and other long-term debt of $471,000. The
Company's cash balance amounted to $987,000 at March 31, 1997.
Total shareholders' equity was $2.9 million as of March 31, 1997,
decreasing $202,000 during the three month period ended March 31, 1997, as a
result of net losses incurred during that period.
The Company does not currently 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.
13
<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
EXHIBIT NO. DESCRIPTION
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
27 Financial Data Schedule E-1
(b) Reports on Form 8-K
1. Form 8-K filed January 3, 1997 submitting audited Financial
Statements of the Company for the eight months ended August
31, 1996.
2. Form 8-K filed February 18, 1997 announcing the signing of a
non-binding Letter of Intent to merge with a privately held
Florida based company.
14
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, as of the 15th of May, 1997.
GUARDIAN INTERNATIONAL, INC.
By: /s/ ROBERT K. NORRIS
---------------------------------
Robert K. Norris
Chief Financial Officer
and Senior Executive
Vice President
15
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(a) Letter from Heller Fiancial, Inc. Regarding E-1
Increase in Credit Facility
27 Financial Data Schedule E-2
16
EXHIBIT 10(a)
May 13, 1997
Mr. Richard Ginsburg
Guardian International, Inc.
3880 North 28th Terrace
Hollywood, FL 33020
RE: Loan and Security Agreement dated as of November 16, 1994 (as from
time to time amended, the "Credit Agreement") between Guardian
International, Inc. ("Guardian") and Heller Financial, Inc. ("Heller")
Dear Richard:
We refer to the above referenced Credit Agreement. Capitalized words and
phrases not otherwise defined herein shall be used with the meanings given
such term in the Credit Agreement.
Notwithstanding any other provision of the Credit Agreement to the
contrary, by our respective signatures below we each hereby agree until the
first to occur of: (i) sixty (60) days from the date hereof; or (ii) the
execution and delivery of an amended and restated credit agreement in form and
substance satisfactory to Lender and Guardian evidencing Lender's increased
commitment to make Loans upon terms previously communicated to Guardian by
Lender, that Lender's Commitment to make Loans to Borrower during said period
shall be increased from $7,000,000 to $8,000,000.
If the foregoing is in accordance with your understanding please indicate
your agreement by signing and dating a copy of the letter in the space provided
below, and return a fully executed copy to my attention.
Very Truly Yours,
HELLER FINANCIAL, INC.
By: \s\ Doug Barnard
-------------------------
Title: Vice President
Agreed this 13 day of May, 1997
GUARDIAN INTERNATIONAL, INC.
By: \s\ Richard Ginsburg
------------------------
Title: President/CEO
E-1
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