SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
NO. 6
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
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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, including area code)
(Address of principal executive offices)
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, $.001 PAR VALUE
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TABLE OF CONTENTS
PAGE NO.
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Introductory Note.................................................................................................1
PART I
Item 1. Description of Business.........................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation......................................................................14
Item 3. Description of Property........................................................................22
Item 4. Security Ownership of Certain Beneficial Owners and
Management....................................................................................23
Item 5. Directors, Executive Officers, Promoters and Control Persons...................................24
Item 6. Executive Compensation.........................................................................26
Item 7. Certain Relationships and Related Transactions.................................................27
Item 8. Description of Securities......................................................................27
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Stockholder Matters.....................................................................28
Item 2. Legal Proceedings..............................................................................30
Item 3. Changes in and Disagreements with Accountants..................................................30
Item 4. Recent Sales of Unregistered Securities .......................................................30
Item 5. Indemnification of Directors and Officers......................................................33
PART F/S
Financial Statements of the Registrant...........................................................................35
PART III
Item 1. Index to Exhibits..............................................................................89
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INTRODUCTORY NOTE
FORWARD-LOOKING STATEMENTS. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Guardian
International, Inc. (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.
"MRR". As used in this Registration Statement on Form 10-SB ("Form 10-SB"),
"MRR" means monthly recurring revenue that the Company is entitled to receive
under contracts in effect at the end of the period covered by this Form 10-SB,
unless a different period is specified. Monthly recurring revenue is an index
commonly used in the security alarm industry as a measure of the size of a
company. It is not, however, used as a measure of profitability or performance,
and does not include any allowance for future attrition or allowance for
doubtful accounts.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY'S SERVICES
The information contained below includes statements of the Company's or
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a description of such risks and uncertainties,
see the information set forth in the Introductory Note to this Form 10-SB under
the caption "Forward-Looking Statements," which information is incorporated
herein by reference.
The Company was incorporated under the laws of the State of Nevada on
October 30, 1986 as Burningham Enterprises, Inc. On August 28, 1996, Guardian
International, Inc., then a privately held Florida corporation, merged with and
into the Company (then named Everest Security Systems Corporation). Following
the merger, the Company changed its name to Guardian International, Inc. For
more information regarding the Company's history and its merger with the
privately-held Guardian International, Inc., see the information set forth under
the caption "History," below.
The Company is presently a leading supplier of security monitoring and
high grade monitored security systems in the United States; its primary market
is the southeastern United States. Based on the Company's gross revenues and
number of subscribers for the fiscal year ended December 31, 1996 ("Fiscal Year
1996"), and assuming no significant changes in the data published in SDM'S
(formerly SECURITY DISTRIBUTING & MARKETING MAGAZINE) May 1996 issue's annual
listing of the top security firms in the United States, the Company expects it
will be ranked among the top one hundred (100) security companies in the United
States in SDM'S 1997 annual listing. In addition, according to the 1997 Fact
Book Issue of SECURITY SALES (Vol. 18. No.12, supplement), only 10.1% of all
security companies in the United States generate gross revenues in excess of
$2,500,000. The Company's gross revenues for Fiscal Year 1996 were above this
figure, standing at $3,620,990, as reflected in the Company's financial
statements, set forth in Part F/S, below.
The Company consists of three business components: (i) Guardian
International ("Guardian International"), a division engaged in monitoring
services, the provision of field repair services for the account base, ongoing
account acquisitions, and dealer funding of monitoring accounts, (ii) Gibraltar
Security Alarm Systems ("Gibraltar"), a division engaged in high grade
installations, and (iii) Specialty Device Installers, Inc. ("SDI"), a wholly
owned subsidiary of the Company engaged in providing installation services to
third party security alarm companies, some of which are competitors of the
Company.
The Company's revenues consist primarily of recurring payments under
written contracts for the monitoring of security systems. For Fiscal Year 1996
monitoring revenues represented approximately 74% of total revenues. The balance
of the Company's revenues for Fiscal Year 1996 were derived from (i) the sale of
enhanced security systems (approximately 10 % of total revenues), (ii) the
provision of local field repair services (approximately 2% of total revenues),
and (iii) the provision of installation services to third party security alarm
companies, some of which are competitors of the Company (approximately 14% of
total revenues).
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Neither the Company nor the pre-merged Guardian International, Inc. (see
Item 1 - "History" below) has ever had any net income, and the Company has a
history of consistent and sometimes significant net losses. See Item 2. -
"Results of Operations" for further discussion.
MONITORING SERVICES (GUARDIAN INTERNATIONAL)
The Company, through Guardian International, monitors digital signals
arising from burglaries, fires and other events through security systems
installed at subscribers' premises. Most of these signals are received and
processed at the Company's well-equipped central monitoring station located in
Hollywood, Florida. The Company's central monitoring station is listed by
Underwriters Laboratories Inc. ("UL") both as (i) a burglar alarm system central
station and (ii) a protective signaling services central station. This facility
is able to withstand hurricane-force winds and can maintain operations
indefinitely without electrical power using its propane generators.
The Company's central monitoring facility has many security devices,
including closed circuit television, motion detecting units, high intensity
lighting, and access control. All of the equipment Guardian International uses
to monitor its customers and to protect its facility is generally the latest
enhancement and the majority of the equipment is less than four years old.
The entire monitoring facility is redundant, and, therefore, if there
is ever a failure in a piece of equipment, an exact duplicate is available to
back it up within minutes. In addition, the monitoring facility is entirely
paperless, resulting in lower costs and greater efficiency than would be
obtained otherwise. The phone system is digital (as opposed to analog); all
conversations are recorded and compressed digitally. Every alarm function is
handled through automation, including the dialing of customer and police
telephone numbers, reducing the possibility of human error.
The Company's monitoring center is comprised of a number of devices.
These devices include, alarm receiving equipment, telephone dialers, radio
signal receiving equipment, a digital telephone recorder, a digital telephone
system, and a voice mail / auto phone attendant. All of these devices are
maintained internally by the Company's technical personnel. The balance of the
Company's equipment includes dual redundant Data General mainframe servers,
associated CRT s (terminals), and the software which runs the automated
functions of the Company's security, service, and accounting functions. The
software is maintained by Monitoring Automation Systems (Irvine, CA) and the
Data General mainframe and terminals are maintained by Data General Corporation
(Boston, MA) pursuant to annual maintenance contracts. The maintenance services
of Monitoring Automation Systems and Data General cost the Company approximately
$5,000 per month in the aggregate.
WHOLESALE MONITORING PROGRAM
Under Guardian International's wholesale monitoring program (the
"Wholesale Monitoring Program") Guardian International monitors subscribers on a
"wholesale" basis for certain third party security alarm companies, some of
which are competitors of Guardian International. This practice is referred to in
the industry as "third party monitoring" or "wholesale" monitoring. Guardian
International provides monitoring services to the customers of the third party
companies, which are generally high-end alarm companies. Guardian International
also offers such third party companies additional services, such as off-site
data entry and account maintenance, automated account history and testing via
touch tone telephone, marketing and technical support.
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Under the Wholesale Monitoring Program, Guardian International bills the
third party company a monthly amount for all services rendered. The third party
company is responsible for billing its customers. Typical fees for wholesale
monitoring are approximately 20% of the amount billed directly by Guardian
International to its retail customers. While wholesale monitoring results in
significantly lower margins than are obtained with respect to the Company's
retail subscribers, the wholesale customer base creates an opportunity for the
Company to expand its customer base by purchasing customer accounts from third
party companies. The Company has on occasion purchased customer accounts that
were being monitored under the Wholesale Monitoring Program. In addition, the
wholesale revenue subsidizes a portion of the operational costs arising from
Guardian International's central monitoring facility.
The Wholesale Monitoring Program generated revenues of $504,000 and
$338,000 in fiscal years 1996 and 1995, respectively. As of the date of this
Form 10-SB, the Company has approximately 16,000 wholesale customers. No such
wholesale account represents more than 5% of the Company's total revenues.
HIGH GRADE ALARM SYSTEMS (GIBRALTAR)
The Company also sells high grade and standard alarm systems through
Gibraltar, and provides local field repair services. The Gibraltar business was
acquired through a portfolio acquisition of customer accounts in the first
quarter of 1996 by Guardian International, Inc. prior to its merger with and
into Everest Security Systems Corporation. (See "History," below.) Gibraltar
specializes in commercial installation, and monitoring and servicing of high
grade security and fire systems. The Company believes that Gibraltar's account
base allows the Company the opportunity to capitalize on the commercial market
in the southeastern United States.
Gibraltar safeguards a number of businesses--including financial
institutions, drug companies, airlines, industrial complexes, marinas and yacht
clubs--as well as private residences which require state of the art monitoring
systems. The Company's UL-listed central monitoring system gives Gibraltar the
ability to monitor its customers' buildings for burglary, fire and environmental
problems. If an alarm, fire or environmental condition is detected, a signal is
transmitted over telephone and or radio transmission to the Company's central
monitoring station. When the conditions require verification and/or dispatch
action, human operators react as appropriate, in accordance with standard
procedures.
The central monitoring system also monitors opening and closing
schedules for Gibraltar's commercial customers. Commercial customers have the
option of receiving weekly reports reflecting the date, time, action, and
employee name with respect to each opening or closing activity during the
relevant week. The reports can be sent to any location around the world via
facsimile or e-mail.
The Company maintains Gibraltar's image as a stand-alone high-end
organization; specifically, the Company does not actively reveal its affiliation
with Gibraltar in order to maximize the Gibraltar company name, established in
1977. Gibraltar has its own President, Director of Sales and service and
installation teams. Gibraltar's officers are not officers or directors of the
Company.
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INSTALLATION SERVICES TO THIRD PARTY ALARM COMPANIES (SDI)
SDI provides installation services to third party security alarm
companies, many of which are competitors of the Company. The Company has
recently 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.
RECENT DEVELOPMENTS
During May 1997 the Company negotiated a new credit facility ("Renewed
Credit Facility") with its current lender, Heller Financial, Inc. ("Heller" or
the "Senior Lender"). (For information regarding Heller's ownership of certain
shares of Class B Nonvoting Common Stock and its right to receive additional
Class B shares, see Part II, Item 1, below.) Under the Renewed Credit Facility,
the maximum credit facility was increased from $7 million (see Part I, Item 2 -
"Credit Facility," below) 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 Renewed Credit Facility) of $5 million provided that
there have been no defaults under the Renewed Credit Facility. Credit
availability under the Renewed Credit Facility is subject to certain "Borrowing
Base" limitations (as such term is defined in 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. The Renewed Credit Facility was filed as Exhibit 10(b) of the
Company's 10-QSB for the period ended June 30, 1997.
In May 1997 the Company completed the acquisition of the customer
contracts as well as certain other assets of Alarm Control, Inc. The total
number of contracts acquired was approximately 2,300. The consideration paid by
the Company consisted of $2.2 million in cash, 50,000 shares of the Company's
common stock ("Common Stock"), and options to purchase an additional 100,000
shares of Common Stock at an exercise price of $2.50 per share. Pursuant to the
terms of the purchase, the Company entered into an employment agreement with a
majority shareholder of the Seller for a period of four years; pursuant to such
contract, such majority shareholder of the Seller will provide certain sales,
marketing, and consulting services to the Company at an annual salary of
$150,000 plus other benefits
The Company's previously announced agreements with respect to the
merger of SPS Holdings, Inc., a Florida based security company, with and into a
wholly-owned subsidiary of the Company, have been terminated.
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HISTORY
The Company was incorporated under the laws of the State of Nevada on
October 30, 1986 as Burningham Enterprises, Inc.("Burningham"). Burningham
launched a "blank check/blind pool" initial public offering (the "IPO"),
registering its shares with the SEC on a Registration Statement on Form S-18
which was declared effective in March 1987. The Company raised one hundred
thousand dollars ($100,000) pursuant to the IPO.
The Company had no operations and did not acquire any business between
October 1986 and February 1988, at which time the Company changed its name from
Burningham Enterprises to Everest Funding Corporation ("Everest Funding") and
completed a reverse subsidiary merger with Everest Mortgage Corporation ("EMC").
Following that merger, EMC became a wholly-owned subsidiary of the Company. EMC
was in the mortgage origination business, but ceased operations in late 1993.
EMC was subsequently dissolved on July 5, 1995.
The Company was again inactive between the end of 1993 and June 1995,
at which time the Company underwent a change of control. New directors were
elected to the Company's board (the "Board") and in July 1995, the Board and a
majority of shareholders approved a one for twenty reverse split, effective July
24, 1995. On November 27, 1995, the Company changed its name from Everest
Funding to Everest Security Systems Corporation ("Everest Security") and entered
into the home alarm installation and service business.
On October 9, 1995, the Company entered into a stock purchase agreement
("Stock Purchase Agreement") with Specialty Device Installers, Inc. ("SDI"), a
company incorporated under the laws of the State of Florida in August 1991.
Under the terms of the Stock Purchase Agreement, the Company purchased all of
the shares of SDI in exchange for 100,000 shares of Common Stock, valued at
$2.00 per share or $200,000 in the aggregate. The Stock Purchase Agreement also
required the Company to enter into an employment contract with Frank Bauer for a
term of five years commencing on October 1, 1995, presently at an annual salary
of $62,400. Mr. Bauer is still serving as President of SDI pursuant to the terms
of that employment agreement, but he is neither an officer of the Company nor a
member of the Board. SDI provides installation services to third party security
alarm companies, some of which are competitors of the Company. During the first
quarter of 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.
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 established to provide monitoring services for the owners of
burglar alarm systems installed by SDI, and to monitor and service purchased
burglar alarm contracts. Subsequent to the establishment of FASI, the Company's
management decided to perform these services through SDI, and FASI became, and
currently remains, inactive.
MERGER WITH GUARDIAN INTERNATIONAL, INC.
On August 15, 1996, the Company executed an Agreement and Plan of
Merger ("Merger Agreement") with Guardian International, Inc. ("Guardian"), a
Florida corporation. On August 28, 1996, Guardian merged with and into Everest
(the "Merger"). Pursuant to the terms of the Merger Agreement, in reliance upon
the exemption from registration afforded by Section 4(2) of the Securities Act
of 1933, the
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Company issued three million two hundred twenty-six thousand nine hundred two
(3,226,902) shares of Common stock to the shareholders of Guardian in exchange
for all of the outstanding shares of common stock of Guardian. These shares
represented approximately fifty percent (50%) of the Company's issued and
outstanding Common Stock. Also, pursuant to the terms of the Merger Agreement,
the Company paid approximately $1.8 million to Harold Ginsburg, one of the
shareholders of Guardian, in repayment of certain loans to Guardian and as a
return of capital.
In connection with the Merger transaction, Harold Ginsburg, received an
irrevocable voting proxy from International Treasury & Investments, Ltd. ("ITI")
to vote one million (1,000,000) shares of Common Stock owned at the time by ITI.
These shares were also pledged by ITI to the Guardian shareholders pursuant to
the terms of the Merger Agreement to secure an obligation of G.M. Capital
Partners, Ltd. ("G.M. Capital") to raise additional equity for the Company
within a specified period following the Merger. As a result of a default by G.M.
Capital on its obligations, the shares are available to be transferred to the
Guardian shareholders and are presently being held by an escrow agent for the
benefit of the Guardian shareholders. In addition, pursuant to an agreement
between certain shareholders of the Company and certain members of the Ginsburg
family who constituted the principal shareholders of Guardian (the "Ginsburgs"),
the Ginsburgs have voting control over approximately 230,000 additional shares
of Common Stock for a period of two years (which commenced on August 28, 1996).
Following the Merger, the Company changed its name to Guardian
International, Inc. The Company's directors preceding the Merger resigned
following the Merger, and the directors of Guardian filled the vacancies on the
Board. For a listing of the Company's directors following the Merger (also the
Company's present directors), see Part I, Item 5, below. The Merger was a
reverse acquisition for accounting purposes, with Guardian deemed the acquirer.
For a further discussion of the accounting treatment of this transaction and its
impact on information contained in the Company's Consolidated Financial
Statements included in Part F/S of this Form 10-SB, refer to the first paragraph
under the caption "Results of Operations" in Part I, Item 2, below.
MARKET OVERVIEW AND TRENDS
The Company's target market consists of owners of single family
residences, residential development communities where the Company has bulk
service contracts, and commercial establishments.
The security alarm industry is characterized by a high degree of
fragmentation and currently is comprised mostly of a large number of small
providers of alarm systems and services. A survey published by SDM MAGAZINE
(formerly named SECURITY DISTRIBUTING AND MARKETING MAGAZINE) in May 1996
reported that in 1995, based upon information provided by its respondents, the
100 largest companies in the alarm industry accounted for approximately 23% of
industry revenues. The Company believes that many smaller alarm service
companies, because of their size, have higher overhead expenses as a percentage
of revenues than the Company and lack access to capital on terms as attractive
as those available to the Company. Moreover, due to a decline in security system
installation prices over the last two years, security alarm companies
participating in market growth are required today to make a substantial
investment in each new subscriber; for example, security alarm companies sell
equipment at below cost or transfer equipment gratuitously in the expectation of
generating future monitoring revenues. Consequently, access to capital has
become an increasingly important factor in a security alarm company's success.
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The residential security alarm market is also characterized by rapid
growth, but a relatively low level of market penetration. The Company believes
that several factors have spawned an increased demand for residential security
alarm systems in the markets where the Company operates, including increased
crime rates, increased public concern about crime, and the surge of insurance
company discounts to homeowners who purchase alarm systems.
Advances in digital communications technology have prompted some
consolidation in the security alarm industry. Prior to the development of
digital communications technology, alarm monitoring required a dedicated
telephone line, which made long-distance monitoring uneconomic. Consequently, in
order to achieve a national or regional presence, alarm monitoring companies
were required to maintain a large number of geographically dispersed monitoring
stations. The development of digital communications technology eliminated the
need for dedicated telephone lines, reducing the cost of monitoring services to
the subscriber and permitting the monitoring of subscriber accounts over a wide
geographic area from a central monitoring station. The elimination of local
monitoring stations has decreased the cost of providing alarm monitoring
services and has substantially increased the economies of scale for larger alarm
service companies. In addition, the concurrent development of
microprocessor-based control panels has substantially reduced the cost of the
equipment available to subscribers in the residential and commercial markets.
Digital technology has also enabled equipment manufacturers to build more
features into security systems (i.e., remote user interface, lighting and
heating controls, user programming features).
Large, consumer-oriented companies in industries facing deregulation,
including long distance and local telephone companies and electric and gas
utilities (e.g. Entergy Corporation, Western Resources, Inc., and Ameritech
Corporation), have demonstrated an increased interest in the security alarm
industry over the last several years. The Company believes telecommunication and
utility companies are interested in offering their customers additional
services, including security services, as a means of enhancing customer loyalty
and reducing future risk of losing customers in a fully competitive environment.
The entrance by such large companies into the security alarm business poses the
threat that such companies will engage in price wars with other companies in the
security alarm industry. Such price wars, if they were to occur, could have a
materially adverse effect on the Company's financial condition.
The increased demand for security systems may also be attributable in
part to the granting by insurance companies of discounts to homeowners who
purchase alarm systems, and such discounts are typically greater when systems
are monitored by a central station. In addition, insurance companies may require
that businesses install an alarm system as a condition of insurance coverage.
BUSINESS STRATEGY
The Company's strategy for growth has consisted primarily of the
implementation of an aggressive and strategic acquisition plan. Between 1994 and
1996, prior to its merger into the Company, Guardian acquired a combination of
twelve (12) alarm companies and/or portfolios of customer monitoring contracts
from existing alarm companies. The financing for these acquisitions was derived
from a seven million dollar ($7,000,000) credit facility with pre-merger
Guardian's lender, which credit facility is currently the Company's. See Part I,
Item 2 - "Credit Facility," below. These acquisitions enabled Guardian to more
than double its annual retail account base in that two-year period.
Management believes that numerous acquisition opportunities continue to
be available, and the Company is pursuing, and intends to continue to pursue,
acquisitions of alarm companies or portfolios of
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subscriber accounts, some of which may be significant to the Company's expected
future growth. (See "Recent Developments," above.) Acquisitions of portfolios of
accounts thus far has been achieved primarily through two methods: the
"Independent Alarm Acquisition Program" and the "Dealer Program," both as
described below.
Under the Independent Alarm Acquisition Program, the Company acquires
company accounts from independent alarm companies whose territories cover the
southeastern United States. Under this Program, the independent alarm company
solicits sales of the its own alarm systems from residential or commercial
customers, who are also offered the option to enter into an agreement with the
independent alarm company, in the independent alarm company's own name, for the
provision of alarm monitoring and/or repair services, typically for a 60-month
term, although the monitoring period may be shorter. The independent alarm
company then sells the customer contract to the Company for an amount typically
between 25 to 35 times the amount of MRR to be generated by the contract, or a
proportionately smaller multiple of MRR if the contract is for less than 60
months. The costs of such acquisitions are accounted for at the fair value as of
the date of acquisition and amortized over 10 years.
Under the Dealer Program, the Company has many authorized dealers
("Dealers") whose territories cover the southeastern United States. Most of the
Dealers are independent alarm companies performing under agreements to sell
under the Company name, although in most cases the Dealer is not obligated under
the agreement to sell exclusively for the Company. The Dealers are offered
numerous support services including but not limited to marketing, equipment
discounts, technical expertise and competitive purchase multiples. The Company's
goal is to aid the Dealers in achieving performance goals, which in turn
benefits the Company. Each Dealer solicits sales of the Dealer's own alarm
systems from residential or commercial customers, who also may be offered the
option to enter in an agreement for the provision of alarm monitoring and/or
repair services, typically for a 60-month term, although the monitoring period
may be shorter. The Dealer can offer the provision of monitoring services to the
customer under the name of the Company, under the Dealer's own name, or under
any other independent alarm company name. In such cases where the customer
contract for monitoring services is written under the name of the Company, the
Company pays the Dealer a placement fee. In other cases where the customer
contract is written under any providers name other than the Company, the Dealer
sells the contract to the Company. The amount paid by the Company to the Dealer
under either scenario described is typically between 25 to 35 times the amount
of MRR to be generated by the contract, or a proportionately smaller multiple of
MRR if the contract is for less than 60 months. The amount paid to Dealers is
capitalized and amortized over 10 years.
Under both the Independent Alarm Acquisition Program and the Dealer
Program, the independent alarm company or the Dealer, as the case may be
(collectively referred to as the "Contract Seller"), is required to guarantee
that a minimum number of payments (usually between 12 and 18 monthly payments)
will be received by the Company from the customer during a specified period (the
"Minimum Payment Period"), and that customers will pay any amounts owed within
90 days during such Minimum Payment Period. If the guaranteed number of payments
is not received by the Company, or if a customer is late in paying any amounts
due for a period exceeding 90 days, the Contract Seller must replace the
subscriber contract with a new contract of equal original duration and MRR. In
order to ensure that such Contract Seller guarantees are met, the Company
typically withholds an average of 10% of the payment made to the Contract Seller
at the inception of the transaction (referred as a "holdback"). After the
guarantee period lapses, the Company will pay the Contract Seller any holdback
monies due.
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Another source of revenue growth is the Company's internal sales
department. The Company has various retail marketing programs in place intended
to generate additional subscribers. One such program is a customer referral
program pursuant to which new customers are generated by referrals from the
Company's existing and continually increasing customer account base. These
"referral accounts" enable the Company to increase its revenue at a much lower
cost than traditional marketing methods. The Company is presently evaluating its
retail sales and marketing programs, and considering significantly increasing
its efforts in these areas.
Management is hopeful that significant additional revenue sources will
be generated from the Company's bulk service communities builder projects. The
Company currently has a total of over two thousand seven hundred (2,700) homes
under either seven (7) or ten (10) year master association contracts ("Master
Contracts") with two large development companies. Each Master Contract calls for
Company- installed alarms to be monitored by the central station with one bill
each month to the relevant master homeowners association. Closings on homes
located in these developments began in the first quarter of 1996 and will
continue for the next four (4) years. Guardian's revenue under a Master Contract
increases incrementally with each closing. Management anticipates that upon
completion of the two development projects, the Company will generate over forty
thousand dollars ($40,000) in additional MRR under the Master Contracts; there
can be no assurances, however, as to the completion of these projects or the
realization of the additional MRR.
CUSTOMER ACCOUNT ACTIVITY DURING FISCAL YEAR 1996
The Company purchased 3,499 contracts (net of 244 contracts which were
returned to sellers due to collectability problems -- such returned contracts
are not counted towards attrition, as defined under the caption "Overview" in
Part I, Item 2, below) during Fiscal Year 1996.
The following table reflects the Company's customer account activity
during Fiscal Year 1996:
<TABLE>
<CAPTION>
<S> <C>
Number of customer contracts owned as of January 1, 1996 4,049
Contracts purchased during Fiscal Year 1996 3,499
Contracts generated through internal sales during Fiscal Year 1996 176
Contracts acquired through Everest merger 424
Contracts lost through net attrition* (208)
-----
Number of customer contracts owned as of December 31, 1996 7,940
=====
</TABLE>
* For the definition of net attrition and a discussion of the primary
reasons for attrition of customer accounts, see information under the
caption "Overview" in Part I, Item 2, below.
The 3,499 contracts purchased by the Company during Fiscal Year 1996
generated average MRR of approximately $29 per contract. The range of monthly
recurring revenue is between $15 per contract and $60 per contract.
Approximately 65% of the contracts purchased were residential contracts and
approximately 35% were commercial contracts. The breakdown of the number of
purchased contract for Fiscal Year 1996 by recurring revenue range is as
follows:
10
<PAGE>
NUMBER OF CONTRACTS PURCHASED
RECURRING DURING THE YEAR ENDED
REVENUE RANGE DECEMBER 31, 1996
------------- -----------------
$15 - $25 2,340
$26 - $35 918
$36 - $60 168
Over $60 73
-----
3,499
-----
The average attrition guarantee period, for which dealers must replace
nonperforming contracts, is between 12 and 18 months from the date of purchase.
The average purchase price holdback is 10%.
EQUIPMENT AND TECHNOLOGY
Prior to its merger with the Company, Guardian, during the first quarter of
1996, completed hardware and software upgrades to its security monitoring
system. These improvements included the addition of memory to the Data
General/Aviion machines, the Company's redundant file servers, and the
implementation of automation improvements that have increased overall efficiency
and reduced monitoring costs. The Company expects to upgrade its security
monitoring system periodically as necessary to keep up with technological
advances.
The Company currently operates under the MAS 5.50.14 version, for its
automation, service and billing system. The Company is one of the few companies
in the United States to incorporate integrated MAS fax technology. This gives
the Company the ability to automate numerous aspects of information that were
previously processed manually. In addition, such technological advancements as
the provision of alpha-numeric alarm indications and the use of security
industry-specific software such as MASTrak and MASLink, gives the Company's
off-site locations the ability to process data efficiently with little or no
human interaction.
The Company's central monitoring system currently has the capacity to
monitor up to approximately two hundred thousand (200,000) subscribers with
moderate upgrades to the storage and processor capacity of its existing hardware
system. Moreover, the operating facility would require little or no physical
changes to accommodate such a volume of accounts. (For information regarding the
Company's plans to expand its administrative office space at the central
monitoring facility, see Part I, Item 3, below.)
MARKETING
A large portion of the Company's marketing activities have consisted
of 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. Consequently, while the
Company expects to continue to rely on customer referrals, management expects
the Company's main marketing focus will be on the expansion of a direct sales
force.
As of December 31, 1996, the Company had engaged 31 dealers.
Additionally, the Company purchased customer accounts from 9 independent alarm
companies other than dealers during the Fiscal Year 1996. Such dealers and other
independent alarm companies are located throughout South Florida, Central
Florida, and the Tampa/Sarasota, Florida areas.
11
<PAGE>
COMPETITION
Competitive conditions vary within each segment of the security
industry. The largest segment is composed of security system dealers. Most of
these companies can be described as having fewer than twenty employees,
averaging one hundred fifty to eight hundred fifty (150- 850) accounts, are
usually under capitalized, are owner-managed and do not have their own central
monitoring stations.
According to a 1995 survey conducted by SDM MAGAZINE (published in May
1996), the one hundred (100) largest companies in the security industry account
for approximately twenty three percent (23%) of the industry's total revenue.
Therefore, the majority of the industry revenue is generated by smaller alarm
service companies.
The segment of the industry composed of central monitoring services is
characterized by a small number of companies that provide both wholesale and
retail monitoring. The barriers to entry in this segment are high due to the
large investment required to equip and conform the facilities for UL approval.
This segment is divided into national and regional firms. The smaller regional
companies have difficulty competing with the larger national firms due to higher
overhead, the inability to purchase service and equipment on volume discounts,
and, often, the lack of capital to make acquisitions. However, the Company
believes that large regional companies are at a competitive advantage relative
to large national companies; these large national companies provide sales and/or
leases, installations and service of security systems and provide central
monitoring services, but typically provide only retail monitoring for security
systems installed by them. They generally do not enter the wholesale market. In
contrast, regional companies typically provide wholesale monitoring services to
other regional and local alarm companies that are unable to supply the
monitoring function for the security systems which they sell. (See "Wholesale
Monitoring Program," above, for a discussion of the Company's Wholesale
Monitoring Program.)
There are a number of larger companies which may have significantly
greater capital and resources than the Company. (See also "Market Overview and
Trends," above, for a discussion of competition from large companies in other
industries). The following chart reflects the size (measured in revenues) of the
nine largest alarm companies. The information was obtained from the May 1996
issue of SDM MAGAZINE (formerly SECURITY DISTRIBUTING & MARKETING MAGAZINE).
Guardian's revenues in 1995 are also included in the table.
1995 REVENUE
COMPANY (IN MILLIONS) NUMBER OF ACCOUNTS
- ------- --------------- ------------------
ADT Security $814 1,039,000
Wells Fargo Alarm Services $255 146,000
Security Link from Ameritech $250 344,000
Honeywell $223 190,000
Brinks Home Security $128 378,700
Westinghouse Security Systems $115 266,000
Rollins Protective Services $ 66 120,000
ASH, USA $ 64 33,000
Westec Security $ 62 62,000
Guardian International, Inc. $ 1 4,049
12
<PAGE>
GOVERNMENT REGULATION
The Company's operations are subject to federal, state, county and
municipal laws, regulations and licensing requirements. SDI has an unlimited
electrical contractor license as required by the State of Florida. In addition,
the Company believes it has all municipal and city licenses required to operate
in Dade, Broward, and Palm Beach Counties (all in Florida).
Because the Company operates a central monitoring station and installs
burglar and fire alarms, the State of Florida requires that the Company's
employees directly involved in the monitoring of customers and provision of
field repair services complete a certification program, and that the Company
maintain a license to conduct its monitoring business. The Company believes that
it holds the necessary licenses to conduct its business and that it is in
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.
TRADEMARKS
During Fiscal Year 1996, the Company filed applications with the United
States Patent and Trademark Office to register the marks Guardian
International(TM) and Gibraltar Security Alarm Systems(TM). The Company believes
that its trademarks are important to the marketing of its security alarm
services and the establishment of a strong identity with its customers. No
assurance can be given that the Company will be able to successfully enforce or
protect its rights to its trademarks in the event that any of them is subject to
third-party infringement.
EMPLOYEES
At December 31, 1996, the Company employed 86 individuals, all of whom
were full-time employees. As a result of the Company's recent downsizing of SDI,
the Company terminated 35 employees during the first quarter of 1997. For
additional information relating to the downsizing of SDI, see the information
under the caption "Installation Services to Third Party Alarm Companies (SDI),"
above. Any future increase in the number of employees will depend upon growth of
the Company's business. (See "Recent Developments," above.)
Currently, none of the Company's employees is represented by a labor
union or covered by a collective bargaining agreement. The Company and
management believe that the Company's relations with its employees are
satisfactory.
RESEARCH AND DEVELOPMENT AND ENVIRONMENTAL ISSUES
The Company does not conduct any research and development activity. To
the Company's knowledge, the Company is not presently confronted by any
environmental issues.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The information contained below includes statements of the Company's or
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the forward-
looking statements. For a description of such risks and uncertainties, see the
information set forth in the Introductory Note to this Form 10-SB under the
caption "Forward-Looking Statements," which information is incorporated herein
by reference.
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 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 Fiscal Year 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) 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 is 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 Fiscal Year 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) the customer
dies; (iii) a business or commercial accounts closes or goes out of business;
(iv) a customer is unhappy with the Company's level of service; (v) a building
or home is destroyed; and (vi) 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
14
<PAGE>
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 Fiscal Years 1996 and 1995 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, 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
expending every economically feasible effort 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.
RESULTS OF OPERATIONS
As discussed in various portions of this Form 10-SB, including Note 2
of the Notes to Consolidated Financial Statements of the Company set forth in
Part F/S herein, the Company is the surviving corporation of a merger of
Guardian with the Company's predecessor, Everest Security, which was consummated
on August 28, 1996. (See Part I, Item 1- "History," above.) The transaction was
a reverse acquisition for accounting purposes, with Guardian deemed to be the
acquirer. The financial results for the fiscal year ended December 31, 1996
include the consolidated balance sheet of the surviving entity as of December
31, 1996; the statement of operations and of cash flows include Guardian's
figures for the entire twelve month period, but include SDI's figures only from
the date of merger (August 28, 1996). The results for the fiscal year ended
December 31, 1995 include the accounts and activity strictly of Guardian.
15
<PAGE>
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Monitoring 74.2% 87.3%
Installation and service 25.8 12.7
---- ----
100.0 100.0
Total revenues
Operating expenses (as a percentage of revenues):
Monitoring 13.8% 27.3%
Installation and service 25.6 12.7
General and administrative 40.0 53.0
Amortization of customer contracts (as a
percentage of revenues) 16.0 8.0
Depreciation and amortization (as a percentage
of revenues) 5.4 10.4
---- ----
Total operating expenses 101% 111%
Loss from operations (20.6%) (7.0%)
Interest expense (as a percentage of revenues) 15.5% 13.4%
Net loss (as a percentage of revenues) (16.3)% (24.8)%
===== =====
</TABLE>
Neither the Company nor the pre-merged Guardian International, Inc.
(see Item 1 - "History" above) 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 Heller, 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 approximately more than 20,000 and it has significantly
reduced its indebtedness. At December 31, 1996, the Company had approximately
7,900 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 has recently renegotiated its Credit Facility
(the "Renewed Credit Facility") with Heller 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
16
<PAGE>
contemplated terms of the Renewed Credit Facility) of $5,000,000)), which, the
Company believes, would provide sufficient capital availability for achieving a
base of 20,000 customers. There can be no assurances, however, that the Company
will achieve a base of 20,000 customers. For information regarding the Company's
strategy for expanding its customer account base, and the average terms of
monitoring contracts, please refer to the information under the caption
"Business Strategy" in Item I, Part 1, above.
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 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. 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 Fiscal Years
1996 and 1995:
For the Fiscal Year Ended
December 31,
1996 1995
---- ----
Net loss $(590,348) $(270,383)
Plus:
Amortization of customer contracts 577,611 87,873
Depreciation and amortization 195,679 115,016
Interest expense 560,680 146,331
--------- ---------
EBITDA $743,622 $78,837
========= ========
17
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues for the fiscal year ended December 31, 1996 ("Fiscal
Year 1996") increased 231% to $3.6 million, from $1.1 million for the fiscal
year ended December 31,1995 ("Fiscal Year 1995"). Monitoring revenues increased
by 182% to $2.7 million during Fiscal Year 1996, from $953,000 during Fiscal
Year 1995. Installation and service revenues increased by 571% to $935,000
during Fiscal Year 1996, compared to $139,000 during Fiscal Year 1995. Total
retail subscribers numbered approximately 7,900 at December 31, 1996, compared
to approximately 4,000 at December 31, 1995, a net increase of 98%. The increase
in revenues and number of subscribers from Fiscal Year 1995 to Fiscal Year 1996
is primarily attributable to the Company's ongoing Independent Alarm Acquisition
Program and Dealer Program, and the portfolio acquisition of customer accounts
(Gibraltar) during the first quarter of Fiscal Year 1996, which added
approximately 1,250 retail subscribers and continues to add new accounts through
the Company's internal sales force. Additionally, during Fiscal Year 1996 SDI
provided approximately $520,000 in installation and service revenue subsequent
to the merger of Guardian and Everest.
Total operating expenses for Fiscal Year 1996 increased 200% to $3.7
million, from $1.2 million during Fiscal Year 1995. Monitoring expenses
increased 67% to $499,000 during Fiscal Year 1996, compared to $298,000 during
Fiscal Year 1995. The increase in monitoring costs from Fiscal Year 1995 to
Fiscal Year 1996 was a result of the significant increase in monitoring revenues
and number of subscriber accounts (see previous paragraph). As a percentage of
monitoring revenues, however, monitoring expenses decreased to 19% in Fiscal
Year 1996, compared to 31% in Fiscal Year 1995. The decrease in monitoring
expenses as a percentage of monitoring revenue is attributable to the Company's
state-of-the-art monitoring facility, which currently is configured to monitor
up to approximately 50,000 subscribers, and up to 200,000 subscribers with
moderate upgrades. Though the ongoing costs of monitoring will increase as the
number of subscriber accounts increase, such costs will not increase
proportionately to the increase in MRR. The Company expects monitoring costs to
continue to decrease as a percentage of monitoring revenue until such time as
the central monitoring facility is at or near capacity. Installation and service
costs for Fiscal Year 1996 increased by 569% to $926,000, compared to $139,000
during Fiscal Year 1995. Included in installation and service costs during
Fiscal Year 1996 is approximately $398,000 incurred by SDI subsequent to the
merger of Guardian and Everest. The increase in total installation and service
costs from Fiscal Year 1995 to Fiscal Year 1996 were the result of a similar
percentage increase in related revenues from Fiscal Year 1995 to Fiscal Year
1996 (see previous paragraph). As a percentage of installation and service
revenue, such costs were 99% in both Fiscal Year 1996 and Fiscal Year 1995. 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 235% to $2.2 million in Fiscal Year
1996, compared to $656,000 in Fiscal Year 1995. Gross profit from monitoring
revenues increased by 230% to $2.2. million in Fiscal Year 1996, compared to
$655,000 in Fiscal Year 1995. Gross profit from installation and service
activities increased 904% to $8,900 compared to $900 in Fiscal Year 1995. 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 151% to $l.5
million in Fiscal Year 1996, compared to $579,000 during Fiscal Year 1995.
Included in G&A costs during Fiscal Year 1996 is approximately $246,000 incurred
by SDI subsequent to the merger of Guardian and Everest. The increase in G&A
costs from Fiscal Year 1995 to Fiscal Year 1996 is related primarily to the
Company's growth in
18
<PAGE>
revenue, resulting in an increase in the Company's overhead cost structure.
Additionally, there were certain nonrecurring costs incurred in connection with
the merger of Guardian and Everest. Included in G&A is bad debt expense of
$152,000 in Fiscal Year 1996, compared to $24,000 in Fiscal Year 1995. As a
percentage of total revenues, bad debt expense was 4.2% in Fiscal Year 1996
compared to 2.2% in Fiscal Year 1995. The increased bad debt expense during
Fiscal Year 1996 over Fiscal Year 1995 resulted from increases in revenues and a
tightened reserve policy. As a percentage of total revenues, G&A decreased to
40% in Fiscal Year 1996 compared to 53% in Fiscal Year 1995. As with monitoring
costs, discussed above, the Company does not anticipate a proportionate increase
in G&A as a percentage of revenues as subscriber revenue hopefully increases in
the future.
Amortization of customer contracts increased 558% to $578,000 during
Fiscal Year 1996, compared to $88,000 during Fiscal Year 1995. The increase in
such costs from 1995 to 1996 resulted from the increase in the amount of
capitalized customer contracts, which increased from a net balance of $2.1
million at December 31, 1995 to $5.1 million at December 31, 1996. The
amortization of such costs is over 10 years, unless a contract is canceled and
not replaced by the corresponding independent alarm company or Dealer, or
otherwise, in which case the remaining unamortized balance is written off
(charged to amortization expense). Included in such amortization costs are
$138,000 and $0 for Fiscal Year 1996 and Fiscal Year 1995, Fiscal Year 1995,
respectively, relating to customer attrition, discussion in "Overview," above.
Depreciation and amortization increased by 73% to $196,000 during
Fiscal Year 1996, compared to $113,000 during Fiscal Year 1995. Such costs
include depreciation of property and equipment (the gross balance of which
increased from $422,000 at December 31, 1995 to $785,000 at December 31, 1996 as
a result of the Company's continued expansion activities and the merger of
Guardian and Everest, which resulted in additional property and equipment being
acquired), amortization of goodwill recorded in connection with the merger of
Guardian and Everest (such gross amount totaling $1.2 million which is being
amortized over 10 years), and amortization of certain other intangible assets.
Interest expense increased 283% to $561,000 during Fiscal Year 1996,
compared to $146,000 during Fiscal Year 1995. The increase in interest expense
was the result of additional debt incurred primarily in connection with the cost
of acquiring subscriber accounts. The total number of retail subscriber accounts
increased from approximately 4,000 as of December 31, 1995 to approximately
7,900 as of December 31, 1996. The majority of such subscriber acquisition
costs, amounting to $3.3 million, were financed by Heller. Total borrowings
under the Heller credit facility increased from $1.9 million as of December 31,
1995 to $5.0 million as of December 31, 1996. As of March 26, 1997, the Company
has $5,360,697 of borrowings under the Heller credit facility.
Net loss increased by 118% to $590,000 during Fiscal Year 1996,
compared to $270,000 during Fiscal Year 1995.
CREDIT FACILITY
On November 16, 1994, Guardian, prior to its merger into the Company,
entered into a $7,000,000 Loan and Security Agreement with Heller primarily for
the purpose of borrowing funds to acquire customer accounts (the "Credit
Facility"). Borrowings under the Credit Facility bore interest at 4% above the
prime rate, and the Company was required to pay a funding fee of 1% of any
amounts borrowed. The loan was collateralized by the Company's assets and
secured by the personal guaranties of Harold and Sheilah
19
<PAGE>
Ginsburg, both of whom are directors, officers, and principal shareholders of
the Company. The Credit Facility had a maturity date of November 30, 1999.
As discussed in Item 1 above, under the caption "Recent Developments,"
in May 1997, the Company renegotiated the Credit Facility (the "Renewed Credit
Facility") with Heller to increase the maximum credit availability to $15
million. The maximum credit availability under the Renewed Credit Facility 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 Renewed Credit Facility)
of $5 million, provided that there have been no defaults. There can be no
assurances, however, that the Company will achieve a Tangible Net Worth (as
defined) of $5 million.
The Credit Facility included, and the Renewed Credit Facility includes,
customary covenants, including, but not limited to, restrictions related to the
incurring 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. At December 31, 1996 and 1995, the Company did not comply with
certain conditions of the Credit Facility for which waivers were obtained from
Heller. Specifically, the Company failed to maintain a Tangible Net worth (as
defined) of not less than $1,450,000 (see Exhibit 10(l) of Form 10-KSB for
Heller's waiver letter regarding this default). In addition, the Company failed
to provide to Heller certain financial reports, calculations, projections, and
certain compliance certificates required under the loans (see Exhibit 10(k) of
Form 10-KSB for Heller's waiver letter regarding these defaults.) Borrowings
under the Credit Facility amounted to $5.0 million as of December 31, 1996.
Borrowings under the Renewed Credit Facility amounted to $7.4 million (which
included the balance of $5 million previously outstanding under the Credit
Facility) as of August 31, 1997.
For information regarding Heller's ownership of certain shares of Class
B Nonvoting Common Stock and its right to receive additional Class B shares, see
Part II, Item 1, below.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in various portions of this Form 10-SB, the surviving
Company is the result of a merger of the predecessor Guardian International,
Inc. ("Guardian") with Everest Security Systems Corporation ("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.
During fiscal 1994 the pre-merged Guardian entered into a $7 million
credit facility with Heller, with a maturity date of November 30, 1999. (See
"Credit Facility," immediately above.) As discussed above under the caption
"Credit Facility", the Credit Facility was increased to $15 million in May 1997
under the Renewed Credit Facility. The Renewed Credit Facility is used primarily
for acquisitions of customer subscriber accounts. Borrowings under the Renewed
Credit Facility amounted to $7.4 million (which included the balance of $5
million previously outstanding under the Credit Facility) as of August 31, 1997.
20
<PAGE>
The Company's continued plan of growth through acquisitions of subscriber
accounts is contingent upon its ability to borrow under the Heller credit
facility. See "Recent Developments" in Part I, Item 1, above).
At December 31, 1996, the Company had working capital of $841,000, and
a current ratio of 2.1 to 1, compared to a working capital deficit of $136,000
and current ratio of .56 to 1 at December 31, 1995. Net cash flow provided by
(used in) operating activities during Fiscal Year 1996 and Fiscal Year 1995 was
$213,000 and ($178,000), respectively. The Company incurred a net loss of
$590,000 during Fiscal Year 1996, compared to a net loss of $270,000 during
Fiscal Year 1995; however, included in such losses was depreciation and
amortization totaling $773,000 during Fiscal Year 1996, compared to $201,000
during Fiscal Year 1995. Also included in net cash provided by operations during
Fiscal Year 1996 was a cash outflow of $350,000 related to an increase in
accounts receivable from Fiscal Year 1995 to Fiscal Year 1996. The increase in
accounts receivable relates to the Company's overall increase in revenues (the
Company's accounts receivable turnover ratio was 8.1 in Fiscal Year 1996,
compared to a ratio of 8.9 in Fiscal Year 1995). Net cash used in investing
activities was $359,000 during Fiscal Year 1996, comprised primarily of
acquisition of customer accounts of $3.3 million (such significant amount of
acquisitions being consistent with the Company's continued growth strategy)
offset by $3.2 million of cash received in the merger of Guardian and Everest
(such amount coming from the net proceeds from the Regulation S common stock
offering as described above). Net cash used in investing activities was $1.7
million during Fiscal Year 1995, comprised primarily of acquisition of customer
contracts. Net cash provided by financing activities was $1.2 million during
Fiscal Year 1996. The primary items included in such financing activities during
Fiscal Year 1996 were proceeds from Heller of $5.1 million, less repayments of
long-term debt under the Credit Facility of $2.0 million, further offset by a
payment to Harold Ginsburg, a former majority shareholder of Guardian (and
presently a director, officer, and principal shareholder of the Company) in
repayment of loans to pre-merger Guardian and as a return of capital of $1.8
million. Net cash provided by financing activities during Fiscal Year 1995 was
$1.9 million, comprised primarily of net proceeds from Heller. For the various
reasons specified, the Company's cash balance amounted to $1.0 million at
December 31, 1996, compared to $14,000 at December 31, 1995.
Total shareholder' equity was $3.2 million as of December 31, 1996,
compared to $187,000 as of December 31, 1995. The net increase of $2.9 million
consisted of an increase of $4.8 million relating to the issuance of stock in
connection of the merger of Everest and Guardian, a decrease of $1.7 million
relating to a payment to a former majority shareholder as described in the
previous paragraph, an increase of $423,000 relating to the issuance of 484,035
Class B shares to Heller in connection with the merger and in exchange for
certain capital appreciation rights it held with respect to Guardian, and a
decrease of $590,000 relating to the net loss incurred during Fiscal Year 1996.
The Company does not currently have any significant commitments for
capital outlays. As discussed in Part I, Item 1. - "Recent Developments,"
however, the Company has executed a nonbinding letter of intent to acquire the
assets of another company. If the Company proceeds with the contemplated asset
purchase, it would incur approximately $2.2 million in additional debt, to fund
the cash portion of the consideration that would be paid to the seller.
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
21
<PAGE>
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.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases its corporate headquarters from Guardian
Investments, a Florida partnership owned by Harold and Sheilah Ginsburg, both of
whom are directors, officers, and principal shareholders of the Company. (See
Part I, Item 7 -- "Certain Relationships and Related Transactions," below.) The
property, a six thousand (6,000) square foot building which holds the Company's
central monitoring facility, is located at 3880 N. 28 Terrace, Hollywood,
Florida 33020. The telephone number is (954) 926-5200. The lease will expire on
December 31, 1999, but the Company has an option to renew for an additional five
years under the same terms and conditions. The annual rental is approximately
fifty one thousand dollars ($51,000), with annual increases not to exceed three
percent (3%). The terms of the lease are no less favorable to the Company than
those which could be obtained from unaffiliated third parties.
The Company is currently arranging a modification of the lease on its
corporate headquarters to expand its administrative office space by six thousand
(6,000) square feet. The Company expects that the amended lease will be on terms
no less favorable to the Company than under the existing lease, and that the
rent under the amended lease would be increased proportionately to the increased
space.
SDI leases a two thousand five hundred (2,500) square foot
office/warehouse facility located at 823 NW 57th Street, Fort Lauderdale,
Florida 33309. It is a one-year lease which expires in May 1997. The rent is one
thousand five hundred twenty two dollars ($1,522) per month. SDI also has
another one-year lease, expiring in June 1997, for an office at 417 Whooping
Loop, Suite 1745, Altamonte Springs, Florida 32701. The Altamonte Springs office
is one thousand seven hundred fifty (1,750) square feet (together with the lease
on the premises at 823 NW 57th Street in Ft. Lauderdale, the "SDI Leases"). The
rent is seven hundred fifty dollars ($750) per month. Concomitantly with the
downsizing of SDI in the first quarter of 1997, the Company relocated SDI's
entire operations to the Company's headquarters in Hollywood, Florida.
Consequently, the Company does not intend to renew either of the SDI Leases.
OWNERSHIP OF REAL ESTATE
The Company does not own any real estate at this time.
22
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS OF MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of December 31, 1996 by
the executive officers and directors of the Company. The percentages shown
include both the Class A voting Common Stock and the Class B convertible
nonvoting Common Stock. All shares shown are Class A voting Common Stock unless
otherwise indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF IDENTITY GROUP (1) OWNED (5) OUTSTANDING SHARES (5)
- ---------------------------------------------- --------- ----------------------
<S> <C> <C>
Richard Ginsburg(2)(4) 629,246 9.07%
Harold Ginsburg(2)(3)(4) 903,533 13.02
Sheilah Ginsburg(2)(4) 903,533 13.02
Rhonda Ginsburg(2)(4) 629,245 9.07
Robert K. Norris 0 0.00
</TABLE>
(1) The address for each person listed in this table is c/o Guardian
International, Inc., 3880 North 28 Terrace, Hollywood, Florida
33020-1118.
(2) Richard Ginsburg and Rhonda Ginsburg are siblings and are the adult
children of Harold and Sheilah Ginsburg. Harold and Sheilah are husband
and wife, and each disclaims ownership of the other's shares.
(3) At the time of the merger of Guardian into the Company, Harold Ginsburg
received an irrevocable voting proxy from International Treasury &
Investments, Ltd. ("ITI") to vote 1,000,000 shares of Common Stock
owned at the time by ITI for a period of two (2) years commencing on
August 28, 1996. When these shares were counted towards Mr. Ginsburg's
beneficial ownership, he had the power to vote 1,988,533 shares of the
Common Stock. These shares, which were pledged by ITI to the Pre-Merged
Guardian Shareholders pursuant to the terms of the Merger Agreement to
secure the obligations of G.M. Capital Partners, Ltd. to obtain
additional equity investments in the Company are available to be
transferred to the Pre-Merger Guardian Shareholders as a result of a
default by G.M. Capital. These shares are presently held by an escrow
agent for the benefit of the Pre-Merged Guardian Shareholders, as
discussed in Part II, Item 1, above.
(4) Pursuant to an agreement between certain shareholders of the Company
and the Ginsburgs, for a period of two years which commenced on August
28, 1996, the Ginsburgs have voting control over approximately an
additional 230,000 shares of Common Stock, representing approximately
4% of the 6,453,804 shares of Common Stock outstanding.
23
<PAGE>
(5) The number of shares and percentages reflected in this table do not
include the additional 1,000,000 shares of Common Stock to which the
pre-merger Guardian shareholders are entitled as described in note 3,
immediately above.
The following table sets forth certain information regarding each
person known to the Company other than the executive officers and directors of
the Company (similar information regarding executive officers and directors is
shown in the above table) who may be considered a beneficial owner of more than
5% of the outstanding shares of the Common Stock as of December 31, 1996. The
percentages shown include both the Class A Voting Common Stock and the Class B
Nonvoting Convertible Common Stock. All shares shown are Class A voting Common
Stock unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF IDENTITY GROUP OWNED OUTSTANDING SHARES
- ------------------------------------------ ----- ------------------
<S> <C> <C>
Heller Financial, Inc. (1) 484,035 6.98%
Royal Bank of Scotland 400,000 5.77
</TABLE>
(1) The shares owned by Heller Financial, Inc. ("Heller") are Class B, are
nonvoting and convertible at the option of the holder into an equal
number of Class A Voting Shares, provided that any such conversion will
not result in a violation of any applicable law, regulation, or other
restriction. Heller is also entitled to receive an additional 150,000
shares of Class B Nonvoting Common Stock pursuant to an agreement with
the pre-merger Guardian shareholders. See Part II, Item 1, above.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company as of December 31, 1996. A
summary of the background and experience of each of these individuals is set
forth following the table. Under the Company's bylaws, directors hold office for
a period of one year, at which time the shareholders elect new directors.
Further, under the Company's bylaws, directors hold office until their
successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard Ginsburg (1) 28 CEO, President, Director
Sheilah Ginsburg (1) 58 Secretary/Treasurer, Director
Rhonda Ginsburg (1) 32 Vice President
Harold Ginsburg (1) 63 Chairman
Robert K. Norris 39 Senior Executive Vice President, Chief
Financial Officer
</TABLE>
24
<PAGE>
(1) Richard Ginsburg and Rhonda Ginsburg are siblings and are the adult
children of Harold and Sheilah Ginsburg.
RICHARD GINSBURG
Mr. Ginsburg was a co-founder of Guardian. He received a Bachelor of
Science degree in communications from the University of Miami. He subsequently
acquired management skills at Guardsman Central Security Corporation where he
was the Central Station Manager from 1987 to 1990. Mr. Ginsburg then became
Operations Manager for the Alert Centre, another security alarm company, a
position he filled from 1990 to 1992. From 1993 to the present, at Guardian, Mr.
Ginsburg developed and implemented the Guardian Authorized Dealer Program, the
Guardian acquisition strategy program and the development of Guardian's central
station and related operations. Mr. Ginsburg has a working knowledge of numerous
industry automation systems, including PICK, UNIX and off-site data base
management programs commonly used within the alarm industry.
Mr. Richard Ginsburg has not held a directorship position with any
other reporting company.
HAROLD GINSBURG
Mr. Harold Ginsburg was a co-founder and the President of Guardian from
its inception in 1993 until August 15, 1996. Mr. Ginsburg is an acknowledged
authority on electronic/computer technology security systems and has personally
developed high-tech security systems for such companies as United Parcel
Services, WendiCorp, Lufthansa, and many other regional and national firms. Mr.
Ginsburg also has served as a consultant to financial organizations and
government agencies throughout Latin America and Europe. In addition to being
regarded as an international consultant in the alarm service and monitoring
industry, he is responsible for the start-up of several successful security
companies, including Guardsman Security Corporation, which he owned and operated
from 1983 to 1991, at which time Guardsman was sold to Alert Centre, now owned
by ADT Security, Inc. In 1978, Mr. Ginsburg founded Gibraltar Central Security
Corporation, which he partially owned and operated until 1982, at which time
Gibraltar Central was sold to Security Centres of London, England.
Mr. Harold Ginsburg has not held a directorship position with any
other reporting company in over twenty years.
SHEILAH GINSBURG
Mrs. Sheilah Ginsburg was a co-founder of Guardian. She is responsible
for day-to-day accounting and administrative functions of the Company. Prior to
her participation in the development of Guardian, Mrs. Ginsburg was the Vice
President/Controller of Guardsman Central Security, a business similar to
Guardian.
Mrs. Ginsburg has not held a directorship position with any other
reporting company.
25
<PAGE>
RHONDA GINSBURG
Ms. Rhonda Ginsburg presently holds a sales management position with
NBC Television (a subsidiary of General Electric), and has been employed in that
capacity since 1993. Between 1991 and 1993, she held a sales position at Sunbeam
Television in Miami, Florida. Ms. Ginsburg holds a Masters of Science from Barry
University and a Bachelor of Arts from the University of Miami.
ROBERT K. NORRIS
Mr. Robert K. Norris is a Certified Public Accountant in the State of
Florida and received his accounting degree from Florida International University
in 1982. Before joining the Company as its Chief Financial Officer in January
1997, Mr. Norris was Vice President-Finance of International Airline Support
Group, Inc., a publicly held company, from 1994 to 1996. From 1988 to 1993 Mr.
Norris was the Senior Director of Finance and Controller for Niagara
Corporation, a publicly held company.
ITEM 6. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following sets forth certain information regarding the aggregate
cash and other compensation paid to or earned by the executive officers and/or
directors of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------ -----------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS OPTIONS/SAR'S (#)
--------------------------- ---- ---------- ----- -----------------
<S> <C> <C> <C> <C>
Richard Ginsburg, President 1996 $29,042 $0 0
and CEO, Director 1995 24,911 0 0
Harold Ginsburg, Chairman 1996 18,464 0 0
1995 0 0 0
Sheilah Ginsburg, Secretary / 1996 18,000 0 0
Treasurer, Director 1995 19,900 0 0
Robert K. Norris, Chief (2) 1996 0 0 0
Financial Officer 1995 0 0 0
</TABLE>
(1) The 1996 compensation set forth for each of Richard, Harold and
Sheilah Ginsburg represents only the amounts paid between September 1,
1996 and December 31, 1996. The annual compensation for each of
Richard, Harold and Sheilah Ginsburg is $90,000, $60,000, and $53,000,
respectively. Harold Ginsburg's compensation consists of consulting
fees paid by the Company under the Consulting Agreement filed as
Exhibit 10(d) hereto.
26
<PAGE>
(2) Mr. Norris did not become employed by the Company until January 1997.
OTHER COMPENSATION
In addition to the compensation set forth in the Summary Compensation
table, above, the Company makes payments of approximately $622 and $600 per
month under leases for the automobiles used by Harold Ginsburg and Richard
Ginsburg, respectively.
The Company also pays health insurance premiums of approximately $200
per month per individual to provide health care coverage to each of Richard
Ginsburg, Harold Ginsburg, Sheilah Ginsburg, and Robert Norris.
AGGREGATE OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTIONS/SAR VALUE
NUMBER OF UNEXERCISED OPTIONS
AT FY-END
NAME EXERCISABLE/UNEXERCISABLE
---- -------------------------
Richard Ginsburg 0/0
Harold Ginsburg 0/0
Sheilah Ginsburg 0/0
Robert K. Norris 0/0
Rhonda Ginsburg 0/0
COMPENSATION OF DIRECTORS
Richard Ginsburg, Harold Ginsburg, and Sheilah Ginsburg are the sole
directors of the Company, none of whom receive any additional compensation to
act in such capacity.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its corporate headquarters from Guardian
Investments, a Florida partnership owned by Harold and Sheilah Ginsburg, both of
whom are directors, officers, and principal shareholders of the Company. The
property, a six thousand (6,000) square foot building which holds the Company's
central monitoring facility, is located at 3880 N. 28 Terrace, Hollywood,
Florida 33020. The telephone number is (954) 926-5200. The lease will expire on
December 31, 1999, but the Company has an option to renew for an additional five
years under the same terms and conditions. The annual rental is approximately
fifty one thousand dollars ($51,000), with annual increases not to exceed three
percent (3%). The terms of the lease are no less favorable to the Company than
those which could be obtained from unaffiliated third parties.
For a discussion of certain stock issuances and transfers to certain
affiliates of the Company, see Part I, Item 1, below.
ITEM 8. DESCRIPTION OF SECURITIES
The holders of Class A Voting and Class B Nonvoting Common Stock (i)
have equal ratable rights to dividends from funds legally available therefor,
when and if declared by the Board; (ii) are entitled to share ratably
27
<PAGE>
in ll 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; and (iii) do not have preemptive, subscription, or conversion rights,
or redemption or sinking fund provisions applicable thereto. The holders of
Class A Voting common stock are entitled to one non-cumulative vote per share,
either in person or by proxy, with respect to all matters on which stockholders
are entitled to vote at meetings of the stockholders or through written consent.
The holders of Common Stock of the Company do not have cumulative
voting rights. This signifies that if a person or group of persons holds more
than 50% of outstanding shares of Common Stock (or has the right to vote more
than 50% of the outstanding shares of Common Stock), such person or group of
persons controls the election of directors as well as other shareholder action
requiring only a majority of votes. As disclosed in Part I, Item 4, above, the
Ginsburgs currently control more than 50% of the Class A Voting Common Stock.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
The Common Stock has been publicly traded under the symbol "GIIS" since
November 1996 through the National Quotation Bureau's National Daily Quotation
Price Sheets . Prior to the merger of Guardian into the Company, the Common
Stock (Everest Security common stock) was traded under the symbol EVST.
To the best of the Company's knowledge, there are presently ten (10)
market-makers. A public trading market for the Common Stock 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 assurance that these market-makers will continue to make a market for the
Common Stock. If the market-makers discontinue making a market for the Company,
the Common Stock would possess virtually no liquidity.
The following table sets forth the high and low closing prices of the
Common Stock for the fiscal periods indicated below, as reported by the National
Quotation Bureau during such periods. The prices reflect inter-dealer prices
without retail mark-up, mark-down, quotation, or commission. The figures do not
necessarily represent actual transactions.
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
Second Quarter $4 7/8 $3 1/4
Third Quarter $5 $4 1/8
Fourth Quarter $2 1/2 $1 3/4
* Following a 1-for-20 reverse split of the Company's Common Stock,
effective July 24, 1995.
28
<PAGE>
The Company is presently authorized to issue one hundred million
(100,000,000) shares of Class A Common Stock, $0.001 par value per share, of
which six million four hundred fifty three thousand eight hundred four
(6,453,804) shares were issued and outstanding as of March 31, 1997. The Company
is authorized to issue 484,035 shares of Class B Common Stock, $0.001 par value
per share, of which 484,035 shares are issued and outstanding as of March 31,
1997.
Pursuant to the terms of the agreement and plan of merger by and among
the Company, Guardian, and Guardian's principal shareholders (the "Merger
Agreement"), the shareholders of Guardian prior to its merger into the Company
are entitled to receive an additional one million (1,000,000) million shares of
Common Stock, presently held in escrow by the Company's counsel, Navon, Kopelman
& O'Donnell, P.A., as escrow agent ("Escrow Agent"). Specifically, pursuant to
Section 9.2 of the Merger Agreement, in order to secure the obligation of G.M.
Capital Partners, Ltd. ("G.M. Capital") to raise an additional $7,000,000 in
equity capital, International Treasury and Investments, Ltd., a British Virgin
Islands corporation and an affiliate of G.M. Capital, pledged one million shares
of Common Stock (the "Pledged Shares") to the shareholders of the pre- merged
Guardian (the "Pre-Merger Guardian Shareholders"). Further, pursuant to the
terms of Section 9.2, the Escrow Agent was authorized to deliver the Pledged
Shares to the Pre-Merger Guardian Shareholders if the additional capital was not
deposited with the Company within 60 days of the closing date of the Merger (the
"Outside Date"). The additional capital was not deposited on or prior to the
Outside Date, and, therefore, the Pre-Merger Guardian Shareholders, which
include the Company's principal shareholders at present, are entitled to receive
the Pledged Shares proportionately to their ownership in the pre-merged
Guardian. As of the date of this filing, the shares are being held for the
benefit of the Pre-Merger Guardian Shareholders by the Escrow Agent.
In connection with the merger of Guardian into the Company, Heller
received 484,035 shares of Class B Nonvoting Common Stock in exchange for
certain capital appreciation rights with respect to the common stock of
pre-merger Guardian held by Heller. In addition, pursuant to the terms of an
agreement entered into among the Pre-Merger Guardian Shareholders and Heller, as
a result of G.M. Capital's failure to raise the additional $7,000,000 in equity
capital (see paragraph immediately above), the Pre-Merger Guardian Shareholders
are required to transfer one hundred and fifty thousand (150,000) shares of
Class B Nonvoting Common Stock to Heller. In order to fulfill this commitment,
an amendment to the Company's Articles of Incorporation will be required to
authorize additional shares of Class B Nonvoting Common Stock.
DIVIDENDS
The Company has not declared any cash dividends since its inception,
and does not anticipate paying such dividends in the foreseeable future. The
Company plans to retain any future earnings for use in the Company's business.
In addition to the self-imposed restriction on the payment of dividends
resulting from the Company's own policies, the payment of dividends is currently
restricted pursuant to the terms of the existing credit facility with Heller,
and is likely to remain subject to such restriction for the foreseeable future.
For additional information regarding the Heller credit facility, see information
under the caption "Credit Facility," in Part I, Item 2, above.
Assuming the restrictions on dividends under the credit facility (or
under the New Credit Facility) do not prohibit it, the payment of any future
dividends rests within the discretion of the Board, subject to the conditions
then existing, including the Company's earnings, capital requirements, financial
condition, and other relevant factors.
29
<PAGE>
TRANSFER AGENT
The transfer agent for the Common Stock is Interwest Transfer Company,
1981 E. Murray Holladay Road, Suite 100, Salt Lake City, Utah 84117.
ITEM 2. 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 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On August 29, 1996, the Company dismissed Semple & Cooper, P.L.C.
("Semple & Cooper") as its independent auditors. The Board approved at a meeting
on August 29, 1996 McKean, Paul, Chrycy, Fletcher & Co. ("McKean, Paul") as the
Company's independent auditors for the fiscal year ended December 31, 1996.
McKean, Paul served as Guardian's independent auditors for the two fiscal years
preceding its merger with the Company.
The reports of Semple & Cooper on the Company's financial statements
for both of the past two fiscal years did not contain an adverse opinion nor a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1994 and December 31, 1995,
respectively, and in the subsequent interim period preceding Semple & Cooper's
dismissal, there were no disagreements on any matters of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which if not resolved to the satisfaction of Semple & Cooper would have caused
Semple & Cooper to make references to the matter in their report.
The Company requested and received from Semple & Cooper a letter
addressed to the SEC stating that it agrees with the statements set forth above,
in connection with the filing Company's Form 8-K, filed with the SEC on
September 9, 1996 (the "Form 8-K"), which Form 8-K contains the same disclosures
as are made in this Item 8. A copy of that letter, dated September 6, 1996, was
filed as Exhibit 16.1 to the Form 8-K.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On June 7, 1995, the Company issued twenty million (20,000,000) shares
of Common Stock 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.
30
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
- --------- ----------------- ------------- ----
<S> <C> <C> <C>
International Treasury 6/7/95 20,000,000 (before the 1 $100,000 in J.A.
& Investments Ltd. for 20 reverse split) Industries stock
</TABLE>
On July 5, 1995, the Company issued 3,975,000 shares of Common Stock to
three individuals (or entities owned or controlled by such individuals) for par
value. 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, as amended the "Securities Act"). The shares were issued
as compensation for services rendered or to be rendered.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
- --------- ----------------- ------------- ----
<S> <C> <C> <C>
427968 B.C. Ltd. (1) 7/5/95 1,325,000 (prior to 1:20 $1,325
reverse split)
Knight Financial Ltd. (2) 7/5/95 1,325,000 (prior to the $1,325
1:20 reverse split)
Steven A. Sanders 7/5/95 1,325,000 (prior to the $1,325
1:20 reverse split)
</TABLE>
In October 1995, the Company issued 500,000 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.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES 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 (3) 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 12/15/95 75,000 $150,000
[Cayman] Ltd. (4)
International Treasury & 12/15/95 75,000 $150,000
Investments Ltd. (5)
12/15/95 75,000 75,000
Langara Capital Foundation (6)
</TABLE>
- ---------------------
31
<PAGE>
(1) 427968 B.C. Ltd. is controlled by J.A. Michie.
(2) Knight Financial Ltd. is controlled by Robert Knight.
(3) Royal Bank of Scotland purchased shares for clients of the bank,
identities unknown.
(4) Tiger Eye Investments (Cayman) Ltd. is owned by Campbell Nominees, Ltd.
(5) International Treasury & Investments is owned by Warwyck Nominees,
Ltd., identity unknown, and an affiliate of G.M. Capital Partners, Ltd.
(6) Langara Capital Foundation is owned by Linchenstein Trust, administered
by J.A. Michie.
In November 1995, the Company issued one hundred thousand (100,000)
shares of Common Stock at $0.01 per share 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, amended.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
- --------- ----------------- ------------- ----
<S> <C> <C> <C>
Frank Bauer 11/95 100,000 $1,000
</TABLE>
On March 12, 1996, the Company issued thirty thousand (30,000) shares
of Common Stock to employees and directors of the Company as payment for their
services. The issuance was exempt from registration under Section 4(2) of the
Securities Act.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
- --------- ----------------- ------------- ----
<S> <C> <C> <C>
Frank Bauer 3/12/96 10,000 $100
Gary Liscio 3/12/96 5,000 $ 50
Harvey Doischen 3/12/96 5,000 $ 50
Karl Gelbard 3/12/96 10,000 $100
</TABLE>
32
<PAGE>
On August 14, 1996, the Company issued a total of one million
(1,000,000) shares of Common Stock at $3.50 per share to the following
institutions. The issuance was exempt from registration under Regulation S
promulgated under the Securities Act.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
- --------- ----------------- ------------- ----
<S> <C> <C> <C>
Bank of Austria
(Switzerland) 8/14/96 15,000 $52,500
Bank Leu 8/14/96 60,000 $210,000
Coutts & Co. AG Zurich 8/14/96 15,000 $52,500
Credit Suisse 8/14/96 170,000 $595,000
Darier Hentsch Private
Bank & Trust 8/14/96 30,000 $105,000
FAI Overseas Investments 8/14/96 200,000 $700,000
Royal Bank of Scotland 8/14/96 400,000 $1,400,000
Swiss Bank Corp. 8/14/96 110,000 $385,000
</TABLE>
On October 4, 1996, pursuant to a Plan and Agreement of Merger dated
August 15, 1996 between the Company (then known as Everest Security Systems
Corporation) and Guardian International, Inc., a Florida corporation ("Old
Guardian"), three million two hundred twenty-six thousand nine hundred two
(3,226,902) shares of Common Stock were issued to the shareholders of Old
Guardian in exchange for all of the outstanding shares of common stock of Old
Guardian. These shares were issued in reliance upon the exemption from
registration afforded by Section 4(2) of the Securities Act.
<TABLE>
<CAPTION>
NUMBER OF
PURCHASER DATE OF PURCHASES COMMON SHARES
- --------- ----------------- -------------
<S> <C> <C>
Harold Ginsburg 10/04/96 903,533
Rhonda Ginsburg 10/04/96 629,245
Richard Ginsburg 10/04/96 629,246
Sheilah Ginsburg 10/04/96 903,533
Robert and Nancy Kasky 10/04/96 161,345
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the General Corporation Law of the State of Nevada
contains provisions which entitle directors and officers of the Company to
indemnification from judgments, fines, amounts paid in settlement, and
33
<PAGE>
reasonable expenses, including attorneys' fees, resulting from 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 that such director or officer acted
in good faith. Neither the Company's Certificate of Incorporation nor its bylaws
presently contain any provisions regarding the indemnification of directors and
officers of the Company.
34
<PAGE>
PART F/S
Index to Financial Statements
Guardian International, Inc. comparative financial statements
for the fiscal years ended December 31, 1996 and 1995.........................36
Everest Security Systems Corporation and Subsidiary consolidated
financial statements for the year ended December 31, 1995.....................51
Everest Security Systems Corporation and Subsidiary unaudited
interim financial statements for the eight month period ended
August 31, 1996...............................................................70
35
<PAGE>
GUARDIAN INTERNATIONAL, INC.
FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED
DECEMBER 31, 1996 AND 1995
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
GUARDIAN INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of GUARDIAN
INTERNATIONAL, INC. and subsidiary ("the Company") as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GUARDIAN INTERNATIONAL, INC.
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II - Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
Miami, Florida,
March 15, 1997.
37
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $1,037,861 $ 14,263
Accounts receivable, net of allowance for doubtful accounts of
$166,315 and $15,000 in 1996 and 1995, respectively 569,180 146,285
Other 20,736 12,443
---------- ------------
Total current assets 1,627,777 172,991
---------- ------------
Property and equipment, net 484,859 209,947
Customer accounts, net 5,124,449 2,075,671
Intangible assets, net 1,718,377 65,053
Deposits and other assets 26,517 110,104
---------- ----------
Total assets $8,981,979 $2,633,766
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 578,592 $ 185,067
Unearned revenue 123,961 60,880
Current portion of long term obligations 84,004 63,251
------------- ------------
Total current liabilities 786,557 309,198
------------- ------------
Long term obligations, less current portion 5,079,832 2,137,852
Shareholders' equity:
Class A voting common stock, $.001 par value, 100,000,000 shares
authorized, 6,453,804 shares issued and outstanding in 1996 and
3,226,902 shares issued and outstanding in 1995 6,454 3,227
Class B non voting common stock, $.001 par value, 484,035
shares authorized, 484,035 issued and outstanding in 1996 and 0 shares
issued and outstanding in 1995 484 -
Additional paid-in capital 4,777,772 1,060,903
Accumulated deficit (1,467,762) (877,414)
Stock subscriptions receivable (201,358) -
---------- ------------
3,115,590 186,716
----------- ------------
Total Liabilities and Shareholders' Equity $8,981,979 $2,633,766
=========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
38
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
For the Year Ended December
31,
1996 1995
---- ----
<S> <C> <C>
Revenues:
Monitoring $2,685,734 $ 953,034
Installation and service 935,256 139,474
----------- ----------
Total revenue 3,620,990 1,092,508
---------- ----------
Operating expenses:
Monitoring 498,929 298,126
Installation and service 926,319 138,584
General and administrative 1,452,120 579,051
Amortization of customer contracts 577,611 87,783
Depreciation and amortization 195,679 113,016
----------- ---------
Total operating expenses 3,650,658 1,216,560
---------- ---------
Loss from operations (29,668) (124,052)
Interest expense 560,680 146,331
------- -------
Net loss $ (590,348) $ (270,383)
========== ==========
Loss per share $ (0.13) $ (0.08)
========== ==========
Average number of shares outstanding 4,418,366 3,226,902
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
39
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
COMMON STOCK COMMON STOCK ADDITIONAL STOCK
CLASS A CLASS B PAID IN ACCUMULATED SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLES TOTAL
------ ------ ------ ------ ------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 3,226,902 $3,227 -- $ -- $ 1,060,903 $ (607,031) $ -- $457,099
Net loss for period -- -- -- -- -- (270,383) -- (270,383)
----------- ------ ------- ------ ----------- ---------- -------- --------
Balance, December 31, 1995 3,226,902 3,227 -- -- 1,060,903 (877,414) -- 186,716
Issuance of stock in connection
with Everest acquisition 3,226,902 3,227 4,962,429 -- (201,358) 4,764,298
Distribution to shareholder -- -- -- -- (1,667,838) -- -- (1,667,838)
Issuance of stock to financial
institution -- -- 484,035 484 422,278 -- -- 422,762
Net loss for period -- -- -- -- -- (590,348) -- (590,348)
----------- ------ ------- ------ ----------- ---------- -------- --------
Balance, December 31, 1996 6,453,804 $6,454 484,035 $ 484 $4,777,772 $(1,467,762) $(201,358) $3,115,590
=========== ====== ======= ====== ============ ============ ========= ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
40
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (590,348) $ (270,383)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 195,679 113,016
Amortization of customer accounts 577,611 87,783
Amortization of deferred financing costs 14,092 -
Provision for doubtful accounts 124,015 23,815
Changes in assets and liabilities:
Accounts receivable (349,874) (88,653)
Intangibles and other assets 57,327 (90,585)
Accounts payable and accrued liabilities 121,064 (1,027)
Unearned revenue 63,081 48,018
---------- ---------
Net cash provided by (used in) operating activities 212,647 (178,016)
---------- ---------
Cash flows from investing activities:
Purchase of fixed assets (237,731) (34,636)
Acquisition of customer accounts (3,274,389) (1,650,334)
Cash acquired in acquisition 3,153,330 -
---------- ---------
Net cash used in investing activities (358,790) (1,684,970)
---------- ---------
Cash flows from financing activities:
Payments of long term obligations (2,022,467) (356,945)
Proceeds from line of credit 5,054,690 2,001,539
Distribution to shareholder (1,667,838) -
(Payment of) proceeds from shareholder loans (194,644) 218,644
---------- ---------
Net cash provided by financing activities 1,169,741 1,863,238
---------- ---------
Net change in cash and cash equivalents 1,023,598 252
Cash and cash equivalents, beginning of period 14,263 14,011
---------- ---------
Cash and cash equivalents, end of period $1,037,861 $ 14,263
========== ==========
Noncash investing and financing activities:
Financed acquisition of property $ 100,537 $ 14,362
============ ==========
Issuance of Class B common stock $ 422,761 $ -
============ ==========
Value of Everest net assets acquired :
Subscriber accounts acquired $ 352,000 -
Goodwill $ 1,223,000 -
Other assets $ 332,743 -
Purchase price and assumed liabilities $ (1,870,032) -
Supplemental disclosures:
Interest paid $ 540,933 $ 128,281
============ ==========
Income taxes paid $ - $ -
============ ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
41
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Guardian
International, Inc. ("Guardian") and its wholly owned subsidiary,
collectively the Company ("the Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company operates a central monitoring alarm station and sells and
installs alarm systems for residential and commercial customers in Florida.
REVENUE RECOGNITION
Revenues are recognized when installation of security alarm systems has
been performed and when monitoring services are provided. Customers are
billed for monitoring services primarily on a monthly or quarterly basis in
advance of the period in which such services are provided. Unearned
revenues result from billings in advance of performance of monitoring.
Costs of providing installations, including inventory, are charged to
income in the period when the installation occurs, except in cases where
the Company maintains ownership of the equipment installed, in which case
the Company capitalizes the cost of the equipment to property and equipment
and amortizes the amount over a seven year period. Losses on contracts for
which future costs are anticipated to exceed revenues are recognized in the
period such losses are identified. Contracts for monitoring services are
generally for an initial non-cancelable term of five years with automatic
renewal on an annual basis thereafter unless terminated by either party. A
substantial number of contracts are on an automatic renewal basis.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with a remaining maturity of three
months or less at the date acquired are considered cash equivalents.
CUSTOMER ACCOUNTS AND INTANGIBLE ASSETS
Customer accounts acquired from alarm dealers are reflected at cost. The
cost of acquired accounts in an acquisition is based on the estimated fair
value at the date of acquisition and included in "Customer accounts, net"
in the accompanying consolidated balance sheets. Costs applicable to
internally generated customer accounts are expensed as incurred. Customer
accounts that are capitalized are amortized on a straight-line basis over a
10 year period. It is the Company's policy to perform monthly evaluations
of acquired customer account attrition and, if necessary, adjust the
remaining useful lives. The Company periodically estimates future cash
flows from customer accounts. Because expected cash flows have exceeded the
unamortized cost of customer accounts the Company has not recorded an
impairment loss.
Intangible assets are recorded at cost and amortized over their estimated
useful lives. The carrying value of intangible assets is periodically
reviewed and impairments are recognized when expected operating cash flows
derived from such intangibles is less than their carrying value.
42
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided on the straight-line method. The estimated useful
lives for property and equipment range from five to seven years, and the
estimated useful lives for leasehold improvements is thirty-one and
one-half years.
INCOME TAXES
Everest, the predecessor company (see Note 2), is a C Corporation subject
to income taxes at the corporate level. Prior to the merger, Guardian was
an S Corporation and subject to tax at the shareholder level. As a result
of the merger on August 28, 1996, Guardian's S Corporation was terminated
and any future earnings will be subject to income taxes at the corporate
level.
The Company has established deferred tax assets and liabilities for
temporary differences between financial statement and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from
a large number of customers, including both residential and commercial. The
Company extends credit to its customers in the normal course of business,
performs periodic credit evaluations and maintains allowances for potential
credit losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting 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.
LOSS PER SHARE
Primary loss per share is computed by dividing the 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.
2. ACQUISITIONS
On August 28, 1996, Everest Security Systems Corporation ("Everest" or "the
predecessor company") acquired all of the outstanding common stock of
Guardian International, Inc. ("Guardian"), a non public company, by issuing
3,226,902 new shares of Everest, representing 50% of Everest at August 28,
1996. In addition, the merger specified that $1,750,000 shall 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
43
<PAGE>
name of the surviving entity was changed from Everest to Guardian. The
consolidated balance sheet at December 31, 1996 includes the consolidated
balance sheet of the surviving entity and its wholly owned subsidiary; the
consolidated statements of operations and cash flows include Guardian's
operations for the twelve month period ended December 31, 1996 and include
the wholly owned subsidiary acquired by Guardian from the merger date
(August 28, 1996) through December 31, 1996. The financial statements in
1995 include the accounts and activity strictly of Guardian.
In addition, 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.
Unaudited pro forma results of operations giving effect to the acquisition at
the beginning of the periods are reflected below.
<TABLE>
<CAPTION>
UNAUDITED
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues, net $4,497,340 $2,312,790
Net loss $1,065,830 $ 722,180
Loss per share $ 0.17 $ 0.15
Weighted average number of shares outstanding 6,373,059 4,702,544
</TABLE>
Pro forma net loss per share is computed by dividing the pro forma net loss
by the pro forma number of shares of common stock outstanding during the
periods.
Pro forma shares outstanding represent the number of shares of common stock
outstanding after giving retroactive effect to the 3,226,902 shares issued
in connection with the merger.
The pro forma information is not necessarily indicative of the results of
operations that would have occurred had the acquisition taken place on
January 1 of the years presented, or of results which may occur in the
future.
3. CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer accounts
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $2,075,671 $ 513,120
Purchase of customer accounts 3,274,389 1,650,334
Customer accounts acquired in merger 352,000 -
Amortization of customer accounts (577,611) (87,783)
----------- ----------
Balance, end of year $5,124,449 $2,075,671
=========== ==========
</TABLE>
44
<PAGE>
In conjunction with certain purchases of customer accounts, the Company
withholds a portion of the price as a credit to offset qualifying attrition
of the acquired customer accounts and for purchase price settlements of
assets acquired and liabilities assumed. The Company withheld $92,949 and
$102,484 at December 31, 1996 and 1995, respectively, in connection with
the acquisition of customer accounts which is included in "Accounts payable
and accrued expenses" in the consolidated balance sheets.
4. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Property and equipment, at cost:
Station equipment $504,973 $287,055
Vehicles, furniture and office equipment 147,244 31,859
Leasehold improvements 133,025 103,217
------- --------
785,242 422,131
Accumulated depreciation and amortization (300,383) (212,184)
-------- --------
$484,859 $209,947
======== ========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets, net, consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1996 1995
------- ---- ----
<S> <C> <C> <C>
Intangibles, at cost:
Excess of acquisition cost over net
assets acquired 10 years $ 1,223,000 $ -
Deferred financing costs 3 years 422,761 -
Covenant not to compete, organization
costs and other Various 215,429 118,072
------------- --------
1,861,190 118,072
Less accumulated amortization ( 142,813) (53,029)
------------- ---------
$ 1,718,377 $ 65,043
============= =========
</TABLE>
Excess of acquisition cost over net assets acquired was recorded as a
result of the merger of Guardian and Everest as described in Note 2.
Deferred financing costs were incurred as a result of issuing to a
financial institution 484,035 shares of Class B non voting common stock in
connection with the merger of Guardian and Everest as described in Note 2.
The amortization of such costs is charged to interest expense over the life
of the related indebtedness.
45
<PAGE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Trade accounts payable $357,219 $ 54,173
Contract holdbacks 92,949 102,484
Accrued payroll and related taxes 56,223 -
Other 72,201 28,410
-------- --------
$578,592 $185,067
======== ========
</TABLE>
7. LONG TERM OBLIGATIONS
Long term obligations consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Credit facility with financial institution $4,968,571 $1,895,299
Note payable to shareholders - 194,644
Equipment notes payable and other 195,265 111,160
---------- ----------
5,163,836 2,201,103
Less current portion (84,004) (63,251)
---------- ----------
$5,079,832 $2,137,852
========== ==========
</TABLE>
The Company has a $7 million credit facility with a financial institution
for the purpose of borrowing funds to acquire customer alarm accounts.
Borrowings under the agreement ($4,968,571 and $1,895,299 at December 31,
1996 and 1995, respectively) bear interest at 3% above prime (8.50% and
8.25% at December 31, 1996 and 1995, respectively). The credit facility is
collateralized by substantially all of the Company's assets. The credit
facility has a maturity date of November 30, 1999. The Company must renew
with the lender, on an annual basis, the ability to draw against any
remaining unfunded portion. The lender's current commitment to fund expires
on December 31, 1997. The principal shareholders of the Company have
personally guaranteed $700,000 of the credit facility and pledged their
stock in the Company as collateral. The agreement contains certain
conditions including, but not limited to, restrictions related to
indebtedness, net worth and distribution payments to shareholders other
than $1,750,000 which was paid to a shareholder in September 1996. At
December 31, 1996 and 1995, the Company did not comply with certain
conditions of the agreement, primarily the net worth requirement, for which
waivers were obtained from the lender.
8. RELATED PARTY TRANSACTIONS
LEASED FACILITIES
The Company leases its monitoring facilities from an affiliate which is
owned by the principal shareholders of the Company at an annual rental of
approximately $51,000 (plus annual increases not to exceed 3%) through
December 31, 1999 with an option to renew for an additional 5 years under
the same terms.
46
<PAGE>
9. INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $903,000 which begin to expire
in 2010. These net operating loss carryforwards will be subject to
significant annual limitations on utilization in future years as a result
of the merger and related change in ownership control of the Company.
The components of deferred tax assets and liabilities at December 31, 1996
are as follows:
1996
----
Deferred tax (liabilities) assets
Allowance for doubtful accounts - current $ 64,863
Difference in amortization of customer contracts (222,931)
Net operating loss carryforwards 231,702
Other 54,925
---------
128,559
Less valuation allowance (128,559)
---------
Net deferred tax (liabilities) assets $ -
=========
Realization of the above deferred tax assets is dependent on generating
sufficient taxable income in the future to offset the deductible temporary
differences generating the deferred tax assets. Net deferred tax assets
have been fully reserved as their net realizability is not assured at the
current time.
10. SHAREHOLDERS' EQUITY
(a) Class A Common Stock
The Company has authorized the issuance of up to 100,000,000 shares of
Class A common stock with a par value of $.001 each. At December 31, 1996
and 1995 there were 6,453,804 and 3,226,902 shares, respectively, of Class
A common stock issued and outstanding. See Note 2.
(b) Class B Non Voting Common Stock
The Company has authorized the issuance of 484,035 shares of Class B non
voting common stock with a par value of $.001 each. At December 31, 1996
and 1995 there were 484,035 and 0 shares, respectively, of Class B non
voting common stock issued and outstanding. The shares are convertible into
Class A common stock at any time at the holder's election. See Note 2 and
Note 5.
(c) Stock Subscriptions Receivable
In December 1995, the Company, through Everest (see Note 2) issued 285,000
shares of Class A common stock at $2 per share ($570,000 in the aggregate)
to certain parties. The proceeds from the sale of the common stock were
evidenced by 8% stock subscription notes receivable due in January 1996 and
collateralized by the common stock. As of December 31, 1996 there remains
an outstanding balance of $201,358 under the notes receivable. The amount
has been reflected as "Stock subscriptions receivable" and
47
<PAGE>
a reduction of shareholders' equity in the accompanying consolidated
balance sheet. Management is in the process of attempting to collect the
outstanding amounts.
11. STOCK OPTIONS
The Company, through Everest (see Note 2), has issued stock options to
various employees to purchase 100,000 and 10,000 shares of common stock at
$2 and $3 per share, respectively, and issued options to purchase 74,720
shares at $2 per share to an investment banker. There were 184,720 options
shares issued and outstanding preceding and subsequent to the merger with
Everest (see Note 2). As of December 31, 1996, all stock options were
exercisable.
The following is a summary of stock option activity for the year ended
December 31, 1996:
WEIGHTED
OPTION AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding at January 1, 1996
Granted - -
Assumed in connection with merger 184,720 $2.05
Cancelled - -
Exercised - -
------- -----
Outstanding at December 31, 1996 184,720 $2.05
======= =====
As discussed above, the stock options were issued by Everest. Accordingly,
no compensation expense has been recognized for the issuance of the stock
options in the accompanying financial statements. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for stock based
compensation. Had the pro forma compensation been recorded based on the
fair value at the grant dates for awards consistent with the method of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS No. 123"), the pro forma net loss and the pro
forma net loss per share would have increased as follows:
UNAUDITED
---------
For the Year Ended
December 31,
1996 1995
---- ----
Pro forma net loss:
As reported $1,065,830 $722,180
Pro forma for SFAS No. 123 $1,083,730 $951,064
Pro forma net loss per share:
As reported $ 0.17 $ 0.15
Pro forma for SFAS No. 123 $ 0.17 $ 0.20
48
<PAGE>
The value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted average
assumptions: expected volatility approximating 70%, risk-free interest rate
ranging from 6% to 7%, expected dividends of $0 and expected lives of 4 to
5 years.
12. PENDING ACQUISITIONS
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. Under the transaction, all of the outstanding stock of the
privately held company, a Florida corporation, will be exchanged for
approximately 6.6 million shares (or 48% on a fully diluted basis) of
common stock of the Company. The Company would form a separate, wholly
owned subsidiary ("Guardian Sub") in connection with the contemplated
merger. The large privately held Florida-based company would merge with and
into Guardian Sub, which would be the surviving corporation. Under the
Letter of Intent, the transaction is subject to, among other things, due
diligence review and the approval of the Company's Senior Lender.
In March 1997, the Company executed a non-binding letter of intent to
purchase certain assets of a privately held Florida Corporation (the
"Seller"). The assets to be acquired consist primarily of approximately two
thousand two hundred (2,200) customer accounts and contracts, which, in the
aggregate, will increase monthly revenue by about $60,000 per month.
Certain other operating assets will also be acquired. The purchase price
shall be $2.2 million in cash, 50,000 shares of common stock, and options
to purchase a certain amount of additional shares of common stock at a
defined price. The letter of intent calls for the parties to reach a
definitive asset purchase agreement by April 10, 1997, at which time if no
agreement is reached, the letter of intent will expire.
49
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO OTHER BALANCE AT
BEGINNING OF YEAR COST AND EXPENSES ACCOUNTS (A) DEDUCTIONS (B) END OF YEAR
----------------- ----------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowances deducted from assets for
doubtful accounts $15,000 $124,015 $27,300 $ - $166,315
======= ======== ======= ======== ========
YEAR ENDED DECEMBER 31, 1995
Allowances deducted from assets for
doubtful accounts $ 5,000 $ 10,000 $ - $ - $ 15,000
======= ======== ======= ======== ========
</TABLE>
(A) Allowance of subsidiary acquired in merger.
(B) Results from write-offs of accounts receivable.
50
<PAGE>
EVEREST SECURITY SYSTEMS
CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For The Year Ended
December 31, 1995
51
<PAGE>
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.
Semple & Cooper, P.L.C.
Phoenix, Arizona
February 23, 1996
52
<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
53
<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
54
<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
55
<PAGE>
<TABLE>
<CAPTION>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Year Ended December 31, 1995
UNREALIZED
LOSS ON TOTAL TREASURY
ADDITIONAL CUMULATIVE AVAILABLE FOR SALE
COMMON STOCK PAID-IN ACCUMULATED SUBSCRIPTIONS TRANSLATION OF STOCKHOLDERS
SUBSCRIPTIONS
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE ADJUSTMENT STOCK SECURITIES EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, 326,152 $326 $847,959 $(848,083) $ - $ - $ (202) $ -
beginning of
year
Issued for 1,000,000 1,000 99,000 - - - - 100,000
available for
sale securities
Issued for 218,750 219 59,656 - - - - 59,875
consulting
services
Issued for 100,000 100 199,900 - - - - 200,000
shares of
Specialty
Device
Installers,
Inc.
Issued for cash 100,000 100 199,900 - - - - 200,000
Issued and 285,000 285 569,715 - (570,000) - - -
unpaid
Aggregate - - - - 11,861 - - -
adjustment
from foreign
currency
translation
Net unrealized - - - - - - (34,400) (34,400)
losses on
available for
sale securities
Net loss - - - - - - - (205,494)
--------- ------- ---------- ------------ --------- ----------- --------- -------- --------
Balance, end 2,029,902 $2,030 $1,976,130 $(1,053,577) $(570,000) $ 11,861 $ (202) $(34,400) $331,842
of year) ========= ======= ========== ============ ========= =========== ========= ======== ========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
56
<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
57
<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
58
<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.
59
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
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.
Revenue Recognition: (Continued)
Monitoring Services:
Revenues from contract monitoring services, which are normally
prebilled, 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.
60
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Property and Equipment: (Continued)
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.
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.
61
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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:
62
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Subsequent to the date of these financial statements, J.A. Industries,
Inc.'s common stock was trading at approximately $.42 per share.
Management believes this is a temporary devaluation of J.A. Industries,
Inc.'s market price. Although J.A. Industries, Inc. has no assets as
of March 31, 1996, the Company is in the process of performing a
reverse merger with another company. The investment in J.A.
63
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments: (Continued)
Industries, Inc.'s common stock is recorded at the fair market value of
the stock, based on the trading price 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 Frank Bauer, due on
demand with no stated interest. 13,387
-------------
$ 33,387
=======
64
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions: (Continued)
The Company has accrued interest payable of $7,311 at December 31, 1995
related to the above note payable to Frank Bauer, President of
Specialty Device Installers, Inc. The interest was accrued through the
date of acquisition, September 30, 1995, at which time further interest
accrual was suspended in accordance with the terms agreed to between
the parties.
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.
10% note payable to High Tech, monthly installments of $879, including
principal and interest, due May, 1995; unsecured.
65
<PAGE>
6. Notes Payable (Cont.)
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.
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.
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-cancelable and
secured by the monitoring equipment. Credit limits, ongoing credit
evaluation and account monitoring procedures are utilized to minimize
the risk of loss.
66
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Operating Lease:
The Company is currently leasing office space in Fort Lauderdale,
Florida under a non-cancelable 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.
9. Stockholders' Equity: (Continued)
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, the options expire. As of December 31,
1995, none of these options have been exercised.
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:
67
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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-cancelable April 18, 1997
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
========
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:
68
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
69
<PAGE>
EVEREST SECURITY SYSTEMS
CORPORATION AND SUBSIDIARY
FINANCIAL STATEMENTS
(UNAUDITED)
For the Eight Month Period
Ended August 31, 1996
70
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
August 31, 1996
ASSETS
(Unaudited)
Current Assets:
Cash and cash equivalents (Note 1) $ 37,711
Accounts receivable - trade, net of allowance for
doubtful accounts (Notes 1 and 8) 197,036
Available for sale securities (Notes 1 and 3) 37,500
Pre-paid expenses 21,034
Inventory 51,646
----------
Total Current Assets 344,927
----------
Property and Equipment, net (Notes 1, 4 and 7) 21,568
----------
Other Assets:
Refundable deposits 4,060
Goodwill, net (Note 1) 181,493
Monitoring costs, net of amortization 251,395
Investment (Note 2) 3,020,000
----------
3,456,948
----------
Total Assets $3,823,443
==========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
71
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (Continued)
August 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
Current Liabilities:
Notes payable
-current (Note 6) $ 2,594
-related party (Note 5) 13,387
Obligation under capital lease
-current portion (Notes 1 and 7) 2,649
Accounts payable 110,383
Accrued liabilities 66,459
--------
Total Current Liabilities 195,472
--------
Long-Term Liabilities:
Obligation under capital lease
-long-term portion (Notes 1 and 7) 5,987
--------
Commitments and Contingencies: (Notes 5 and 8) -
Stockholders' Equity: (Notes 9 and 10)
Common stock 3,227
Additional paid-in capital 5,284,407
Accumulated deficit (1,401,590)
----------
3,886,044
----------
Stock subscriptions receivable (201,358)
Treasury stock (202)
Unrealized loss on available for sale
securities (Notes 1 and 3) (62,500)
---------
(264,060)
---------
Total Stockholders' Equity 3,621,984
---------
Total Liabilities and Stockholders' Equity 3,823,443
==========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
72
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Eight Month Period Ended August 31, 1996
(Unaudited)
Revenues $ 870,717
Cost of Revenues (598,770)
-----------
Gross Profit 271,947
General and Administrative Expenses (616,278)
-----------
Loss From Operations (344,331)
Other Income (Loss):
Interest expense (12,301)
Interest income 21,598
Exchange loss (12,979)
-----------
(3,682)
-----------
Net Loss: $ (348,013)
==========
Net Loss per Share (Note 1) $ (.16)
==========
Weighted Average Shares Outstanding 2,147,952
==========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
73
<PAGE>
<TABLE>
<CAPTION>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Eight Month Period Ended August 31, 1996
(Unaudited)
Common Stock Additional paid Accumulated Stock
Shares Amount Capital Deficit Subscription
Receivable
<S> <C> <C> <C> <C> <C>
Balance at
Dec. 31, 1995 2,029,902 $ 2,030 $1,976,130 $(1,053,578) $ (570,000)
Stock issued for cash 100,000 100 199,900 - -
Stock issued for
consulting services 22,000 22 2,178 - -
Cash received for
stock subscriptions
receivable - - (120,000) - 390,240
Accrued interest on stock
subscriptions receivable - - - - (21,598)
Stock issued to pay
debt 75,000 75 49,347 - -
Stock issued for
cash 1,000,000 1,000 3,176,852 - -
Aggregate adjustment
from foreign currency
translation - - - - -
Net unrealized losses
on available for
sale securities - - - - -
Net loss for the eight
month period ended
Aug. 31, 1996 - - - (348,012) -
--------- ------- ----------- ----------- ---------
Balance of
Aug. 31, 1996 3,226,902 $ 3,227 $ 5,284,407 $(1,401,590) $(201,358)
========= ======= =========== =========== =========
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Eight Month Period Ended August 31, 1996
(Unaudited)
CONTINUED FROM PREVIOUS PAGE
Cumulative Unrealized loss on Total
Translation Treasury Available for sale Stockholders'
Adjustment Stock Securities Equity
<S> <C> <C> <C> <C>
Balance at
Dec. 31, 1995 $ 11,861 $ (202) $ ( 34,400) $ 331,841
Stock issued for
cash - - - 200,000
Stock issued for
consulting services - - - 2,200
Cash received for
stock subscriptions
receivable - - - 270,240
Accrued interest on stock
subscriptions receivable - - - (21,998)
Stock issued to pay debt - - - 49,422
Stock issued for
cash - - - 3,177,852
Aggregate adjustment
from foreign currency
translation (11,861) - - (11,861)
Net unrealized losses
on available for
sale securities - - (28,100) (28,100)
Net loss for the eight
month period ended
Aug. 31, 1996 - - - (348,015)
-------- ---------- --------- ----------
Balance of
Aug. 31, 1996 $ - (202) $ (62,500) $3,621,981
======== ========== ========= ===========
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Eight Month Period Ended August 31, 1996
(Unaudited)
<S> <C>
Reconciliation of Net Loss to Net Cash Used
By Operating Activities:
Net loss $ (348,013)
---------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 67,873
Recognized loss on loan receivable 28,100
Stock issued for consulting services 2,200
Interest accrued on stock subscription receivable (21,598)
Changes in Assets and Liabilities:
Accounts receivable - trade (45,611)
Prepaid expenses (14,001)
Inventory (904)
Refundable deposits (1,650)
Accounts payable 11,021
Accrued liabilities 23,037
-------------
48,467
-------------
Net cash used by operating activities $ (299,546)
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
76
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Eight Month Period Ended August 31, 1996
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 825,106
Cash paid to suppliers and employees (1,112,351)
Interest paid (12,301)
-------------
Net cash used by operating activities (299,546)
-------------
Cash flows from investing activities:
Loan receivable - related entity (7,600)
Purchase of property and equipment (9,063)
Purchase of monitoring contracts (240,023)
Purchase of investment (3,020,000)
-------------
Net cash used by investing activities (3,276,686)
------------
Cash flows from financing activities:
Proceeds from notes payable 82,172
Repayment of notes payable (91,822)
Proceeds from notes payable - related parties 30,000
Repayment of notes payable - related parties (50,000)
Repayment of obligation under capital lease (752)
Proceeds from sale of common stock 3,377,852
Proceeds from stock subscription receivable 270,240
------------
Net cash provided by financing activities 3,617,690
-----------
Effect of exchange rate changes (11,861)
----------
Net increase in cash and cash equivalents 29,597
Cash and cash equivalents at beginning of year 8,114
----------
Cash and cash equivalents at end of year $ 37,711
=========
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements
77
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. The acquisition was accounted for under the purchase
method of accounting as a reverse acquisition, whereby Everest Funding
Corporation.
During 1992, Everest Mortgage Corporation 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. In October, 1995, the Company conducted a
private offering of its common stock. In October, 1995, the Company's
of Directors resolved to change the name of the Corporation to Everest
Security Corporation. In August, 1996, the Company acquired Guardian
International, Inc. (Note 2).
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 principals 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.). 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.
78
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 prorate 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 represents amounts billed but
uncollected on completed installations and monitoring contracts. The
receivable are principally unsecured.
The company follows the allowance method of recognizing uncollectible
amounts receivable. The allowance is provided for based upon a review
of the individual accounts outstanding and the prior history of
uncollectible accounts receivable. At August 31, 1996, an allowance has
been provided for potentially uncollectible accounts receivable in the
amount of $27,300.
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.
79
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies: (Continued)
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 $2,571 for the eight month period ended August
31, 1996.
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.
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
eight month period through August 31, 1996 was $29,631. The carrying
value of goodwill will be periodically reviewed by the Company and 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 eight month period ended August 31, 1996 was
$35,671. The carrying value of deferred contract costs will be
periodically reviewed by the Company and impairments, if any, will be
when expected future operating cash flows derived from the monitoring
contracts less than the deferred contract cost.
Translation of Foreign Currencies:
Account balances and transactions denominated in the foreign currencies
and the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
80
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Summary of Significant Accounting Policies: (Continued)
Translation of Foreign Currencies: (Continued)
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
carry forward. Deferred tax assets and liabilities are measured using
tax rates expected to apply to taxable income in the years in which
those differences are expected to be recovered or settled.
Loss Per Share:
The loss per share amount is based on the weighted average number of
shares outstanding of 2,147,952 at August 31, 1996. A fully diluted
loss per share amount is not presented for this period as it is
anti-dilutive.
2. Business Combinations:
On August 15, 1996, the Company signed an Agreement and Plan of Merger
(Merger Agreement) with Guardian International (Guardian). On August
29, 1996, 3,226,904 shares of common stock were issued to Guardian's
common stockholders for 100% of the issued and outstanding stock of
Guardian International. The acquisition was accounted for
81
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Business Combinations: (Continued)
by the purchase method of accounting as a reverse acquisition, since
the stockholders of Guardian obtained control of the Company and the
Board of Directors. As such, these financial statements were prepared
without regard to the issuance of the 3,266,902 shares to Guardian
International, as Everest Security Systems Corporation was the target
corporation in the reverse acquisition. As a condition of the Merger
Agreement, Everest Security Systems Corporation conducted a private
placement of 1,000,000 common stock shares for $3.50 per share. As of
August 31, 1996, the investment account consists principally of
$3,500,000 from the private placement, which was paid directly to
Guardian less commissions and other expenses paid by Guardian on behalf
of Everest Security Systems Corporation.
3. Investments:
Available for Sale Securities:
As of August 31, 1996, the Company had securities classified as
available for sale of follows:
<TABLE>
<CAPTION>
Aggregate Unrealized
Fair Value Cost Holding Loss
<S> <C> <C> <C>
Equity Securities:
J.A. Industries,
Inc., 100,000 shares $ 37,500 $ 100,000 $ (62,500)
========== ========= ==========
</TABLE>
For the eight month period ended August 31, 1996, an unrecognized
holding loss on available for sales securities of $28,100 was recorded
to increase the unrealized holding loss to $62,500. Realized gains and
losses are determined on the specific identification basis. During the
eight month period ended August 31, 1996, there were no sales proceeds
or gross realized gains on securities classified as available for sale.
J.A. Industries, Inc. acquired Electronic Manufacturing Services Group,
Inc. (KMSG) in a reverse acquisition. The new company, EMSG, approved a
one for four (1-4) reverse stock split. As a result, Everest Security
Systems Corporation now owns 25,000 shares of EMSG stock.
82
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Property and Equipment:
As of August 31, 1996, property and equipment consist of the following:
Furniture $ 3,000
Equipment 19,808
Vehicles 3,500
--------
26,308
Less: accumulated
depreciation (4,740)
$ 21,568
5. Related Party Transactions:
Notes Payable - Related Parties:
As of August 31, 1996, notes payable - related parties consist of the
following:
Note payable to Frank Bauer, due on
demand with no stated interest. $ 13,387
========
Included in the above note is accrued interest payable of $7,311. The
interest was accrued through the date of acquisition, September 30,
`995, at which time further interest accrual was suspended in
accordance with the terms agreed to between the parties.
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 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. Per the terms of the Merger
Agreement, the Company canceled the Management Agreement effective
August 31, 1996.
The Company has an employment agreement with the president of the
Company's subsidiary. The agreement was effective through December 31,
1995, and has been for one (1) additional year. The agreement is for a
base of $52,000 plus a ten percent (10%) incentive based on the year
and net profits of the subsidiary. The
83
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Related Party Transactions: (Continued)
Other Transactions: (Continued)
net profits of the Company will be adjusted to exclude any incentive
salary pursuant to this agreement, any contributions to the pension or
profit plans, any extraordinary gains or losses (including but not
limited to or losses on disposition of assets) and any provisions or
refunds for or federal income taxes.
6. Notes Payable:
As of August 31, 1996, notes payable consist of the following:
10% note payable to High Tech, with monthly
installments of $879, including principal and
interest, due May, 1995; unsecured $ 2,594
=======
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
August 31, 1996, future minimum lease payments due under the capital
lease agreement are as follows:
Year Ended
December 31, Amount
1996 $ 3,851
1997 3,063
1998 3,063
1999 766
---------
Total minimum lease payments 10,743
Less: amount representing interest (2,107)
Present value of net minimum lease
payments 8,636
Less: current maturities of capital
lease obligations (2,649)
84
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Obligation Under Capital Lease: (Continued)
Non-current maturities of capital
lease obligations $ 5,987
========
The interest rate under the capital lease agreement is based on the
lessor's implicit rate of return at the inception of the lease.
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 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.
9. Stockholders' Equity:
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 August 31,
1996, there were 3,226,902 shares issued and 3,216,824 shares
outstanding.
Treasury Stock:
Treasury stock is shown at cost, and as of August 31, 1996 consists
of 10,078 shares.
As of August 31, 1996, stock subscriptions receivable consist of the
following:
85
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Stockholders' Equity: (Continued)
Stock Subscriptions Receivable.
8% note receivable from Langars Capital Foundation, principal and
interest due January 31, 1996; secured by 75,000 shares of Everest
Security Systems Corporation common stock.
This note receivable is in default.
160,050
==============
$ 201,358
10. Stock Option Plan:
The Company has issued stock options to various key employees and an
outside consulting firm. As of August 31, 1996, the Company has granted
options to purchase 174,720 and 10,000 shares of common stock at $2 and
$3 per share, respectively. On December 31, 2000, the options expire.
As of August 31, 1996, none of these options have been exercised.
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 August 31, 1996, the Company has not
determined if it will change its accounting policy for stock-based
compensation, or only provide the required financial statement
disclosures. As such, the impact on the Company's financial position
and results of operations is currently unknown. The Company does not
expect adoption to have a material effect on its financial position or
results of operations.
11. Deferred Income Taxes:
The timing differences that give rise to the deferred tax asset at
August 31, 1996, are presented below:
Net operating loss carry forward $ 48,500
Unrecognized holding loss on
available for sale securities 15,625
Allowance for doubtful accounts 6,825
70,950
Less: valuation allowance (70,950)
Net deferred tax asset $ -
============
86
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Deferred Income Taxes: (Continued)
At August 31, 1996, the Company has a net operating loss carry forward
for federal purposes of approximately $194,000, which expires in 2010.
As a result of the Tax Reform Act of 1986, the Company's net operating
loss carry forwards will be subject to significant annual limitations
on utilization in future years as a result of a greater than fifty
percent (50%) ownership change.
12. Monitoring Contracts:
The Company has contracts to perform monitoring services on various
security alarm installations. As of October 1, 1996, the Company
transferred all of their monitoring contracts to Guardian
International.
13. Statement of Cash Flows:
Non-Cash Investing and Financing Activities:
During the eight month period ended August 31, 1996, 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 75,000 shares of common stock to pay debt
valued at $49,422.
The Company issued 22,000 shares of common stock for
consulting services valued at $2,200.
The Company accrued interest of $21,598 on stock subscriptions
receivable.
The Company recognized a loss on a loan receivable to a
related party valued at $28,100.
The Company had an unrecognized loss on investment in the
amount of $28,100.
The Company forgave a stock subscription receivable of
$120,000 in lieu of paying commission of $120,000 on stock
offering.
87
<PAGE>
EVEREST SECURITY SYSTEMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
14. Major Customers:
For the eight month period ended August 31, 1996, two (2) customers
make up approximately twenty percent (20%) and twenty percent (20%) of
the Company's sales, respectively.
15. Commissions on Stock Issuance:
For the eight month period ended August 31, 1996, commissions paid on
stock issuance represents $120,000 in commissions which were paid in
the form of stock to a company for funds raised in an offering started
in 1995 and completed in 1996. The $120,000 was included in stock
subscriptions receivable at December 31, 1996. An additional $350,000
was paid in connection with a private offering in 1996.
88
<PAGE>
PART III
ITEM 1. INDEX TO 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
9 Lock-up Agreement dated August 15, 1996 among the Company,
International Treasury and Investments, Ltd., Steven
Sanders, Knight Financial Corporation and Frank Bauer
incorporated by reference to Exhibit 9 of the Company's
Annual Report on Form 10-KSB filed March 31, 1997
10(a) Share Purchase Agreement dated October 9, 1995 between
Security Device Installers, Inc. and Everest Security
Systems Corporation incorporated by reference to Exhibit
10(b) of the Company's Form 10-SB filed May 6, 1996
10(a)(1) Amendment to October 9, 1995 Share Purchase Agreement
between Security Device Installers, Inc. and Everest
Security Systems Corporation incorporated by reference to
Exhibit 10(b)(1) the Company's Form 10-SB filed May 6, 1996
10(b) Employment Agreement between Security Device Installers,
Inc. and Frank Bauer incorporated by reference to Exhibit
10(c) of the Company's Form 10-SB/A filed January 24, 1997
10(d) Consulting Agreement between Harold Ginsburg and the Company
incorporated by reference to Exhibit 10(d) of the Company's
Form 10-SB/A filed January 24, 1997
89
<PAGE>
10(e) Executive Employment Agreement between Richard Ginsburg and
the Company incorporated by reference to Exhibit 10(e) of
the Company's Annual Report on Form 10-KSB filed March 31,
1997
10(f) Employee Stock Option Agreement with G.M. Capital Partners,
Ltd. incorporated by reference to Exhibit 10(f) of the
Company's Form 10-SB/A filed January 24, 1997
10(g) Employee Stock Option Agreement with Frank Bauer
incorporated by reference to Exhibit 10(f) of the Company's
Form 10-SB filed May 6, 1996
10(h) Loan and Security Agreement between Heller Financial, Inc.
and Guardian International, Inc. and exhibits thereto
incorporated by reference to Exhibits 10(h) and 10(h)(1)
through 10(h)(6) of the Company's Form 10-SB/A filed January
24, 1997
10(i) Modification Agreement with Heller Financial, Inc.
incorporated by reference to Exhibit 10(i) of the Company's
Form 10-SB/A filed January 24, 1997
10(j) Plan and Agreement of Merger of Guardian International, Inc.
with and into Everest Security Systems Corporation,
incorporated by reference to Exhibit 2.1 AG of the Company's
8-K filed September 12, 1996
10(k) Waiver letter from Heller Financial, Inc. dated March 11,
1997 incorporated by reference to Exhibit 10(k) of the
Company's Annual Report on Form 10-KSB filed March 31, 1997
10(l) Waiver letter from Heller Financial, Inc. dated March 26,
1997 incorporated by reference to Exhibit 10(l) of the
Company's Annual Report on Form 10-KSB filed March 31, 1997
16 Letter dated September 6, 1996 from Semple & Cooper, P.L.C.,
the Company's former certifying accountant, incorporated by
reference to Exhibit 16.1 of the Company's Form 8-K filed
September 12, 1996
21 Subsidiaries of the Company -- Specialty Device Installers,
Inc., a company duly incorporated under the laws of the
State of Florida, is a wholly-owned subsidiary of the
Company E-1
27 Financial Data Schedule E-2
90
<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 5th of September, 1997.
GUARDIAN INTERNATIONAL, INC.
By: /s/ RICHARD GINSBURG
--------------------------------------
Richard Ginsburg
President and Chief Executive Officer
In accordance with Section 12 of the Securities Exchange Act of 1934, this
registration statement has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ HAROLD GINSBURG Chairman of the Board September 5, 1997
- ---------------------
Harold Ginsburg
/s/ RICHARD GINSBURG Director, President September 5, 1997
- --------------------- and Chief Executive Officer
Richard Ginsburg (Principal Executive Officer)
/s/ SHEILAH GINSBURG Director, Secretary and Treasurer September 5, 1997
- ---------------------
Sheilah Ginsburg
/s/ TERRY E. AKINS Director, Chief Operating Officer September 5, 1997
- ---------------------
Terry E. Akins
/s/ ERNEST H. DUNHAM Director September 5, 1997
- ---------------------
Ernest H. Dunham
/s/ WILLIAM REMINGTON Director September 5, 1997
- ---------------------
William Remington
91
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
21 Subsidiaries of the Company
27 Financial Data Schedule
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Specialty Device Installers, Inc., a company duly incorporated under the
laws of the State of Florida, is a wholly-owned subsidiary of the Company.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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