FORM 10-Q/A NO. 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO THE QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 0-28490
GUARDIAN INTERNATIONAL, INC.
(Formerly Everest Security Systems Corporation,
formerly Everest Funding Corporation,
formerly Burningham Enterprises, Inc.)
(Exact name of Registrant as specified in its charter)
STATE OF NEVADA 58-1799634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
GUARDIAN INTERNATIONAL, INC.
3880 N. 28 TERRACE
HOLLYWOOD, FLORIDA 33020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954)926-1800
_______________________
<PAGE>
Part I of the Registrant's Form 10-Q and Form 10-Q/A for the quarter
ended September 30, 1996 is hereby amended in its entirety by the following:
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,175,129 $ 14,263
Accounts receivable, less allowance
for doubtful accounts of $68,147 and $15,000 553,052 146,285
Other current assets 146,274 7,943
------------- ------------
Total current assets 1,874,455 168,491
------------- ------------
PROPERTY & EQUIPMENT:
Station equipment 521,401 287,055
Furniture and office equipment 44,636 31,859
Leasehold improvements 112,429 103,217
------------- ------------
678,466 422,131
Accumulated depreciation and amortization (278,977) (212,184)
------------- ------------
399,489 209,947
------------- ------------
CUSTOMER ACCOUNTS, net 4,835,415 2,075,671
INTANGIBLE ASSETS, net 1,330,338 41,165
OTHER 18,043 138,492
------------- ------------
Total Assets $ 8,457,740 $ 2,633,766
============= ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expense $ 420,093 $ 185,067
Unearned revenue 123,705 60,880
Current portion of debt 45,241 44,947
------------ ------------
Total current liabilities 589,039 290,894
------------ ------------
DEFERRED INCOME TAX LIABILITY 63,000 -
LONG TERM DEBT:
Equipment installment notes payable 144,044 61,970
Notes and loans payable to shareholders - 198,887
Note payable to financial institution 4,598,669 1,895,299
----------- ------------
Total long term debt 4,742,713 2,156,156
SHAREHOLDERS' EQUITY:
Common stock, 100,000,000 shares authorized, $.001 pa
value, 6,453,804 shares issued and outstanding 6,454 3,227
Additional paid-in capital 4,355,494 1,060,903
Accumulated deficit (1,097,602) ( 877,414)
Stock subscriptions receivable (201,358) -
------------ ------------
3,062,988 186,716
------------ ------------
Total Liabilities and Shareholders' Equity $ 8,457,740 $ 2,633,766
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
MONITORING $679,304 $269,980 $1,894,290 $659,307
INSTALLATION AND SERVICE 228,557 7,858 405,151 121,589
---------- ---------- ---------- ---------
TOTAL REVENUES 907,861 277,838 2,299,441 780,896
OPERATING EXPENSES:
MONITORING 92,441 50,214 270,552 154,058
INSTALLATION AND SERVICE 200,637 14,604 373,867 127,667
GENERAL AND ADMINISTRATIVE 357,646 158,121 856,661 453,112
AMORTIZATION OF CUSTOMER CONTRACTS 184,889 36,555 438,998 84,978
DEPRECIATION AND AMORTIZATION 35,477 23,693 116,500 71,079
---------- ---------- ---------- --------
TOTAL OPERATING EXPENSES 871,090 283,188 2,056,578 890,895
INCOME (LOSS) FROM OPERATIONS 36,771 (5,350) 242,863 (109,999)
INTEREST EXPENSE 151,631 36,811 400,051 83,147
LOSS BEFORE TAXES $ (114,860) ($42,161) ($157,188) ($193,145)
PROVISION FOR TAXES: (63,000) - (63,000) -
---------- ---------- ---------- ----------
Net loss $ (177,860) $ (42,161) $ (220,188) $(193,145)
========== =========== ========== =========
Loss per share $ (0.04) $ (0.01) $ (0.05) $ (0.06)
========== ========== ========== =========
Weighted average shares outstanding 4,418,366 3,226,902 4,418,366 3,226,902
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
STOCK
COMMON ADDITIONAL ACCUMULATED SUBSCRIPTION
STOCK AMOUNT PAID IN CAPITAL DEFICIT RECEIVABLE TOTAL
SHARES
<S> <C> <C> <C> <C> <C> <C>
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) 4,663,491
Distribution to -- -- (1,667,838) -- -- (1,667,838)
Shareholder
Net loss for period -- -- -- (220,188) -- (220,188)
Balance, September
30, 1996 6,453,804 $ 6,454 $ 4,355,494 $(1,097,602) $ (201,358) $ 3,062,988
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES: 1996 1995
------------- ----------
<S> <C> <C>
Net loss $ (220,188) $(193,145)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 116,500 71,079
Amortization of customer accounts 438,998 84,978
Provision for doubtful accounts 24,047 9,140
Changes in assets and liabilities:
Accounts receivable (233,778) (28,341)
Other Assets (16,435) 17,034
Accounts payable and accrued liabilities (6,319) (36,630)
Acquisition contracts payable (33,765) (53,058)
Unearned revenue 62,825 107,414
Deferred income tax liability 63,000 --
------------- ----------
Net cash provided by (used in) operating activities 194,885 (21,529)
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (179,402) (25,226)
Acquisition of customer accounts (2,846,742) (896,109)
Cash acquired in acquisition 3,153,330 --
------------- ----------
Net cash provided by (used in) investing activities 127,186 (921,335)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of long-term debt (1,274,129) (936,124)
Net proceeds from line of credit 3,979,649 1,958,652
Payment of shareholder loans (198,887) --
Distribution to shareholder (1,667,838) --
------------ --
Net cash provided by financing activities 838,795 1,022,528
------------- ----------
Increase in cash 1,160,866 79,664
CASH BEGINNING OF PERIOD 14,263 14,011
------------- -----------
CASH, END OF PERIOD $ 1,175,129 $ 93,675
============= ===========
NONCASH INVESTING AND FINANCING
ACTIVITY:
Financed acquisition of property $ 58,250 $ 14,362
------------- -----------
Fair value of Everest net assets acquired:
Subscriber accounts acquired $ 352,000 --
Goodwill $ 1,223,000 --
Other assets acquired $ 332,743
Purchase price of assumed liabilities $ (1,870,032) --
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 345,957 356,776
Income taxes paid $ - $ -
------------- -----------
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
GUARDIAN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
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. Substantially all costs associated with
purchasing an alarm account are capitalized and included in "Customer
accounts, net" in the accompanying consolidated balance sheets. Costs
related to marketing and installation of systems for 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.
6
<PAGE>
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.
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 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.
7
<PAGE>
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
shares of Everest. 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 name of the surviving entity was
changed from Everest to Guardian. The consolidated balance sheet at September
30, 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 three and nine months ended
September 30, 1996 and include the wholly owned subsidiary acquired by Guardian
from the merger date (August 28, 1996) through September 30, 1996. The financial
statements in 1995 include the accounts and activity strictly of Guardian.
In addition, the Company must issue 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 UNAUDITED
--------- ---------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues, net $1,143,000 $ 584,000 $3,212,000 $1,703,000
Net loss $ (199,000) $(116,000) $ (405,000) $ (348,000)
Loss per share $ (0.03) $ (0.02) $ (0.06) $ (0.07)
Weighted average number of shares
outstanding 6,373,059 4,702,544 6,373,061 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 periods presented, or of results which may occur in the future.
8
<PAGE>
3. CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer accounts
for the nine months ended September 30, 1996.
Balance, beginning of year $2,075,671
Purchase of customer accounts 2,846,742
Customer accounts acquired in merger 352,000
Amortization of customer accounts (438,998)
------------
Balance, end of year $4,835,415
============
In conjunction with certain purchases of customer accounts, the Company
withholds a portion of the price as a credit to offset qualifying attrition of
the acquired customer accounts and for purchase price settlements of assets
acquired and liabilities assumed. The Company withheld $68,718 at September 30,
1996, in connection with the acquisition of customer accounts which is included
in "Accounts payable and accrued expenses" in the consolidated balance sheets.
4. INTANGIBLE ASSETS
Intangible assets consist of the following at September 30, 1996:
ESTIMATED
LIVES AMOUNT
--------- ------------
Excess of acquisition cost over
net assets acquitted 10 years $ 1,223,000
Covenant not to compete, organization
costs and other Various 193,455
-----------
1,416,455
Less accumulated amortization (86,117)
-----------
$ 1,330,338
===========
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, totaling $422,761, will be incurred as a result of
issuing to a financial institution 484,035 shares of nonvoting Class B common
stock as described in Note 2 "Acquisitions". These costs will be charged to
operations as additional interest expense over 3 years, the life of the related
indebtedness.
9
<PAGE>
5. NOTES PAYABLE TO FINANCIAL INSTITUTION
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 ($4,598,669 at September 30, 1996) bear interest at 3% above
prime. 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.
6. 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.
7. INCOME TAXES
The conversion of Guardian from an S Corporation to C Corporation resulted
in recognition of a net deferred tax liability. The components of deferred
tax assets and liabilities at September 30,1996 are as follows:
Deferred Tax Assets -
Net operating loss carry forwards $48,500
Allowance for doubtful accounts 22,500
--------
Total deferred tax assets 71,000
--------
Deferred Tax Liabilities -
Difference in amortization of customer
contracts 120,200
Other 13,800
Total deferred tax liabilities 134,000
--------
Net deferred tax liability $ 63,000
========
At September 30, 1996, the Company has net operating loss carry forwards
for federal income tax purposes of approximately $143,000 which expire in 2010.
These net operating loss carry forwards will be subject to significant annual
limitations on utilization in future years as a result of the merger and related
change in ownership control of the company.
10
<PAGE>
8. STOCKHOLDERS' 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 September 30, 1996 there were
6,453,804 shares of Class A common stock issued and outstanding. See Note 2.
(b) Class B Nonvoting Common Stock to be Issued
The Company will issue 484,035 shares of Class B Nonvoting Common Stock to a
financial institution as described in Note 2 - "Acquisitions".
(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 September 30, 1996 there remains an outstanding
balance of $201,358 under the notes receivable. The amount has been reflected as
"Stock subscriptions receivable" and a reduction of shareholders' equity in the
accompanying consolidated balance sheet. Management is in the process of
attempting to collect the outstanding amounts.
9. 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. As of September 30, 1996, all stock options were
exercisable.
The following is a summary of stock option activity for the year ended September
30, 1996:
WEIGHTED
OPTION AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
Outstanding at January 1, 1996
Granted - -
Assumed in connection with merger 184,720 $ 2.05
Canceled - -
Exercised - -
---------- ---------
Outstanding at September 30, 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
11
<PAGE>
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:
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro forma net loss:
As reported $199,000 $116,000 $405,000 $348,000
Pro forma for SFAS No. 123 (a) (a) $422,900 (a)
Pro forma net loss per share:
As reported $(0.03) $(0.02) $(0.06) $(0.07)
Pro forma for SFAS No. 123 (a) (a) $(0.07) (a)
</TABLE>
(a) There were no options issued during this applicable period.
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
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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.
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
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<PAGE>
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 the nine month period
ended September 30, 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 the nine month period
ended September 30, 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 disconnecting service during the
period in question, net of any replacement of such subscriber by means of Dealer
or independent company replacement during the guarantee period, or by other
account replacement methods employed by the Company; these methods might
include, for example, the solicitation of monitoring contracts from new
occupants (where attrition is attributable to customer relocation). Net
subscriber attrition of the Company's own customers during the nine month period
ended September 30, 1996 was less than 10%.
The Company has developed an in-house system for identifying and
decreasing account attrition. The program has been dubbed the "No-Tolerance
Attrition Policy." This program consists of the following: (1) the
identification of possible lost accounts via a daily test; (2) false alarm
fines, tracking and cause identification; (3) early account delinquent
procedures; (4) quality customer service; (5) control lockout; (6) early
identification of new tenants/residences in homes with alarms installed by the
Company; and (7) aggressive problem solving by
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<PAGE>
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 Note 2 of the Notes to Consolidated Financial
Statements of the Company, 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. The transaction was a reverse acquisition for
accounting purposes, with Guardian deemed to be the acquirer. The financial
results include the consolidated balance sheet of the surviving entity as of
December 31, 1996; the statement of operations include Guardian's figures for
the three and nine month periods ended September 30, 1996, but include SDI's
figures only from the date of merger (August 28, 1996). The statement of cash
flows included Guardian's figures for the nine months ended September 30, 1996,
but include SDI's figures only from the date of merger (August 28, 1996). The
consolidated balance sheet as of December 31, 1995, and the results for the
three and nine months ended September 30, 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.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED UNAUDITED
--------- ---------
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Monitoring 74.9% 97.2% 82.4% 84.4%
Installation and service 25.1% 2.8% 17.6% 15.6%
------------------------------ ---------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Monitoring 10.2% 18.1% 11.8% 19.7%
Installation and service 22.1% 5.3% 16.3% 16.3%
General and administrative 39.4% 56.9% 37.2% 58.0%
Amortization of customer
contracts 20.4% 13.2% 19.1% 10.9%
Depreciation and amortization 3.9% 8.5% 5.1% 9.1%
------------------------------ ---------------------------
Total operating expenses 96.0% 101.9% 89.5% 114.1%
Income (loss) from operations 4.1% (1.9%) 10.5% (14.1%)
Interest expense 16.7% 13.2% 17.4% 10.6%
------------------------------ ---------------------------
Loss from operations before
income taxes (12.6%) (15.1%) (6.9%) (24.7%)
Provision for income taxes (7.0%) - (2.8%) -
------------------------------ ---------------------------
Net loss (19.6%) (15.1%) (9.6%) (24.7%)
============================== ===========================
</TABLE>
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
16
<PAGE>
base totals over 20,000. At September 30, 1996, the Company had approximately
6,800 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 related in connection
with account acquisitions. The Company is currently renegotiating its Credit
Facility with Heller from $7 million to $15 million, 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
obtain the New Credit Facility or that it will achieve a base of 20,000
customers.
Earnings before interest, taxes, depreciations, 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 the three and nine
month periods ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
--------- ---------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (177,860) $(42,161) $(220,188) $(193,145)
Plus:
Amortization of customer 184,889 36,555 438,998 84,978
contracts
Depreciation and amortization 35,477 23,693 116,500 71,079
Interest expense 151,631 36,811 400,051 83,147
Provision for taxes 63,000 - 63,000 -
--------- ---------- ---------- ---------
EBITDA $ 257,137 $ 54,898 $438,361 $46,059
========= ========== ========== ========
</TABLE>
17
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues for the three and nine month periods ended September 30,
1996 increased 227% and 195% to $908,000 and $2,299,000, respectively, from
$278,000 and $781,000 during the corresponding periods in the prior fiscal year.
Monitoring revenues increased by 152% and 187% during the three and nine month
periods ended September 30, 1996 to $679,000 and $1,894,000, respectively, from
$270,000 and $659,000 during the corresponding periods in the prior fiscal year.
Installation and service revenues increased by 2,809% and 233% to $229,000 and
$405,000 during the three and nine month periods ended September 30, 1996,
respectively, from $7,900 and $122,000 during the corresponding periods in the
prior fiscal year. Total retail subscribers numbered approximately 6,800 as of
September 30, 1996, compared to approximately 4,000 as of December 31, 1995, a
net increase of 70%. The increase in revenues and number of subscribers from
December 31, 1995 to September 30, 1996 is primarily attributable to the
Company's ongoing Dealer and independent alarm acquisition programs, and the
acquisition during the first quarter of fiscal 1996 of Gibraltar contracts,
which added approximately 1,250 retail subscribers and continues to add new
accounts through Gibraltar's internal sales force.
Total operating expenses increased by 208% and 131% to $871,000 and
$2,057,000 during the three and nine month periods ended September 30, 1996,
respectively, compared to $283,000 and $891,000 during the corresponding periods
of the prior fiscal year. Monitoring expenses increased 84% and 76% to $92,000
and $271,000, respectively, from $50,000 and $154,000 during the corresponding
periods in the prior fiscal year. The increase in monitoring costs from fiscal
1995 to fiscal 1996 was a result of the significant increase in monitoring
revenues (see previous paragraph). As a percentage of monitoring revenues,
however, monitoring expenses decreased to 13% and 14% during the three and nine
month periods ended September 30, 1996, respectively, compared to 19% and 23%
during the corresponding periods in the prior fiscal year. 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 without requiring substantial
equipment upgrades or significant personnel additions. 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 monitoring revenue.
The Company expects monitoring costs to continue to decrease as a percentage of
monitoring revenue until such time that the facility is at or near capacity.
Installation and service costs increased during the three and nine month periods
ended September 30, 1996 increased by 1,274% and 193% to $201,000 and $374,000,
respectively, from $15,000 and $128,000 during the corresponding periods in the
prior fiscal year. The increase in installation and service costs were the
result of increases in related revenues during the three and nine month periods
ended September 30, 1996 as compared to the corresponding periods in the prior
fiscal year (see previous paragraph). As a percentage of installation and
service revenue, such costs were 88% and 92% during the three and nine months
ended September 30, 1996, compared to 186% and 105% during the corresponding
periods in the prior fiscal year. The Company does not now, nor does it
anticipate in the future, generating any appreciable margins or profits from
installation and service activity, but such activity is necessary to the
generation and retention of alarm monitoring subscribers.
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<PAGE>
Total gross profit increased by 189% and 232% to $615,000 and $1.7
million, respectively, during the three and nine months ended September 30,
1996, compared to $213,000 and $499,000 during the corresponding periods of the
prior fiscal year. Gross profit from monitoring revenues increased by 167% and
221% to $587,000 and $1.6 million, respectively, during the three and nine
months ended September 30, 1996, compared to $220,000 and $505,000 during the
corresponding periods of the prior fiscal year. Gross profit from installation
and service revenues was $28,000 and $31,000, respectively, during the three and
nine month periods ended September 30, 1996, compared to losses from such
installation and service revenues less direct costs of $7,000 and $6,000 during
the corresponding periods of the prior fiscal year. See the previous two
paragraphs for a discussion of revenues and expenses of such monitoring and
installation and service activity.
General and administrative ("G&A") costs increased by 56% and 89% to
$358,000 and $857,000 during the three and nine month periods ended September
30, 1996, compared to $158,000 and $453,000 during the corresponding periods in
the prior fiscal year. Included in G&A is bad debt expense of $41,597 and
$50,091, respectively, during the three and nine months ended September 30,
1996, compared to $1,605 and $3,395 during the corresponding periods of the
prior fiscal year. The increased bad debt expense during 1996 over 1995 resulted
from increases in revenues and a tightened reserve policy. The increase in G&A
costs from fiscal 1995 to fiscal 1996 is related primarily to the Company's
growth in revenue, resulting in an increase in the Company's overhead cost
structure. As a percentage of total revenues, G&A decreased to 39% and 37%
during the three and nine month periods ended September 30, 1996 compared to 57%
and 58% during the corresponding periods in the prior fiscal year. 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 406% and 417%, to $185,000
and $439,000 during the three and nine month periods ended September 30, 1996,
respectively, compared to $37,000 and $85,000 during the corresponding periods
of the prior fiscal year. 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 $4.8
million at September 30, 1996 (such increase being consistent with the Company's
strategy of continued growth). The amortization of such costs is over 10 years,
unless a contract is canceled and not replaced by the Dealer, in which case the
remaining unamortized balance is written off.
Depreciation and amortization increased by 50% and 64% to $35,000 and
$116,500 during the three and nine month periods ended September 30, 1996,
respectively, compared to $24,999 and $71,000 during the corresponding periods
of the prior fiscal year. Such costs include depreciation of property and
equipment (the gross balance of which increased from $422,000 at December 31,
1995 to $679,000 at December 31, 1996 coincidental with the Company's continued
overall increase in size and also with 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.
19
<PAGE>
Interest expense increased 312% and 381% to $152,000 and $400,000
during the three and nine month periods ended September 30, 1996, compared to
$37,000 and $83,000 during the corresponding periods of the prior fiscal year.
The increase in interest expense was the result of additional debt incurred
primarily in connection with the cost of acquiring subscriber accounts. The
total number of retail subscriber accounts increased from approximately 4,000 as
of December 31, 1995 to approximately 6,800 as of September 30, 1996. The
majority of such subscriber acquisition costs, amounting to $2.8 million, were
financed by the Company's Senior lender. Total borrowings under the credit
facility increased from $1.9 million as of December 31, 1995 to $4.6 million as
of September 30, 1996.
Net loss increased by 322% and 14% to $178,000 and $220,000 during the
three and nine month periods ended September 30, 1996 compared to a net loss of
$42,000 and $193 during the corresponding periods in the prior fiscal year.
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 bear interest at 4% above the
prime rate, and the Company is required to pay a funding fee of 3% of any
amounts borrowed. The loan is collateralized by the Company's assets, and ten
percent (10%) of the loan is secured by the personal guaranties of Harold and
Sheilah Ginsburg, both of whom are directors, officers, and principal
shareholders of the Company. The Credit Facility has a maturity date of November
30, 1999. Credit availability under both the Credit Facility and the New Credit
Facility is subject to certain "Borrowing Base" limitations (as such term is
defined in the Credit Facility and would be defined under the contemplated New
Credit Facility).
The Company must renew with Heller, on an annual basis, its ability to
draw against any remaining unfunded portion of the Credit Facility. Heller's
current commitment to fund expires on December 31, 1997. The Company is
currently renegotiating the Credit Facility with Heller to increase the maximum
credit availability to $15 million. The maximum credit availability under the
New Credit Facility would be further increased to $20 million at such time as
the Company achieves a Tangible Net Worth (as defined under the contemplated
terms of the New Credit Facility) of $5 million, provided that there have been
no defaults. There can be no assurances, however, that the Company will
successfully renegotiate the credit facility, or that the Company will achieve a
Tangible Net Worth (as defined) of $5 million.
The Credit Facility includes customary covenants, including, but not
limited to, restrictions related to the incurrence of other debt, the
encumbrance or sale of the Company's assets, and the payment of dividends or
making of other distributions to the Company's shareholders and other financial
covenants.
Borrowings under the Credit Facility amounted to $4.6 million as of
September 30, 1996.
20
<PAGE>
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
Note 2 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Note 2 of Notes to Consolidated Financial Statements,
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.) The Credit Facility is used primarily for
acquisitions of customer subscriber accounts. Borrowings under the Credit
Facility amounted to $4.6 million as of September 30, 1996. The Company's
continued plan of growth through acquisitions of subscriber accounts is
contingent upon its ability to borrow under the Heller credit facility. The
Company believes it has an excellent relationship with Heller, and is presently
negotiating an increase in the facility to $15 million, and, subject to the
Company's achieving a Tangible Net Worth (as defined under the contemplated
terms of the New Credit Facility) of $5 million, would be further increased to
$20 million.
At September 30, 1996, the Company had working capital of $1.3 million,
and a current ratio of 3.2 to 1. Net cash flow provided by operating activities
during the nine months ended September 30, 1996 was $195,000. The Company
incurred a net loss of $220,000 during the nine months ended September 30, 1996;
however, included in such losses was depreciation and amortization totaling
$555,000. Net cash provided by operations also includes a cash outflow of
$234,000 relating to an increase in accounts receivable, such increase resulting
from the overall increase in revenues (the Company's accounts receivable
turnover ratio was 5.9 during the nine month period ended September 30, 1996,
compared to 4.0 during the corresponding period in the prior fiscal year). Net
cash provided by investing activities was $127,000 during the nine month period
ended September 30, 1996 comprised primarily of acquisition of customer accounts
of $2.8 million (consistent with the Company's strategy of continued growth)
offset by $3.2 million of cash received in the merger of Guardian and Everest.
Net cash provided by financing was $839,000, comprised primarily proceeds
borrowings under the Heller Credit Facility of $4.0 million, offset by
repayments under the Credit Facility of $1.3 million and a payment to a former
majority shareholder of Guardian as a return of capital of $1.7 million. For the
various reasons as specified, the Company's cash balance amounted to $1.2
million at September 30, compared to $14,000 at December 31, 1995.
21
<PAGE>
Total shareholder equity was $3.1 million as of September 30, 1996,
compared to $187,000 as of December 31, 1995. The net increase of $2.9 million
consisted of an increase of $4.7 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, and a decrease of $220,000 relating to the net loss incurred
during the nine months ended September 30, 1996.
The Company does not currently have any significant commitments for
capital outlays. However, the Company executed on February 7, 1997 a nonbinding
letter of intent to merge with another company. As of the date of filing this
Form 10-Q/A No. 2, the parties have not terminated the letter of intent, but are
rethinking their respective positions. The transaction is not probable at this
time.
Additionally, the Company executed on March 20, 1997 a nonbinding
letter of intent to acquire certain assets of another company, consisting
primarily of customer contracts. 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 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.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GUARDIAN INTERNATIONAL, INC.
Date: April 22, 1997
By: /s/ ROBERT K. NORRIS
-----------------------------------
Robert K. Norris
Chief Financial Officer and Senior
Executive Vice President
23
