SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-28490
GUARDIAN INTERNATIONAL, INC.
(Formerly Everest Security Systems Corporation, formerly Everest
Funding Corporation, formerly Burningham Enterprises, Inc.)
(Exact name of registrant as specified in its charter)
NEVADA 58-1799634
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3880 N. 28 TERRACE (954) 926-5200
HOLLYWOOD, FLORIDA 33020 (The Company's telephone number,
(Address of principal executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No[ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant 's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
The issuer's revenues for the 1996 fiscal year were $3,620,990.
The aggregate market value of voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold as of March 26,
1997 was $1,998,067.13.
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [ ] No [X]
As of March 31, 1997, there are 6,453,804 shares of Class A Voting
Common Stock and 484,035 shares of Class B Nonvoting Common Stock of the issuer
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer incorporates by reference in the exhibits set forth in Item
13, various documents filed as exhibits to the Company's Form 8-K filed
September 12, 1996, to report the merger of the issuer (then called Everest
Security Systems Corporation, and Guardian International, Inc., then a private
Florida corporation.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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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. Description of Property..........................................13
Item 3. Legal Proceedings................................................14
Item 4. Submission of Matters to a Vote of Security Holders..............14
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters............................................14
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.......................................19
Item 7. Financial Statements.............................................27
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................42
PART III
Item 9. Directors and Executive Officers of the Registrant...............42
Item 10. Executive Compensation...........................................44
Item 11. Security Ownership of Certain Beneficial Owners and
Management.....................................................45
Item 12. Certain Relationships and Related Transactions...................46
Item 13. Exhibits.........................................................47
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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 Annual Report on Form 10-KSB ("Annual Report"), "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 Annual Report,
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 Annual Report
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 in
this Item 1 under the caption "History".
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. As reflected in the Company's financial statements, set forth in
Item 7, below, the Company's gross revenues for Fiscal Year 1996 were above this
figure, standing at $3,620,990.
The Company consists of three business components: (i) Guardian
International ("Guardian International"), a division involved 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 involved in high grade
installations, and (iii) Specialty Devices, 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 are 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. under the caption "History" below) has ever had any net income, and
has a history of consistent and sometimes significant net losses. See Item 6. -
"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 ("CCTV"), 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. 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 CRTs (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 commonly
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
Annual Report, the Company had 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 an asset acquisition 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 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 Item 5, below.) Under the Renewed Credit Facility, the
maximum credit facility was increased from $7 million (see Item 6 - "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 filed August 14, 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.
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.
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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. 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 fiscal 1997, the Company
significantly downsized SDI as a result of SDI's poor operating performance, and
because the Company intends to focus on its core businesses of alarm
installation, monitoring, and related services.
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 has been
dissolved.
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 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.
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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 Item 9 contained herein. 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, see
Note 2. of Notes to Consolidated Financial Statements included in Item 7
contained herein.
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.
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
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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 has been replaced by the Company's Renewed Credit
Facility. See Item 1 - "Recent Developments," above, and Item 6 - "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 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
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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 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 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 (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.
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. In addition, the Company is evaluating
its current retail sales and marketing programs, and is 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
9
<PAGE>
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 6 , below) during Fiscal Year 1996.
The following table reflects the Company's customer account activity
during Fiscal Year 1996:
<TABLE>
<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 Item 6, 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:
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
-----
10
<PAGE>
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 Item 2, 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 fiscal year 1996. Such dealers and other
independent alarm companies are located throughout South Florida, Central
Florida, and the Tampa/Sarasota, Florida areas.
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.
11
<PAGE>
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 Item 1 - "Market
Overview and Trends," above, for a discussion of competition from large
companies in other industries). The following chart reflects the size of the
nine largest alarm companies. The information was obtained from the May 1996
issue of SDM MAGAZINE (formerly SECURITY DISTRIBUTING & MARKETING MAGAZINE).
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
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
12
<PAGE>
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 Item 1 - "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.
ITEM 2. 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
Item 12 -- "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
13
<PAGE>
($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.
During the second quarter of fiscal year 1997 the Company negotiated a
modification of the lease on its corporate headquarters to expand its
administrative office space by six thousand (6,000) square feet. The amended
lease is on terms no less favorable to the Company than under the previously
existing lease.
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.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through proxy
or otherwise, during the fourth quarter ended December 31, 1996. As set forth in
the Company's Definitive Information Statement on Form 14C filed with the SEC on
November 14, 1996 (the "Definitive Form 14C"), Richard, Harold, Sheilah and
Rhonda Ginsburg (the "Ginsburgs"), who owned or controlled sixty-two percent
(62%) of the outstanding shares of Common Stock as of September 10, 1996,
approved by written consent in November 1996, the filing of amendments to the
Company's Certificate of Incorporation (i) to change the name of the Company to
Guardian International, Inc. and (ii) to authorize two new classes of Common
Stock, Class A Voting Common Stock and Class B Nonvoting Common Stock and
establish the relative rights, powers and limitations of the Class A and Class B
Common Stock.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER 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.
14
<PAGE>
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.
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 are 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,
1977.
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 March 31, 1977, the shares were 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
15
<PAGE>
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 Item 6, below.
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.
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.
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.
<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 for $100,000 in J.A.
& Investments Ltd. 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.
16
<PAGE>
<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 [Cayman] Ltd. (4) 12/15/95 75,000 $150,000
International Treasury & Investments 12/15/95 75,000 $150,000
Ltd. (5)
Langara Capital Foundation (6)
12/15/95 75,000 $150,000
</TABLE>
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.
- ----------------------
(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.
17
<PAGE>
<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>
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 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
18
<PAGE>
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.
NUMBER OF
PURCHASER DATE OF PURCHASES COMMON SHARES
--------- ----------------- -------------
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
ITEM 6. 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 Annual Report
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,
19
<PAGE>
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 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 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.
20
<PAGE>
RESULTS OF OPERATIONS
As discussed in various portions of this Annual Report, including Note
2 of the Notes to Consolidated Financial Statements of the Company set forth in
Item 7 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 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 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.
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
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
----- -----
79.4 93.0
Income before interest expense,
amortization, and depreciation
(as a percentage of revenues) 20.6 7.0
Interest expense (as a percentage of revenues) 15.5 13.4
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
----- ----
36.9 31.8
---- ----
Net loss (as a percentage of revenues) (16.3) (24.8)
===== ====
</TABLE>
21
<PAGE>
Neither the Company nor the pre-merged Guardian International, Inc.
(see Item 1. under the caption "History") has ever had any net income, and has a
history or 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
contemplated terms of the Renewed Credit Facility) of $5,000,000)), which, the
Company believes, will 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 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
======== =======
22
<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 revenue, resulting in an increase in the Company's overhead
cost structure. Additionally, there were
23
<PAGE>
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
had $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 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
24
<PAGE>
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 included,
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. 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 Item 5, above.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in various portions of this Annual Report on Form 10-KSB,
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 terms of the Renewed Credit Facility. The Renewed Credit Facility is
used primarily for acquisitions of customer subscriber accounts. 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 under the Credit Facility) as of
August 31, 1997. The Company's continued plan of growth through acquisitions of
subscriber accounts is contingent upon its ability to borrow under the Heller
credit facility.
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
25
<PAGE>
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.
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.
26
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
GUARDIAN INTERNATIONAL, INC.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
27
<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
28
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
Assets
<S> <C> <C>
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 expense $ 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.
29
<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.
30
<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.
31
<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.
32
<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.
33
<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 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
34
<PAGE>
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 as consideration for their consent to the
merger and to amending certain covenants of 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.
1996 1995
---- ----
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
========== ==========
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
35
<PAGE>
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:
1996 1995
---- ----
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
======== ========
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.
36
<PAGE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1996 and 1995:
1996 1995
---- ----
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
======== ========
7. LONG TERM OBLIGATIONS
Long term obligations consist of the following at December 31, 1996 and
1995:
1996 1995
---- ----
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
========== ==========
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, 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.
37
<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 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.
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. 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 a reduction of shareholders' equity in the accompanying
consolidated balance sheet. Management is in the process of attempting to
collect the outstanding amounts.
38
<PAGE>
11. STOCK OPTIONS
The Company, through Everest (see Note 2), has issued stock options to
various key 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
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.
39
<PAGE>
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 majority shareholder of the Seller will enter into an
employment agreement for a period of four years to provide certain sales
and marketing duties. 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.
40
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF YEAR COST AND EXPENSES CHARGED TO OTHER DEDUCTIONS (B) END OF YEAR
----------------- ----------------- ACCOUNTS (A) -------------- -----------
------------
<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.
41
<PAGE>
ITEM 8. 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.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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.
NAME AGE POSITION
- ---------------------------------------------------------------
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
(1) Richard Ginsburg and Rhonda Ginsburg are siblings and are the children of
Harold and Sheilah Ginsburg.
42
<PAGE>
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 had a directorship 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 had a directorship 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.
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.
43
<PAGE>
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. Mr. Norris began his career with KMG Main
Hurdman in 1982 and worked in public accounting until 1988.
Mr. Norris has not held a directorship position with any other reporting
company.
ITEM 10. 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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.
(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.
44
<PAGE>
The Company also pays health insurance premiums of approximately $600 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
NAME NUMBER OF UNEXERCISED OPTIONS AT
---- FY-END
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 11. 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 children of
Harold and Sheilah Ginsburg. Harold and Sheilah and 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
45
<PAGE>
owned at the time by ITI for a period of two (2) years commencing on August
28, 1996. When these shares are counted towards Mr. Ginsburg's beneficial
ownership, he has 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 "Item 5," 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 as of March 31, 1997.
(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.
SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF IDENTITY GROUP OWNED OUTSTANDING SHARES
- ------------------------------------------ ----- ------------------
Heller Financial, Inc. (1) 484,035 6.98%
Royal Bank of Scotland 400,000 5.77
(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 Item 5, above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its corporate headquarters from Guardian
Investment, 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 transfer to certain
affiliates of the Company, see Item 5.
46
<PAGE>
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (SEE TABLE OF CONTENTS)
<S> <C>
3(i) Articles of Incorporation dated October 30, 1986 incorporated by reference to the Company's Form 10-SB filed
May 6, 1996
3(i)(a) Amendment to the Articles of Incorporation incorporated by reference to the Company's Form 10-SB filed May 6, 1996
3(i)(b) Amendment to the Articles of Incorporation incorporated by reference to the Company's Form 10-SB filed May 6, 1996
3(i)(c) Amendment to the Articles of Incorporation incorporated by reference to 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 the Company's Form 10-SB filed June 18, 1996 incorporated
by reference to Exhibit 4 of the Company's Annual Report on Form 10-KSB filed March 31, 1997
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 the Company's Form 10-SB filed May 6, 1996
10(b) Amendment to October 9, 1995 Share Purchase Agreement incorporated by reference to the Company's Form 10-SB filed
May 6, 1996
10(b)(1) Employment Agreement between Security Device Installers, Inc. and Frank Bauer incorporated by reference to 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 the Company's Form 10-SB/A
filed January 24, 1997
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 the Company's
Form 10-SB/A filed January 24, 1997
10(g) Employee Stock Option Agreement with Frank Bauer incorporated by reference to the Form 10-SB filed May 6, 1996
incorporated by reference to the Company's Form 10-SB/A filed January 24, 1997
47
<PAGE>
10(h) Loan and Security Agreement between Heller Financial, Inc. and Guardian International, Inc. and exhibits thereto
incorporated by reference to the Company's Form 10-SB/A filed January 24, 1997
10(j) Modification Agreement with Heller Financial, Inc. incorporated by reference to the Company's Form 10-SB/A filed
January 24, 1997
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
10(m) 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
16 Letter dated September 6, 1996 from Semple & Cooper, P.L.C., the Company's former certifying accountant, incorporated
by reference to the Company's Form 8-K filed September 12, 1996
21 Specialty Device Installers, Inc., a company duly incorporated under the laws of the State of Florida, is a
wholly-owned subsidiary of the Company
27 Financial Data Schedule
28 Guardian International, Inc. Incentive Stock Option Plan Incorporated by reference to the Form 10-SB filed May 6, 1996
</TABLE>
The Company did not file any reports on Form 8-K during the last
quarter of the period covered by this Annual Report.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 5th of
September, 1997.
GUARDIAN INTERNATIONAL, INC.
By: /S/ RICHARD GINSBURG
------------------------------------------
Richard Ginsburg
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/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
</TABLE>
49
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
21 Specialty Device Installers, Inc., duly incorporated
under the laws of the State of Florida, is a
wholly-owned subsidiary of the Company E-1
27 Financial Data Schedule
50
Exhibit 21
Specialty Device Installers, Inc., duly incorporated under the laws of
the State of Florida, is a wholly-owned subsidiary of the Company
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,037,861
<SECURITIES> 0
<RECEIVABLES> 735,495
<ALLOWANCES> 166,315
<INVENTORY> 53,793
<CURRENT-ASSETS> 1,627,777
<PP&E> 785,242
<DEPRECIATION> 300,383
<TOTAL-ASSETS> 8,981,979
<CURRENT-LIABILITIES> 786,557
<BONDS> 5,079,832
0
0
<COMMON> 6,938
<OTHER-SE> 3,108,652
<TOTAL-LIABILITY-AND-EQUITY> 8,981,979
<SALES> 3,620,990
<TOTAL-REVENUES> 3,620,990
<CGS> 1,425,248
<TOTAL-COSTS> 3,526,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124,015
<INTEREST-EXPENSE> 560,680
<INCOME-PRETAX> (590,348)
<INCOME-TAX> 0
<INCOME-CONTINUING> (70,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (590,348)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
