As Filed with the Securities and Exchange Commission on July 24, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GUARDIAN INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
Nevada 58-1799634
(State of other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
3880 N. 28th Terrace
Hollywood, Florida 33020-1118
(954) 926-5200
(Address, including zip code, and telephone number
including area code, of registrant's principal executive office)
RICHARD GINSBURG HARVEY GOLDMAN, ESQ.
President and Chief Executive Officer Steel Hector & Davis LLP
Guardian International, Inc. 200 South Biscayne Boulevard
3880 N. 28th Terrace 41st Floor
Hollywood, Florida 33020-1118 Miami, FL 33131-2398
(954) 926-5200 (305) 577-7011
(Name, addresses, including zip codes, and telephone numbers
including area codes. of agents for service)
It is respectfully requested that the Commission send
copies of all notices, orders and communications to:
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AT SUCH
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS THE SELLING
SECURITY HOLDERS SHALL DETERMINE.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OTHER THAN OFFERED ONLY IN CONNECTION
WITH DIVIDEND OR INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. [X]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(D)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER REGISTRATION STATEMENT FOR THE SAME
OFFERING. [ ]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH CLASS NUMBER OF SHARES OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED TO BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE (1)
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<S> <C> <C> <C> <C>
Class A Voting Common Stock, 1,981,700 1.47 2,913,099 $859
par value $.001 per share
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(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act on the basis of the
average of bid and asked price of the small business issuer's Class A
Common Stock through the National Quotation Bureau's National Daily
Quotation Price Sheets on July 21, 1998.
The Small Business Issuer hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Small
Business Issuer shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determined.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Subject to Completion, dated July 24, 1998
GUARDIAN INTERNATIONAL, INC.
1,981,700 SHARES OF CLASS A VOTING COMMON STOCK
PAR VALUE $.001 PER SHARE
This Prospectus relates to the public offering that may be made from
time to time of up to 1,981,700 shares (the "Shares") of Class A Voting Common
Stock, par value $.001 per share (the "Class A Common Stock"), of Guardian
International, Inc., a Nevada corporation (the "Company" or "Guardian") by, or
for the accounts of, the holders thereof (the "Selling Security Holders").
The Shares were issued by the Company as a portion of the consideration
for the acquisition by the Company of 100% of the common stock of Mutual Central
Alarm Services, Inc., a New York corporation ("Mutual"), pursuant to a Stock
Purchase Agreement effective as of February 1, 1998 between all of the Selling
Security Holders and the Company (the "Purchase Agreement"). The Shares were
exempt from registration under the Securities Act and applicable state
securities laws pursuant to Section 4(2) of the Securities Act.
The Class A Common Stock is quoted through the National Quotation
Bureau's National Daily Quotation Price Sheets under the symbol "GIIS." The
average of the bid and asked price for the Class A Common Stock through the
National Quotation Bureau's National Daily Quotation Price Sheets on July 21,
1998 was $1.47 per share.
THE CLASS A COMMON STOCK OFFERED HEREBY INVOLVES A SUBSTANTIAL DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Shares may be sold from time to time by the Selling Security
Holders or their transferees. No underwriting arrangements have been entered
into by the Selling Security Holders as of the date hereof. The distribution of
the Shares by the Selling Security Holders may be effected in one or more
transactions that may take place in the over-the-counter market, including
ordinary broker's transactions, privately negotiated transactions, or through
sales to one or more dealers for resale of such Shares as principals, at
prevailing market prices at the time of sale, prices related to such prevailing
market prices, or negotiated prices. Underwriting discounts and usual and
customary or specifically negotiated brokerage fees or commissions will be paid
by the Selling Security Holders in connection with sales of the Shares. See
"Plan of Distribution."
The Company will not receive any proceeds from the sale of the Shares.
By agreement with the Selling Security Holders, the Company will pay all of the
expenses incident to the registration of the Shares under the Securities Act
(other than the Selling Security Holders' pro rata share of underwriter's
commissions and discounts, if any, which is to be paid by the Selling Security
Holders), estimated to be approximately $25,859.
PROCEEDS TO ISSUER OR
PRICE TO PUBLIC OTHER PERSONS
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Per Share
Total (1)
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(1) The total amount of expenses incurred or expected to be incurred by the
Company in connection with the issuance and distribution of the
securities offered hereby is $25,859. See "Other Expenses of Issuance
and Distribution" below for an itemization of this total.
The Selling Security Holders, and any broker-dealers, agents, or
underwriters through whom the Shares are sold, may be deemed "underwriters"
within the meaning of the Securities Act with respect to securities offered by
them, and any profits realized or commissions received by them may be deemed
underwriting compensation.
THE DATE OF THIS PROSPECTUS IS JULY ___, 1998.
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AVAILABLE INFORMATION
Guardian is subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and files reports and other information
with the Securities and Exchange Commission (the "Commission") in accordance
therewith. Such reports and other information filed by Guardian are available
for inspection and copying at the public reference facilities of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at 7 World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material may be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants, including Guardian, that file
electronically with the Commission.
This Prospectus constitutes part of a Registration Statement which the Company
has filed with the Commission under the Securities Act with respect to the
Shares. This Prospectus omits certain of the information contained in the
Registration Statement, and reference is made to the Registration Statement and
related Exhibits thereto for further information with respect to the Company and
the securities offered hereby. Such additional information can be obtained from
the Commission's office in Washington, D.C. Any statements contained in this
Prospectus concerning the provisions of any documents are not necessarily
complete, and in each instance, reference is made to the copy of such document
filed as an Exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
REPORTS TO SECURITY HOLDERS
The Company will send a copy of its Annual Report on Form 10-KSB to security
holders in conjunction with the filing as of March 31, 1998 with the Commission
of its Form 10-KSB for fiscal year 1997. The Annual Report includes audited
financial statements
Additional copies of the Annual Report can be obtained from Guardian
International, Inc., 3880 North 28th Terrace, Hollywood, Florida 33020-1118;
Attention: Chief Financial Officer. The Company's telephone number is: (954)
926-5200.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company herein or orally, whether in presentations, in
response to questions or otherwise. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, identified through the use
of words or phrases such as the Company or management "believes," "expects,"
"anticipates," "hopes," words or phrases such as "will result," "are expected
to," "will continue," "is anticipated," "estimated," "projection" and "outlook,"
and words of similar import) are not historical facts and may be
forward-looking.
Such forward-looking statements involve estimates, assumptions, and
uncertainties, and, accordingly, actual results could differ materially from the
those expressed in the forward-
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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, internally generated new accounts
and strategic alliances which lend to the Company's appeal as an acquirer; (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, (iv) increased false
alarm fines and/or the possibility of reduced public response to alarm signals,
(v) changes in local, state and federal regulations, (vi) availability of
qualified personnel, (vii) competitive factors in the industry, including
additional competition from existing competitors or future entrants to the
industry, (viii) social and economic conditions (ix) natural disasters and (x)
other risk factors described in the Company's reports filed with the Commission
from time to time. See "Risk Factors" below.
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.
RISK FACTORS
Prospective purchasers of shares of Common Stock offered hereby should
carefully review the information contained elsewhere in this Prospectus, in the
accompanying Prospectus Supplement and incorporated by reference herein or
therein and should carefully consider the following risk factors. These risk
factors may contain forward-looking statements. See "Cautionary Note" above.
IMPACT OF ACQUISITION STRATEGY ON OPERATIONS
A principal element of the Company's business strategy is to grow
rapidly by acquiring portfolios of alarm monitoring accounts. Acquisitions have
been the primary source of the Company's growth. Since January 1996, Guardian
has completed 12 transactions, thereby adding approximately 13,400 subscribers.
These acquisitions have placed and will continue to place substantial demands on
the Company's management, operational resources and financial and internal
control systems. The Company's future operating results will depend in part on
the Company's ability to integrate acquired businesses efficiently and to
continue to implement and improve the Company's operating and financial controls
and to expand, train and manage the Company's expanding employee base.
Significant changes in quarterly revenues and costs may result from the
Company's execution of its business strategy, resulting in fluctuating financial
results. Additionally, management of growth may limit the time available to the
Company's management to attend to other operational, financial and strategic
issues. Moreover, due to the continuing consolidation of the security alarm
monitoring industry and the acquisition by the Company and other alarm companies
of a number of large portfolios of subscriber accounts, there may in the future
be fewer large portfolios of subscriber accounts available for acquisition. The
Company faces competition for the acquisition of portfolios of subscriber
accounts, and may be required to offer higher prices for subscriber accounts it
acquires in the future than the
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Company has offered in the past. See "Description of Business Competition."
There can be no assurance that the Company will be able to find acceptable
acquisition candidates or, if such candidates are identified, that acquisitions
can be consummated on terms acceptable to the Company.
Acquisitions of portfolios of subscriber accounts involve a number of
risks, including the possibility of unanticipated problems not discovered prior
to the acquisition, higher than expected account attrition and the diversion of
management's attention from other business activities in order to focus on the
integration of accounts. For acquisitions that are structured as stock purchases
of other companies, the Company may assume unexpected liabilities and must
dispose of unnecessary or undesirable assets of the acquired companies. Because
the Company's primary consideration in acquiring a portfolio of subscriber
accounts is the amount of cash flow that can be derived from the monthly
recurring revenues ("MRR") associated with the purchased accounts, the price
paid by the Company is customarily directly tied to such MRR. The price paid
varies based on the number and quality of accounts being purchased from the
seller, the historical activity of such accounts and other factors. The seller
typically does not have audited historical financial information with respect to
the acquired accounts. In making acquisition decisions, the Company generally
has relied on management's knowledge of the industry, due diligence procedures
and representations and warranties of the sellers. There can be no assurance
that such representations and warranties are true and complete or, if such
representations and warranties are inaccurate, that the Company will be able to
uncover such inaccuracies in the course of its due diligence or recover damages
from the seller in an amount sufficient to fully compensate the Company for any
resulting losses. The Company expects that future acquisitions will present at
least the same risks to the Company as its prior acquisitions.
An important aspect of the Company's acquisition program is the
integration of subscriber accounts into the Company's operations after purchase.
Depending on the size, frequency and location of acquisitions, the integration
of subscribers may adversely affect the provision of field repair services to
existing subscribers, which may cause subscriber attrition to increase. In
addition, if the Company's corporate or branch operations fail to integrate a
substantial portion of or do not adequately service acquired subscriber
accounts, the Company may experience higher attrition in the future.
GEOGRAPHIC CONCENTRATION
The Company's existing subscriber base is geographically concentrated
predominantly in Florida and New York. Accordingly, the performance of the
Company may be adversely affected by regional or local economic and
environmental conditions, including weather conditions.
The Company may from time to time make acquisitions in regions outside
of its current operating area. The acquisition of companies in other regions, or
in metropolitan areas in which the Company does not currently have subscribers,
requires an investment by the Company. In order for the Company to expand
successfully into a new area, the Company must acquire companies with a
sufficient number and density of subscriber accounts in such area to support the
investment. There can be no assurance that the Company will find such
opportunities or that an expansion into new geographic areas will generate
operating profits.
HISTORY OF LOSSES
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The Company incurred a net loss of $1,574,091 in 1997 and a net loss of
$590,348 in 1996. For the three months ended March 31, 1998, the Company
incurred a net loss of $242,112 compared to a net loss of $202,044 for the same
period in 1997. These losses reflect, among other factors, substantial charges
incurred by the Company for amortization of purchased subscriber accounts,
interest incurred on indebtedness and non-recurring charges. Such charges, with
the exception of the non-recurring charges, will increase as the Company
continues to purchase subscriber accounts, if the Company's indebtedness
increases, or if interest rates increase. The Company's earnings have been
insufficient to cover its fixed charges since the Company was formed, and there
can be no assurance that the Company will attain profitable operations on an
annual basis or at all.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
Historically, the Company's quarterly operating results have fluctuated
significantly as a result of a number of factors, including increases and
decreases in recurring monthly revenues, timing of acquisitions, rate of
cancellation of existing contracts and certain non-recurring expenses, none of
which can be predicted with any degree of certainty.
SIGNIFICANT OWNERSHIP OF CLASS A COMMON STOCK BY CERTAIN STOCKHOLDERS
Western Resources, Inc., a Kansas Corporation, through its wholly-owned
subsidiary, Westar Capital, Inc., owns a controlling interest in Protection One,
Inc., a Delaware corporation. Protection One, Inc., in turn, through its
wholly-owned subsidiary, Westar Security, presently holds 41.6% of the
outstanding shares of Class A Common Stock on a fully diluted basis. Western
Resources, Inc., Westar Capital, Protection One, Inc. and Westar Security are
collectively referred to herein as "Western". For purposes of determining this
percentage of ownership, the term "fully diluted" includes shares of stock which
are immediately convertible into Class A Common Stock and outstanding options
granted to employees of the Company to purchase shares of Class A Common Stock
which are immediately exercisable. Western acquired (a) 2,500,000 shares of
Class A Common Stock and 1,875,000 shares of Series A 9 3/4% Convertible
Cumulative Preferred Stock, par value $.001 per share, pursuant to a Stock
Subscription Agreement dated as of October 14, 1997 between the Company and
Western for a total investment of $7,500,000 (the "1997 Investment"); (b)
1,600,000 shares of Series B 10 1/2% Convertible Cumulative Preferred Stock, par
value $.001 per share (the "Series B Preferred Stock" and together with the
Series A Preferred Stock, the "Preferred Stock"), for $4,000,000 pursuant to a
Stock Subscription Agreement dated as of February 23, 1998 between the Company
and Western and (c) 460,000 shares of Class A Common Stock purchased on the open
market. In addition, 172,578 dividend shares of Preferred Stock have been issued
to Western as of July 1, 1998. Each share of the Preferred Stock is immediately
convertible to Class A Common Stock on a share-for-share basis.
Until the Preferred Stock is converted, the holders of Preferred Stock
shall be entitled to vote with the Common Stock on all matters required or
permitted to be submitted to the stockholders of the Company for their approval,
but not as a separate class, and shall have such other voting rights as
specifically provided by Nevada law. Each issued and outstanding share of
Preferred Stock shall have one vote.
As part of the 1997 Investment, Western entered into a Stockholders
Agreement with the Company and Harold Ginsburg, Sheilah Ginsburg, Richard
Ginsburg and Rhonda Ginsburg (collectively, the "Ginsburgs"), who were at that
time the majority shareholders of the Company,
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dated as of October 21, 1997 (the "Stockholders Agreement"). Under the terms of
the Stockholders Agreement, the number of directors is currently set at eight,
but may increase to nine directors if Western exercises its right under the
Stockholders Agreement to convert the Preferred Stock into shares of Class A
Common Stock (the "Conversion"). Prior to Conversion, Western may nominate up to
two members of the eight-member Board of Directors of the Company (the "Board")
and up to two Independent Directors (defined in the Stockholders Agreement)
mutually with the Ginsburgs. Upon Conversion, Western is entitled to nominate up
to three directors to the nine-member Board and to nominate up to three
Independent Directors mutually with the Ginsburgs.
Pursuant to the terms of the Stockholders Agreement, Western has the
following rights:
(a) Preemptive rights to purchase its pro rata share of any equity
offerings of the Company on the same terms, but only if such
offerings (individually or in the aggregate) would reduce
Western's percentage ownership of the Company's outstanding
equity securities to less than 35%, on a fully diluted basis;
(b) Tag-along rights (on a pro rata basis) if the Majority
Stockholders, as defined in the Stockholders Agreement, effect
a sale or other transfer of more than half of their Common
Stock holdings; and
(c) A right to match any third-party cash offer for the purchase
of 100% of the Common Stock or substantially all of the assets
of the Company for a period of 30 days.
Pursuant to the terms of the Stockholders Agreement, without the prior
approval of Western, the Company shall not (a) so long as shares of Series A or
Series B Preferred Stock are outstanding, (i) issue securities on a parity with
or senior to the Series A Preferred Stock as to dividends and liquidation rights
or (ii) authorize or make any dividends or other distributions to the holders of
Common Stock, and (b) so long as Western or its affiliates own or control at
least 15% of the outstanding equity securities of the Company, issue any equity
securities senior to the Common Stock of the Company. In addition, if an
independent committee of the Board recommends the acceptance of a bona fide
third-party cash offer for the purchase of 100% of the Common Stock or all or
substantially all of the assets of the Company, Western agrees to vote in favor
of the offer or to purchase the Common Stock not already owned by Western on
substantially the same terms and conditions of such offer.
In addition, Harold Ginsburg, Chairman of the Board and Director of the
Company, owns 6.3% of the outstanding shares of Class A Common Stock and Sheilah
Ginsburg, Secretary and Director of the Company, owns 5.7% of the outstanding
shares of Class A Common Stock, on a fully diluted basis. Harold Ginsburg and
Sheilah Ginsburg are husband and wife. Their children, Richard Ginsburg and
Rhonda Ginsburg, own 4.1% and 4.0%, respectively, of Class A Common Stock.
Collectively, the Ginsburgs own 20.0% of the Class A Common Stock.
There can be no assurance that the individual and cumulative impact of
the large ownership positions of Western and of the Ginsburgs and the rights
accompanying the Series A and Series B Preferred Stock will not make the Company
a less attractive investment for future investors and/or public shareholders.
NEED FOR ADDITIONAL CAPITAL
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The Company's purchases of subscriber accounts through acquisitions of
portfolios of subscriber accounts have generated cash needs that exceed the
Company's net cash provided by operating activities. The Company intends to
continue to pursue subscriber account growth through acquisitions. As a result,
the Company will be required to seek additional funding through additional
borrowings under the Renewed Credit Facility, defined below in "Risk Factors -
Leverage", and the sale of additional securities in the future, which may lead
to higher leverage or the dilution of then existing holders' investment in the
Common Stock. Any inability of the Company to obtain funding through external
financing is likely to adversely affect the Company's ability to increase its
subscribers, revenues and cash flows from operations. There can be no assurance
that external funding will be available to the Company on terms considered
favorable by the Company or at all.
ATTRITION OF SUBSCRIBER ACCOUNTS
The Company experiences attrition of subscriber accounts as a result
of, among other factors, relocation of subscribers, adverse financial and
economic conditions, and competition from other alarm service companies. In
addition, the Company experiences attrition of newly acquired accounts to the
extent the Company does not integrate such accounts or does not adequately
service those accounts. An increase in attrition rates could have a material
adverse effect on the Company's revenues and earnings.
When acquiring accounts, the Company seeks to withhold a portion of the
purchase price as a partial reserve against excess subscriber attrition. If the
actual attrition rate for the accounts acquired is greater than the rate assumed
by the Company at the time of the acquisition, and the Company is unable to
recoup its damages from the portion of the purchase price held back from the
seller, such attrition could have a material adverse effect on the Company's
financial condition or results of operations. There can be no assurance that the
Company will be able to obtain purchase price holdbacks in future acquisitions,
particularly acquisitions of large portfolios. The Company has no assurance that
actual account attrition for acquired accounts will not be greater than the
attrition rate assumed or historically incurred by the Company. In addition,
because some acquired accounts are prepaid on an annual, semiannual or quarterly
basis, attrition may not become evident for some time after an acquisition is
consummated.
As of March 31, 1998, the cost of subscriber accounts, net accumulated
amortization, was $25,692,566, which constituted approximately 78% of the book
value of the Company's total assets. The Company's purchased subscriber accounts
are amortized on a straight-line basis over the estimated life of the related
revenues (generally ten years). The effects of gross subscriber attrition has
historically been offset by adding new accounts from subscribers who move into
premises previously occupied by prior subscribers and in which security alarm
systems are installed, conversions of accounts that were previously monitored by
other alarm companies to the Company's monitoring services, and accounts for
which the Company obtains a guarantee from the seller that provides for the
Company to "put" back to the seller canceled accounts. The resulting figure is
used as a guideline to determine the estimated life of subscriber revenues. It
is the Company's policy to review periodically actual account attrition and,
when necessary, adjust the remaining estimated lives of the Company's purchased
accounts to reflect assumed future attrition. There could be a material adverse
effect on the Company's results of operations and financial condition if actual
account attrition significantly exceeds assumed attrition and the Company has to
shorten the period over which it amortizes the cost of purchased subscriber
accounts.
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POSSIBLE ADVERSE EFFECT OF "FALSE ALARM" ORDINANCES
According to the Company's experience and industry data, the majority
of alarm activations that result in the dispatch of police or fire department
personnel are not emergencies, and thus are "false alarms." Significant concern
has arisen in certain municipalities about this high incidence of false alarms.
This concern could cause a decrease in the likelihood or timeliness of police
response to alarm activations and thereby decrease the propensity of consumers
to purchase or maintain alarm monitoring services.
A number of local governmental authorities have considered or adopted
various measures aimed at reducing the number of false alarms. Such measures
include (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms, and (v) requiring further
verification of an alarm signal before the police will respond. Enactment of
such measures could adversely affect the Company's future business and
operations.
POSSIBLE ADVERSE EFFECT OF FUTURE GOVERNMENT REGULATIONS, RISKS OF LITIGATION
The Company's operations are subject to a variety of laws, regulations
and licensing requirements of federal, state and local authorities. In certain
jurisdictions, the Company is required to obtain licenses or permits, to comply
with standards governing employee selection and training, and to meet certain
standards in the conduct of the Company's business. The loss of such licenses,
or the imposition of conditions to the granting or retention of such licenses,
could have a material adverse effect on the Company.
The Company's advertising and sales practices are regulated by both the
Federal Trade Commission and state consumer protection laws. Such regulations
include restrictions on the manner in which the Company promotes the sale of
security alarm systems and the obligation of the Company to provide purchasers
of alarm systems with certain rescission rights. While the Company believes that
it has complied with these regulations in all material respects, there can be no
assurance that none of these regulations was violated in connection with the
solicitation of the Company's existing subscriber accounts, particularly with
respect to accounts acquired from third parties, or that no such violation will
occur in the future.
LIABILITY FROM OPERATIONS
The nature of the services provided by the Company potentially exposes
it to greater risks of liability for employee acts or omissions or system
failure than may be inherent in other businesses. Most of the Company's alarm
monitoring agreements and other agreements pursuant to which the Company sells
its products and services contain provisions limiting liability to subscribers
in an attempt to reduce this risk. However, in the event of litigation with
respect to such matters, there can be no assurance that these limitations will
be enforced, and the costs of such litigation could have an adverse effect on
the Company.
The Company's alarm response and patrol services require Company
personnel to respond to emergencies that may entail risk of harm to such
employees and to others. In most
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cities in which the Company provides such services, the Company's patrol
officers carry firearms, which may increase such risk. Although the Company
screens and trains its employees, the provision of alarm response service
subjects the Company to greater risks related to accidents or employee behavior
than other types of businesses. Reduction of police participation in the
handling of emergencies could expose the Company's patrol officers to greater
hazards and further increase the Company's risk of liability.
The Company carries insurance of various types, including general
liability and errors and omissions insurance. The loss experience of the Company
and other security service companies may affect the availability and cost of
such insurance. Certain of the Company's insurance policies and the laws of some
states may limit or prohibit insurance coverage for punitive or certain other
types of damages, or liability arising from gross negligence.
DEPENDENCE UPON SENIOR MANAGEMENT
The success of the Company's business is dependent upon the active
participation of the executive officers of the Company, in particular Messrs.
Richard Ginsburg, Darius G. Nevin, and Joel A. Cohen, the latter two of whom
have only recently been employed by the Company. In the event that the services
of certain of such officers are lost for any reason, the Company's business may
be materially and adversely affected.
LEVERAGE
The Company has substantial indebtedness. As of June 30, 1998, the
Company had approximately $12.2 million of indebtedness outstanding under its
existing credit facility (the "Renewed Credit Facility"), as amended, with
Heller Financial, Inc. ("Heller"), and approximately $7.8 million was available
for future borrowings under the Renewed Credit Facility. See "Management's
Discussion and Analysis or Plan of Operation Credit Facility". The Company may
incur additional indebtedness in the future, subject to certain limitations
contained and to be contained in the credit agreements governing the Company's
indebtedness, in order to fund future additions of subscriber accounts through
purchases of subscriber account portfolios as part of its business strategy. See
"Impact of Acquisition Strategy on Operations" above. To the extent the Company
will need to rely on funds under the Renewed Credit Facility beyond its current
maturity of May 2001, the Company believes that it will be able to obtain
further extensions of the maturity date of the Renewed Credit Facility from time
to time, or will be able to refinance the Renewed Credit Facility prior to its
present maturity date, although there can be no assurance that the Company will
be able to do so. The consolidated debt of the Company bears interest at
floating rates; therefore, the financial results of the Company are and will
continue to be affected by changes in prevailing interest rates. As of June 30,
1998, the Company's approximately $12.2 million of debt outstanding under the
Renewed Credit Facility was bearing interest at floating interest rates.
The Company's degree of leverage may have important consequences to
holders of the Common Stock, including the following: (i) a substantial portion
of the Company's cash flow from operations is, and will continue to be,
dedicated to the payment of the principal and interest on the Company's
indebtedness, thereby reducing the funds available to the Company for its
operations and future growth or other business opportunities; (ii) the Company's
ability to obtain additional financing in the future for working capital, the
acquisitions of portfolios of subscriber accounts, capital expenditures, general
corporate purposes or other purposes may be impaired; (iii) the Renewed Credit
Facility contains, and is expected to continue to contain, certain
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<PAGE>
restrictive covenants that require the Company to obtain the consent of the
lenders under the Renewed Credit Facility to certain actions by the Company and
to maintain certain financial ratios in order to undertake significant
acquisitions of portfolios of subscriber accounts, all of which impose
limitations on the Company's ability to execute its business strategy; (iv) the
Company's borrowings under the Renewed Credit Facility are at floating rates of
interest, causing the Company to be vulnerable to increases in interest rates;
(v) the Company may be more vulnerable to a downturn in the Company's business
or the economy generally; and (vi) the Company's ability to compete against
other less leveraged companies may be adversely affected.
IMPACT OF ACCOUNTING DIFFERENCES FOR ACCOUNT PURCHASES AND NEW INSTALLATIONS
A difference between the accounting treatment of the purchase of
subscriber accounts (including both purchases of subscriber account portfolios
and purchases under ongoing agreements with independent alarm dealers) and the
accounting treatment of the generation of subscriber accounts through direct
sales by the Company's sales force has a significant impact on the Company's
results of operations. All direct external costs associated with purchases of
subscriber accounts are capitalized and amortized over 10 years on a
straight-line basis. Also included in capitalized costs are certain acquisition
transition costs that reflect the Company's estimate of costs associated with
incorporating the purchased subscriber accounts into the Company's operations.
Such costs include costs incurred by the Company in fulfilling the seller's
pre-acquisition obligations to the acquired subscribers, such as providing
warranty repair services. In contrast, the Company's costs related to the sales
and marketing of new alarm monitoring systems generated by the Company's sales
force, as well as indirect overhead incurred in support of such activities, are
expensed in the period in which such activities occur. In certain of the market
segments in which the Company competes, the Company's sales, marketing and
indirect overhead expenses for new systems exceed installation revenues. In the
aggregate, however, the Company's installation revenues exceed sales, marketing
and indirect overhead expenses for new systems.
There can be no assurance that the Company will not increase its
emphasis on the marketing and sales of lower revenue new alarm system
installations in the future, particularly in connection with a joint venture or
other strategic alliance. Any such increase could adversely affect reported
results.
COMPETITION
The security alarm industry is highly competitive and highly
fragmented. The Company competes with major companies with substantial financial
resources, including: ADT Operations Inc., a subsidiary of Tyco International,
Inc.; Protection One, Inc., a subsidiary of Western Resources, Inc. (see "Risk
Factors" "Significant Ownership of Class A Voting Common Stock by Certain
Shareholders"); the security subsidiaries of the Ameritech Corporation; Brinks
Home Security Inc., a subsidiary of The Pittston Services Group; Alarmguard
Holdings, Inc.; Response USA, Inc.; the security subsidiary of Entergy
Corporation; Security Associates International; and AFA Protective, Inc. Other
alarm service companies have adopted a strategy similar to the Company's that
entails the aggressive purchase of alarm monitoring accounts both through
acquisitions of account portfolios and through dealer programs. Some competitors
have greater financial resources than the Company, or may be willing to offer
higher prices than the Company is prepared to offer, to purchase subscriber
accounts. The effect of such competition may be to reduce the purchase
opportunities available to the Company, thus reducing the Company's rate of
growth, or to increase the price paid by the Company for subscriber accounts,
which would
11
<PAGE>
adversely affect the Company's return on investment in such accounts and the
Company's results of operations.
POSSIBLE IMPACT OF LOWER CRIME RATES.
For the past several years crime rates have been dropping in the United
States. Particularly relevant to the Company's business is the decrease in the
number of burglaries. While the number of homes and businesses with installed
alarm systems has continued to increase even as crime rates have decreased,
there can be no assurance that this will continue to be the case. Any
significant decrease in the number of homes and businesses installing new alarm
systems could have a material adverse effect on the Company's business.
IMPACT OF DECLINES IN NEW CONSTRUCTION OF SINGLE-FAMILY DWELLINGS
The Company derives a significant percentage of its
internally-generated sales of new monitoring accounts from newly constructed
single-family residences in planned communities or developments. Demand for
alarm monitoring services in the single-family alarm monitoring market is tied
to the construction of new single-family dwellings. The Company believes that
developers of single-family communities view the provision of alarm monitoring
services as an added feature that can be used in marketing newly developed
communities. Accordingly, the Company anticipates that the growth in the
single-family alarm monitoring market will continue so long as there is a demand
for new single-family developments. However, the real estate market in general
is cyclical and, in the event of a decline in the market for new single-family
dwellings, it is likely that demand for the Company's alarm monitoring services
to single-family dwellings would also decline, which could negatively impact the
Company's results of operations.
POSSIBLE ANTI-TAKEOVER EFFECTS OF NEVADA LAW
The terms of Chapter 78 of the Nevada Revised Statutes ("Chapter 78")
apply to the Company. Under certain circumstances, the following selected
provisions of Chapter 78 may delay or make more difficult acquisitions or
changes of control of the Company. The Articles of Incorporation and Amended and
Restated By-Laws (the "By-Laws") of the Company do not exclude the Company from
such provisions of Chapter 78. Such provisions may make it more difficult to
accomplish transactions which stockholders may otherwise deem to be in their
best interests. Such provisions may also have the effect of preventing changes
in the management of the Company.
CONTROL SHARE ACQUISITIONS
Pursuant to Sections 78.378 to 78.3793 of Chapter 78, an "acquiring
person," who acquires a "controlling interest" in an "issuing corporation," may
not exercise voting rights on any "control shares" unless such voting rights are
conferred by a majority vote of the disinterested stockholders of the issuing
corporation at a regular meeting of the stockholders or a special meeting of
such stockholders held upon the request and at the expense of the acquiring
person. In the event that the control shares are accorded full voting rights,
and the acquiring person acquires control shares with a majority or more of all
the voting powers, any stockholder, other than the acquiring person, who does
not vote in favor of authorizing voting rights for the control shares is
entitled to demand payment for the fair value of his or her shares, and the
corporation must comply with the demand.
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<PAGE>
For purposes of the above provisions, "acquiring person" means (subject
to certain exceptions) any person who, individually or in association with
others, acquires or offers to acquire, directly or indirectly, a controlling
interest in an issuing corporation. "Controlling interest" means the ownership
of outstanding voting shares of an issuing corporation sufficient to enable the
acquiring person, individually or in association with others, directly or
indirectly, to exercise (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority and/or (iii) a majority or more of
the voting power of the issuing corporation in the election of directors. Voting
rights must be conferred by a majority of the disinterested stockholders as each
threshold is reached and/or exceeded. "Control shares" means those outstanding
voting shares of an issuing corporation which an acquiring person acquires or
offers to acquire in an acquisition or within 90 days immediately preceding the
date when the acquiring person became an acquiring person. "Issuing corporation"
means a corporation that is organized in Nevada, has 200 or more stockholders
(at least 100 of whom are stockholders of record and residents of Nevada) and
does business in Nevada directly or through an affiliated corporation.
The above provisions do not apply if the articles of incorporation or
by-laws of the corporation in effect on the 10th day following the acquisition
of a controlling interest by an acquiring person provide that said provisions do
not apply. However, the foregoing provisions do not apply to Nevada companies
that have less than 100 stockholders of record resident in Nevada. As noted
above, the Company's Articles of Incorporation and By-Laws do not exclude the
Company from the restrictions imposed by such provisions.
CERTAIN BUSINESS COMBINATIONS
Subject to certain conditions, Sections 78.411 to 78.444 of Chapter 78
restrict the ability of a "resident domestic corporation" to engage in any
combination with an "interested stockholder" for three years following the
interested stockholder's date of acquiring the shares that cause such
stockholder to become an interested stockholder. The restrictions do not apply
if the combination or the purchase of shares by the interested stockholder on
the interested stockholder's date of acquiring the shares that caused such
stockholder to become an interested stockholder is approved by the board of
directors of the resident domestic corporation before that date. If the
combination was not previously approved, the interested stockholder may effect a
combination after the three-year period only if such stockholder receives
approval from a majority of the disinterested shares or the offer meets certain
fair price criteria.
For purposes of the above provisions, "resident domestic corporation"
means a Nevada corporation that has 200 or more stockholders. "Interested
stockholder" means any person, other than the resident domestic corporation or
its subsidiaries, who is (i) the beneficial owner directly or indirectly, of 10%
or more of the voting power of the outstanding voting shares of the resident
domestic corporation or (ii) an affiliate or associate of the resident domestic
corporation and, at any time within three years immediately before the date in
question, was the beneficial owner, directly or indirectly, of 10% or more of
the voting power of the then outstanding shares of the resident domestic
corporation.
The above provisions do not apply to corporations that so elect in a
charter amendment approved by a majority of the disinterested shares. Such a
charter amendment, however, would not become effective for 18 months after its
passage and would apply only to stock acquisitions occurring after its effective
date. As noted above, the Company's Articles of Incorporation and By-Laws do not
exclude the Company from the restrictions imposed by such provisions.
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<PAGE>
DIRECTORS' DUTIES
Section 78.138 of Chapter 78 allows directors and officers, in
exercising their respective powers with a view to the interests of the
corporation, to consider the interests of the corporation's employees,
suppliers, creditors and customers, the economy of the state and the nation, the
interests of the community and of society and the long and short-term interests
of the corporation and its stockholders, including the possibility that these
interests may be best served by the continued independence of the corporation.
Directors may resist a change or potential change in control if the directors,
by a majority vote of a quorum, determine that the change or potential change is
opposed to or not in the best interest of the corporation. In so determining,
the board of directors must consider the interests set forth above or have
reasonable grounds to believe that, within a reasonable time, the debt created
as a result of the change in control would cause the assets of the corporation
or any successor to be less than the liabilities or would render the corporation
or any successor insolvent or lead to bankruptcy proceedings.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
As of July 1, 1998, the Company had 11,273,241 shares of Class A Common
Stock outstanding. In addition, 759,720 shares of Class A Common Stock are
reserved for issuance upon exercise of outstanding options, including 575,000
shares of Class A Common Stock which are reserved for issuance upon exercise of
options which were granted to Douglas T. Lake and granted pursuant to Employment
Agreements with Richard Ginsburg, Darius G. Nevin, Terry E. Akins, Joel A. Cohen
and Raymond L. Adams. Currently, a majority of the shares of Class A Common
Stock outstanding are "restricted stock" as that term is defined under Rule 144
promulgated under the Securities Act ("Rule 144"), including (i) shares held at
any time by an "affiliate" of the Company, as such term is defined under Rule
144 and (ii) certain shares subject to registration rights agreements described
below, except for approximately 3,000,000 shares of Class A Common Stock which
are freely tradeable. The possibility that substantial amounts of the restricted
stock and other shares of Class A Common Stock may be sold in the public market
could have a material adverse effect on prevailing market prices of the Class A
Common Stock. Such sales could impair the Company's ability to raise capital or
make acquisitions through the sale of its equity securities.
Pursuant to the terms of its Registration Rights Agreement with the
Company dated October 21, 1997 and amended on February 23, 1998, Western has
been granted certain registration rights with respect to its shares of Preferred
Stock presently held. Pursuant to the terms of the registration rights under the
Amended and Restated Loan and Security Agreement dated as of February 23, 1998
between the Company and Heller, the Company's primary lender, Heller has also
been granted certain registration rights with respect to the 634,035 shares of
Class B Non-Voting Common Stock, par value $.001 per share, of the Company (the
"Class B Common Stock" and together with the Class A Common Stock, the "Common
Stock"), immediately convertible into Class A Common Stock on a share-for-share
basis. Pursuant to the terms of the Registration Rights Agreement dated as of
February 23, 1998 among the Company and the Selling Security Holders (the
"Mutual Registration Rights Agreement"), each of the Selling Security Holders
has been granted certain registration rights with respect to the Shares. Each
Selling Security Holder has exercised such registration rights and his or her
restricted stock is being offered in this Prospectus. (See "Selling Security
Holders" below.) Both Western and Heller have waived their respective
registration rights at this time.
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<PAGE>
The Company is incurring additional expense to register the Shares. The
Company may experience additional costs and complexity in the event Western and
Heller exercise their respective registration rights. In addition, the exercise
of such rights could have an adverse effect on the market price of the Class A
Common Stock.
DIVIDEND POLICY, RESTRICTIONS ON DIVIDENDS
The Company has never paid any cash dividends on the Common Stock and
does not intend to pay any cash dividends in the foreseeable future. The Renewed
Credit Facility prohibits the Company from declaring or paying any dividend on,
or making any other distribution in respect of, the Company's capital stock. In
addition, the Company's outstanding series of preferred stock contain
restrictions on the ability of the Company to declare or pay any dividend or
distribution on the Company's Common Stock. (See "Dividend Policy" and
"Description of Capital Stock--Preferred Stock.")
POSSIBLE VOLATILITY OF PRICES OF THE COMMON STOCK
The stock market has from time to time experienced extreme price and
volume fluctuations that have been unrelated to the operating performance of
particular companies. The market prices of the Common Stock may be significantly
affected by quarterly variations in the Company's operating results, litigation
involving the Company, general trends in the security alarm industry, actions by
governmental agencies, national economic and stock market conditions, industry
reports and other factors, many of which are beyond the control of the Company.
Due to all of the foregoing factors, it is likely that the Company's operating
results will fall below the expectations of the Company, securities analysts or
investors in future quarters. In such event, the trading price of the Common
Stock would likely be materially and adversely affected.
POSSIBLE LACK OF FINANCIAL RESOURCES OF SELLING SHAREHOLDERS
The Selling Security Holders may be deemed to be underwriters pursuant
to the Securities Act, and in that regard may become liable to the purchasers of
the Shares pursuant to the terms of the Securities Act if the Selling Security
Holders do not comply with certain provisions of the Securities Act. There can
be no assurance that any of the Selling Shareholders has the financial resources
to discharge any such liability.
POSSIBLE ADVERSE EFFECTS ASSOCIATED WITH THE ISSUANCE OF "BLANK CHECK" PREFERRED
STOCK
The Company's Certificate of Incorporation authorizes the Company's
Board of Directors to issue up to 30,000,000 shares (of which 26,352,422 remain
available after dividends earned through June 30, 1998) of "blank check"
preferred stock, from time to time, in one or more series, solely on the
authorization of its Board of Directors. The Board of Directors will thus be
authorized, without further approval of the stockholders, to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges and
restrictions applicable to each new series of preferred stock. The issuance of
such stock could, among other results, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a third party to gain control of the Company, discourage bids for the Common
Stock at a premium, or otherwise adversely affect the market price of the Common
Stock. (See "Description of Securities--Series A Convertible Preferred Stock.")
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
by the Selling Security Holders.
SELLING SECURITY HOLDERS
All of the Shares are being sold by the Selling Security Holders named
below, consisting of all the former shareholders of Mutual who received the
Shares from the Company under the terms of the Purchase Agreement. The
information with respect to the number of shares of Class A Common Stock held by
each Selling Security Holder listed below is correct as of July 1, 1998. Since
such date, the information may have changed.
The table indicates that all the Shares will have been sold after the
offering. However, any or all of the Shares listed below may be retained by any
of the Selling Security Holders, and therefore no accurate forecast can be made
as to the number of Shares that will be held by the Selling Security Holders
upon termination of this offering. The Company believes that the Selling
Security Holders listed in the table have sole voting and investment powers with
respect to the Shares indicated.
The Company will not receive any proceeds from the sale of the Shares.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
----------------------- NUMBER OF SHARES --------------------
SELLING SECURITY HOLDERS NUMBER (4) % OF CLASS BEING OFFERED NUMBER % OF CLASS
- ------------------------ ---------- ---------- ------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Abramson, Herbert 27,104 * 27,104 0 *
Adams, Gerard 29,412 * 29,412 0 *
Adams, Scott 9,235 * 9,235 0 *
Avin, Betty 3,529 * 3,529 0 *
Avin, Irving 3,529 * 3,529 0 *
Avin, Kimberly 1,765 * 1,765 0 *
Belch, Joseph 14,728 * 14,728 0 *
Bitton, Robert 15,384 * 15,384 0 *
Blauschild, Douglas 29,412 * 29,412 0 *
Burger, James 3,529 * 3,529 0 *
Cohen, Joel (1) 198,009 1.28% 198,009 0 *
DiGilio, Joseph 33,394 * 33,394 0 *
diMonda, Daniel 3,529 * 3,529 0 *
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
diMonda, Douglas 52,941 * 52,941 0 *
diMonda, Katherine 3,529 * 3,529 0 *
Eyl, Peter 1,176 * 1,176 0 *
Fishman, David 24,886 * 24,886 0 *
Fischman, Michael 2,941 * 2,941 0 *
Freeman, Evelyn 15,384 * 15,384 0 *
Freeman, Mitchell 148,262 * 148,262 0 *
Hirschfield, Jack 24,886 * 24,886 0 *
Isaacman, Seymour 28,054 * 28,054 0 *
Kassman, Donna 1,471 * 1,471 0 *
Kassman, Irene 1,471 * 1,471 0 *
Kleinhaus, Laurie 18,778 * 18,778 0 *
Kowalczyk, George 47,511 * 47,511 0 *
Liebling, Ronald 44,118 * 44,118 0 *
Marilyn Levy & William A. Levy, 22,042 * 22,042 0 *
Trustees, Article Fourth Trust
Milton Levy
Lucks, Vivian 5,515 * 5,515 0 *
Mevorach, Martin 132,353 * 132,353 0 *
Mevorach, Samuel 44,118 * 44,118 0 *
Pesci, Mark 7,059 * 7,059 0 *
Rhein, Miriam 8,824 * 8,824 0 *
Rose, Gary 15,384 * 15,384 0 *
Rossi, Joseph 36,176 * 36,176 0 *
Rubin, Norman (3) 501,827 3.23% 501,827 0 *
Slatken, Jeffrey 5,882 * 5,882 0 *
Black, Joyce Debra 2,059 * 2,059 0 *
Victor, Alan Robert 2,059 * 2,059 0 *
Victor, Saul 4,118 * 4,118 0 *
Wager, Lila and Eli 10,000 * 10,000 0 *
Zimmer, Sophia 12,353 * 12,353 0 *
Zuckerman, Bob 17,647 * 17,647 0 *
Adams, Raymond (2) 348,589 2.25% 348,589 0 *
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Glass, Arlene and Irwin 17,728 * 17,728 0 *
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%.
(1) Mr. Cohen currently serves as a Vice President of the Company and
President of Mutual, a wholly-owned subsidiary of the Company. Pursuant
to the terms of the Purchase Agreement, Mr. Cohen may not begin selling
his Shares until February 23, 1999. See "Recent Developments -
Acquisition of Mutual Central Alarm Services, Inc."
(2) Mr. Adams currently serves as a Vice-President of Mutual. Pursuant to
the terms of the Purchase Agreement, Mr. Adams may not begin selling
his Shares until February 23, 1999. See "Recent Developments -
Acquisition of Mutual Central Alarm Services, Inc."
(3) Pursuant to the terms of the Purchase Agreement, Mr. Rubin may not
begin selling his Shares until February 23, 1999. See "Recent
Developments - Acquisition of Mutual Central Alarm Services, Inc."
(4) Pursuant to Section 4 of the Purchase Agreement, the Selling Security
Holders, jointly and severally, agreed to indemnify Guardian and hold
Guardian harmless, for a period ending on the later of February 23,
1999 or until the adjudication to final resolution of any and all
claims for indemnification thereunder, from and against all Liabilities
(defined in the Purchase Agreement). In connection with such
indemnification, subject to the terms of an Escrow Agreement dated
February 23, 1998 by and among the Company, the Selling Security
Holders and Emanuel Zimmer, Esq., each Selling Security Holder placed
its pro rata portion of 750,000 Shares (collectively, the "Escrowed
Shares") in escrow and pledged such Escrowed Shares as security for
payment of any Liabilities. See "Recent Developments - Acquisition of
Mutual Central Alarm Services, Inc."
PLAN OF DISTRIBUTION
The Shares offered by this Prospectus may be sold from time to time by
the Selling Security Holders or by transferees thereof. See "Selling Security
Holders" above and notes 1 through 4 regarding the escrow provisions and
provisions regarding restrictions on disposition under the terms of the Purchase
Agreement. To the actual knowledge of the Company, no underwriting arrangements
have been entered into by the Selling Security Holders. The distribution of the
Shares by the Selling Security Holders may be effected in one or more
transactions that may take place in the over-the-counter market, including
ordinary broker's transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such shares as principals, at
prevailing market prices at the time of sale, prices related to prevailing
market prices or negotiated prices. The Selling Security Holders may pledge all
or a portion of the Shares owned as collateral for margin accounts or in loan
transactions, and the Shares may be resold pursuant to the terms of such
pledges, accounts or loan transactions. Upon default by such Selling Security
Holders, the pledgee in such loan transaction would have the same rights of sale
as the Selling Security Holders under this Prospectus.
The Selling Security Holders also may enter into exchange traded listed
option transactions which require the delivery of the Shares listed hereunder.
See "Selling Security Holders" above, and notes 1 through 4 thereof for the
escrow provisions and provisions regarding restrictions on disposition of the
Purchase Agreement. The Selling Security Holders may also transfer Shares owned
in other ways not involving market makers or established trading markets,
including directly by gift, distribution, or other transfer without
consideration, and upon any such transfer the transferee would have the same
rights of sale as such Selling Security Holders under this Prospectus. In
addition, any securities covered by this Prospectus which
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<PAGE>
qualify for sale pursuant to Rule 144 of the Securities Act may be sold under
Rule 144 rather than pursuant to this Prospectus. (See "Selling Security
Holders" above, and notes 1 through 4 thereof regarding the escrow provisions
and provisions regarding restrictions on disposition of the Purchase Agreement.)
Without limiting the foregoing, brokers may act as dealers by
purchasing any or all of the Shares either as agents for others or as principals
for their own accounts and reselling such shares pursuant to this Prospectus.
Such brokers will receive compensation from the Selling Security Holders in the
form of commissions or discounts and may receive compensation from purchasers of
the Shares for whom they may act as agent or to whom they may sell as principal
in the form of commissions or discounts. Finally, the Selling Security Holders
and any brokers and dealers through whom sales of the Shares are made may be
deemed to be "underwriters" within the meaning of the Securities Act, and the
commissions or discounts and other compensation paid to such persons may be
regarded as underwriters' compensation. (See "Risk Factors -- Possible Lack of
Financial Resources of Selling Shareholders," "Selling Security Holders" above
and notes 1 through 4 thereof regarding the escrow provisions and provisions
regarding restrictions in disposition of the Purchase Agreement.)
To the extent required, the number of Shares to be sold, the name of
the Selling Security Holder, the purchase price, the name of any agent or broker
and any applicable commissions, discounts or other compensation to such agents
or brokers with respect to a particular offering will be set forth in a
Prospectus Supplement.
There can be no assurances that the Selling Security Holders will sell
any or all of the Offered Shares.
In order to comply with certain state securities laws, if applicable,
the Shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In certain states, the Shares may not be sold
unless such Shares have been registered or qualified for sale in such state or
an exemption from registration or qualification is available and is complied
with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Shares may not simultaneously engage in
market-making activities with respect to such Shares for a period of one or five
business days prior to the commencement of such distribution. In addition to,
and without limiting, the foregoing, each of the Selling Security Holders and
any other person participating in a distribution will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of any of the Shares by the Selling
Security Holders or any such other person. All of the foregoing may affect the
marketability of the Shares.
Pursuant to the Mutual Registration Rights Agreement, the Company will
pay all the fees and expenses incident to the registration of the Shares (other
than the Selling Security Holders' pro rata share of underwriting discounts and
commissions, if any, which is to be paid by the Selling Security Holders). In
addition, the Company has agreed to indemnify the Selling Security Holders
against certain liabilities, including liabilities under the Securities Act.
Furthermore, each Selling Security Holder has agreed to indemnify the Company
against certain liabilities, including liabilities under the Securities Act.
Such agreements also provide for rights of contribution if such indemnification
is not available.
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LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal conduct of its
business. The Company believes that any such pending litigation will not have,
individually or in the aggregate, a material adverse effect on its respective
business or financial condition.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company as of July 1, 1998. A summary of
the background and experience of each of these individuals is set forth
following the table. Under the By-Laws, directors hold office for a period of
one year, at which time the shareholders elect new directors. Further, under the
By-Laws, directors hold office until their successors are elected and qualified.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- -----
<S> <C> <C> <C>
Harold Ginsburg (1) 65 Chairman of the Board, Director 1993
Sheilah Ginsburg (1) 58 Secretary/Treasurer, Director 1993
Richard Ginsburg (1) 30 Chief Executive Officer, 1996
President, Director
Darius G. Nevin 40 Vice President, Chief Financial 1997
Officer, Director
Douglas T. Lake 48 Director 1998
William Remington 68 Director 1996
Terry E. Akins 51 Vice President, Chief Operating
Officer
Joel A. Cohen 58 Vice President, President of Mutual
Raymond L. Adams 68 Vice President of Mutual
</TABLE>
(1) Harold and Sheilah Ginsburg are married and Richard Ginsburg is their son.
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 many well-known 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 does not hold directorships in any other reporting
companies.
21
<PAGE>
SHEILAH GINSBURG
Mrs. Sheilah Ginsburg was a co-founder of Guardian. She is responsible
for the human resources and certain other 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 does not hold directorships in any other reporting
companies.
RICHARD GINSBURG
Mr. Ginsburg was a co-founder of Guardian. He has been President and
Chief Executive Officer of Guardian since August 1996. 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.
Mr. Ginsburg does not hold directorships in any other reporting
companies.
DARIUS G. NEVIN
Mr. Darius G. Nevin assumed the position of Chief Financial Officer of
the Company in October 1997. For most of the ten years leading up to that time,
Mr. Nevin served as Chief Financial Officer of Guard Technologies, Inc. (now
Security Technologies Group, Inc.), a provider of electronic security systems
and services to the commercial market. For the last three years, prior to
joining the Company, Mr. Nevin also served as President of Guard Technologies,
Inc. Before entering the security industry, Mr. Nevin was a junior partner of
Madison Dearborn Partners, at that time the venture capital division of First
Chicago Corp. Mr. Nevin holds an A.B. from Harvard University and an M.B.A. from
the University of Chicago.
Mr. Nevin does not hold directorships in any other reporting companies.
DOUGLAS T. LAKE
Mr. Lake has been a Director of the Company since April 1998. Since
1995, Mr. Lake has been Senior Managing Director of Investment Banking with Bear
Stearns & Company in New York City. Prior to 1995, he was Managing Director with
Dillon Reed & Company in New York City. Mr. Lake holds a B.A. from Trinity
College in Hartford, Connecticut and an M.B.A. from Amos Tuck School at
Dartmouth.
Mr. Lake does not hold directorships in any other reporting companies.
WILLIAM REMINGTON
Mr. William Remington is a Canadian citizen and resident. For the past
twenty-one years, Mr. Remington has been the Director General of the Town of
Hampstead, Quebec, Canada. In addition, Mr. Remington has participated in the
design and installation of central
22
<PAGE>
monitoring stations for alarm monitoring companies located in Montreal, Canada,
Kingston, Jamaica, London, England and Florida.
Mr. Remington does not hold directorships in any other reporting
companies.
TERRY E. AKINS
Mr. Terry E. Akins served as president of ACI, which he co-founded in
1970, between 1989 and May 1997. From 1970 to 1989, Mr. Akins served as Vice
President of ACI. In addition, Mr. Akins has been active with local, state and
national alarm associations, having served in 1989 as President of The Alarm
Association of Florida, an association he co-founded in 1970. Mr. Akins received
a Bachelor of Science from the Georgia Institute of Technology in 1969.
JOEL A. COHEN
Mr. Cohen is Vice President of the Company and President of Mutual. Mr.
Cohen has served as President of Mutual since March 1989. He holds a B.A. from
Brooklyn College and an M.B.A. from LIU in Brooklyn.
RAYMOND L. ADAMS
Mr. Adams is Vice President of Mutual. He has served as Vice President
of Mutual since January 1991. Mr. Adams holds a B.A. from Syracuse University.
23
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the
beneficial ownership as of July 1, 1998 of any person (including any "group")
known by the Company to be the beneficial owner of more than 5% of any class of
stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP(1) CLASS (2)(3)
-------------- ---------------- ------------ ------------
<S> <C> <C> <C>
Preferred Stock (4) Westar Security (5) 3,647,578 (6) 100.0
Class A Common Stock Westar Security (5) 2,960,000 26.3
Class A Common Stock Harold Ginsburg (7) 1,003,533 8.9
Class A Common Stock Sheilah Ginsburg (7) 903,533 8.0
Class A Common Stock Richard Ginsburg (7) 649,246 (8) 5.7
Class A Common Stock Rhonda Ginsburg (7) 629,245 5.6
Class B Non-Voting
Common Stock (4) Heller (9) 634,035 5.3 (10)
</TABLE>
(1) Each beneficial owner listed in the above Table has sole
voting and investment power with respect to the shares
beneficially owned.
(2) For purposes of this table, a person is deemed to have
"beneficial ownership" of any shares which such person has the
right to acquire on or within 60 days of July 1, 1998. For
purposes of computing the percentage of the class held by each
person named above, any shares which such person has or has
the right to acquire on or within 60 days after July 1, 1998
are deemed to be outstanding for such person, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(3) On a fully diluted basis as of July 1, 1998, Westar Security
holds 41.6%, Harold Ginsburg holds 6.4%, Sheilah Ginsburg
holds 5.7%, Richard Ginsburg holds 4.1%, Rhonda Ginsburg holds
4.1% and Heller holds 4.0% of the outstanding securities of
the Company. See "Risk Factors --Significant Ownership of
Class A Common Stock by Certain Stockholders" above.
(4) Shares of Preferred Stock and Class B Common Stock are
immediately convertible into shares of Class A Common Stock on
a share-for-share basis at any time.
24
<PAGE>
(5) The address for Westar is 818 South Kansas Avenue, Topeka,
Kansas, 66612-1203. Westar is the sole holder of all of the
outstanding shares of Preferred Stock. See "Risk Factors
--Significant Ownership of Class A Common Stock by Certain
Stockholders" above.
(6) The amount includes stock dividends accumulated through June
30, 1998.
(7) The address for such shareholder is c/o the Company, 3880
N.28th Terrace, Hollywood, Florida, 33020-1118.
(8) Includes 20,000 options which are immediately exercisable.
(9) Heller is the sole holder of all of the outstanding shares of
Class B Common Stock. See "Proxies; Voting Securities" above.
The address for Heller is 500 West Monroe Street, Chicago,
Illinois, 60661.
(10) Represents the percent of outstanding shares of Common Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership as of July 1, 1998 of Class A Common Stock by (i) each
Director of the Company; (ii) each nominee to the Board of Directors; (iii) the
Chief Executive Officer; and (iv) all directors and executive officers of the
Company as a group. On July 1, 1998, there were 11,273,223 shares of Class A
Common Stock issued and outstanding. No other executive officer received a total
annual salary and bonus in excess of $100,000 during the last fiscal year.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS (2)
------------------------------------ ------------------------ --------------------
<S> <C> <C>
Harold Ginsburg (3) 1,003,533 8.9
Sheilah Ginsburg (3) 903,533 8.0
Richard Ginsburg (3) 649,246 (4) 5.7
Darius G. Nevin (3) 20,000 (5) *
William Remington (3) 0 *
Douglas T. Lake (3) 15,000 (5) *
Joel A. Cohen (6) 198,009 1.8
All Directors and Executive Officers as
a Group (7) 3,293,423 29.2
</TABLE>
* Represents less than 1% of outstanding Voting Stock.
(1) Each director and executive officer has sole voting and
investment power with respect to the shares beneficially
owned.
(2) For purposes of this table, a person is deemed to have
"beneficial ownership" of any shares of Class A Common Stock
which such person has the right to acquire on or within 60
days of July 1, 1998. For purposes of computing the percentage
of the class of Class A Common Stock held by each
25
<PAGE>
person named above, any shares which such person has or has
the right to acquire on or within 60 days after July 1, 1998
are deemed to be outstanding for such person, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(3) The address of such shareholder is c/o the Company, 3880 North
28th Terrace, Hollywood, Florida 33020-1118.
(4) Includes 20,000 options which are immediately exercisable.
(5) Represents options which are immediately exercisable.
(6) The address of such shareholder is c/o Mutual, 10 West 46th
Street, New York, New York, 10036.
(7) Includes Messrs. Harold Ginsburg, Richard Ginsburg, Nevin,
Remington, Lake, Cohen, Akins and Adams and Mrs. Ginsburg.
All of the Shares will be entitled to share equally in dividends from
funds legally available therefor when, as and if declared by the Board, and upon
liquidation or dissolution of the Company, whether voluntary or involuntary, to
share equally in all assets of the Company available for distribution to
shareholders. It is not anticipated that the Company will pay any cash dividends
on the Class A Common Stock in the near future. Each holder of Class A Common
Stock will be entitled to one vote for each share on all matters submitted to
the shareholders. Holders of Class A Common Stock will not have any preemptive
right to acquire authorized but unissued Class A Common Stock. There is no
cumulative voting, redemption right, sinking fund provision or right of
conversion in existence with respect to the Class A Common Stock.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 78.7502 of the Nevada Revised Statutes ("NRS") provides that
Nevada corporations may limit, through indemnification, the personal liability
of their directors or officers in actions, claims or proceedings brought against
such person by reason of that person's current or former status as an officer or
director of the corporation. Indemnification of directors or officers is
available if the person acted in good faith and in a manner the person
reasonably believed was, at least, not opposed to the best interests of the
corporation. In the event of a criminal action or proceeding, indemnification is
not available if the person had reasonable cause to believe their action was
unlawful. Further, in an action brought by the corporation or in the right of
the corporation, if the person, after exhaustion of all appeals, is found to be
liable to the corporation, or if the person makes payment to the corporation in
settlement of the action, indemnification is available only to the extent a
court of competent jurisdiction determines the person is fairly and reasonably
entitled to indemnification.
Such discretionary indemnification is available only as authorized on a
case-by-case basis by: (1) the stockholders; (2) a majority of a quorum of the
board of directors consisting of members of the board who were not parties to
the action, suit or proceeding; (3) if a majority of a quorum of the board of
directors consisting of members of the board who were not parties to the action,
suit or proceeding so orders, by independent legal counsel in a written opinion;
or (4) if a quorum of the board of directors consisting of members of the board
who were not parties to the action cannot be obtained, by independent legal
counsel in a written opinion.
26
<PAGE>
To the extent that a director or officer of a corporation is successful
in defending against an action, suit or proceeding brought against that person
as a result of their current or former status as an officer or director, the
corporation must indemnify the person against all expenses actually and
reasonably incurred by the person in connection with their defense.
Nevada law also allows Nevada corporations to advance expenses of
officers and directors incurred in defending a civil or criminal action as they
are incurred, upon receipt of an undertaking by or on behalf of the director or
officer to repay such expenses if it is ultimately determined by a court of
competent jurisdiction that such officer or director is not entitled to be
indemnified by the corporation because such officer or director did not act in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation.
Section 78.751 of the NRS provides that any indemnification provided
for by NRS 78.7502 (by court order or otherwise) shall not be deemed exclusive
of any other rights to which the indemnified party may be entitled and that the
scope of indemnification shall continue as to directors or officers who have
ceased to hold such positions and to their heirs, executors and administrators.
Section 78.752 of the NRS allows corporations to provide insurance, or
other financial arrangements such as a program of self-insurance, for their
directors or officers. Such insurance may provide coverage for any liability
asserted against the person and liability and expenses incurred by the person in
their capacity as a director or officer or arising out of their status as such,
whether or not the corporation has the authority to indemnify the person against
such liability and expenses. However, no financial arrangement made under
Section 78.752 may provide protection for a person adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
for intentional misconduct, fraud or a knowing violation of law, except with
respect to the advancement of expenses or indemnification ordered by a court.
Article XII of the By-Laws requires indemnification by the Company of
each person who serves as a director or officer. A summary of the circumstances
in which such indemnification is provided is set forth in the following three
paragraphs, but such summary is qualified in its entirety by reference to
Article XII.
In general, any director or officer of the Company who was or is a
party to, or is threatened to be made a party, or was or is a witness, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and any appeal therefrom
(collectively, a "Proceeding"), by reason of the fact that he is or was a
director or officer of such company or is or was serving in any capacity at the
request of such company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (including
serving as a fiduciary of an employee benefit plan) shall be indemnified by the
Company to the full extent permitted by Nevada law against all liability (which
for purposes of Article XII includes all judgments, settlements, penalties and
fines) and costs, charges and expenses (including attorneys' fees) asserted
against him or incurred by him in connection with any Proceeding.
Article XII permits the Company to deny indemnification to a person who
initiated a Proceeding if the Company denied authorization of the Proceeding
within 60 days after receipt of notice of the Proceeding from the indemnified
person. Such indemnification for costs, charges and expenses incurred by a
person who initiates a suit may not, however, be permitted under Nevada law.
27
<PAGE>
Article XII also provides that the Company shall advance costs, charges
and expenses (including attorneys' fees) incurred by an indemnified person, but
permits the Company to withhold advancement of costs to a director or officer in
an action in which such person is an adverse party to the Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provision, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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 "Cautionary Note Regarding Forward-Looking
Statements" above, 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 below
under the caption "History."
The Company is presently a leading supplier of security monitoring and
high grade monitored security systems in Florida and New York City (see "Recent
Developments" below). Based on the Company's gross revenues and number of
subscribers for the fiscal year ended December 31, 1997 ("Fiscal Year 1997"),
the Company ranked 57th among the top 100 security companies in the United
States in SDM MAGAZINE'S 1998 annual listing. If the ranking had given effect to
the Company's acquisition of Mutual Central Alarm Services, Inc. (see "Recent
Developments" below), the Company would have ranked 27th in the country. In
addition, according to the 1998 Fact Book Issue of SECURITY SALES (Vol. 19,
No.12, supplement), only 5.3% of all security companies in the United States
generate gross revenues in excess of $2.5 million. These statistics place the
company as a significant leader among U.S. security firms. As reflected in the
Company's financial statements set forth below, the Company's gross revenues for
fiscal year ended December 31, 1997 were $5,624,790. Gross revenues for the
periods ended March 31, 1998 and 1997 were $2,609,890 and $1,222,487,
respectively.
The Company's principal activities include the following: (i)
monitoring services provided pursuant to alarm contracts owned by the Company;
(ii) monitoring services provided pursuant to alarm contracts owned by other
alarm companies (wholesale monitoring); (iii) the sales and installation of
electronic security systems including alarm, CCTV and access control
28
<PAGE>
systems; (iv) maintenance of electronic security systems; and (v) acquisition of
alarm contracts in connection with the acquisition of other alarm companies or
otherwise.
The Company's revenues consist primarily of monthly recurring payments
under written contracts for the monitoring of security systems. For Fiscal Year
1997, monitoring revenues represented approximately 67% of total revenues. The
balance of the Company's revenues are derived from (i) the sale of electronic
security systems (approximately 23% of total revenues); (ii) the provision of
maintenance services (approximately 9% of total revenues) and (iii)
miscellaneous sources (approximately 1% of total revenues).
Neither the Company nor the pre-merged Guardian International, Inc.
(see "History" below) has ever had any net income and both the Company and the
pre-merged Guardian International, Inc. have a history of consistent and
sometimes significant net losses. See Management's Discussion and Analysis or
Plan of Operation -- Results of Operations" below for further discussion.
RETAIL MONITORING SERVICES
The Company 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. In addition, the company also received certification
from Factory Mutual ("FM"), an industry regulatory agency, in August 1996. The
Company's central station is constructed to withstand hurricane-force winds and
can maintain operations indefinitely without electrical power using its propane
generators. The Company also operates a UL listed central station in New York
from which it monitors approximately 20% of its customers.
The Company's principal central monitoring station in Hollywood,
Florida has many security devices, including closed circuit television ("CCTV"),
motion detecting units, high intensity lighting and access control. All of the
equipment the Company uses to monitor its customers' systems and to protect its
central monitoring station is generally the latest enhancement and the majority
of the equipment is less than four years old. In June 1997, the Company
installed new Data General computer hardware which significantly increased the
processing power, disk storage and growth capabilities of its billing/service
and monitoring systems.
The central monitoring station 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 central station monitoring facility is largely
paperless, resulting in lower costs and greater efficiency than would be
obtained otherwise. The Company's 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, thereby reducing the possibility of human error.
The Company's central monitoring station is comprised of a number of
electronic 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
29
<PAGE>
personnel. The balance of the Company's equipment includes dual redundant Data
General Aviion/trademark/ 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 Corporation computers 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 $5,800 per month in the
aggregate.
The monitoring services provided by the Company include monitoring
homes and commercial facilities 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, the Company's human operators react in accordance with standard
procedures.
The central monitoring system also monitors opening and closing
schedules for the Company'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.
Retail monitoring generated revenues of approximately $3.2 million and
$2.2 million in fiscal years 1997 and 1996, respectively. Revenues for the three
months ended March 31, 1998 were approximately $1.7 million compared to
approximately $813,000 for the same period in 1997. As of July 1, 1998, the
Company had approximately 19,500 retail customers, which includes the accounts
acquired from Mutual, Gator and Precision (see "Recent Developments" below). No
retail customer represents more than 5% of the Company's total revenues.
WHOLESALE MONITORING PROGRAM
Under the Company's wholesale monitoring program (the "Wholesale
Monitoring Program") subscribers are monitored on a "wholesale" basis for
certain third party security alarm companies, some of which are competitors of
the Company. This practice is commonly referred to in the industry as "third
party monitoring" or "wholesale" monitoring. The Company 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.
Under the Wholesale Monitoring Program, the Company 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 the Company 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
retail customer base by purchasing customer accounts from third party companies.
In fact, the Company has on occasion purchased customer accounts that were being
monitored under the Wholesale Monitoring Program.
30
<PAGE>
The Wholesale Monitoring Program generated revenues of approximately
$573,000 and $504,000 in fiscal years 1997 and 1996, respectively. Revenues for
the three months ended March 31, 1998 and 1997 were approximately $162,000 and
$134,000, respectively. As of July 1, 1998, the Company had approximately 19,800
wholesale customers. No such wholesale account represents more than 5% of the
Company's total revenues.
INSTALLATION AND SALE OF ELECTRONIC SECURITY SYSTEMS
The Company typically installs electronic security systems for its
residential and commercial customers. These systems can range in complexity from
simple alarm panels interfaced with one or two sensors up to highly integrated
card access and CCTV systems. Residential systems are usually sold for a
one-time non-refundable fee. Commercial systems are usually leased to the
customer for a period of time coinciding with the monitoring contract.
Most of the alarm-related products sold by the Company are manufactured
or distributed by subsidiaries of Pittway Corporation. The Company sells a
variety of brands of access control and CCTV products depending upon the
specific application.
Revenues derived from the installation and sale of security systems
totaled approximately $1,287,000 and $863,000 in fiscal years 1997 and 1996,
respectively. Installation revenues for the three months ended March 31, 1998
and 1997 were approximately $680,000 and $353,000, respectively. Increased
revenues are a result of increased efforts to generate accounts, through
additional sales and marketing staffing, and the additional Specialty Device
Installers, Inc. ("SDI") revenues (see "History - General" below).
MAINTENANCE OF ELECTRONIC SECURITY SYSTEMS
A strong maintenance and service capability is an important element in
maintaining good customer relations and low attrition. Guardian provides
responsive service to its clients whose electronic security systems require
repair or upgrading. Depending on the nature of the problem and the customer,
such services are typically provided within 24-48 hours.
Revenues derived from the maintenance of security systems totaled
approximately $489,000 and $69,000 in fiscal years 1997 and 1996, respectively.
Revenues for the three months ended March 31, 1998 were approximately $176,000
and $56,000 for the same period in 1997. Increased revenues correlate to the
increase in the Company's account base (see "Customer Account Activity" during
Fiscal Year 1997).
HISTORY
GENERAL
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 Securities and Exchange Commission ("SEC") on a
Registration Statement on Form S-18 which was declared effective in March 1987.
The Company raised $100,000 pursuant to the IPO.
The Company had no operations and did not acquire any business between
October 1986 and February 1988, at which time the Company changed its name from
Burningham Enterprises to Everest Funding Corporation ("Everest Funding") and
completed a reverse subsidiary merger
31
<PAGE>
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 of Directors (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 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 in the role of President of SDI, a
wholly-owned subsidiary. SDI was subsequently downsized due to poor financial
performance and a lack of significant margins from the subcontract installation
business. Mr. Bauer is presently serving as an employee of the Company, but is
not an officer of the Company nor a member of the Board, nor the President of
any significant operating subsidiary. During the first quarter of Fiscal Year
1997, the Company significantly downsized SDI as a result of SDI's poor
operating performance and discontinued its operations entirely by the end of
Fiscal Year 1997.
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 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,
the Company issued 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 then 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.
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, see "Directors, Executive
Officers, Promoters and Control Persons" above. For a discussion of the
accounting treatment of this transaction, see Note 2 of Notes to Consolidated
Financial Statements contained herein.
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<PAGE>
RECENT DEVELOPMENTS
INVESTMENT BY WESTAR CAPITAL, INC.
On October 14, 1997, the Company and Westar Capital, Inc. ("Westar
Capital"), executed a Stock Subscription Agreement (the "Subscription
Agreement") for Westar Capital to acquire approximately 37 percent of the equity
of the Company. The proceeds of the investment totaled approximately $7.5
million. The investment consisted of Westar Capital purchasing 2,500,000 newly
issued shares of Class A Common Stock and 1,875,000 shares of newly issued
Series A 9 3/4% Convertible Cumulative Preferred Stock, par value $.001 (the
"Series A Preferred Stock"). The Series A Preferred Stock is convertible to
Class A Common Stock on a share for share basis. Westar Capital has assigned its
shares of Guardian capital stock and its rights under the Subscription Agreement
to Westar Security, Inc. ("Westar Security"). Following the transaction, Westar
Capital transferred its interest in Westar Security to Protection One, Inc., an
affiliate of Western Resources, Inc. (see Risk Factors - "Significant Ownership
of Class A Common Stock by Certain Shareholders"). As part of the transaction,
Western was granted the right to appoint two members to an expanded eight member
board.
ACQUISITION OF MUTUAL CENTRAL ALARM SERVICES, INC.
In February 1998, the Company completed the acquisition of all of the
capital stock of Mutual Central Alarm Services, Inc. ("Mutual"), the nation's
60th largest monitored alarm company (according to SDM MAGAZINE) and one of the
largest independent alarm companies in the metropolitan New York area. Founded
nine years ago, Mutual grew through a strategy of concentration on high-grade UL
listed commercial security, fire, CCTV and access control systems. Mutual
provides services to high-end retail businesses, financial institutions and
Fortune 500 companies. As a result of the acquisition, the Company added MRR of
approximately $320,000, annual revenues of approximately $5 million and earnings
before interest, taxes, depreciation and amortization ("EBITDA") of
approximately $1.5 million.
The total purchase price was approximately $10.5 million in cash and
1,981,700 shares (the "Shares") of unregistered Class A Common Stock. The
Company granted certain rights to the Selling Security Holders to have the
Mutual Shares registered by the Company under the Securities Act. Under the
terms of the Purchase Agreement, 750,000 shares of the Shares are being held in
escrow for a one-year period for indemnification purposes pro rata per Selling
Security Holder. The effective date of the acquisition was February 1, 1998. The
transaction was accounted for under the purchase method of accounting.
Pursuant to the terms of the Purchase Agreement, the Company and Mutual
entered into employment agreements with Joel A. Cohen and with Raymond L. Adams.
Mr. Cohen was retained under a five year agreement as President of Mutual and
was appointed to serve as a Vice President of the Company. Mr. Cohen was granted
options to purchase 100,000 shares of Class A Common Stock. Twenty percent of
the options vest and are exercisable on each of the first five anniversaries of
the effective date of his employment agreement. Mr. Adams was retained under a
three-year agreement as a Vice President of Mutual. Mr. Adams was also granted
options to purchase 100,000 shares of Class A Common Stock, thirty three and
one-third percent of which vest and are exercisable on each of the first three
anniversaries of the effective date of his employment agreement.
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<PAGE>
The Company funded the cash portion of the acquisition with borrowings
under its Renewed Credit Facility with Heller (see "Management's Discussion and
Analysis or Plan of Operation -- Credit Facility" below) and proceeds from a
$4.0 million preferred stock investment from Western. Western purchased
1,600,000 shares of Series B Preferred Stock at $2.50 per share. The Company
granted to Western certain rights to have the shares of Class A Common Stock
issuable upon conversion of the Series B Preferred Stock on a share-for-share
basis registered by the Company under the Securities Act.
Guardian will continue to operate Mutual under its trade name as a
wholly-owned subsidiary of Guardian and will continue to operate Mutual's New
York based central monitoring and dispatch center.
ACQUISITION OF GATOR TELECOM, INC.
On March 9, 1998, the Company acquired all the assets of Gator Telecom,
Inc., a Florida corporation ("Gator"), for $1.4 million in cash and 94,937
shares of restricted Class A Common Stock. The Company funded the cash portion
of the acquisition by using its Renewed Credit Facility with Heller. (See
"Management's Discussion and Analysis or Plan of Operation -- Credit Facility"
below.)
Gator provides security installation, monitoring, structured wiring and
home automation to over 125 active residential builders in the Tampa Bay area.
Gator was founded in 1981.
The Company will continue to operate Gator from its 5,000 square foot
service facility in Tampa. Dan Lawrence, the founder of Gator, has been named
the Company's Central Florida Regional Manager and will also oversee service for
the Company's pre-existing 1,500 Tampa customers that are presently serviced by
dealers.
The acquisition, which included a significant number of corporate
assets such as accounts receivable, inventory, vehicles and other fixed assets,
added approximately 1,800 monitored subscribers to the Company's current MRR
base and increased MRR under contract by more than $37,000.
ACQUISITION OF PRECISION SECURITY SYSTEMS, INC.
In April 1998, the Company acquired Precision Security Systems, Inc.
("Precision"), one of the largest independent security alarm installation
companies in South Florida, for $3 million in cash consideration and 194,269
shares of Class A Common Stock. The Company funded the cash portion of the
acquisition using borrowings under the Renewed Credit Facility with Heller.
David Weston, Vice President of Precision, joined the Company's senior
management team as Director of Operations, under a one-year employment contract.
Precision's operations were consolidated into the Company's existing
infrastructure.
MARKET OVERVIEW AND TRENDS
The Company's target market consists of owners of single family
residences, residential development communities where the Company has or may
obtain bulk service contracts and commercial establishments.
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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 in
May 1998 reported that in 1997, based upon information provided by its
respondents, the 100 largest companies in the alarm industry accounted for
approximately 24% of industry revenues. The Company believes that many smaller
alarm service companies, because of their small 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, in order to be
competitive, security alarm companies must sell equipment at or below cost or
transfer equipment gratuitously in the expectation of generating future
recurring 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 and is therefore still
in a relatively immature stage. The pricing has only recently made it accessible
to a broader homeowners' market. 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 prevalence of insurance company discounts to
homeowners who purchase alarm systems, which discounts are typically larger when
alarm systems are monitored by a central station. In addition, insurance
companies may require that businesses install an alarm system as a condition to
obtaining or renewing insurance coverage. Also, the Company enjoys the benefits
of operating in two separate sectors of the industry, high grade commercial and
traditional residential. By operating in both sectors, economic strength in one
can subsidize any weaknesses that may occur in the other, a reputation earned in
one sector can carry over into the reputation for the other and cash flow from
commercial projects can help fund investments in the residential market.
Advances in digital communications technology have prompted some
consolidation in the security alarm industry. Prior to the development of
digital communications technology, alarm monitoring required a dedicated
telephone line, which made long-distance monitoring uneconomic. Consequently, in
order to achieve a national or regional presence, alarm monitoring companies
were required to maintain a large number of geographically dispersed local
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 (e.g., 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
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<PAGE>
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 competition with other companies in the security alarm industry. Such
price competition, if it was to occur, could have a materially adverse effect on
the Company's financial condition. As discussed above in "Recent Developments",
Western has invested $11.5 million in the Company. The Company believes that its
strategic alliance with affiliates of Western Resources, Inc. will help the
Company's competitive position by (i) improving the Company's financial strength
by increasing the Company's equity; (ii) lowering its cost of capital; (iii)
improving its appeal to potential sellers of alarm accounts or alarm companies
and (iv) improving and expanding acquisition and investment opportunities made
available to the Company.
BUSINESS STRATEGY
The Company has never had any net income and has a history of
consistent and sometimes significant net losses. Although no assurance can be
given by the Company as to when or if the Company will realize net earnings, the
Company anticipates that, based on its strategy of continued growth and customer
account expansion, and barring any unforeseen significant changes in the nature
of its business or operations (including its method of financing customer
account acquisitions through its existing and/or any Renewed Credit Facility
with Heller and the accounting for such acquisitions), it will continue to
record such net losses until such time as it has significantly reduced its
indebtedness and has substantially increased its customer base.
The Company's strategy for growth has consisted primarily of the
implementation of an aggressive and strategic acquisition plan, while
maintaining a strong balance sheet. Between 1994 and 1997, prior to its merger
into the Company, Guardian acquired a combination of 20 alarm companies and/or
portfolios of customer monitoring contracts from existing alarm companies. The
financing for these acquisitions was derived from a $7.0 million credit facility
with Heller, which has been replaced by the Company's Renewed Credit Facility
(see "Management's Discussion and Analysis or Plan of Operations -- Credit
Facility" below) and with the proceeds from the investment by Western (see
"Recent Developments" above).
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. Through its
recent acquisition of Mutual, the Company has expanded its operations outside of
Florida and into New York. The Company plans to continue pursuing other
acquisitions outside Florida, not only in New York, but in major metropolitan
areas in North and South America. Acquisitions of account portfolios thus far
have been achieved primarily through the acquisition of alarm companies, the
"Independent Alarm Acquisition Program" and, until recently, the "Dealer
Program", as described below.
Under the Independent Alarm Acquisition Program, the Company acquires
customer contracts from independent alarm companies in Florida. Under this
Program, the independent alarm company solicits sales of its own alarm systems
from potential residential or commercial customers, who are also offered the
option to enter into an agreement with the independent alarm company, in the
independent alarm company's own name, for the provision of alarm monitoring
36
<PAGE>
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.
While the Company is not using aggressive efforts to continue the
Dealer Program, due to concerns about the quality of accounts offered for sale
by dealers, there are several authorized dealers in Florida. 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 benefit the
Company. Each Dealer solicits sales of the Dealer's own alarm systems from
residential or commercial customers, who also may be offered the option to enter
in an agreement for the provision of alarm monitoring and/or repair services,
typically for a 60 month term, although the monitoring period may be shorter.
The Dealer can offer the provision of monitoring services to the customer under
the name of the Company, under the Dealer's own name, or under any other
independent alarm company name. In such cases where the customer contract for
monitoring services is written under the name of the Company, the Company pays
the Dealer a placement fee. In other cases where the customer contract is
written under any provider's 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"), may be 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 the holdback monies due.
Another source of growth of account portfolios 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 recently became an authorized distributor of First Alert
Professional/trademark/ security products, a product line
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available to a select group of alarm dealers. Such dealers also receive
significant marketing support from First Alert Professional/trademark/ including
sales literature, sales training and leads.
Management is hopeful that significant additional revenue sources will
be generated from the Company's bulk service communities builder projects. The
Company currently has master association contracts ("Master Contracts") with
eight 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
three years. Guardian's revenue under a Master Contract increases incrementally
with each closing. Current MRR under the Master Contracts is approximately
$13,000. Management anticipates that upon completion of the development
projects, the Company will generate over $25,000 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.
The financial strategy for effecting the business goals was enhanced in
1997 by developing a relationship with Western, see "Recent Developments" above.
The Company believes that the relationship enhances its access to capital for
the future, affording management the ability to focus on executing the business
strategy. Some of the relationship's many potential benefits are enumerated in
"Market Overview and Trends" above.
CUSTOMER ACCOUNT ACTIVITY DURING FISCAL YEAR 1997
The Company purchased 4,268 contracts (net of 434 contracts which were
returned to sellers due to collectability problems -- such returned contracts
are not counted towards attrition, as defined in "Overview" in "Management's
Discussion and Analysis or Plan of Operation" below) during Fiscal Year 1997. A
total of 276 accounts were purchased during the quarter ended March 31, 1998.
The following table reflects the Company's customer account activity
during Fiscal Year 1997 and the first quarter of 1998:
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <C>
Number of customer contracts, beginning of period 7,940 11,855
Contracts purchased 4,268 276
Contracts acquired in acquisitions (1) - 4,448
Contracts generated through internal sales 618 303
Contracts lost through net attrition (2) (971) (407)
------- ------
Number of customer contracts, end of period 11,855 16,475
======= ======
</TABLE>
(1) Includes 2,583 accounts acquired from Mutual and 1,865 accounts
acquired from Gator. In addition, approximately 3,100 contracts were
acquired in April 1998 in the Precision acquisition (see "Recent
Developments", above).
(2) 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 "Management's Discussion and Analysis or Plan of
Operation" below.
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<PAGE>
The 4,268 contracts purchased by the Company during Fiscal Year 1997
("Purchased Contracts") generated average MRR of approximately $28 per contract.
The range of MRR for most contracts is between $12 per contract and $60 per
contract, with the majority being between $12 and $35. Approximately 68% of the
contracts purchased were residential contracts and approximately 32% were
commercial contracts. The average MRR for the contracts of Mutual, Gator and
Precision is approximately $125, $18 and $29, respectively.
The breakdown of the number of Purchased Contracts for Fiscal Year 1997
and the three months ended March 31, 1998 by MRR range is as follows:
<TABLE>
<CAPTION>
NUMBER OF PURCHASED CONTRACTS
-----------------------------------------------------------
MONTHLY RECURRING YEAR ENDED THREE MONTHS ENDED
REVENUE RANGE DECEMBER 31, 1997 MARCH 31, 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
$12 - $25 3,315 173
$26 - $35 501 100
$36 - $60 319 3
Over $60 133 -
----- ---
4,268 276
===== ===
</TABLE>
The average attrition guarantee period, for which dealers must replace
non-performing contracts on Purchased Contracts, is between 12 and 18 months
from the date of purchase. The average purchase price holdback is 10%. This
holdback period affords the Company the opportunity to confirm that the
customers of the Purchased Contracts will pay timely and honor their contracts
after their acquisition by the Company.
EQUIPMENT AND TECHNOLOGY
In June 1997, the Company invested $150,000 to upgrade the hardware and
software of its security monitoring system in Florida. These improvements
included new Data General/Aviion machines based on Intel processors, positioning
the Company for a transition to a Windows NT(TM) computing environment. This
investment increased capacity and improved the productivity of operators and
other administrative staff using the automation and accounting systems. 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 5.50.11 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, give 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 250,000 subscribers with moderate upgrades to the
storage and processor capacity of its existing hardware system. Moreover, the
operating facility would require minimal physical changes to accommodate such a
volume of accounts.
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<PAGE>
MARKETING
A large portion of the Company's marketing activities have consisted
of referrals and a limited amount of advertising. As mentioned above, the
Company elected to become a First Alert Professional(TM) dealer to enhance its
direct sales efforts. The direct sales staff was more than doubled in 1997 and
additional increases are expected in fiscal year 1998. The Company intends to
expand its direct sales organization not only in South Florida and New York, but
in other major metropolitan markets of North and South America.
The Company purchased customer accounts from 14 independent alarm
companies and 14 dealers during Fiscal Year 1997. Accounts were purchased from 2
independent alarm companies and 4 dealers during the three months ended March
31, 1998. The decrease is due to the increased emphasis on direct sales, as
discussed above. Such dealers and 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 have fewer than twenty employees, average one hundred fifty to
eight hundred fifty (150- 850) customer accounts, are usually under capitalized,
are owner-managed and do not have their own central monitoring stations.
According to a 1997 survey conducted by SDM MAGAZINE (published in May
1998), the 100 largest companies in the security industry account for
approximately twenty-four percent (24%) 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 or financing to make acquisitions. However, the
Company believes that large regional companies have a competitive advantage
relative to large national companies because 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 "Market Overview and Trends"
above, for a discussion of competition from large companies in other industries.
The following chart reflects the size of the
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nine largest alarm companies. The information was obtained from the May 1998
issue of SDM MAGAZINE.
<PAGE>
1997 REVENUE NUMBER OF
COMPANY (IN MILLIONS) ACCOUNTS
- ------- ------------- --------
ADT Security $1,100 1,600,000
SecurityLink from Ameritech 450 1,100,000
Wells Fargo Alarm Services, Inc. 227 170,000
Honeywell, Inc. Home & Building Control 201 200,000
Brinks Home Security, Inc. 180 511,500
Protection One, Inc. (1) 145 756,800
The Westec Security Group 85 120,000
Slomins Security 51 84,800
Entergy Security, Inc. 50 168,000
Guardian International, Inc. 6 13,500
(1) Protection One, Inc., a Delaware corporation, is a majority-owned
subsidiary of Western Resources, Inc. and directly and indirectly owns
41.6%, in total, of the Company's outstanding shares of Class A Common
Stock, on an as-converted basis, as of July 1, 1998.
GOVERNMENT REGULATION
The Company's operations are subject to federal, state, county and
municipal laws, regulations and licensing requirements. The Company's employees
include four qualifiers for the low-voltage electrical contractor license as
required by the State of Florida. In addition, the Company believes it holds all
the licenses required to operate in the counties and municipalities in Florida
in which it is presently providing services.
Because the Company operates a central monitoring station and installs
burglar and fire alarms, the State of Florida requires that the Company's
employees directly involved in the monitoring of customers and provision of
field repair services complete a certification program and that the Company
maintain a license to conduct its monitoring business. The Company believes that
it holds the necessary licenses to conduct its business and that it is in
compliance with all licensing and regulatory requirements in each jurisdiction
in which it operates.
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 the fiscal year 1997, the Company filed an application with the
United States Patent and Trademark Office ("Office") to register the mark
"Security By Guardian International" & "G" design. In late 1997, the Company
received notification from the Office that its application had not been
accepted. The Company retained the Washington D.C. based
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<PAGE>
Intellectual Property law firm of Cohen & Smith. The Company was advised to
continue its common law use of the mark and file for state trademark protection.
Two state trademark registrations were granted for Guardian International
Security & G design (T98000000478 on April 29, 1998) and a G design contained
within a circle (T98000000637 on June 1, 1998). The Company has been using these
marks in Florida since January 1993 without third party opposition. In July
1998, the Company filed a federal trademark application with the Office for the
mark Mutual Central Alarm Services, Inc. & design. The Company is currently
monitoring its trademarks: Guardian International, Inc., Gibraltar Security
Alarm Services, Alarm Control, Inc., Mutual Central Alarm Services, Inc. and
Gator Telecom, Inc. in order to evaluate the availability and feasibility of
continuing to operate under separate trademarks or consolidate them into one
name. No assurances can be given that third parties will not attempt to assert
superior trademark rights in similar marks or that the Company will be able to
successfully enforce and protect its rights in its trademarks against third
party infringers.
EMPLOYEES
At July 1, 1998, the Company employed 172 individuals, all of whom were
full-time employees. Any future increase in the number of employees will depend
upon growth of the Company's business.
As of July 1, 1998, certain employees of Mutual were represented by a
labor union and 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.
The Company has the need to dispose of many batteries, which constitute
environmentally sensitive waste. The used batteries are stored in the Company's
warehouse until such time as they are transported to a recycling center for
disposal.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 "Cautionary Note Regarding Forward-Looking
Statements" above, 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. The excess of installation revenue over estimated selling
costs is amortized over the initial term of the related service/monitoring
contract (generally five years). All direct installation costs, which include
equipment, labor and installation overhead are capitalized and amortized over a
five year period. 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 1997,
installation and service revenues generated only modest gross margins. The
margins increased during the three months ended March 31, 1998 due to the larger
gross margins Mutual derives from its large commercial security system sales.
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, discussed in "Description of Business") are capitalized and amortized
over 10 years on a straight-line basis. In contrast, costs attributed to
providing the installations, which include direct labor, direct materials and
direct overhead, are capitalized and amortized over a five year period. All
other costs associated with the sales and installation are charged to income in
the period when the installation occurs.
Although no single subscriber represents more than two (2) percent of
the Company's recurring revenue base, the Company is vulnerable to subscribers
canceling their contracts. The Company experiences customer cancellations, i.e.,
attrition, of monitoring and related services as a result of subscriber
relocation, the cancellation of acquired accounts during the process of
integrating such accounts into the Company's operations, unfavorable economic
conditions and other reasons. This attrition is offset to a certain extent by
revenues from the sale of additional services to existing subscribers, the
reconnection of premises previously occupied by subscribers, the conversion of
accounts previously monitored by other alarm companies, and guarantees provided
by the sellers of such accounts. The Company defines attrition numerically for a
particular period as a quotient, the numerator of which is equal to the
difference of gross MRR lost as the result of canceled subscriber accounts less
MRR lost that was replaced pursuant to guarantees from sellers of accounts
purchased by the Company, and the denominator of which is
43
<PAGE>
the average month-end MRR during such period. Net MRR attrition of the Company's
customers during 1997 and during the three months ended March 31, 1998 was less
than 10%, on an annualized basis.
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 toward the collection of amounts owed and the retention of subscribers. In
certain instances, this collection and evaluation period may exceed six months.
When, in the judgment of the Company's collection personnel, all reasonable
efforts have been made to collect balances due and certain legal steps are taken
to ensure proper cancellation of the relevant monitoring contract, nonpaying
subscribers are disconnected from the Company's monitoring center and are
included in the calculation of net subscriber and MRR attrition.
RESULTS OF OPERATIONS
As discussed in this report, including Note 2 of the Notes to
Consolidated Financial Statements of the Company set forth 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
"Description of Business --History" above. The transaction was a reverse
acquisition for accounting purposes, with Guardian deemed to be the acquirer.
The financial results for fiscal year 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).
44
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31 ENDED MARCH 31,
----------- ---------------
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Monitoring 67.1 74.2 66.2 66.5
Installation and service 32.9 25.8 33.8 33.5
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Monitoring 10.3 13.8 13.7 12.4
Installation and service 29.4 25.6 26.1 33.0
General and administrative 44.2 40.1 32.7 32.7
----- ----- ----- -----
83.9 79.5 72.5 78.1
----- ----- ----- -----
Income before interest expense, amortization
and depreciation 16.1 20.5 27.5 21.9
----- ----- ----- -----
Interest expense 17.8 15.5 9.0 16.1
Amortization of customer contracts 21.0 16.0 23.0 15.9
Depreciation and amortization 5.3 5.4 4.7 6.4
----- ----- ----- -----
44.1 36.9 36.7 38.4
----- ----- ----- -----
Net loss (28.0) (16.4) (9.2) (16.5)
====== ====== ===== ======
</TABLE>
The Company has never had any net income and has a history of
consistent and sometimes significant net losses. Although no assurance can be
given by the Company as to when or if the Company will realize net earnings, the
Company anticipates that, based on its strategy of continued growth and customer
account expansion, and barring any unforeseen significant changes in the nature
of its business or operations (including its method of financing customer
account acquisitions through its existing and/or any Renewed Credit Facility
with Heller and the accounting for such acquisitions), it will continue to
record such net losses until such time as it has significantly reduced its
indebtedness and has substantially increased its customer base.
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.
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<PAGE>
The following table provides a calculation of EBITDA for fiscal years
1997 and 1996 and for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------ ---------
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(1,574,091) $(590,348) $(242,112) $(202,044)
Plus:
Amortization of customer contracts 1,181,607 577,611 601,064 193,816
Depreciation and amortization 295,666 195,679 122,972 78,365
Interest expense 1,001,187 560,680 235,270 196,939
--------- ------- ------- -------
EBITDA * $ 904,369 $ 743,622 $ 717,194 $ 267,076
========== ========= ========= =========
</TABLE>
* 1997 includes non-recurring costs of approximately $143,000 in connection with
a proposed merger which was not consummated.
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues for "Fiscal Year 1997" increased 55% to $5,624,790, from
$3,620,990 for the fiscal year ended December 31, 1996 ("Fiscal Year 1996").
Monitoring revenues increased by 40% to $3,772,108 during Fiscal Year 1997, from
$2,685,734 during Fiscal Year 1996. Installation and service revenues increased
by 98% to $1,852,682 during Fiscal Year 1997, compared to $935,256 during Fiscal
Year 1996. Total retail subscribers numbered approximately 11,900 at December
31, 1997, compared to approximately 7,900 at December 31, 1996, a net increase
of approximately 51%. The increase in revenues and number of subscribers from
Fiscal Year 1996 to Fiscal Year 1997 is primarily attributable to the Company's
portfolio acquisition of Alarm Control, Inc. (ACI) during the second quarter of
Fiscal Year 1997, which added approximately 2,200 retail subscribers, the
ongoing Independent Alarm Acquisition Program and Dealer Program and the
continued addition of 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 1997 increased 70% to
$6,197,694, from $3,650,658 during Fiscal Year 1996. Monitoring expenses
increased 16% to $579,373 during Fiscal Year 1997, compared to $498,929 during
Fiscal Year 1996. The increase in monitoring costs from Fiscal Year 1996 to
Fiscal Year 1997 was a result of the significant increase in monitoring revenues
and number of subscriber accounts (see previous paragraph). As a percentage of
monitoring revenues, however, monitoring expenses decreased to 15% in Fiscal
Year 1997, compared to 19% in Fiscal Year 1996. 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 250,000 subscribers. 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
46
<PAGE>
monitoring facility is at or near capacity. Installation and service costs for
Fiscal Year 1997 increased by 78% to $1,653,003, compared to $926,319 during
Fiscal Year 1996. 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 1996 to Fiscal Year 1997 was the result of a similar percentage
increase in related revenues from Fiscal Year 1996 to Fiscal Year 1997 (see
previous paragraph). As a percentage of installation and service revenue, such
costs were 89% in Fiscal Year 1997, compared to 99% in Fiscal Year 1996. 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 costs and
installation and service costs, increased by 55% to $3,392,414 in Fiscal Year
1997, compared to $2,195,742 in Fiscal Year 1996. Gross profit from monitoring
revenues increased by 46% to $3,192,735 in Fiscal Year 1997, compared to
$2,186,805 in Fiscal Year 1996. Gross profit from installation and service
activities increased 2,134% to $199,679 compared to $8,937 in Fiscal Year 1996.
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 71% to $2,488,045
in Fiscal Year 1997, compared to $1,452,120 during Fiscal Year 1996. 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 1996 to Fiscal Year 1997 is related primarily to the Company's
growth in revenue, resulting in an increase in the Company's overhead cost
structure. Additionally, there were certain nonrecurring costs of approximately
$143,000 incurred in 1997 in connection with a proposed merger which was not
consummated. Included in G&A is bad debt expense of $287,870 in Fiscal Year
1997, compared to $124,105 in Fiscal Year 1996. As a percentage of total
revenues, bad debt expense was 5.1% in Fiscal Year 1997 compared to 3.4% in
Fiscal Year 1996. The increased bad debt expense during Fiscal Year 1997 over
Fiscal Year 1996 resulted from increases in revenues and a stricter reserve
policy. Along with the stricter reserve policy, deductions against the bad debt
reserve increased as a result of the policy permitting a shorter period for
collection efforts. As a percentage of total revenues, G&A increased to 44% in
Fiscal Year 1997 compared to 40% in Fiscal Year 1996. 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 increases in the future.
Amortization of customer contracts increased 105% to $1,181,607 during
Fiscal Year 1997, compared to $577,611 during Fiscal Year 1996. The increase in
such costs from 1996 to 1997 resulted from the increase in the amount of
capitalized customer contracts, which increased from a net balance of $5,124,449
at December 31, 1996 to $8,048,495 at December 31, 1997. Such costs are
amortized 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 $373,408 and $138,000 for
Fiscal Year 1997 and Fiscal Year 1996, respectively, relating to customer
attrition. See discussion in "Overview" above.
Depreciation and amortization increased by 51% to $295,666 during
Fiscal Year 1997, compared to $195,679 during Fiscal Year 1996. Such costs
include (i) depreciation of property and equipment (the gross balance of which
increased from approximately $785,000 at December
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<PAGE>
31, 1996 to approximately $1.2 million at December 31, 1997 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); (ii) the
investment in new monitoring automation host computers; (iii) amortization of
goodwill recorded in connection with the merger of Guardian and Everest (such
gross amount totaling approximately $1.2 million which is being amortized over
10 years); and (vi) amortization of certain other intangible assets.
Interest expense increased 79% to $1,001,187 during Fiscal Year 1997,
compared to $560,680 during Fiscal Year 1996. 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 7,900 as of December 31, 1996 to approximately
11,900 as of December 31, 1997. The majority of such subscriber acquisition
costs, amounting to $4.2 million, were financed by Heller and by the proceeds of
the investment in the Company's Preferred Stock by Western. Total borrowings
under the Heller Credit Facility decreased from approximately $5.0 million as of
December 31, 1996 to approximately $753,000 million as of December 31, 1997. As
of March 26, 1998, the Company had approximately $8.8 million of borrowings
under the Heller Renewed Credit Facility, in connection with the acquisition of
Mutual, discussed in "Description of Business -- Recent Developments" above.
Net loss increased by 167% to $1,574,091 during Fiscal Year 1997,
compared to $590,348 during Fiscal Year 1996. The increased net loss is
attributable to increased amortization costs and increased interest expense, as
discussed in the preceding paragraphs.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total revenues for the three months ended March 31, 1998 increased 113%
to $2,609,890 from $1,222,487 during the corresponding period in the prior year.
Monitoring revenues for the three months ended March 31, 1998 increased to
$1,726,903, or 112% from $812,846 during the corresponding period of the prior
fiscal year. Installation and service revenues for the three months ended March
31, 1998 increased by 116% to $882,987, compared to $409,641 during the
corresponding period of the prior fiscal year. Total retail subscribers
approximated 16,400 at March 31, 1998, compared to 8,300 at March 31, 1997, a
net increase of 98%. The increase in revenues and number of subscribers in 1998
from 1997 is primarily attributable to the Company's recent acquisitions of
Mutual and Gator (see Note 2 to the Consolidated Financial Statements) and the
May 1997 purchase of 2,200 retail customers from Alarm Control.
Total operating expenses for the three months ended March 31, 1998
increased 113% to $2,616,732 compared to $1,227,592 during the corresponding
period in the prior year. Monitoring expenses increased 136% to $357,714,
compared to $151,559 during the corresponding period in the prior fiscal year.
As a percentage of monitoring revenues during the three months ended March 31,
1998, monitoring expenses were 21%, compared to 19% during the corresponding
period in the prior year. The increase in monitoring costs, in absolute as well
as on a percentage basis, from 1997 to 1998 was a result of the significant
increase in monitoring revenues and number of subscriber accounts, as well as
the acquisition of Mutual, which operates its own central monitoring station.
Installation and service costs during the three months ended March 31, 1998
increased by 69% to $681,920, compared to $403,498 during the corresponding
period in the prior year. The increase in total installation and service costs
in 1998 from 1997 was partly the result of increases in related revenues in 1998
from 1997. As a percentage of installation and service revenue, installation and
service costs were 77% during the three months
48
<PAGE>
ended March 31, 1998, compared to 99%, during the corresponding period in the
prior fiscal year, due to the larger gross margins Mutual derives from its large
commercial security system sales. The Company does not now generate, nor does it
anticipate generating in the future, any appreciable margins or profits from the
sale of alarm systems, and may incur future losses from such installation and
service activity, but such activity is considered necessary to the generation
and retention of alarm monitoring subscribers.
Total gross profit, defined as total revenues less monitoring and
installation and service costs, increased by 135% to $1,570,256 during the three
months ended March 31, 1998, compared to $667,430 during the corresponding
periods in the prior year. Gross profit from monitoring revenues increased by
107% to $1,369,189 during the three months ended March 31, 1998, compared to
$661,287 during the corresponding period in the prior year. The increase in
gross profit from monitoring revenues is primarily attributable to the Company's
recent acquisitions of Mutual and Gator, and the May 1997 purchase of 2,200
retail customers from Alarm Control. Gross profit from installation and service
activities increased by 3,173% to $201,067 during the three months ended March
31, 1998, compared to $6,143 during the corresponding period in the prior year,
due to the profitability Mutual derives from its large commercial security
system sales.
General and administrative costs ("G&A") increased by 113% to $853,062
during the three months ended March 31, 1998, compared to $400,354 during the
corresponding period in the prior year. The increase in G&A costs in 1998 from
1997 is related primarily to the Company's acquisition of Mutual, a comparably
sized company, and its growth in revenue, resulting in an increase in the
Company's overhead cost structure. As a percentage of total revenues, G&A held
constant at 33% during the three months ended March 31, 1998, as compared to the
corresponding period in the prior year.
Amortization of customer contracts increased by 210% to $601,064 during
the three months ended March 31, 1998, compared to $193,816 during the
corresponding period in the prior year. The increase in such costs resulted from
the increase in the amount of capitalized customer contracts, which increased to
a net balance of $25,692,566 at March 31, 1998 from $5,325,582 at March 31,
1997.
Depreciation and amortization increased by 57% to $122,972 during the
three months ended March 31, 1998, compared to $78,365 during the corresponding
period in the prior year. Such costs include depreciation of property and
equipment (the gross balance of which increased to $2,056,062 million at March
31, 1998 from approximately $829,305 at March 31, 1997 as a result of (i) the
Company's continued expansion activities and (ii) the acquisitions of Mutual and
Gator (which resulted in additional property and equipment being acquired),
goodwill amortization (a gross balance of $1,506,970 in goodwill was recorded in
connection with the acquisitions, which is being amortized over 10 years), and
amortization of certain other intangible assets.
Interest expense increased 20% to $235,270 during the three months
ended March 31, 1998, compared to $196,939 during the corresponding period in
the prior year. The increase in interest expense resulted from additional debt
incurred primarily in connection with acquiring subscriber accounts. The
majority of such subscriber acquisition costs were financed by Heller and by the
proceeds of the investment in the Company's Preferred Stock by Western. Total
borrowings under the Renewed Credit Facility increased to $9,044,898 at March
31, 1998 from approximately $5,357,196 at March 31, 1997.
49
<PAGE>
Net loss applicable to common stock for the three months ended March
31, 1998 was $(376,769), or $(0.04) per share, compared to a net loss of
$(202,044), or $(0.03) per share, during the corresponding period of the prior
fiscal year.
CREDIT FACILITY
On November 16, 1994, Guardian, prior to its merger into the Company,
entered into a $7.0 million 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 3% to 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 guarantees of Harold and Sheilah Ginsburg, both of whom
are directors, officers and principal shareholders of the Company.
As discussed in "Description of Business" above, under the caption
"Recent Developments," in May 1997, the Company renegotiated the Credit Facility
(the "Renewed Credit Facility") with Heller to increase the maximum credit
availability to $15.0 million. The Renewed Credit Facility was further amended
in connection with the investment in the Company by Western to increase the
availability, subject to various constraints including operating cash flow
coverage and MRR levels, to $20.0 million. The Renewed Credit Facility expires
in May 2001 and shall automatically renew from year to year thereafter, unless
terminated by either party.
The Renewed Credit Facility includes customary covenants, including, but not
limited to, restrictions related to the incurrence of other debt, the
encumbrance or sale of the Company's assets and the payment of dividends or
other distributions to the Company's shareholders. At June 30, 1998 the Company
believes it was in compliance with such covenants. Borrowings under the Credit
Facility amounted to approximately $12.2 million as of that same date (see
"Description of Business -- Recent Developments"). For information regarding
Heller's ownership of Class B Common Stock, see "Risk Factors - Shares Eligible
for Future Sale; Registration Rights".
LIQUIDITY AND CAPITAL RESOURCES
As discussed in "Business Strategy", above, the Company believes that
its relationship with Western represents a reliable source of equity capital for
the future, affording management the ability to focus on executing its business
strategy. Some of the relationship's many potential benefits are enumerated in
"Market Overview and Trends", above.
As discussed in this report, the surviving Company is the result of a
merger of the predecessor Guardian International, Inc. ("Guardian") with
Everest, which occurred on August 28, 1996. Everest conducted a private
placement in August 1996 under Regulation S promulgated under the Securities Act
of 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 shareholder of Guardian, in repayment of
certain loans to Guardian and as a return of capital and approximately $1.2
million remained within the Company for working capital purposes.
50
<PAGE>
In May 1997, the Company refinanced its existing credit facility with
Heller. Under the Renewed Credit Facility, the maximum credit facility available
to the Company was increased from an existing $7.0 million to $15.0 million. In
connection with the investment by Western (see Note 2), the Renewed Credit
Facility was further amended to increase the maximum available to $20,000,000.
The Renewed Credit Facility expires in May 2001 and shall automatically renew
from year to year thereafter, unless terminated by either party. Availability
under the Renewed Credit Facility is subject to certain "Borrowing Base"
limitations (as defined). The Renewed Credit Facility includes customary
covenants, including, but not limited to, restrictions related to the incurring
of other debt, the encumbrance or sale of the Company's assets, and the payment
of dividends or making of other distributions to the Company's shareholders, and
other financial performance covenants. On March 31, 1998, the Company believes
it was in compliance with all such covenants.
The Renewed Credit Facility will be used primarily for acquisitions of
subscriber accounts. The Company's continued plan of growth through acquisitions
of subscriber accounts is contingent upon its ability to borrow under the
Renewed Credit Facility.
Net cash provided by operating activities during the three months ended
March 31, 1998 was $1,089,978. The Company incurred a net loss of $242,112
during such period; however, included in such loss was depreciation and
amortization expense, amortization of customer contracts expense and
amortization of deferred financing costs totaling $792,294, bad debt provision
of $120,902, cash outflows of $591,250 related to increases in accounts
receivable and other assets and cash inflows of $1,010,144 related to net
increases in liabilities.
Net cash used in investing activities was $12,679,758 during the three
months ended March 31, 1998 and was comprised of $11,193,593 used in the
acquisitions of Mutual and Gator, the purchase and placement of customer
accounts of $1,191,652 and purchases of fixed assets of $294,513.
Net cash provided by financing activities was $12,235,176 during the
three months ended March 31, 1998, consisting of net proceeds from issuance of
stock of $3,989,549, proceeds under borrowings from Heller of $9,338,433 reduced
by repayments to Heller and other long-term debt of $1,092,806. The Company's
cash balance was $739,709 at March 31, 1998.
Total shareholders' equity was $17,468,822 at March 31, 1998,
increasing by a net amount of $8,452,596 during the three months ended March 31,
1998. The net increase resulted from the investment in the Company by Western
and the issuance of Class A Stock in connection with the acquisitions of Mutual
and Gator less the net loss of $242,112.
The Company does not currently have any significant commitments for
capital outlays.
YEAR 2000 COMPLIANCE
The Company had previously received assurance from Monitoring
Automation Systems (MAS) that all applications in its software are Year 2000
compliant. In a recent technical bulletin received from MAS, the Company was
informed that all of the MAS monitoring, database and billing systems are Year
2000 compliant, however, its general ledger and accounts payable programs are
not. The Company is in the final stages of selecting replacement accounting
software, which is Year 2000 compliant, which it intends to install by early
1999.
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<PAGE>
The Year 2000 compliance status of no other supplier will materially
affect the Company's business.
The Company believes that any costs incurred in connection with the
Year 2000 compliance will not have a material adverse effect on the Company.
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.
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
Certain Relationships and Related Transactions below.) During April 1998, the
Company began leasing additional space in the building which houses the
Company's central monitoring facility located at 3880 N. 28 Terrace, Hollywood,
Florida 33020. The telephone number is (954) 926-5200. The Company now leases
12,100 square feet of the building. 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 $125,000, 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.
With the acquisition of Mutual, the Company became the assignee on a
lease with Windbrook Realty. The assignment commenced February 1, 1998 and
extends through December 31, 1999. The leased property is 3,500 square feet of
office space in a nineteen-story building housing a central monitoring station,
offices and warehouse facilities. The annual rent is approximately $88,000.
With the acquisition of Gator, the Company executed a three year lease,
commencing March 1, 1998, with Dan and Cindy Lawrence, former owners of Gator.
The leased property is a 5,000 square foot building housing offices and
warehouse facilities. The annual rent is approximately $50,000.
OWNERSHIP OF REAL ESTATE
The Company does not own any real estate at this time.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its corporate headquarters from Guardian Investment,
a Florida partnership owned by Mr. and Mrs. Harold and Sheilah Ginsburg, both of
whom are directors, officers and principal shareholders of the Company. During
April 1998, the Company began leasing additional space in the building which
houses the Company's central monitoring facility located at 3880 N. 28 Terrace,
Hollywood, Florida 33020. The telephone number is (954)
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<PAGE>
926-5200. The Company now leases 12,100 square feet of the building. 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. At December 31, 1997,
the annual rental was approximately $125,000, 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.
With the acquisition of Gator, the Company executed a three year lease,
commencing March 1, 1998, with Dan and Cindy Lawrence, former owners of Gator.
The leased property is a 5,000 square foot building housing offices and
warehouse facilities. The annual rent is approximately $50,000.
For a discussion of certain Common Stock issuances and transfers to
certain affiliates of the Company, see "Market for Common Equity and Related
Stockholder Matters" below.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock has been publicly traded under the symbol
"GIIS" since November 1996 through the National Quotation Bureau's National
Daily Quotation Price Sheets. Prior to the merger of Guardian into the Company,
the Common Stock (Everest Security common stock) was traded under the symbol
EVST.
To the best of the Company's knowledge, there are presently 12
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 bid information 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.
HIGH LOW
---- ---
1996
----
First Quarter $3.56 $3.00
Second Quarter $4.87 $3.25
Third Quarter $5.00 $4.13
Fourth Quarter $2.50 $1.75
1997
----
First Quarter $2.50 $1.00
Second Quarter $1.25 $0.63
Third Quarter $1.75 $0.78
Fourth Quarter $2.50 $1.47
1998
----
First Quarter $3.50 $2.13
53
<PAGE>
The Company is authorized to issue 30,000,000 shares of Preferred
Stock, of which 3,647,578 shares are issued and outstanding as of July 1, 1998.
The Company is presently authorized to issue 100,000,000 shares of Class A
Common Stock, of which 11,280,241 shares are issued 11,273,241 are outstanding
as of July 1, 1998. There are approximately 126 holders of record of Class A
Common Stock as of July 1, 1998. The Company is authorized to issue 1,000,000
shares of Class B Common Stock, of which 634,035 shares are issued and
outstanding as of March 26, 1998. Heller is the sole holder of record of Class B
Common Stock.
Pursuant to the terms of the agreement and plan of merger dated August
15, 1996 by and among the Company, Guardian and Guardian's principal
shareholders (the "Merger Agreement"), the pre-merger Guardian shareholders were
entitled to receive an additional 1,000,000 shares of Common Stock if certain
additional capital was not raised and 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 includes the Ginsburgs, received the pledged shares
proportionately to their ownership in pre-merged Guardian. Subsequently, the
principal shareholders distributed 500,000 of the pledged shares to other
shareholders of the Company.
In connection with the merger of Guardian into the Company, Heller
received 484,035 shares of Class B Common Stock in exchange for certain capital
appreciation rights with respect to the common stock of pre-merger Guardian held
by Heller. In addition, pursuant to the terms of an agreement entered into among
the pre-merger Guardian shareholders and Heller, as a result of the Company's
failure to raise the additional equity capital (see paragraph immediately
above), the Company was required to issue 150,000 shares of Class B Common Stock
to Heller. In order to fulfill this commitment, the Company's Articles of
Incorporation were amended to authorize additional shares of Class B Common
Stock which were issued to Heller in November 1997.
DIVIDENDS
The Company has not declared any cash dividends on its Common Stock
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 "Credit Facility" in "Management's Discussion and Analysis or Plan
of Operation" above.
The Company has not declared any cash dividends on its Series A
Preferred Stock and Series B Preferred Stock (collectively, the "Preferred
Stock") and does not anticipate paying cash dividends until required to do so
two years after the Preferred Stock was issued. During the interim period, the
Company will pay dividends in the form of additional shares of Preferred Stock.
The payment of cash dividends is currently restricted pursuant to the terms of
the existing credit facility with Heller (see "Management's Discussion and
Analysis or Plan of Operation -- Credit Facility" above).
Assuming the payment of dividends is not prohibited under the Renewed
Credit Facility, the payment of any future dividends rests within the discretion
of the Board, subject to the
54
<PAGE>
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.
55
<PAGE>
EXECUTIVE COMPENSATION
The following sets forth certain information regarding the aggregate
cash and other compensation paid to or earned by the Chief Executive Officer of
the Company. No other executive officer earned salary and bonus in Fiscal Year
1997 in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) OTHER(2)
--------------------------- ---- --------- --------
<S> <C> <C> <C>
Richard Ginsburg, President and CEO, Director 1997 $91,985 $10,800
1996 29,042 10,800
</TABLE>
(1) Mr. Ginsburg's salary was increased in October 1997, with the execution
of his employment agreement, see below. The 1996 compensation
represents only the amounts paid between September 1, 1996, the date
Mr. Ginsburg was elected Chief Executive Officer of the Company, and
December 31, 1996. The annualized compensation for 1996 for Mr.
Ginsburg was $90,000.
(2) Included in other annual compensation, in both 1997 and 1996, is
approximately $600 per month for lease payments for the automobile used
by Mr. Ginsburg and approximately $300 per month for health insurance
premiums.
COMPENSATION OF DIRECTORS
Directors of the Company received no compensation in 1997 to act in
such capacity.
EMPLOYMENT AGREEMENTS
On October 14, 1997, the Company entered into an employment agreement
for an initial three year term with Mr. Richard Ginsburg pursuant to which he
serves as President and Chief Executive Officer of the Company. Under the terms
of the agreement, Mr. Ginsburg receives an initial annual base salary of
$100,000, which may be increased from time to time by the Board of Directors and
will be eligible for annual bonuses also determined at the discretion of the
Board. Also included was a grant of an option to purchase 100,000 shares of
Class A Common Stock at $1.95 per share, which vest 20% at the inception of the
contract and 20% on each anniversary of employment until fully vested and expire
in ten years.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
Individual Grants
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS GRANTED EXERCISE OR
OPTIONS/SARS GRANTED TO EMPLOYEES IN BASE PRICE
NAME (#) (1) FISCAL YEAR ($/SH) EXPIRATION DATE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard
Ginsburg 100,000 50%(2) $1.95 October 15, 2007
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The options vest 20% at the inception of Mr. Ginsburg's Employment Agreement
and 20% on each anniversary of commencement of employment until fully vested
and expires ten years after the date of grant. See "Employment Agreements"
above.
56
<PAGE>
LEGAL MATTERS
Steel Hector & Davis LLP, West Palm Beach, Florida, relying on Lionel,
Sawyer & Collins, Reno, Nevada, has rendered an opinion as to the validity of
the Shares.
EXPERTS
The financial statements and schedules of the Company as of December
31, 1997 and 1996 and for each of the two years in the period ended December 31,
1997 included in this Prospectus and elsewhere in the Registration Statement, of
which this Prospectus forms a part, have been audited by McKean, Paul, Chrycy,
Fletcher & Co., independent public accountants, as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
57
<PAGE>
GUARDIAN INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
NO.
-----
Interim Financial Statements (Unaudited)
Consolidated Balance Sheet as of March 31, 1998 F-2
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Three Months Ended March 31, 1998 F-4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
Annual Financial Statements
Report of Independent Certified Public Accountants F-11
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-12
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 F-13
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1997 and 1996 F-14
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 F-15
Notes to Consolidated Financial Statements F-17
Schedule II - Valuation and Qualifying Accounts F-27
F-1
<PAGE>
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED UNAUDITED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
----
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 739,709
Accounts receivable, net of allowance for doubtful accounts of $301,019 1,641,152
Other 528,545
-------------
Total current assets 2,909,406
Property and equipment, net 1,155,688
Customer accounts, net 25,692,566
Goodwill and other intangible assets, net 3,106,667
Deposits and other assets 135,182
-------------
Total Assets $32,999,509
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,837,195
Unearned revenue 4,413,080
Current portion of long term obligations 20,000
-------------
Total current liabilities 6,270,275
-------------
Long term obligations, less current portion 9,260,412
Shareholders' equity:
Preferred stock, $.001 par value, 30,000,000 shares authorized:
Series A preferred stock, 1,940,074 and 1,894,033 shares issued and
outstanding, respectively 1,940
Series B preferred stock, 1,617,030 and 0 shares issued and outstanding,
respectively 1,617
Class A voting common stock, $.001 par value, 100,000,000 shares authorized,
11,080,441 shares issued; and 11,073,441 shares outstanding, respectively 11,081
Class B non voting common stock, $.001 par value, 634,035 shares authorized,
issued and outstanding, respectively 634
Additional paid-in capital 20,916,674
Accumulated deficit (3,456,686)
Treasury shares, at cost (6,438)
-------------
17,468,822
-------------
Total Liabilities and Shareholders' Equity $ 32,999,509
=============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-2
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Monitoring $1,726,903 $ 812,846
Installation and service 882,987 409,641
---------- ----------
Total revenues 2,609,890 1,222,487
---------- ----------
Operating expenses:
Monitoring 357,714 151,559
Installation and service 681,920 403,498
General and administrative 853,062 400,354
Amortization of customer contracts 601,064 193,816
Depreciation and amortization 122,972 78,365
---------- ----------
Total operating expenses 2,616,732 1,227,592
---------- ----------
Loss from operations (6,842) (5,105)
Interest expense 235,270 196,939
---------- ----------
Loss before income taxes (242,112) (202,044)
Provision for income taxes - -
---------- ----------
Net loss (242,112) (202,044)
Preferred stock dividends (134,656) -
---------- ----------
Net loss applicable to common stock $ (376,768) $ (202,044)
========== ==========
Loss per common share $ (0.04) $ (0.03)
======= =======
Average number of shares outstanding 10,557,875 6,937,839
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
SERIES A SERIES B CLASS A CLASS B
-------- -------- ------- -------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,894,033 $ 1,894 - $ - 8,996,804 $9,004 634,035 $ 634
Stock dividend on Series A
preferred stock 46,041 46 - - - - - -
Stock dividend on Series B
preferred stock - - 17,030 17 - - - -
Issuance of Series B
preferred stock, net of
issuance costs of $10,451 - - 1,600,000 1,600 - - - -
Issuance of Class A
common stock - - - - 2,076,637 2,077 - -
Issuance of options - - - - - - - -
Net loss - - - - - -
--------- ------- --------- ------ ---------- -------- ------- -----
Balance, March 31, 1998 1,940,074 $ 1,940 1,617,030 $1,617 11,073,441 $ 11,081 634,035 $ 634
========= ======= ========= ====== ========== ======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED TREASURY
CAPITAL DEFICIT SHARES TOTAL
------- ------- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $12,091,050 $ (3,079,918) $ (6,438) $9,016,226
Stock dividend on Series A
preferred stock 92,035 (92,081) - -
Stock dividend on Series B
preferred stock 42,558 (42,575) - -
Issuance of Series B
preferred stock, net of
issuance costs of $10,451 3,998,400 - - 4,000,000
Issuance of Class A
common stock 4,060,631 - - 4,062,708
Issuance of options 632,000 - - 632,000
Net loss (242,112) - (242,112)
----------- ----------- --------- -----------
Balance, March 31, 1998 $20,916,674 $(3,456,686) $ (6,438) $17,468,822
=========== =========== ========= ===========
</TABLE>
F-4
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (242,112) $ (202,044)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 122,972 78,365
Amortization of customer accounts 601,064 193,816
Amortization of deferred financing costs 68,258 35,230
Provision for doubtful accounts 120,902 20,000
Changes in assets and liabilities:
Accounts receivable (284,427) (91,403)
Intangible assets, deposits and other assets (306,823) (55,231)
Accounts payable and accrued liabilities (196,776) (62,562)
Unearned revenue 1,206,920 18,497
------------- -----------
Net cash provided by (used in) operating activities 1,089,979 (65,332)
------------- -----------
Cash flows from investing activities:
Purchase of fixed assets (294,513) (44,152)
Business acquisitions, net of cash acquired (11,193,593) -
Purchase and placement of customer accounts (1,191,652) (394,949)
------------- -----------
Net cash used in investing activities (12,679,758) (439,101)
------------- -----------
Cash flows from financing activities:
Payments of long term obligation (1,092,806) (471,063)
Proceeds from line of credit 9,338,433 924,507
Issuance of preferred stock, net of issuance costs 3,989,549 -
------------- -----------
Net cash provided by financing activities 12,235,176 453,444
------------- -----------
Net increase (decrease) in cash and cash equivalents 645,396 (50,989)
Cash and cash equivalents, beginning of period 94,313 1,037,861
------------- -----------
Cash and cash equivalents, end of period $ 739,709 $ 986,872
============= ===========
Supplemental disclosures:
Interest paid $ 94,463 $ 161,709
========= ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Guardian
International, Inc. ("Guardian") and its wholly owned subsidiaries,
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 the
United States (its primary market).
REVENUE RECOGNITION
Installation Revenue Customers are billed for installation services when
the installation is completed or an a percentage of completion basis. The
Company defers the excess of installation revenue over estimated selling
costs and amortizes such difference over the initial term of the
non-cancelable customer monitoring/service contract (generally over five
years). Costs attributed to providing the installations, which include
direct labor, direct materials and direct overhead, are capitalized and
amortized over a five year period. All other costs associated with the
installation are charged to income in the period when the installation
occurs.
Monitoring/Service Revenue Customers are billed for monitoring and
maintenance services primarily on a monthly or quarterly basis in advance
of the period in which such services are provided. Deferred revenues result
from billings in advance of performance of services. 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 is based on the estimated fair value at the date
of acquisition and included in "Customer Accounts, net" in the accompanying
consolidated balance sheets. Acquired customer accounts are capitalized and
amortized on a straight-line basis over a 10 year period. Costs applicable
to providing installation of internally generated customer accounts are
capitalized and amortized over the life of the monitoring/service contract
(generally five years). 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.
F-6
<PAGE>
Intangible assets are recorded at cost and amortized over their estimated
useful lives. The carrying value of intangible assets is periodically
reviewed and impairments are recognized when expected operating cash flows
derived from such intangibles is less than their carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided on the straight-line method. The estimated useful
lives for property and equipment range from five to seven years, and the
estimated useful lives for leasehold improvements is approximately thirty
years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accrued payroll, and other accrued
liabilities approximate fair value because of their short term maturities.
INCOME TAXES
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.
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.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain adjustments (consisting only of normal and
recurring adjustments) necessary to present fairly the Company's financial
position and the results of operations for the periods presented and the
disclosures herein are adequate to make the information presented not
misleading. Operating results for interim periods are not necessarily
indicative of the results that can be expected for a full year. These
interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto.
2. ACQUISITIONS
In February 1998, the Company acquired all of the outstanding common stock
of Mutual Central Alarm Services, Inc. ("Mutual"), for approximately
$10,000,000 in cash consideration and 1,981,700 shares of unregistered
Class A Common Stock, par value $.001 ("Class A Stock") of the Company. In
addition, options to purchase 200,000 shares of Class A Stock were granted
to two employees of Mutual. The acquisition agreement also contains a
provision whereby a net working capital surplus (as defined) would be
distributed to the former owners. This amount totals $486,117; a portion
was paid at closing and the balance was paid on May 5, 1998. The
transaction was accounted for under the purchase method of accounting,
accordingly the purchase price was allocated to the assets acquired and the
liabilities assumed based on their relative fair values at the date of
acquisition, with the excess being allocated to goodwill in the
F-7
<PAGE>
amount of $1,408,937. The acquisition of Mutual increased the Company's
customer base by approximately 2,500 subscribers.
The cash portion of the Mutual acquisition was funded with borrowings of
$6,250,000 under the Company's existing credit facility (the "Renewed
Credit Facility", see Note 6) with Heller Financial, Inc. ("Heller") and
proceeds from a $4,000,000 preferred stock investment from Western. Western
purchased 1,600,000 shares of newly issued Series B 10 1/2% Convertible
Cumulative Preferred Stock, par value $.001 ("Series B Preferred Stock"),
of the Company at $2.50 per share. The Series B Preferred Stock is
convertible into shares of Class A Stock on a share for share basis and pay
dividends at 10 1/2% per annum, payable quarterly in additional Preferred
Stock. Additionally, the Company granted to Western certain rights to have
the Class A Common Stock issuable upon conversion of the Series B Preferred
Stock registered by the Company under the Securities Act of 1933 as
amended.
In March 1998, the Company acquired certain assets and liabilities of Gator
Telecom, Inc., ("Gator"), for $1,400,000 in cash consideration and 94,937
shares of unregistered Class A Common Stock. The Company funded the cash
portion of the acquisition by using its Renewed Credit Facility with
Heller. The transaction was accounted for under the purchase method of
accounting, accordingly the purchase price was allocated to the assets
acquired and the liabilities assumed based on their relative fair values at
the date of acquisition, with the excess being allocated to goodwill in the
amount of $98,000. The acquisition of Gator increased the Company's
customer base by approximately 1,800 subscribers.
In conjunction with the acquisition of Mutual in February 1998 and the
acquisition of Gator in March 1998, net cash consideration paid was as
follows:
<TABLE>
<CAPTION>
MUTUAL GATOR TOTAL
------ ----- -----
<S> <C> <C> <C>
Assets acquired $18,887,315 $1,848,000 $20,735,315
Liabilities assumed (4,145,561) (70,000) (4,215,561)
Equity issued (4,405,157) (300,000) (4,705,157)
----------- ---------- -----------
Cash paid 10,336,597 1,478,000 11,814,597
Less - cash acquired (620,479) - (620,479)
----------- ---------- -----------
Net cash paid $ 9,716,118 $1,478,000 $11,194,118
=========== ========== ===========
</TABLE>
Unaudited pro forma condensed results of operations, giving effect to the
February 1998 acquisition of Mutual as of January 1, 1998 and 1997, are
reflected below.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Revenues, net $3,086,598 $2,400,557
Income from operations 547,975 560,705
Net loss applicable to common shares (581,494) (519,579)
Loss per common share (0.05) (0.06)
Average common shares outstanding 11,636,801 8,919,539
</TABLE>
The pro forma average number of common shares outstanding represents the
number of shares
F-8
<PAGE>
of common stock outstanding after giving effect to the 1,981,700 shares
issued in connection with the acquisition of Mutual.
The pro forma information is not necessarily indicative of the results of
operations that would have occurred had the acquisition taken place on
January 1 of the periods presented, or of results which may occur in the
future.
3. CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer accounts
for the three months ended March 31, 1998:
Balance, December 31, 1997 $ 8,048,495
Purchase of customer accounts 131,151
Customer accounts acquired in acquisitions 17,053,483
Internally generated accounts 1,097,608
Charges against contract holdbacks (37,107)
Amortization of customer accounts (601,064)
------------
Balance, March 31, 1998 $25,692,566
============
In conjunction with certain purchases of customer contracts and accounts,
the Company withholds a portion of the price as a credit to offset
qualifying attrition of the acquired customer accounts and for purchase
price settlements of assets acquired and liabilities assumed. The Company
had a total balance withheld of $165,326 and $292,297 at March 31, 1998 and
December 31, 1997, respectively, as contract holdbacks in connection with
the acquisition of customer accounts which are included in "Accounts
payable and accrued expenses" in the accompanying consolidated balance
sheets.
4. INTANGIBLE ASSETS
Intangible assets, net, consist of the following:
<TABLE>
<CAPTION>
AMORTIZATION MARCH 31,
PERIOD 1998
------ ----
<S> <C> <C>
Intangibles, at cost:
Goodwill 10 years $2,729,970
Deferred financing costs 3 years 783,186
Covenant not to compete, organization costs
and other Various 297,103
----------
3,810,259
Accumulated amortization (703,592)
----------
$3,106,667
==========
</TABLE>
Goodwill was recorded as a result of the acquisitions of Mutual and Gator
and from the 1996 merger of Guardian and Everest.
Deferred financing costs include commitment fees and expenses incurred in
connection with the refinancing of the Company's credit facility and costs
associated with the 1996 merger of Guardian and Everest.
F-9
<PAGE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
MARCH 31,
1998
----
Trade accounts payable $ 258,867
Contract holdbacks 165,326
Accrued commitment fee -
Other 1,413,002
---------
$1,837,195
6. LONG TERM OBLIGATIONS
Long term obligations consist of the following:
MARCH 31,
1998
----
Credit facility with financial institution $ 9,044,898
Obligation for assets under capital lease 130,119
Equipment notes payable and other 105,395
-------------
9,280,412
Less current portion (20,000)
-------------
$ 9,260,412
=============
In connection with the acquisition of Mutual (see Note 2), the Company
amended its credit facility with Heller. Under the Renewed Credit Facility,
borrowings will bear interest at Prime plus 1.75% or, at the Company's
election, LIBOR plus 3.50%. The Renewed Credit Facility expires in May 2001
and shall automatically renew from year to year thereafter, unless
terminated by either party. Availability under the Renewed Credit Facility
is subject to certain "Borrowing Base" limitations (as defined). The
Renewed Credit Facility includes customary covenants, including, but not
limited to, restrictions related to the incurring of other debt, the
encumbrance or sale of the Company's assets and the payment of dividends or
making of other distributions to the Company's shareholders. At March 31,
1998, the Company believes it was in compliance with all such covenants.
7. SUBSEQUENT EVENTS
In April 1998, the Company acquired Precision Security Systems, Inc.
("Precision"), one of the largest independent security alarm installation
companies in South Florida, for $3,000,000 in cash consideration and
194,269 shares of Class A Common Stock. The Company funded the cash portion
of the acquisition using borrowings under the Renewed Credit Facility with
Heller. The transaction will be accounted for under the purchase method of
accounting.
F-10
<PAGE>
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED 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, 1997 and
1996, 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, 1997 and 1996, 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
Commission's 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 5, 1998.
F-11
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 94,313 $1,037,861
Accounts receivable, net of allowance for doubtful accounts
of $198,848 and $166,315 in 1997 and 1996, respectively 539,512 569,180
Other 121,223 20,736
-------------- ----------
Total Current Assets 755,048 1,627,777
-------------- ----------
Property and Equipment, net 729,058 484,859
Customer Accounts, net 8,048,495 5,124,449
Intangible Assets, net 1,514,951 1,718,377
Deposits and Other Assets 27,506 26,517
-------------- ----------
Total Assets $ 11,075,058 $8,981,979
============== ==========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 781,879 $ 578,592
Unearned revenue 242,168 123,961
Current portion of long term obligations 73,201 84,004
-------------- ----------
Total Current Liabilities 1,097,248 786,557
-------------- ----------
Long Term Obligations, less current portion 961,584 5,079,832
Shareholders' Equity:
Preferred stock, $.001 par value, 30,000,000 shares authorized;
and 1,894,033 and 0 shares issued and outstanding in 1997
and 1996, respectively 1,894 -
Class A voting common stock, $.001 par value, 100,000,000
shares authorized; 9,003,804 and 6,453,804 shares issued;
and 8,996,804 and 6,453,804 shares outstanding in 1997 and
1996, respectively 9,004 6,454
Class B non-voting common stock, $.001 par value,
1,000,000 shares authorized; and 634,035 and 484,035
issued and outstanding in 1997 and 1996, respectively 634 484
Additional paid-in capital 12,091,050 4,777,772
Accumulated deficit (3,079,918) (1,467,762)
Treasury shares (6,438) -
Notes receivable from sale of stock - (201,358)
-------------- ----------
9,016,226 3,115,590
-------------- ----------
Total Liabilities and Shareholders' Equity $ 11,075,058 $8,981,979
============== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-12
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Monitoring $3,772,108 $2,685,734
Installation and service 1,852,682 935,256
---------- ----------
Total Revenues 5,624,790 3,620,990
---------- ----------
Operating Expenses:
Monitoring 579,373 498,929
Installation and service 1,653,003 926,319
General and administrative 2,488,045 1,452,120
Amortization of customer contracts 1,181,607 577,611
Depreciation and amortization 295,666 195,679
---------- ----------
Total Operating Expenses 6,197,694 3,650,658
---------- ----------
Loss From Operations (572,904) (29,668)
Interest Expense 1,001,187 560,680
---------- ----------
Net Loss Before Provision for Income Taxes (1,574,091) (590,348)
Provision for (Benefit from) Income Taxes - -
Net Loss $(1,574,091) $(590,348)
=========== =========
Average Common Shares Outstanding 7,510,549 4,497,771
=========== =========
Loss Per Common Share $ (0.21) $ (0.13)
=========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-13
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PREFERRED COMMON STOCK COMMON ADDITIONAL
STOCK CLASS A STOCK PAID-IN ACCUMULATED TREASURY
SERIES A SHARES AMOUNT CLASS B CAPITAL DEFICIT SHARES
--------- ------ ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ - 3,226,902 $3,227 $ - $1,060,903 $ (877,414) $ -
Issuance of stock in
connection with Everest - 3,226,902 3,227 - 4,962,429 - -
acquisition
Distribution to shareholder - - - - (1,667,838) - -
Issuance of 484,035 shares of
stock to financial institution - - - 484 422,278 - -
Net loss for period - - - -
---------- ----------- ------ ----- ---------- ----------- ----------
Balance, December 31, 1996 - 6,453,804 6,454 484 4,777,772 (1,467,762) -
Purchase of treasury shares - (7,000) - - - - (6,438)
Write-off of notes receivable
from sale of stock - - - - (201,358) - -
Issuance of Class A voting
common stock in connection with
acquisition - 50,000 50 - 38,950 - -
Issuance of 150,000 shares of
stock to financial institution - - - 150 130,350 - -
Sale of 1,875,000 Series A
preferred stock at $2.00 per share
and Class A voting common stock
at $1.50 per share, net of issuance
costs of $188,335
1,875 2,500,000 2,500 - 7,307,290 - -
Dividend on Series A preferred
stock of 19,033 shares 19 - - - 38,046 (38,065) -
Net loss for period - - - (1,574,091)
---------- ----------- ------ ----- ---------- ----------- ----------
Balance, December 31, 1997 $ 1,894 8,996,804 $ 9,004 $ 634 $12,091,050 $ (3,079,918) $ (6,438)
NOTES RECEIVABLE
FROM
SALE OF STOCK TOTAL
------------- -----
Balance, January 1, 1996 $ - $ 186,716
Issuance of stock in
connection with Everest (201,358) 4,764,298
acquisition
Distribution to shareholder - (1,667,838)
Issuance of 484,035 shares of
stock to financial institution - 422,762
Net loss for period - (590,348)
----------- -----------
Balance, December 31, 1996 (201,358) 3,115,590
Purchase of treasury shares - (6,438)
Write-off of notes receivable
from sale of stock 201,358 -
Issuance of Class A voting
common stock in connection with
acquisition - 39,000
Issuance of 150,000 shares of
stock to financial institution - 130,500
Sale of 1,875,000 Series A
preferred stock at $2.00 per share
and Class A voting common stock
at $1.50 per share, net of issuance
costs of $188,335
- 7,311,665
Dividend on Series A preferred
stock of 19,033 shares - -
Net loss for period - (1,574,091)
----------- -----------
Balance, December 31, 1997 $ - $ 9,016,226
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part of these statements.
F-14
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (1,574,091) $ (590,348)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 295,666 195,679
Amortization of customer accounts 1,181,607 577,611
Amortization of deferred financing costs 323,210 14,092
Provision for doubtful accounts 287,870 124,015
Changes in assets and liabilities:
Accounts receivable (258,202) (349,874)
Intangibles and other assets (248,043) 57,327
Accounts payable and accrued liabilities 301,316 121,064
Unearned revenue 118,207 63,081
----------- ----------
Net Cash Provided By Operating Activities 427,540 212,647
----------- ----------
Cash Flows From Investing Activities:
Purchase of fixed assets (215,712) (237,731)
Acquisition of customer accounts (4,181,552) (3,274,389)
Cash acquired in acquisition - 3,153,330
----------- ----------
Net Cash Used In Investing Activities (4,397,264) (358,790)
----------- ----------
Cash Flows From Financing Activities:
Payments of long term obligations (11,938,404) (2,022,467)
Proceeds from line of credit 7,659,353 5,054,690
Payment of shareholder loans (194,644)
-
Distribution to shareholder - (1,667,838)
Proceeds from sale of preferred stock, net 7,311,665 -
Purchase of treasury shares (6,438) -
----------- ----------
Net Cash Provided By Financing Activities 3,026,176 1,169,741
----------- ----------
Net Change In Cash and Cash Equivalents (943,548) 1,023,598
Cash and Cash Equivalents, beginning of period 1,037,861 14,263
----------- ----------
Cash and Cash Equivalents, end of period $ 94,313 $ 1,037,861
=========== ==========
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(CONTINUED)
1997 1996
---- ----
<S> <C> <C>
Noncash Investing and Financing Activities:
Financed acquisition of property $ 150,000 $ 100,537
========= ============
Issuance of Class B common stock $ 130,500 $ 422,761
========= ============
Issuance of Class A common stock in acquisition of:
Vehicles $ 16,870 $ -
========== ============
Customer contracts $ 22,130 $ -
========== ============
Write off of notes from sale of stock $ 201,358 $ -
========== ============
Contract hold backs applied against accounts written off $ 98,029 $ -
========== ============
Dividend on Preferred Stock $ 38,065 $ -
========== ============
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 $ 698,833 $ 540,933
========== ===========
Income taxes paid $ - $ -
========== ===========
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part of these statements.
F-16
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Guardian
International, Inc. ("Guardian") and its wholly owned subsidiary,
collectively the Company ("the Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company operates a central monitoring alarm station and sells and
installs alarm systems for residential and commercial customers in the
United States (its primary market).
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 depreciates the amount over a seven year period. Losses on contracts
for which future costs are anticipated to exceed revenues are recognized in
the period in which 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 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
F-17
<PAGE>
when expected operating cash flows derived from such intangibles is less
than their carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided on the straight-line method. The estimated useful
lives for property and equipment range from five to seven years, and the
estimated useful lives for leasehold improvements (see Note 8) is
approximately thirty years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accrued payroll, and other accrued
liabilities approximate fair value because of their short term maturities.
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.
LOSS PER COMMON SHARE
The Company adopted SFAS No. 128 "Earnings Per Share", in December 1997.
Basic loss per common share is computed by dividing net loss attributable
to common shareholders (net loss of $1,574,091 plus the preferred dividends
of $38,065) by the weighted average number of shares of common stock
outstanding during the year. Diluted loss per share, which assumes that the
convertible preferred stock is converted into Class A voting common stock
and the stock options to purchase shares of Class A voting common stock
(see Note 11) are exercised, is not presented because the effect would be
anti-dilutive for both 1997 and 1996. The Company's reported loss per share
for 1996 has been restated to comply with the requirements of SFAS No. 128;
however, there was no change to the amount previously reported. The
weighted average shares outstanding used in the computation of net loss
attributable to common shares are as follows:
F-18
<PAGE>
WEIGHTED AVERAGE SHARES
OUTSTANDING FOR THE YEAR ENDED
DECEMBER 31,
1997 1996
---- ----
Class A common stock 7,008,842 4,332,005
Class B common stock 501,707 165,766
--------- ---------
7,510,549 4,497,771
========= =========
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.
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 subsidiary acquired by
Guardian from the merger date (August 28, 1996) through December 31, 1996.
In connection with the acquisition, the Company issued during 1996,
484,035 shares of Class B non-voting common stock to a financial
institution for cancellation of their existing Capital Appreciation Rights,
as defined in the loan agreement. Also, in accordance with the terms of an
agreement the financial institution was issued during 1997, an additional
150,000 shares of Class B non-voting common stock. The shares were valued
at $0.87 per share ($422,762 and $130,500 in the aggregate, respectively),
capitalized as a cost of the acquisition of Everest and are being amortized
over the remaining life of the debt expiring in May 1999 (see Note 7).
In May 1997, the Company purchased customer accounts and contracts from a
private alarm company for $2,200,000 in cash, 50,000 shares of Class A
voting common stock valued at $0.78 per share, the market price of the
Company's common stock on the date of the
F-19
<PAGE>
transaction ($39,000 in the aggregate), and an option to the Seller to
purchase 100,000 additional shares of Class A voting common stock at $2.50
per share (see Note 11).
Subsequent to year end in February 1998, the Company acquired all of the
outstanding common stock of a private alarm company, for approximately
$10,000,000 in cash and 1,981,700 shares of restricted Class A voting
common stock, valued at $3.25 per share ($6,440,525 in the aggregate). The
cash portion of the transaction was funded through the Company's credit
facility (approximately $6,250,000) and the sale of 1,600,000 shares of 10
1/2% convertible, cumulative preferred stock for $4,000,000. The
transaction will be accounted for under the purchase method of accounting.
The fair value of the net assets acquired is approximately $15,530,000, not
including net cash and cash equivalents. The acquisition agreement also
contains a provision whereby a net working capital surplus (as defined)
will be distributed to the former owners within forty-five days of the
closing date. The excess of the cost over the fair value of the net assets
acquired, approximately $1,119,000, will be amortized on a straight-line
basis over 10 years. The pro forma balance sheet is based on initial
estimates, as the Company has not yet finalized its purchase price
allocation. The effects resulting from the finalization of the purchase
price allocation is not expected to have a material effect on the financial
statements.
Unaudited pro forma balance sheet at December 31, 1997 giving effect to the
February 1998 acquisition as of January 1, 1997 is reflected below.
UNAUDITED
---------
DECEMBER 31,
1997
----
Cash and cash equivalents $ 1,805,197
Other current assets 2,185,506
Property and equipment, net 827,861
Customer accounts, net 21,177,331
Intangibles, net 2,521,862
Other assets 187,804
----------
Total assets $28,705,561
==========
Current liabilities $ 2,977,865
Long term obligations 7,836,584
Shareholders' equity 17,891,112
----------
Total liabilities and shareholders' $28,705,561
==========
Unaudited pro forma results of operations giving effect to the acquisitions
as of January 1, 1997 and 1996 are reflected below.
UNAUDITED
FOR THE YEARS ENDED DECEMBER 31,
1997 1996
---- ----
Revenues, net $11,029,936 $9,305,514
Net loss applicable to common shares $ 3,042,876 $2,385,709
Loss per common share $ 0.32 $ 0.29
Average common shares outstanding 9,624,577 8,357,109
F-20
<PAGE>
Pro forma net loss per share is computed by dividing the pro forma net loss
by the pro forma average number of common shares outstanding during the
periods.
Pro forma average number of common shares outstanding represents the number
of shares of common stock outstanding after giving retroactive effect to
the 1,981,700 and 3,226,902 shares issued in connection with the
acquisitions.
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, 1997 and 1996:
1997 1996
---- ----
Balance, beginning of year $5,124,449 $2,075,671
Purchase of customer accounts 4,203,682 3,274,389
Customer accounts acquired in merger - 352,000
Charges against contract hold backs (98,029) -
Amortization of customer accounts (1,181,607) (577,611)
---------- ----------
Balance, end of year $8,048,495 $5,124,449
========== ===========
In conjunction with certain purchases of customer contracts and accounts,
the Company withholds a portion of the price as a credit to offset
qualifying attrition of the acquired customer accounts and for purchase
price settlements of assets acquired and liabilities assumed. The Company
withheld $292,297 and $92,949 at December 31, 1997 and 1996, respectively,
as contract holdbacks in connection with the acquisition of customer
accounts which are included in "Accounts payable and accrued expenses" in
the consolidated balance sheets (see Note 6).
4. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following at December 31, 1997
and 1996:
1997 1996
---- ----
Property and equipment, at cost:
Station equipment $ 673,381 $504,973
Station equipment under capital lease 150,000 -
Vehicles, furniture and office equipment 183,878 147,244
Leasehold improvements 157,585 133,025
--------- --------
1,164,844 785,242
Accumulated depreciation and amortization (435,786) (300,383)
--------- --------
$ 729,058 $484,859
========= ========
F-21
<PAGE>
5. INTANGIBLE ASSETS
Intangible assets, net, consist of the following at December 31, 1997 and
1996:
AMORTIZATION
PERIOD 1997 1996
------ ---- ----
Intangibles, at cost:
Excess of acquisition cost over net
assets acquired 10 years $1,223,000 $ 1,223,000
Deferred financing costs 3 years 695,686 422,761
Covenant not to compete, organization
costs and other Various 203,187 215,429
---------- -----------
2,121,873 1,861,190
Less accumulated amortization (606,922) (142,813)
---------- -----------
$1,514,951 $ 1,718,377
========== ===========
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 634,035 shares of Class B non-voting common stock in
connection with the merger of Guardian and Everest as described in Note 2.
The Company has also accrued the cost of commitment fees and expenses
incurred in connection with the refinancing of its credit facility (see
Note 7). The amortization of such costs is charged to interest expense over
the life of the related indebtedness.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1997 and 1996:
1997 1996
---- ----
Trade accounts payable $192,900 $357,219
Contract holdbacks 292,297 92,949
Accrued commitment fee 85,266 -
Other 211,416 128,424
-------- --------
$781,879 $578,592
======== ========
7. LONG TERM OBLIGATIONS
Long term obligations consist of the following at December 31, 1997 and
1996:
1997 1996
---- ----
Credit facility with financial institution $ 752,898 $4,968,571
Obligation for assets under capital lease 136,267 -
Equipment notes payable and other 145,620 195,265
---------- ----------
1,034,785 5,163,836
Less current portion (73,201) (84,004)
---------- ----------
$961,584 $5,079,832
========== ==========
F-22
<PAGE>
During 1997, the Company entered into a lease agreement for central station
equipment expiring in 2002, which specifies for annual and aggregate future
minimum rentals of $38,700 and $170,925, respectively. The lease has been
capitalized using an interest rate of approximately 10.51%. Amortization of
the capitalized amount is included in depreciation expense.
During 1997, the Company refinanced its existing credit facility with its
lender (the "Renewed Credit Facility"). Under the Renewed Credit Facility,
as amended and restated, the maximum credit facility available to the
Company was increased from $7 million, available under the then existing
agreement, to $20 million. Interest under the Renewed Credit Facility is
based on the 90 day LIBOR plus an additional percentage varying from 4% to
5% (10.89% at December 31, 1997), depending on the Company's outstanding
borrowings and Tangible Net Worth (as defined). Interest under the prior
credit facility bore interest at prime plus 3% (8.50% at December 31,
1996). The Renewed Credit Facility expires in May 1999, and shall
automatically renew from year to year thereafter unless terminated by
either party. The credit facility is collateralized by substantially all of
the Company's assets.
On December 31, 1997 and 1996, the Company did not comply with certain
conditions of the credit facility, primarily the debt service and net worth
ratio requirements, for which waivers were obtained from the lender.
Subsequent to year end and in connection with the February 1998 acquisition
(see Note 2), the Company amended its credit facility with its lender ("the
Amended Credit Facility"). Under the Amended Credit Facility, the term of
the credit facility has been extended to May 31, 2001. Borrowings will bear
interest at a Base Rate (defined as the Federal Reserve System's Prime
Rate) plus one and three-quarters percent (1.75%) or, at the Company's
election, the LIBOR rate plus three and one-half percent (3.50%).
Availability under the Amended Credit Facility is subject to certain
"Borrowing Base" limitations (as defined). The Amended Credit Facility
includes customary covenants, including, but not limited to, restrictions
related to the incurring of other debt, the encumbrance or sale of the
Company's assets, and the payment of dividends or making of other
distributions to the Company's shareholders.
Long term obligations mature as follows: $73,201 in 1998, $828,260 in 1999,
$68,920 in 2000, $48,694 in 2001, and $15,710 in 2002.
8. COMMITMENTS, CONTINGENCIES AND 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 $84,000 (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. Future minimum payments under operating and capital leases
(see Note 7) are as follows:
F-23
<PAGE>
OPERATING CAPITAL
1998 $102,086 $ 38,700
1999 104,528 38,700
2000 103,020 38,700
2001 97,335 38,700
2002 100,256 16,125
Thereafter 298,185
-------- --------
$805,410 170,925
Less interest (34,658)
-------
Capital lease obligations reflected as
current ($25,585) and non-current
($110,682) portions of long term
obligations
$136,267
========
9. INCOME TAXES
At December 31, 1997, the Company has net operating loss carry forwards for
federal income tax purposes of approximately $3,200,000, which begin to
expire in 2010. The components of deferred tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Deferred tax (liabilities) assets
Allowance for doubtful accounts - current $ 77,551 $ 64,863
Difference in amortization of customer contracts (491,076) (222,931)
Net operating loss carry forwards 1,241,041 231,702
Other 39,325 54,925
--------- ----------
866,841 128,559
Less valuation allowance (866,841) (128,559)
--------- ----------
Net deferred tax (liabilities) assets $ $
========= ==========
</TABLE>
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
COMMON AND PREFERRED STOCK
In October and November 1997, the Company issued 2,500,000 shares of Class
A common stock for $1.50 per share ($3,750,000 in the aggregate) and
1,875,000 newly authorized shares of 9 3/4% Convertible, Cumulative
Preferred Stock for $2.00 per share ($3,750,000 in the aggregate). The
proceeds of the $7,500,000 investment was used to reduce debt and for
acquisitions. The Preferred Shares are convertible (at the option of the
holder or any time after two years from the date of issuance if the common
stock trades above $3.00 per share for 20 consecutive days) into shares of
Class A voting common stock on a share for share
F-24
<PAGE>
basis and have a liquidation preference of $2.00 per share. Dividends, at 9
3/4% per annum, are payable quarterly at the Company's option in cash or
additional Preferred Shares during the first two years after issuance and
in cash thereafter. The January 1, 1998 dividends will be paid by the
issuance of additional Preferred Shares (19,033 shares or $38,065 in the
aggregate, representing the pro-rata dividend from November 25, 1997). All
references to the number of Preferred Shares have been restated to reflect
the effect of the stock dividend.
The Company's Class B non-voting common shares are convertible into Class A
voting common stock at any time at the holder's election.
NOTES RECEIVABLE FROM SALE OF STOCK
Prior to its merger with Guardian International, Inc. (see Note 2), Everest
Security Systems Corporation issued, among other issuances of common stock,
485,000 shares of Common Stock at $2.00 per share. As consideration for
285,000 of the shares issued pursuant to such offering, Everest received
notes with original balances totaling $570,000. As of the date of the
merger of Guardian and Everest, the balances outstanding on the notes was
$201,358. After exhaustive collection efforts by the Company subsequent to
the merger, no further monies have been received, nor are any additional
collections anticipated. In light of the above factors, during the quarter
ended June 30, 1997 the Company wrote off the $201,358 as a direct
reduction to additional paid-in capital.
11. STOCK OPTIONS
During 1997, the Company issued 300,000 stock options to purchase shares of
common stock at exercise prices ranging from $1.95 to $2.50 per share to
various employees. 200,000 of these options are exercisable on a pro rata
basis over five years and the remaining are exercisable on January 1, 1998.
Also, there were 184,720 options shares issued and outstanding preceding
and subsequent to the merger with Everest (see Note 2). As of December 31,
1997 and 1996, 214,720 and 184,720 stock options were exercisable,
respectively.
The following is a summary of stock option activity for the years ended
December 31, 1997 and 1996:
<TABLE>
WEIGHTED
OPTION AVERAGE
SHARES EXERCISE PRICE DATE OF EXPIRATION
------ ------------- ------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 -
Granted -
Assumed in connection with merger 184,720 $2.05 December 31, 2000
Expired -
Exercised -
Outstanding at December 31, 1996 184,720 $2.05
Granted 300,000 $2.13 100,000 options
on January 1, 2002
200,000 options
on October 21,
2007
Expired (10,000) $3.00
Exercised -
Outstanding at December 31, 1997 474,720 $2.08
=======
</TABLE>
F-25
<PAGE>
The Company has adopted Statement No. 123, ("SFAS No. 123") "Accounting for
Stock-Based Compensation", which requires the Company to either recognize
expense for stock based awards based on the fair value on the date of grant
or provide footnote disclosure regarding the impact of such charges. The
Company continues to account for stock options pursuant to APB No. 25.
Accordingly, the Company does not record compensation costs unless the
market price exceeds the exercise price on the date of grant. If the
Company had elected to recognize compensation cost based on the fair value
of the options granted, the pro forma net loss and net loss per common
share would be as follows:
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------
FOR THE YEAR ENDED
DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Net loss applicable to common shares:
As reported for 1997 and previously reported
pro forma for 1996 $ 1,612,156 $ 1,065,830
Pro forma for SFAS No. 123 $ 1,758,116 $ 1,083,730
Net loss per common share:
As reported for 1997 and previously reported
pro forma for 1996 $ 0.21$ 0.17
Pro forma for SFAS No. 123 $ 0.23$ 0.17
</TABLE>
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 157%, risk-free interest
rate ranging from 6% to 7%, expected dividends of $0 and expected lives of
5 to 10 years.
12. IMPLEMENTATION OF NEW FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income" and No. 131 "Disclosure About Segments of an Enterprise and Related
Information." SFAS No. 130 requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately
from retained income and additional capital in the shareholders' equity
section of the balance sheet. SFAS 131 established standards for the way
that public enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also established standards for disclosures about
products and services, geographic areas and major customers. Both
statements are effective for fiscal year 1998. The Company has not
completed evaluating the impact of implementing the provisions of SFAS Nos.
130 and 131.
F-26
<PAGE>
<TABLE>
<CAPTION>
GUARDIAN INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO OTHER BALANCE AT
YEAR COST AND EXPENSES ACCOUNTS (A) DEDUCTIONS (B) END OF YEAR
-------------- ----------------- ---------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowances deducted from assets for
Doubtful accounts $ 166,315 $287,870 $ -- $ (255,337) $198,848
============== ======== ============== ================== ========
Deferred taxes $ 128,559 $738,282 $ -- $ -- $866,841
============== ======== ============== ================== ========
YEAR ENDED DECEMBER 31, 1996
Allowances deducted from assets for
Doubtful accounts $ 15,000 $124,015 $ 27,300 $ -- $166,315
============== ======== ============== ================== ========
Deferred taxes $ -- $128,559 $ -- $ -- $128,559
============== ======== ============== ================== ========
</TABLE>
(A) Allowance of subsidiary acquired in merger.
(B) Results from write-offs of accounts receivable.
F-27
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN GUARDIAN INTERNATIONAL, INC.
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY SELLING SECURITY
HOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS --------------------------------------------------------
NOT AUTHORIZED, OR IN WHICH SUCH PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY --------------------------------------------------------
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR PROSPECTUS
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY ___________, 1998
TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
</TABLE>
TABLE OF CONTENTS
PAGE
----
Available Information...................... 3
Cautionary Note Regarding Forward-Looking
Statements.................................. 3
Risk Factors................................ 4
Use of Proceeds............................. 16
Selling Security Holders.................... 16
Plan of Distribution........................ 18
Description of Business..................... 28
Management's Discussion and Analysis
or Plan of Operation........................ 43
Legal Matters............................... 57
Experts..................................... 57
Financial Statements........................ F-1
85
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.7502 of the Nevada Revised Statutes ("NRS") provides that
Nevada corporations may limit, through indemnification, the personal liability
of their directors or officers in actions, claims or proceedings brought against
such person by reason of that person's current or former status as an officer or
director of the corporation. Indemnification of directors or officers is not
available if the person acted in good faith and in a manner the person
reasonably believed was, at least, not opposed to the best interests of the
corporation. In the event of a criminal action or proceeding, indemnification is
not available if the person had reasonable cause to believe their action was
unlawful. Further, in an action brought by the corporation or in the right of
the corporation, if the person, after exhaustion of all appeals, is found to be
liable to the corporation, or if the person makes payment to the corporation in
settlement of the action, indemnification is available only to the extent a
court of competent jurisdiction determines the person is fairly and reasonably
entitled to indemnification.
Such discretionary indemnification is available only as authorized on a
case-by-case basis by: (1) the stockholders; (2) a majority of a quorum of the
board of directors consisting of members of the board who were not parties to
the action, suit or proceeding; (3) if a majority of a quorum of the board of
directors consisting of members of the board who were not parties to the action,
suit or proceeding so orders, by independent legal counsel in a written opinion;
or (4) if a quorum of the board of directors consisting of members of the board
who were not parties to the action cannot be obtained, by independent legal
counsel in a written opinion.
To the extent that a director or officer of a corporation is successful
in defending against an action, suit or proceeding brought against that person
as a result of their current or former status as an officer or director, the
corporation must indemnify the person against all expenses actually and
reasonably incurred by the person in connection with their defense.
Nevada law also allows Nevada corporations to advance expenses of
officers and directors incurred in defending a civil or criminal action as they
are incurred, upon receipt of an undertaking by or on behalf of the director or
officer to repay such expenses if it is ultimately determined by a court of
competent jurisdiction that such officer or director is not entitled to be
indemnified by the corporation because such officer or director did not act in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation.
Section 78.751 of the NRS provides that any indemnification provided
for by NRS 78.7502 (by court order or otherwise) shall not be deemed exclusive
of any other rights to which the indemnified party may be entitled and that the
scope of indemnification shall continue as to directors or officers who have
ceased to hold such positions and to their heirs, executors and administrators.
Section 78.752 of the NRS allows corporations to provide insurance, or other
financial arrangements such as a program of self-insurance, for their directors
or officers. Such insurance may provide coverage for any liability asserted
against the person and liability and expenses incurred by the person in their
capacity as a director or officer or arising out of their status as such,
whether or not the corporation has the authority to indemnify the person against
such liability and expenses. However, no financial arrangement made under
Section 78.752 may provide protection for a person adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
for intentional misconduct, fraud or a knowing violation of law, except with
respect to the advancement of expenses or indemnification ordered by a court.
Article XII of the By-Laws requires indemnification by the Company of
each person who serves as a director or officer. A summary of the circumstances
in which such indemnification is
II-1
<PAGE>
provided is set forth in the following three paragraphs, but such summary is
qualified in its entirety by reference to Article XII.
In general, any director or officer of the Company who was or is a
party to, or is threatened to be made a party, or was or is a witness, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and any appeal therefrom
(collectively, a "Proceeding"), by reason of the fact that he is or was a
director or officer of such company or is or was serving in any capacity at the
request of such company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise (including
serving as a fiduciary of an employee benefit plan) shall be indemnified by the
Company to the full extent permitted by Nevada law against all liability (which
for purposes of Article XII includes all judgments, settlements, penalties and
fines) and costs, charges and expenses (including attorneys' fees) asserted
against him or incurred by him in connection with any Proceeding.
Article XII permits the Company to deny indemnification to a person who
initiated a Proceeding if the Company denied authorization of the Proceeding
within 60 days after receipt of notice of the Proceeding from the indemnified
person. Such indemnification for costs, charges and expenses incurred by a
person who initiates a suit may not, however, be permitted under Nevada law.
Article XII also provides that the Company shall advance costs, charges
and expenses (including attorneys' fees) incurred by an indemnified person, but
permits the Company to withhold advancement of costs to a director or officer in
an action in which such person is an adverse party to the Company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table is an itemization of all expenses (subject to
future contingencies) incurred or expected to be incurred by the Company in
connection with the issuance and distribution of the securities being offered
hereby. Items marked with an asterisk (*) represent estimated expenses. The
Company has agreed to pay all the costs and expenses of this offering.
SEC Registration Fee ....... $ 859.00
Legal Fees and Expenses .... 18,000.00*
Printing ................... 2,000.00*
Accounting Fees and Expenses 2,000.00*
Miscellaneous .............. 3,000.00*
Total ...................... $25,859.00
==========
* Estimate
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On June 7, 1995, the Company issued 20,000,000 shares of common stock
for 100,000 shares of J.A. Industries, Inc. valued at $100,000. The shares were
issued in reliance upon the exemption from registration afforded by Section 4(2)
of the Securities Act. The shares were issued in a private placement to
International Treasury & Investments Ltd.
II-2
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
- ---------------------- ----------------- ------------------------ ----------------
<S> <C> <C> <C> <C>
International Treasury 6/7/95 20,000,000 (before the 1 $100,000 in J.A.
& Investments Ltd. for 20 reverse split) Industries stock
</TABLE>
On July 5, 1995, the Company issued 3,975,000 shares of Everest 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. The shares were issued as compensation for services
rendered or to be rendered.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
- ---------------------- ----------------- ------------------------ ----------------
<S> <C> <C> <C>
427968 B.C. Ltd. (1) 7/5/95 1,325,000 (prior to 1:20 $1,325
reverse split)
Knight Financial 7/5/95 1,325,000 (prior to the $1,325
Ltd. (2) 1:20 reverse split)
Steven A. Sanders 7/5/95 1,325,000 (prior to the $1,325
1:20 reverse split)
<FN>
- ----------
(1) 427968 B.C. Ltd. is controlled by J.A. Michie.
(2) Knight Financial Ltd. is controlled by Robert Knight.
</FN>
</TABLE>
In October 1995, the Company issued 500,000 shares of Everest 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.
AGGREGATE
DATE OF NUMBER OF CONSIDERATION
PURCHASER PURCHASES COMMON SHARES PAID
- ---------------------- --------- ------------- -------------
427968 B.C. Ltd.(1) 10/13/95 50,000 $100,000
427968 B.C. Ltd.(1) 10/17/95 10,000 $20,000
Royal Bank of Scotland (2) 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. (3)
12/15/95 75,000 $150,000
International Treasury &
Investments 12/15/95 75,000 $150,000
Ltd. (4)
Langara Capital Foundation (5) 12/15/95 75,000 $150,000
II-3
<PAGE>
(1) 427968 B.C. Ltd. is controlled by J.A. Michie.
(2) Royal Bank of Scotland purchased shares for clients of the bank, identities
unknown.
(3) Tiger Eye Investments (Cayman) Ltd. is owned by Campbell Nominees, Ltd.
(4) International Treasury & Investments Ltd. is owned by Warwyck Nominees,
Ltd. and an affiliate of G.M. Capital Partners, Ltd.
(5) Langara Capital Foundation is owned by Lichtenstein Trust, administered by
J.A. Michie.
In November 1995, the Company issued 100,000 shares of Everest 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.
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
--------- ----------------- ------------- -------------
Frank Bauer 11/95 100,000 $1,000
On March 12, 1996, the Company issued 30,000 shares of Everest 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.
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
--------- ----------------- ------------- -------------
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
On August 14, 1996, the Company issued a total of 1,000,000 shares of
Everest 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.
AGGREGATE
NUMBER OF CONSIDERATION
PURCHASER DATE OF PURCHASES COMMON SHARES PAID
--------- ----------------- ------------- -------------
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
II-4
<PAGE>
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
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 ("Guardian"), 3,226,902 shares of
Cass A Common Stock were issued to the shareholders of Guardian in exchange for
all of the outstanding shares of common stock of 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
Sheilah Ginsburg 10/04/96 903,533
Richard Ginsburg 10/04/96 629,246
Rhonda Ginsburg 10/04/96 629,245
Robert and Nancy Kasky 10/04/96 161,345
In connection with the acquisition of the assets of Alarm Controls Inc.,
the Company issued 50,000 shares of Class A Common Stock to Terry E. Akins,
issued in reliance upon the exemption from registration afforded by Section 4(2)
of the Securities Act, and an option to purchase 100,000 shares of Class A
Common Stock at a price of $2.50 per share, pursuant to the Option Agreement
dated May 7, 1997.
NUMBER OF
PURCHASER DATE OF PURCHASES COMMON SHARES
--------- ----------------- -------------
Terry E. Akins 5/7/97 50,000
On October 21, 1997 and November 24, 1997, pursuant to a Stock Subscription
Agreement between the Company and Western, dated as of October 14, 1997, the
Company issued 2,500,000 shares of Class A Common Stock and 1,875,000 shares of
Series A Preferred Stock to Westar Capital, which assigned its Guardian holdings
to Westar Security. (See "Recent Developments -- Investment by Westar Capital,
Inc." and "Security Ownership of Certain Beneficial Owners and Management" in
Part I above.) On February 23, 1998, the Company issued 1,600,000 shares of
Series B Preferred Stock to Westar Security, Inc. ("Westar Security"), the
assignee of Westar Capital, pursuant to a Stock Subscription Agreement dated as
of February 23, 1998. These shares were issued in reliance upon the exemption
from registration afforded by Section 4(2) of the Securities Act.
II-5
<PAGE>
Additionally, the Company issued to Westar Security as of April 1, 1998
19,033 shares of Series A Preferred Stock representing stock dividends for the
period from November 24, 1997 through December 31, 1997 as of March 16, 1998.
The Company issued to Westar Security 46,041 shares of Series A Preferred Stock
representing the stock dividend for the first quarter of 1998 and 17,030 shares
of Series B Preferred Stock representing the stock dividend for the period from
February 23, 1998 through March 31, 1998. The Company issued to Westar Security
47,678 shares of Series A Preferred Stock and 42,796 shares of Series B
Preferred Stock representing the stock dividend for the period from April 1,
1998 through June 30, 1998. These shares were issued in reliance upon the
exemption from registration afforded by Section 4(2) of the Securities Act. See
"Description of Business -- Recent Developments" and "Security Ownership of
Certain Beneficial Owners and Management" in Part I above.
NUMBER OF SHARES
OF CLASS A
PURCHASER DATE OF PURCHASES COMMON STOCK
--------- ----------------- -------------
Westar Security 10/21/97 2,500,000
Westar Security 11/24/97 1,875,000
Westar Security 3/16/98 19,033
Westar Security 4/1/98 63,071
Westar Security 7/1/98 90,474
* On an as-converted basis.
On February 23, 1998, the Company issued the Shares to the Selling Security
Holders. The Shares were issued in reliance upon the exemption from registration
afforded by Section 4(2) of the Securities Act and in compliance with the Blue
Sky Laws of the State of New York. For a list of persons to whom the Shares were
issued, see "Selling Security Holders" above.
II-6
<PAGE>
ITEM 27. EXHIBITS.
The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION
3(i)(a) Articles of Incorporation dated October 30, 1986 incorporated
by reference to Exhibit 3(i) of the Company's Form 10-SB
filed May 6, 1996
3(i)(b) Amendment to the Articles of Incorporation incorporated by
reference to Exhibit 3(i)(a) the Company's Form 10-SB filed
May 6, 1996
3(i)(c) Amendment to the Articles of Incorporation incorporated by
reference to Exhibit 3(i)(b) of the Company's Form 10-SB
filed May 6, 1996
3(i)(d) Amendment to the Articles of Incorporation incorporated by
reference to Exhibit 3(i)(c) of the Company's Form 10-SB/A
filed January 24, 1997
3(ii) Amended and Restated By-Laws of the Company incorporated by
reference to Exhibit 3(ii) of the Company's Quarterly Report
on Form 10-QSB filed as of November 14, 1997
4(a) Specimen of Class A Common Stock Certificate incorporated by
reference to Exhibit 4 of the Company's Form 10SB12G as of
June 18, 1996
4(b) See Exhibits 3(i)(a)-(d) and 3(ii) hereto for provision of
the Articles and By-Laws defining rights of holders of Class
A Common Stock
5 Opinion of Steel Hector & Davis LLP, relying on Lionel,
Sawyer & Collins
10(a) Stock Purchase Agreement effective as of February 23, 1998
incorporated by reference to Exhibit 10(a) of the Company's
Form 8-K filed as of March 10, 1998
10(b) Registration Rights Agreement dated as of February 23, 1998
incorporated by reference to Exhibit 10(b) of the Company's
Form 8-K filed as of March 10, 1998
10(c) Escrow and Pledge Agreement dated as of February 23, 1998
incorporated by reference to Exhibit 10(c) of the Company's
Form 8-K filed as of March 10, 1998
21 List of Subsidiaries
23(a) Consent of McKean, Paul, Chrycy, Fletcher & Co.
23(b) Consent of Steel Hector & Davis (contained in Opinion filed
as Exhibit 5 to this Registration Statement)
23(c) Consent of Lionel Sawyer & Collins
24 Power of Attorney (contained on signature page of this
Registration Statement)
II-7
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To file a post-effective amendment to remove from registration any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-8
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Richard
Ginsburg and Darius G. Nevin, or either of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
re-substitution for him and in his name, place, and stead in any and all
capacities to sign any and all pre- or post-effective amendments to this
Registration Statement, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agent and each of them full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Hollywood, Florida on July 24, 1998.
GUARDIAN INTERNATIONAL, INC.
By: /s/ RICHARD GINSBURG
-----------------------------
Richard Ginsburg
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ RICHARD GINSBURG President, Chief Executive Officer and July 24, 1998
- -------------------- Director (Principal Executive Officer)
Richard Ginsburg
/s/ DARIUS G. NEVIN Chief Financial Officer, Vice President July 24, 1998
- -------------------- and Director (Principal Financial and
Darius G. Nevin Accounting Officer)
/s/ HAROLD GINSBURG Chairman of the Board and Director July 24, 1998
- -------------------
Harold Ginsburg
/s/ SHEILAH GINSBURG Director July 24, 1998
- --------------------
Sheilah Ginsburg
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ WILLIAM REMINGTON Director July 24, 1998
- ---------------------
William Remington
/s/ DOUGLAS T. LAKE Director July 24, 1998
- -------------------
Douglas T. Lake
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3(i)(a) Articles of Incorporation dated October 30, 1986 incorporated
by reference to Exhibit 3(i) of the Company's Form 10-SB
filed May 6, 1996
3(i)(b) Amendment to the Articles of Incorporation incorporated by
reference to Exhibit 3(i)(a) the Company's Form 10-SB filed
May 6, 1996
3(i)(c) Amendment to the Articles of Incorporation incorporated by
reference to Exhibit 3(i)(b) of the Company's Form 10-SB
filed May 6, 1996
3(i)(d) Amendment to the Articles of Incorporation incorporated by
reference to Exhibit 3(i)(c) of the Company's Form 10-SB/A
filed January 24, 1997
3(ii) Amended and Restated By-Laws of the Company incorporated by
reference to Exhibit 3(ii) of the Company's Quarterly Report
on Form 10-QSB filed as of November 14, 1997
4(a) Specimen of Class A Common Stock Certificate incorporated by
reference to Exhibit 4 of the Company's Form 10SB12G as of
June 18, 1996
4(b) See Exhibits 3(i)(a)-(d) and 3(ii) hereto for provision of
the Articles and By-Laws defining rights of holders of Class
A Common Stock
5 Opinion of Steel Hector & Davis LLP, relying on Lionel,
Sawyer & Collins
10(a) Stock Purchase Agreement effective as of February 23, 1998
incorporated by reference to Exhibit 10(a) of the Company's
Form 8-K filed as of March 10, 1998
10(b) Registration Rights Agreement dated as of February 23, 1998
incorporated by reference to Exhibit 10(b) of the Company's
Form 8-K filed as of March 10, 1998
10(c) Escrow and Pledge Agreement dated as of February 23, 1998
incorporated by reference to Exhibit 10(c) of the Company's
Form 8-K filed as of March 10, 1998
21 List of Subsidiaries
23(a) Consent of McKean, Paul, Chrycy, Fletcher & Co.
23(b) Consent of Steel Hector & Davis (contained in Opinion filed
as Exhibit 5 to this Registration Statement)
23(c) Consent of Lionel Sawyer & Collins
24 Power of Attorney (contained on signature page of this
Registration Statement)
EXHIBIT 5
July 23, 1998
Guardian International, Inc.
3880 N. 28th Terrace
Hollywood, Florida 33020-1118
Ladies and Gentlemen:
As counsel for Guardian International, Inc, a Nevada corporation (the
"Company"), we have participated in the preparation and filing of a registration
statement on Form SB-2 to be filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, on or about the date hereof (the
"Registration Statement") in connection with the proposed offering of 1,981,700
shares (the "Shares") of Class A Voting Common Stock, par value $.001 per share,
of the Company.
In connection therewith, we have reviewed the Company's Articles of
Incorporation, as amended to date, the Company's Amended and Restated By-Laws
and such documents and records as we have deemed necessary to enable us to
express an opinion on the matters covered hereby. As to all matters pertaining
to Nevada law, we have relied on the opinion of Lionel Sawyer & Collins, Reno,
Nevada, Nevada counsel to the Company, of even date herewith.
Based on and subject to the foregoing, we are of the opinion that the Shares,
when sold as contemplated by the Registration Statement, will be validly issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to us in the Prospectus
included in the Registration Statement under the caption "Legal Matters."
Very truly yours,
/s/ STEEL HECTOR & DAVIS LLP
- ----------------------------
STEEL HECTOR & DAVIS LLP
EXHIBIT 21
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
Specialty Device Installers, Inc. Florida
The Guardian Security Group, Inc. Florida
Mutual Central Alarm Services, Inc. (1) New York
Gator Telecom, Inc. (2) Florida
Precision Security Systems, Inc. Florida
(1) Acquired pursuant to a Stock Purchase Agreement effective as of February
1, 1998
(2) Acquired pursuant to an Asset Purchase Agreement effective March 9, 1998
(3) Acquired pursuant to a Stock Purchase Agreement effective April 27, 1998
EXHIBIT 23(A)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1997 or performed
any audit procedures to the date of our report.
McKEAN, PAUL, CHRYCY, FLETCHER & CO.
Miami, FL
July 23, 1998
EXHIBIT 23(C)
July 23, 1998
Guardian International, Inc.
3880 North 28 Terrace
Hollywood, Florida 33020-1118
RE: Consent to Reference to Lionel Sawyer & Collins
REGISTRATION STATEMENT ON FORM SB-2
Dear Sirs:
We are in receipt of a draft prospectus (the "Prospectus") to be
included as part of a Registration Statement on Form SB-2 ("Registration
Statement"), being filed by the Guardian International, Inc., a Nevada
corporation (the "Company") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), with
respect to the registration by the Company, of 1,981,700 shares ("Shares") of
Class A Voting Common Stock, par value $.001 per share (the "Common Stock"), for
the account of Selling Security Holders, such Shares to be offered in amounts
and at prices per share to be determined at the time of such offering, and set
forth in one or more prospectus supplements to the Registration Statement (each
a "Prospectus Supplement").
We consent to the reference to Lionel Sawyer & Collins under the
caption "Legal Matters" in the Prospectus. In giving consent, we do not admit
that we are in a category of persons whose consent is required pursuant to
Section 7 of the Act or the rules and regulations of the Commission promulgated
thereunder. Further, we disclaim liability as an expert under the securities
laws of the United States or any other jurisdiction.
Very truly yours,
/s/ LIONEL SAWYER & COLLINS
---------------------------
LIONEL SAWYER & COLLINS
