UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
COMMISSION FILE NUMBER 0-28490
GUARDIAN INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 58-1799634
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3880 N. 28 TERRACE (954) 926-5200
HOLLYWOOD, FLORIDA 33020 (Issuer's telephone number)
(Address of principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO _____
As of May 14, 1998, there are 11,273,241 shares of Class A Voting
Common Stock and 634,035 shares of Class B Nonvoting Common Stock of the issuer
outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES ____ NO X____
<PAGE>
GUARDIAN INTERNATIONAL, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of March 31, 1998 and December 31, 1997 1
Consolidated Statements of Operations
For the Three Month Periods Ended
March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows
For the Three Month Periods Ended
March 31, 1998 and 1997 3
Consolidated Statement of Changes in Stockholders' Equity
For the Three Month Period Ended March 31, 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 10
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except for share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 740 $ 94
Accounts receivable, net of allowance for doubtful accounts of
$301 and $199, respectively 1,641 540
Other 529 121
------- -------
Total current assets 2,910 755
------- -------
Property and equipment, net 1,156 729
Customer accounts, net 25,693 8,048
Goodwill and other intangible assets, net 3,106 1,515
Deposits and other assets 135 28
------- -------
Total Assets $33,000 $11,075
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,837 $ 782
Unearned revenue 4,413 242
Current portion of long term obligations 20 73
------- -------
Total current liabilities 6,270 1,097
------- -------
Long term obligations, less current portion 9,261 962
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 2 2
Series B preferred stock, 1,617,030 and 0 shares issued and outstanding,
respectively 2 -
Class A voting common stock, $.001 par value, 100,000,000 shares authorized,
11,080,441 and 9,003,804 shares issued; and 11,073,441 and 8,996,804 shares
outstanding, respectively 11 9
Class B non voting common stock, $.001 par value, 634,035 shares authorized,
issued and outstanding, respectively 1 1
Additional paid-in capital 20,917 12,091
Accumulated deficit (3,457) (3,080)
Treasury shares, at cost (7) (7)
------- -------
17,469 9,016
------- -------
Total Liabilities and Shareholders' Equity $33,000 $11,075
====== ======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
1
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollar amounts in thousands, except for per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Monitoring $1,727 $ 813
Installation and service 883 410
----- -----
Total revenues 2,610 1,223
----- -----
Operating expenses:
Monitoring 357 152
Installation and service 683 404
General and administrative 853 400
Amortization of customer contracts 601 194
Depreciation and amortization 123 78
----- -----
Total operating expenses 2,617 1,228
----- -----
Loss from operations (7) (5)
Interest expense 235 197
----- -----
Loss before income taxes (242) (202)
Provision for income taxes - -
----- -----
Net loss (242) (202)
Preferred stock dividends (135) -
----- -----
Net loss applicable to common stock $(377) $(202)
====== ======
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.
2
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (242) $ (202)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 123 78
Amortization of customer accounts 601 194
Amortization of deferred financing costs 68 35
Provision for doubtful accounts 121 20
Changes in assets and liabilities:
Accounts receivable (284) (91)
Intangible assets, deposits and other assets (307) (55)
Accounts payable and accrued liabilities (196) (63)
Unearned revenue 1,207 18
-------- -------
Net cash provided by (used in) operating activities 1,091 (66)
-------- -------
Cash flows from investing activities:
Purchase of fixed assets (294) (44)
Business acquisitions, net of cash acquired (11,194) -
Purchase and placement of customer accounts (1,192) (395)
-------- -------
Net cash used in investing activities (12,680) (439)
-------- -------
Cash flows from financing activities:
Payments of long term obligation (1,093) (471)
Proceeds from line of credit 9,338 925
Issuance of preferred stock, net of issuance costs 3,990 -
-------- -------
Net cash provided by financing activities 12,235 454
-------- -------
Net increase (decrease) in cash and cash equivalents 646 (51)
Cash and cash equivalents, beginning of period 94 1,038
-------- -------
Cash and cash equivalents, end of period $ 740 $ 987
======== =======
Supplemental disclosures:
Interest paid $ 94 $ 162
===== ======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
(Dollar amounts in thousands)
<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 $ 2 - $ - 8,996,804 $ 9 634,035 $ 1
Stock dividend on Series A
preferred stock 46,041 - - - - - - -
Stock dividend on Series B
preferred stock - - 17,030 - - - - -
Issuance of Series B
preferred stock, net of
issuance costs of $10 - - 1,600,000 2 - - - -
Issuance of Class A common
stock - - - - - - - -
Issuance of options - - - - 2,076,637 2 - -
Net loss - - - - - - - -
--------- --- --------- --- --------- ---- ------ ----
Balance, March 31, 1998 1,940,074 $ 2 1,617,030 $ 2 11,073,441 $ 11 634,035 $ 1
========= === ========= ==== ========== ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED TREASURY
CAPITAL DEFICIT SHARES TOTAL
------- ------- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $12,091 $ (3,080) $ (7) $9,016
Stock dividend on Series A
preferred stock 92 (92) - -
Stock dividend on Series B
preferred stock 43 (43) - -
Issuance of Series B
preferred stock, net of
issuance costs of $10 3,988 - - 3,990
Issuance of Class A common
stock 4,071 - - 4,073
Issuance of options 632 - - 632
Net loss - (242) - (242)
------- -------- ----- ------
Balance, March 31, 1998 $20,917 $(3,457) $ (7) $17,469
======= ======== ===== =======
</TABLE>
4
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except for per share amounts)
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.
5
<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.
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 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) will be
distributed to the former owners. This amount totals $486; 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 amount of $1,409. 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 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 preferred stock investment from Westar Security, Inc.
6
<PAGE>
("Westar"), a wholly-owned subsidiary of Protection One, Inc., a Delaware
corporation. Westar 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 Westar
certain rights to have the Class A 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 in cash consideration and 94,937
shares of unregistered Class A 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. 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:
MUTUAL GATOR TOTAL
------ ----- -----
Assets acquired $18,888 $1,848 $20,736
Liabilities assumed (4,146) (70) (4,216)
Equity issued (4,405) (300) (4,705)
------- ----- ------
Cash paid 10,337 1,478 11,815
Less - cash acquired (621) - (621)
------- ----- ------
Net cash paid $ 9,716 $1,478 $11,194
======= ===== ======
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.
For the
Three Months Ended
March 31,
----------------------------
1998 1997
---- ----
(Unaudited)
Revenues, net $3,087 $2,401
Income from operations 547 561
Net loss applicable to common shares (582) (520)
Loss per common share (0.05) (0.06)
Average common shares outstanding 11,636,801 8,919,539
The pro forma average number of common shares outstanding represents the
number of shares 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.
7
<PAGE>
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
Purchase of customer accounts 131
Customer accounts acquired in acquisitions 17,055
Internally generated accounts 1,097
Charges against contract holdbacks (37)
Amortization of customer accounts (601)
------
Balance, March 31, 1998 $25,693
======
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 and $292 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, DECEMBER 31,
PERIOD 1998 1997
------ ---- ----
<S> <C> <C> <C>
Intangibles, at cost:
Goodwill 10 years $2,730 $1,223
Deferred financing costs 3 years 783 696
Covenant not to compete, organization costs and
Other Various 296 203
----- -----
3,809 2,122
Accumulated amortization (703) (607)
----- -----
$3,106 $1,515
===== =====
</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.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
March 31, December 31,
1998 1997
---- ----
Trade accounts payable $ 259 $193
Contract holdbacks 165 292
Accrued commitment fee - 85
Other 1,413 212
----- ---
$1,837 $782
===== ===
8
<PAGE>
6. LONG TERM OBLIGATIONS
Long term obligations consist of the following:
March 31, December 31,
1998 1997
---- ----
Credit facility with financial institution $ 9,045 $753
Obligation for assets under capital lease 130 136
Equipment notes payable and other 106 146
----- -----
9,281 1,035
Less current portion (20) (73)
----- -----
$9,261 $962
===== ===
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 3/4% or, at the Company's
election, LIBOR plus 3 1/2%. 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 in cash consideration and 194,269
shares of Class A Stock. The Company funded the cash portion of the
acquisition using borrowings under the Renewed Credit Facility with Heller.
9
<PAGE>
GUARDIAN INTERNATIONAL, INC.
(Dollar amounts in thousands, except for share amounts.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTORY NOTE
FORWARD-LOOKING STATEMENTS. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"), the Company
is hereby providing cautionary statements identifying important factors that
could cause the Company's actual results to differ materially from those
projected in forward-looking statements (as such term is defined in the Reform
Act) made by or on behalf of the Company herein or orally, whether in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to, expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, identified
through the use of words or phrases such as the Company or management
"believes," "expects," "anticipates," "hopes," words or phrases such as "will
result," "are expected to," "will continue," "is anticipated," "estimated,"
"projection" and "outlook," and words of similar import) are not historical
facts and may be forward-looking. Such forward-looking statements involve
estimates, assumptions, and uncertainties, and, accordingly, actual results
could differ materially from those expressed in the forward-looking statements.
Such uncertainties include, among others, the following: (i) the ability of the
Company to add additional customer accounts to its account base through
acquisitions from third parties, to generate new accounts internally, and to
form strategic alliances; (ii) the level of subscriber attrition; (iii) the
availability of capital to the Company relative to certain larger companies in
the security alarm industry which have significantly greater capital and
resources; (iv) increased false alarm fines and/or the possibility of reduced
public response to alarm signals; and (v) other risk factors described in the
Company's reports filed with the Securities and Exchange Commission (the "SEC")
from time to time.
The Company cautions that the factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
OVERVIEW
The majority of the Company's revenues is derived from recurring
payments for the monitoring and maintenance 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 and the servicing and upgrades of such installed systems.
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 to ten years.
10
<PAGE>
Alarm monitoring revenues generate significant gross margins, whereas
installation and service activity may result in direct costs exceeding revenues.
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 acquisition of alarm companies, the Independent
Alarm Acquisition Program and the Dealer Program described in Part I, Item 1.
"Description of Business" in the Company's Form 10-KSB for the fiscal year ended
December 31, 1997) are capitalized and amortized over ten 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 the average month-end
MRR during such period. Net MRR attrition of the Company's customers during the
three months ended March 31, 1998 and 1997 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 taking
every economically feasible action to preserve the revenue stream associated
with these contractual obligations. To this end, the Company actively works both
towards the collection of amounts owed and the retention of subscribers. In
certain instances, this collection and evaluation period may exceed six months.
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
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.
11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS
ENDED MARCH 31,
---------------
1998 1997
---- ----
Revenues:
Monitoring 66.2 66.5
Installation and service 33.8 33.5
----- -----
Total revenues 100.0 100.0
Operating expenses
Monitoring 13.7 12.4
Installation and service 26.1 33.0
General and administrative 32.7 32.7
---- ----
72.5 78.1
Income before interest expense, amortization and
depreciation 27.5 21.9
---- ----
Interest expense 9.0 16.1
Amortization of customer contracts 23.0 15.9
Depreciation and amortization 4.7 6.4
---- ----
36.7 38.4
Net loss (9.2) (16.5)
===== ======
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.
Earnings before interest, taxes, depreciation, and amortization
("EBITDA") is another important factor in considering profitability. EBITDA does
not represent cash flow from operations as defined by generally accepted
accounting principles, should not be construed as an alternative to net earnings
nor is it indicative of the Company's operating performance or of cash flows
available to fund all the Company's cash needs. Items excluded from EBITDA are
significant components in understanding and assessing the Company's financial
performance. Management believes presentation of EBITDA enhances an
understanding of the Company's financial condition, results of operations and
cash flows because EBITDA is used by the Company to satisfy its debt service
obligations and its capital expenditure and other operational needs as well as
to provide funds for growth. In addition, EBITDA has been used by the investment
community to determine the current borrowing capacity and to estimate the
long-term value of companies with recurring cash flows from operations and net
losses. The following table provides a calculation of EBITDA for the three
months ended March 31, 1998 and 1997:
12
<PAGE>
For the Three Months
Ended March 31,
-----------------------
1998 1997
---- ----
(Unaudited)
Net income (loss) $(242) $(202)
Plus:
Amortization of customer contracts 601 194
Depreciation and amortization 123 78
Interest expense 235 197
---- ----
EBITDA $717 $267
=== ===
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 $2,610 from $1,223 during the corresponding period in the prior year.
Monitoring revenues for the three months ended March 31, 1998 increased to
$1,727, or 112% from $813 during the corresponding period of the prior fiscal
year. Installation and service revenues for the three months ended March 31,
1998 increased by 115% to $883, compared to $410 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 $2,617 compared to $1,228 during the corresponding period in
the prior year. Monitoring expenses increased 135% to $357, compared to $152
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
$683, compared to $404 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 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 during the three
months ended March 31, 1998, compared to $667 during the corresponding periods
in the prior year. Gross profit from monitoring revenues increased by 107% to
$1,370 during the three months ended March 31, 1998, compared to $661 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 3,233% to $200 during the three months ended March 31,
1998, compared to $6 during the corresponding period in the prior year, due to
the profitability Mutual derives from its large commercial security system
sales.
13
<PAGE>
General and administrative costs ("G&A") increased by 113% to $853
during the three months ended March 31, 1998, compared to $400 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 during the
three months ended March 31, 1998, compared to $194 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 $25,693 at March 31, 1998 from $5,326 at March 31, 1997.
Depreciation and amortization increased by 58% to $123 during the three
months ended March 31, 1998, compared to $78 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 million at March 31, 1998 from
approximately $500 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 $1,507 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 19% to $235 during the three months ended
March 31, 1998, compared to $197 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 Westar. Total borrowings under
the Renewed Credit Facility increased to $9,045 at March 31, 1998 from
approximately $5,400 at March 31, 1997.
Net loss applicable to common stock for the three months ended March
31, 1998 was $(377), or $(0.04) per share, compared to a net loss of $(202), or
$(0.03) per share, during the corresponding period of the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
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 $7,000 to $15,000. In connection
with the acquisition of Mutual (see Note 2), the Renewed Credit Facility was
further amended to increase the maximum available to $20,000. 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.
14
<PAGE>
Net cash provided by operating activities during the three months ended
March 31, 1998 was $1,091. The Company incurred a net loss of $242 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, bad debt provision of $121, cash outflows of $591
related to increases in accounts receivable and other assets and cash inflows of
$1,011 related to net increases in liabilities.
Net cash used in investing activities was $12,680 during the three
months ended March 31, 1998 and was comprised of $11,194 used in the
acquisitions of Mutual and Gator, the purchase and placement of customer
accounts of $1,192 and purchases of fixed assets of $294.
Net cash provided by financing activities was $12,235 during the three
months ended March 31, 1998, consisting of net proceeds from issuance of stock
of $3,990, proceeds under borrowings from Heller of $9,338 reduced by repayments
to Heller and other long-term debt of $1,093. The Company's cash balance was
$740 at March 31, 1998.
Total shareholders' equity was $17,469 at March 31, 1998, increasing by
a net amount of $8,453 during the three months ended March 31, 1998. The net
increase resulted from the investment in the Company by Westar and the issuance
of Class A Stock in connection with the acquisitions of Mutual and Gator less
the net loss of $242.
The Company does not currently have any significant commitments for
capital outlays.
YEAR 2000 COMPLIANCE
The Company has received assurance from Monitoring Automation Systems
(MAS), the supplier of the Company's monitoring and financial software, that,
with the exception of an upgrade to be installed to the Company's operating
system during 1998, all applications in its software are Year 2000 compliant.
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.
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.
15
<PAGE>
GUARDIAN INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following issuances were exempt pursuant to Section 4(2) of the
Securities Act of 1933, as amended:
On February 19, 1998, the Company issued 1,981,700 shares of Class A
Stock, pursuant to a Stock Purchase Agreement dated February 23, 1998, as
partial consideration in acquiring all of the outstanding common stock of Mutual
(see Note 2 to the Consolidated Financial Statements).
NUMBER OF COMMON
PURCHASER SHARES
--------- ------
Mutual Sellers 1,981,700
On February 19, 1998, pursuant to a Stock Purchase Agreement between
the Company and Westar, dated as of February 23, 1998, the Company issued
1,600,000 shares of Series B Preferred Stock at $2.50 per share, the proceeds of
which were used in the funding of the Mutual acquisition (see Note 2 to the
Consolidated Financial Statements).
DATE OF NUMBER OF COMMON AGGREGATE
PURCHASER PURCHASE SHARES CONSIDERATION PAID
- --------- -------- ------ ------------------
Westar Security, Inc. 2/19/98 1,600,000 * $4,000,000
* On an as-converted basis.
In connection with the acquisition of the assets of Gator, the Company
issued 94,937 shares of Class A Stock on March 9, 1998.
DATE OF NUMBER OF COMMON
PURCHASER PURCHASE SHARES
- --------- -------- ------
Gator Telecom, Inc. 3/9/98 94,937
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
3(i) Articles of Incorporation dated October 30, 1986 incorporated by
reference to Exhibit 3(i) of the Company's Form 10-SB filed May 6, 1996
3(i)(a) Amendment to the Articles of Incorporation incorporated by reference to
Exhibit 3(i)(a) the Company's Form 10-SB filed May 6, 1996
3(i)(b) Amendment to the Articles of Incorporation incorporated by reference to
Exhibit 3(i)(b) of the Company's Form 10-SB filed May 6, 1996
3(i)(c) Amendment to the Articles of Incorporation incorporated by reference to
Exhibit 3(i)(c) of the Company's Form 10-SB/A filed January 24, 1997
3(ii) Amended 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 Stock Certificate incorporated by reference to Exhibit 4 of
the Company's Form 10-SB12G as of June 18, 1996
4(b) Certificate of the Designations, Voting Power, Preferences and
Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of Preferred Stock, of
Guardian International, Inc., filed in the Office of the Secretary of
State of the State of Nevada on February 23, 1998 designating the
second series of Preferred Stock of the Company as Series B 10 1/2%
Convertible Cumulative Preferred Stock, par value $.001 per share,
incorporated by reference to Exhibit 4(c) of the Company's Form 10-KSB
filed March 31, 1998.
4(c) Amendment to Certificate of the Designations, Voting Power, Preferences
and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of the Series A 9 3/4%
Convertible Cumulative Preferred Stock, par value $.001 per share, of
Guardian International, Inc., filed in the Office of the Secretary of
State of the State of Nevada on March 13, 1998, incorporated by
reference to Exhibit 4(d) of the Company's Form 10-KSB filed March 31,
1998.
4(d) Amendment to Certificate of the Designations, Voting Power, Preferences
and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations or Restrictions of the Series B 10 1/2%
Convertible Cumulative Preferred Stock, par value $.001 per share, of
Guardian International, Inc., filed in the Office of the Secretary of
State of the State of Nevada on March 13, 1998, incorporated by
reference to Exhibit 4(e) of the Company's Form 10-KSB filed March 31,
1998.
10(a) Amended and Restated Loan and Security Agreement with Heller Financial,
Inc. dated as of February 23, 1998, incorporated by reference to
Exhibit 10(j) of the Company's Form 10-KSB filed March 31, 1998.
10(b) Stock Purchase Agreement dated 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(c) 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(d) 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.
10(e) Employment Agreement with Joel A. Cohen dated as of February 1, 1998
incorporated by reference to Exhibit 10(d) of the Company's Form 8-K
filed as of March 10, 1998.
17
<PAGE>
10(f) Employment Agreement with Raymond L. Adams dated as of February 1, 1998
incorporated by reference to Exhibit 10(e) of the Company's Form 8-K
filed as of March 10, 1998.
10(g) Asset Purchase Agreement effective as of March 9, 1998 incorporated by
reference to Exhibit 10(a) to the Company's Form 8-K filed as of March
24, 1998.
10(h) Warranty Bill of Sale dated as of March 5, 1998 incorporated by
reference to Exhibit 10(b) to the Company's Form 8-K filed as of March
24, 1998
10(i) Assignment and Assumption Agreement dated as of March 5, 1998
incorporated by reference to Exhibit 10(c) to the Company's Form 8-K
filed as of March 24, 1998.
10(j) Guaranty Agreement dated as of March 9, 1998 incorporated by reference
to Exhibit 10(d) to the Company's Form 8-K filed as of March 24, 1998.
10(k) Escrow Agreement date March 9, 1998 incorporated by reference to
Exhibit 10(e) to the Company's Form 8-K filed as of March 24, 1998.
10(l) Employment Agreement with Dan Lawrence dated March 9, 1998 incorporated
by reference to Exhibit 10(f) to the Company's Form 8-K filed as of
March 24, 1998.
10(m) Amendment to Registration Rights Agreement dated as of February 23,
1998, incorporated by reference to Exhibit 10(gg) to the Company's Form
10-QSB filed as of March 31, 1998.
10(n) Stock Subscription Agreement dated as of February 23, 1998,
incorporated by reference to Exhibit 10(hh) to the Company's Form
10-QSB filed as of March 31, 1998.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
1. Form 8-K filed as of February 23, 1998 announced the acquisition of
Mutual Central Alarm Services, Inc..
2. Form 8-K filed as of March 9, 1998 announced the purchase of the assets
of Gator Telecom, Inc.
18
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of the 14th day of May, 1998.
GUARDIAN INTERNATIONAL, INC.
By: /S/ DARIUS G. NEVIN
----------------------------
Darius G. Nevin
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule (for SEC use only) E-1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 739,709
<SECURITIES> 0
<RECEIVABLES> 1,942,171
<ALLOWANCES> 301,019
<INVENTORY> 0
<CURRENT-ASSETS> 2,909,406
<PP&E> 2,056,062
<DEPRECIATION> 900,374
<TOTAL-ASSETS> 32,999,509
<CURRENT-LIABILITIES> 6,270,278
<BONDS> 9,260,412
0
3,557
<COMMON> 11,715
<OTHER-SE> 17,453,547
<TOTAL-LIABILITY-AND-EQUITY> 32,999,509
<SALES> 882,987
<TOTAL-REVENUES> 2,609,890
<CGS> 682,920
<TOTAL-COSTS> 1,039,634
<OTHER-EXPENSES> 724,036
<LOSS-PROVISION> 120,902
<INTEREST-EXPENSE> 235,270
<INCOME-PRETAX> (242,113)
<INCOME-TAX> 0
<INCOME-CONTINUING> (242,113)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (242,113)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
