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, 1999
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 were 8,582,241 shares of Class A Voting
Common Stock, par value $.001 per share ("Class A Common Stock"), and 634,035
shares of Class B Nonvoting Common Stock, par value $.001 per share, immediately
convertible into shares of Class A Common Stock on a one for one basis, of the
issuer outstanding.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE>
GUARDIAN INTERNATIONAL, INC.
Table of Contents
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 2
Consolidated Statement of Changes in Shareholders' Equity
for the Three Months Ended March 31, 1999 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 832,812 $ 865,857
Accounts receivable, net of allowance for doubtful accounts of $559,166 and
$488,793, respectively 2,039,736 1,994,795
Current portion of notes receivable 115,566 146,210
Inventory 410,991 393,982
Other 210,904 173,102
------------- ------------
Total current assets 3,610,009 3,573,946
Property and equipment, net 2,874,050 2,438,854
Customer accounts, net 30,706,805 31,552,324
Goodwill and other intangible assets, net 1,965,229 2,063,256
Notes receivable, less current portion 48,719 52,042
Deposits and other assets 83,317 98,564
------------- ------------
Total assets $39,288,129 $39,778,986
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable and accrued expenses $ 3,022,844 $ 2,727,058
Current portion of unearned revenue 2,857,676 2,744,462
Current portion of long term obligations 686,620 683,838
------------- ------------
Total current liabilities 6,567,140 6,155,358
Unearned revenue, less current portion 1,335,494 1,311,480
Long term obligations, less current portion 7,063,609 6,799,655
------------- ------------
Total liabilities 14,966,243 14,266,493
Redeemable preferred stock, 16,397 shares issued and outstanding 16,397,000 16,397,000
Shareholders' equity:
Preferred stock, $.001 par value, 30,000,000 shares authorized:
Series D preferred stock, 10,120 shares issued and outstanding 10 10
Class A voting common stock, $.001 par value, 100,000,000 shares authorized, 11,569,241
shares issued and 8,582,241 shares outstanding 11,569 11,569
Class B non-voting common stock, $.001 par value, 1,000,000 shares authorized, 634,035
shares issued and outstanding 634 634
Additional paid-in capital 23,333,329 23,336,470
Accumulated deficit (7,352,062) (6,164,596)
Treasury shares, at cost (8,068,594) (8,068,594)
------------- ------------
Total Shareholders' Equity 7,924,886 9,115,493
------------- ------------
Total Liabilities and Shareholders' Equity $39,288,129 $39,778,986
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Monitoring $2,781,516 $ 1,726,903
Installation and service 1,548,373 882,987
------------ ------------
Total revenues 4,329,889 2,609,890
------------ ------------
Operating expenses:
Monitoring 533,233 357,714
Installation and service 1,198,319 646,279
Selling, general and administrative 1,669,882 888,704
Amortization of customer accounts 1,234,917 601,064
Depreciation and amortization 190,680 122,972
------------ ------------
Total operating expenses 4,827,031 2,616,733
------------ ------------
Operating loss (497,142) (6,843)
Interest and other 255,696 235,270
------------ ------------
Net loss (752,838) (242,113)
Preferred stock dividends 434,627 134,656
------------ ------------
Net loss applicable to common stock $(1,187,465) $ (376,769)
============ ============
Loss per common share $ (0.13) $ (0.04)
============ ============
Weighted average shares outstanding 9,216,276 10,557,875
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Series D Common Stock Common Stock
Preferred Stock Class A Class B Additional
------------------- ------- ------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 10,120 $ 10 11,569,241 $11,569 634,035 $ 634 $23,336,470
Series C Preferred Stock Dividends - - - - - - -
Series D Preferred Stock Dividends - - - - - - -
Equity issuance costs - - - - - - (3,141)
Net loss - - - - - - -
-------- ------ ---------- -------- ------- ------- -----------
Balance March 31, 1999 10,120 $ 10 11,569,241 $11,569 634,035 $ 634 $23,333,329
======== ====== ========== ======== ======= ======= ===========
(RESTUBBED TABLE)
Accumulated Treasury
Deficit Shares Total
------- ------ -----
Balance December 31, 1998 $(6,164,596) $ (8,068,594) $ 9,115,493
Series C Preferred Stock Dividends (283,760) - (283,760)
Series D Preferred Stock Dividends (150,868) - (150,868)
Equity issuance costs - - (3,141)
Net loss (752,838) - (752,838)
----------- ------------ -----------
Balance March 31, 1999 $(7,352,062) $ (8,068,594) $ 7,924,886
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this
consolidated financial statement.
3
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (752,838) $ (242,113)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 190,680 122,972
Amortization of customer accounts 1,234,917 601,064
Amortization of capitalized installation costs 222,839 54,700
Amortization of deferred financing costs 64,431 68,258
Provision for doubtful accounts 118,850 120,902
Provision for inventory losses 15,000 -
Payment of Series C Preferred Stock cash dividends (229,558) -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (163,791) (284,427)
Deposits and other assets (58,542) (306,823)
Accounts payable and accrued expenses 89,780 (196,775)
Unearned revenue 137,228 1,206,920
------------ ------------
Net cash provided by operating activities 868,996 1,144,678
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (536,688) (294,513)
Business acquisitions, net of cash acquired - (11,193,593)
Purchase and placement of customer accounts (611,977) (1,246,352)
------------ ------------
Net cash used in investing activities (1,148,665) (12,734,458)
------------ ------------
Cash flows from financing activities:
Payments of long term obligations (175,752) (1,092,806)
Proceeds from line of credit 425,517 9,338,433
Issuance of preferred stock, net of issuance costs (3,141) 3,989,549
------------ ------------
Net cash provided by financing activities 246,624 12,235,176
------------ ------------
Net increase (decrease) in cash and cash equivalents (33,045) 645,396
Cash and cash equivalents, beginning of year 865,857 94,313
------------ ------------
Cash and cash equivalents, end of year $ 832,812 $739,709
============ ============
Supplemental disclosures:
Interest paid $231,689 $94,463
Non cash investing and financing activities:
Issuance of Class A common stock in consideration for business acquisitions - 4,705,157
Stock dividends on Series A and Series B preferred stock - 134,656
Contract holdbacks applied against accounts written off 13,290 37,107
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
GUARDIAN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying unaudited financial statements of Guardian International,
Inc. ("the Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. 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 for the year ended December 31,
1998, included in the Company's Form 10-KSB.
Reclassifications
-----------------
Certain 1998 amounts in the consolidated statements of operations and cash
flows have been reclassified to conform to the 1999 presentation.
2. PROPERTY AND EQUIPMENT, NET
During the quarter, the Company expended $536,688 for the purchase of fixed
assets, consisting of Company-owned subscriber premises equipment
approximating $400,000 and additional system software of approximately
$137,000.
3. CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer
accounts:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Balance, beginning of period $31,552,324 $8,048,495
Purchase of customer accounts from dealers 145,782 2,605,647
Customer accounts acquired in acquisitions - 23,588,827
Internally generated accounts 479,746 2,088,537
Charges against contract holdbacks (13,291) (156,397)
Amortization of capitalized installation costs (222,839) (650,210)
Amortization of customer accounts (1,234,917) (3,972,575)
----------- -----------
Balance, end of period $30,706,805 $31,552,324
=========== ===========
</TABLE>
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 $83,926 and $95,596 at March 31, 1999 and
December 31, 1998, 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.
5
<PAGE>
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net, consist of the following:
<TABLE>
<CAPTION>
Amortization March 31, December 31,
Period 1999 1998
------ ---- ----
<S> <C> <C> <C>
At cost:
Goodwill 10 years $1,798,101 $1,798,101
Deferred financing costs 3 years 812,667 812,667
Covenant not to compete and other 5 - 10 years 466,953 500,837
----------- ------------
3,077,721 3,111,605
Accumulated amortization (1,112,492) (1,048,349)
----------- ------------
$1,965,229 $2,063,256
=========== ============
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Trade accounts payable $865,531 $749,621
Contract holdbacks 83,926 95,596
Preferred dividends payable 434,627 229,558
Accrued expenses 1,638,760 1,652,283
----------- ------------
$3,022,844 $2,727,058
=========== ============
</TABLE>
6. LONG TERM OBLIGATIONS
Long term obligations consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Credit facility with financial institution $6,419,509 $5,993,992
Capital lease obligations 103,856 110,682
Equipment notes payable and other 1,226,864 1,378,819
------------ -------------
7,750,229 7,483,493
Less-current portion (686,620) (683,838)
------------ -------------
$7,063,609 $6,799,655
============ =============
</TABLE>
In connection with the acquisition of Mutual Central Alarm Services, Inc.
("Mutual"), the Company amended its credit facility in October 1998 (the
"Renewed Credit Facility") with Heller Financial, Inc., the Company's
senior lender ("Heller"). Under the Renewed Credit Facility, borrowings
bear interest at floating rates, either at Prime plus 1 3/4% or, at the
Company's election, LIBOR plus 3 1/2%. At March 31, 1999, the debt was
bearing interest at varying rates. The Renewed Credit Facility expires in
May 2001. Availability under the Renewed Credit Facility is subject to
certain "Borrowing Base" limitations (as defined). In connection with the
October 1998 investment by Protection One (see Part I, Item I "1998
Developments" in the Company's 1998 Form 10-KSB for the fiscal year ended
December 31, 1998), Heller made other amendments to the Renewed Credit
Facility to conform the agreement with the transactions. 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. The Company believes it
was in compliance with all such covenants as of March 31, 1999.
6
<PAGE>
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 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
made herein. 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 risks and uncertainties, and, accordingly,
actual results could differ materially from those expressed in the
forward-looking statements. Information with respect to these risks and
uncertainties is included in the Company's Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 1999.
Overview
The majority of the Company's revenue is derived from recurring
payments for the monitoring, maintenance and leasing of security and fire
systems, pursuant to contracts with initial terms typically ranging from one to
five years. The remainder of the Company's revenue is derived from the sale and
installation of security and fire systems and the servicing and upgrades of such
installed systems. Monitoring and service revenues are recognized as the service
is provided. On installations for which the Company retains title to the
electronic security systems, 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 other installation
revenues are recognized in the period in which installation occurs. All direct
installation costs, which include materials, labor and installation overhead are
capitalized and amortized over a five year period. When the Company maintains
ownership of the equipment, the costs of such equipment are capitalized to
property and equipment and amortized over seven years.
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.
7
<PAGE>
Alarm monitoring revenues generate favorable gross margins.
Historically, installation and service activity generated unfavorable gross
margins because such activity was necessary for the generation and retention of
residential and mid-market commercial alarm monitoring customers. With the
February 1998, acquisition of Mutual, a New York City-based provider to high-end
commercial customers, however, more than half of the Company's installation
activity now generates favorable gross margins. This installation activity is of
a more substantial nature due to the increased security needs of the Company's
high-end commercial clientele and is perceived to be of greater value.
The Company's objective is to provide residential and commercial
security services to an increasing number of subscribers. The Company's growth
strategy is to enhance its position in the security alarm monitoring industry in
Florida and in the Metropolitan New York City area by increasing the number and
density of subscribers for whom it provides services. The Company is pursuing
this strategy through a balanced growth plan involving incorporating
acquisitions of portfolios of subscriber accounts in existing and contiguous
markets and growth of the Company's core business through referrals and
traditional local marketing. The Company believes that increasing the number and
density of its subscribers will help it to achieve economies of scale and
enhance its results of operations. The Company also regularly reviews
opportunities for expanding its operations into other large metropolitan
markets.
Key Operating Measures
The Company believes that EBITDA, MRR, and MRR Attrition are key
measurements of performance in the security monitoring industry.
EBITDA. Earnings before interest, taxes, depreciation and amortization
("EBITDA") does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
operating income and is indicative neither of operating performance nor cash
flows available to fund the cash needs of Guardian. Items excluded from EBITDA
are significant components in understanding and assessing the financial
performance of Guardian. Guardian believes presentation of EBITDA enhances an
understanding of financial condition, results of operations and cash flows
because EBITDA is used by Guardian 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 is used by senior lenders and the investment
community to determine the current borrowing capacity and to estimate the
long-term value of companies with recurring cash flows from operations.
Guardian's computation of EBITDA may not be comparable to other similarly titled
measures of other companies. The following table provides a calculation of
EBITDA for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Net loss $(752,838) $(242,113)
Plus:
Amortization of customer contracts 1,234,917 601,064
Depreciation and amortization 190,680 122,972
Interest expense and other 255,696 235,270
---------- ------------
EBITDA $928,455 $ 717,193
========== ============
</TABLE>
8
<PAGE>
Monthly Recurring Revenue ("MRR"). MRR represents the monthly recurring
revenue the Company is entitled to receive under subscriber contracts in effect
at the end of the period. MRR is a term commonly used in the security alarm
industry as a measure of the size of a company and as a key factor in assessing
the value of a company. It does not measure profitability or performance, and
does not include any allowance for future subscriber attrition or uncollectible
accounts receivable. MRR at March 31, 1999 and 1998 was approximately $935,000
and $639,000, respectively.
MRR Attrition. 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 expected month-end
MRR calculated at the end of such period. Net MRR attrition of the Company's
customers during the three months ended March 31, 1999 and 1998 was less than
10%, on an annualized basis.
Results of Operations
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated for consolidated operations.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Monitoring 64.2 66.2
Installation and service 35.8 33.8
-------- --------
Total revenues 100.0 100.0
Operating expenses
Monitoring 12.3 13.7
Installation and service 27.7 24.7
General and administrative 38.6 34.1
-------- --------
78.6 72.5
-------- --------
Income before interest expense, amortization and
Depreciation 21.4 27.5
-------- --------
Interest expense 5.9 9.0
Amortization of customer contracts 28.5 23.0
Depreciation and amortization 4.4 4.7
-------- --------
38.8 36.7
-------- --------
Net loss (17.4) (9.2)
======== ========
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenue. Total revenues for the three months ended March 31, 1999
increased 66% to approximately $4.3 million from approximately $2.6 million
during the corresponding period in the prior year. Monitoring revenues for the
three months ended March 31, 1999 increased to approximately $2.8 million, or
61%, from approximately $1.7 million during the corresponding period of the
prior year. Installation and service revenues for the three months ended March
31, 1999 increased by 75% to approximately $1.5 million, compared to
approximately $883,000 during the corresponding period of the prior year. Total
retail subscribers approximated 23,700 at March 31, 1999, compared to 16,500 at
March 31, 1998, a net increase of 44%. The increase in revenues and number of
subscribers in the first quarter of 1999 from the first quarter of 1998 is
primarily attributable to the Company's 1998 acquisitions (see Note 2 to the
Consolidated Financial Statements of the Company's Form 10KSB for the fiscal
year ended December 31, 1998).
Operating Expenses. Total operating expenses, excluding depreciation
and amortization, for the three months ended March 31, 1999 increased 80% to
approximately $3.4 million, compared to approximately $1.9 million during the
corresponding period in the prior year. Monitoring expenses increased 49.1% to
approximately $533,000, compared to approximately $358,000 during the
corresponding period in the prior year. As a percentage of monitoring revenues
during the three months ended March 31, 1999, monitoring expenses were 19%,
compared to 21% during the corresponding period in the prior year. The increase
in monitoring costs 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, 1999 increased by 85.4% to
approximately $1.2 million, compared to approximately $646,000 during the
corresponding period in the prior year. The increase in total installation and
service costs in 1999 from 1998 was partly the result of increases in related
revenues in 1999 from 1998. As a percentage of installation and service revenue,
installation and service costs were 77% during the three months ended March 31,
1999, compared to 73%, during the corresponding period in the prior year.
10
<PAGE>
Gross Profit. Total gross profit, defined as total revenues less
monitoring and installation and service costs, increased by 62% to approximately
$2.6 million during the three months ended March 31, 1999, compared to
approximately $1.6 million during the corresponding period in the prior year.
Gross profit from monitoring revenues increased by 64.2% to approximately $2.2
million during the three months ended March 31, 1999, compared to approximately
$1.4 million during the corresponding period in the prior year. The increase in
gross profit from monitoring revenues is primarily attributable to the Company's
1998 acquisitions. Gross profit from installation and service activities
increased to approximately $350,000 during the three months ended March 31,
1999, from approximately $237,000 during the corresponding period in the prior
year, partly due to the increased revenues.
Selling, General and Administrative. Selling, general and
administrative costs ("SG&A") increased by 88% to approximately $1.7 million
during the three months ended March 31, 1999, compared to approximately $889,000
during the corresponding period in the prior year. The increase in SG&A costs in
1999 from 1998 is related primarily to additional personnel and resources
necessary to service the Company's growing customer base.
Amortization of Customer Contracts. Amortization of customer contracts
increased by 105% to approximately $1.2 million during the three months ended
March 31, 1999, compared to approximately $601,000 during the corresponding
period in the prior year. The increase in such costs resulted from the increase
in the amount of capitalized customer contracts ($30.7 million at March 31, 1999
from $25.7 million at March 31, 1998).
Depreciation and Amortization. Depreciation and amortization increased
by 55% to approximately $191,000 during the three months ended March 31, 1999,
compared to approximately $123,000 during the corresponding period in the prior
year. Such costs include depreciation of property and equipment (the gross
balance of which increased to approximately $3.8 million at March 31, 1999 from
approximately $2.1 million at March 31, 1998 as a result of (i) the Company's
continued expansion activities and (ii) the Company's 1998 acquisitions (which
resulted in additional property and equipment being acquired), goodwill
amortization (a gross balance of approximately $1.4 million 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. Interest expense increased 8.7% to approximately
$256,000 during the three months ended March 31, 1999, compared to approximately
$235,000 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. Total borrowings under the Renewed Credit
Facility decreased to approximately $6.4 million at March 31, 1999 from
approximately $9.0 million at March 31, 1998. The decrease was due to the
October 1998 repayment of a portion of the debt, as a result of the investment
by Protection One, Inc., discussed in Note 11 of the Company's Form 10-KSB for
the fiscal year ended December 31, 1998.
Net Loss. Net loss applicable to common stock for the three months
ended March 31, 1999 was approximately $1.2 million, or $(0.13) per share,
compared to a net loss of approximately $377,000, or $(0.04) per share, during
the corresponding period of the prior year.
11
<PAGE>
Liquidity and Capital Resources
As of March 31, 1999, the Company believes it will maintain the ability
to generate sufficient cash to fund future operations of the business.
Generally, cash flow will be generated from a combination of the Company's
existing $20.0 million credit facility, which had approximately $8 million of
availability as of March 31, 1999, subject to compliance with the provisions of
the debt covenants in the Renewed Credit Facility with Heller, as well as
recurring revenue from our security monitoring customer base, which generated
$928,000 of EBITDA in the first quarter of 1999. Cash flow from operating
activities was $869,000 for the first quarter of 1999.
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 $7.0
million to $15.0 million. In connection with the acquisition of Mutual, the
Renewed Credit Facility was further amended to increase the maximum available to
$20.0 million. The Renewed Credit Facility expires in May 2001. Availability
under the Renewed Credit Facility is subject to certain "Borrowing Base"
limitations (as defined). In relation to the October 1998 investment by
Protection One, Inc. (see Note 11 of the Company's Form 10-KSB for the fiscal
year ended December 31, 1998), Heller consented to increase the Company's
borrowing base and made other amendments to conform the agreement with the
transactions. 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. The Company is in compliance with all
such covenants as of March 31, 1999.
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.
Liquidity. Net cash provided by operating activities during the three
months ended March 31, 1999 was approximately $869,000. The Company incurred a
net loss of approximately $753,000 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
approximately $1.7 million, bad debt and inventory provisions of approximately
$134,000, cash outflows of approximately $222,000 related to increases in
accounts receivable and other assets and cash outflows of approximately $3,000
related to net increases in liabilities.
Net cash used in investing activities was approximately $1.1 million
during the three months ended March 31, 1999 and was comprised of approximately
$612,000 used in the purchase and placement of customer accounts and the
purchases of fixed assets of approximately $537,000 which includes equipment
under lease at customer premises of approximately $408,000.
Net cash provided by financing activities was approximately $247,000
during the three months ended March 31, 1999, consisting of proceeds under
borrowings from Heller of approximately $426,000, reduced by repayments to
Heller and other long-term debt of approximately $176,000 and costs related to
the 1998 preferred stock issuance of approximately $3,000. The Company's cash
balance was $832,812 as of March 31, 1999.
Total shareholders' equity was $7,924,886 at March 31, 1999, decreasing
by a net amount of $1,190,607 during the three months ended March 31, 1999. The
net decrease resulted from the payment and accrual of dividends on the Company's
preferred stock and the net loss of approximately $753,000.
12
<PAGE>
Affiliation with Western Resources, Inc. As discussed in the Company's
1998 Form 10-KSB, in Part I, Item I "1998 Developments", Western Resources, Inc.
is a majority owner of Protection One, Inc., who holds a significant investment
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
and mezzanine capital; (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.
The Company does not currently have any significant commitments for
capital outlays.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial customers.
The Company extends credit to its customers in the normal course of business,
performs periodic credit evaluations and maintains allowances for potential
credit losses.
Year 2000 Compliance
General
Guardian faces the same Year 2000 problem that other participants in
the security and alarm monitoring industry face given the high reliance on
computer-based monitoring and electronic customer site equipment. The Year 2000
problem is a result of prior computer programming limiting the use of the year
placeholder to a two digit number, such as "98" (rather than a four digit), so
that when the year 2000 arrives, many systems could interpret the year date "00"
as being of the turn of a prior century. This is generally referred to as the
"Year 2000 Issue." Accordingly, unless corrective action is taken to ensure that
such systems are "Year 2000 Ready," many systems may fail or the processes which
those systems control may malfunction due to the inappropriate year
interpretation.
Guardian does not believe that the Year 2000 problem will have a
significant impact on the Company or on its continuing ability to deliver
installation and alarm monitoring goods and services to its present installed
customer base and/or prospective customers.
State of Readiness
- ------------------
The Company's primary business process is the act of monitoring
electronic signals from equipment placed at residential and commercial customer
premises, which are generally sent over standard analog telephone lines.
Guardian conducts this primary process, including secondary processes of
accounting and financial reporting, through the use of systems acquired from
Monitoring Automation Systems ("MAS"). 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 no longer being offered. Guardian is in the final
stages of implementing Year 2000 compliant general ledger and accounts payable
software. The Company's other significant monitoring station resides at its
Mutual subsidiary in New York. A conversion process to a MAS central station
package is nearing completion at that site and will also be Year 2000 compliant
by mid-1999.
13
<PAGE>
The Company is aware of certain non-information technology-related
("IT") processes which are of critical importance to Guardian's business, but
are largely beyond the Company's ability to control. These non-IT processes
encompass the Company's interaction with providers of local and long-distance
telephony, local police and fire response, utilities including, but not limited
to, electricity and water, and both public and private transportation.
Readiness Program
In order to address the remainder of what the Company believes to be
its Year 2000 risk, it has developed a multi-phase plan to identify, assess and
remediate the Year 2000 problem from its business processes. Accordingly, the
Company has categorized the following phases through which it intends to
progress in the near future:
<TABLE>
<CAPTION>
Phase Estimated Completion Date
----- -------------------------
<S> <C> <C>
I. Identification Completed
o Establish readiness program and methodology
o Identify all computer programs and collect manufacturers' statements
o Identify and evaluate all equipment with embedded programs
II. Assessment and Inventory Completed
o Awareness assessment (vendors) and inventory phase
III. Contingency Plans June 1999
o Develop written contingency plan and policy
IV. Remediation and Testing August 1999
o Corrective application and sample testing
V. Post-Evaluation March 2000
o Post Y2K evaluation of life safety systems (implementation of full testing field services)
</TABLE>
While the Company expects its critical internal business systems to be Year 2000
ready by August 1999, testing may extend beyond that date.
Costs
- -----
The Company estimates that the total cost to remediate its controllable
Year 2000 risks will be approximately $30,000. These costs will primarily be
incurred on IT upgrades. As of March 31, 1999, approximately $2,000 had been
expended.
Risks
- -----
The Company believes that its most reasonably likely worst case
scenario is a limited failure of some portion of its customer premise equipment
leased by the Company. As a general rule, such equipment is Year 2000 compliant
either as a result of recent vendor updates and upgrades, new equipment, or
equipment that is not date dependent. However, the Company does not believe that
it will be able to physically visit, assess, test and potentially remediate all
of its thousands of leased systems that are currently in operation. The Company
intends to work in concert with its equipment vendors to ensure that the risk of
the most reasonable likely worst case scenario actually occurring is reduced to
a minimum level.
14
<PAGE>
Contingency Plans
- -----------------
As of March 31, 1999, the Company had not developed specific,
actionable contingency plans. In the event of failure of the Company's primary
monitoring process, Guardian is currently capable of performing the monitoring
of electronic signals on a manual basis, as required by its Underwriters
Laboratory certification. However, as the Company works through the planned
phases described above, a contingency plan will be created prior to July 1999.
The Company acquires other companies from time to time as part of its
business development strategy, and it anticipates that acquisitions will
continue through the Year 2000. In the course of conducting due diligence
investigations of acquisition candidates, the Company intends to ascertain
whether or not their products or services, or those of their critical suppliers,
are Year 2000 ready, and whether or not such suppliers and key customers, if
any, will be adversely affected by the Year 2000 issue. While acquisition
candidates may provide certain information or make representations and
warranties regarding Year 2000 readiness, in some cases, the Company may be
unable to verify same until the acquisition is completed and the steps outlined
herein as part of the Company's Year 2000 program are undertaken.
The preceding "Year 2000 Readiness Disclosures" contain forward-looking
statements of the Company's expectations regarding the ability of its products
and systems to be Year 2000 ready, as well as its ability to assess the
readiness of its suppliers and customers, and related risks. These statements
relate to future events, the outcome of which is uncertain, and should be read
in conjunction with the cautionary factors listed in the Introductory Note to
this report.
15
<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
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
1. No reports were filed on Form 8-K during the three months ended March 31,
1999.
16
<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 17th day of May, 1999.
GUARDIAN INTERNATIONAL, INC.
By: /s/ DARIUS G. NEVIN
-------------------
Darius G. Nevin
Chief Financial Officer and Vice President
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule (for SEC use only)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 832,812
<SECURITIES> 0
<RECEIVABLES> 2,598,902
<ALLOWANCES> 559,166
<INVENTORY> 0
<CURRENT-ASSETS> 3,610,009
<PP&E> 3,758,165
<DEPRECIATION> 884,115
<TOTAL-ASSETS> 39,288,129
<CURRENT-LIABILITIES> 6,567,140
<BONDS> 7,750,229
0
10
<COMMON> 12,203
<OTHER-SE> 7,912,673
<TOTAL-LIABILITY-AND-EQUITY> 39,288,129
<SALES> 1,195,178
<TOTAL-REVENUES> 4,329,889
<CGS> 1,198,319
<TOTAL-COSTS> 1,731,552
<OTHER-EXPENSES> 1,536,032
<LOSS-PROVISION> 133,850
<INTEREST-EXPENSE> 255,696
<INCOME-PRETAX> (752,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> (752,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (752,838)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
</TABLE>
