UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
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)
Florida 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)
As of August 13, 1999, 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.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 1
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998 2
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months Ended June 30, 1999 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 399,857 $ 865,857
Accounts receivable, net of allowance for doubtful accounts of $581,125 and
$488,793, respectively 2,181,384 1,994,795
Current portion of notes receivable 85,011 146,210
Inventory 403,114 393,982
Other 268,149 173,102
----------- -----------
Total current assets 3,337,515 3,573,946
Property and equipment, net 3,099,976 2,438,854
Customer accounts, net 29,977,269 31,552,324
Goodwill and other intangible assets, net 1,819,078 2,063,256
Notes receivable, less current portion 52,186 52,042
Deposits and other assets 82,667 98,564
----------- -----------
Total assets $38,368,691 $39,778,986
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,842,218 $ 2,727,058
Current portion of unearned revenue 3,075,003 2,744,462
Current portion of long term obligations 687,771 683,838
----------- -----------
Total current liabilities 6,604,992 6,155,358
Unearned revenue, less current portion 1,368,220 1,311,480
Long term obligations, less current portion 7,292,911 6,799,655
----------- -----------
Total liabilities 15,266,123 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 (8,571,380) (6,164,596)
Treasury shares, at cost (8,068,594) (8,068,594)
----------- -----------
Total Shareholders' Equity 6,705,568 9,115,493
----------- -----------
Total Liabilities and Shareholders' Equity $38,368,691 $39,778,986
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
1
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months
June 30, Ended June 30,
-------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Monitoring $ 2,854,558 $ 2,267,675 $ 5,636,074 $ 3,994,578
Installation and service 1,693,209 1,354,332 3,241,582 2,237,319
------------ ----------- ----------- -----------
Total revenues 4,547,767 3,622,007 8,877,656 6,231,897
------------ ----------- ----------- -----------
Operating expenses:
Monitoring 498,695 520,629 1,031,928 878,343
Installation and service 1,317,906 841,603 2,516,225 1,487,882
Selling, general and administrative 1,886,730 1,372,760 3,556,612 2,261,463
Amortization of customer accounts 1,180,388 1,101,639 2,415,305 1,702,703
Depreciation and amortization 181,064 140,372 371,744 263,344
------------ ----------- ----------- -----------
Total operating expenses 5,064,783 3,977,003 9,891,814 6,593,735
------------ ----------- ----------- -----------
Operating loss (517,016) (354,996) (1,014,158) (361,838)
Interest and other 260,520 346,884 516,216 582,154
------------ ----------- ----------- -----------
Net loss (777,536) (701,880) (1,530,374) (943,992)
Preferred stock dividends 441,783 202,346 876,410 337,002
------------ ----------- ----------- -----------
Net loss applicable to common stock $(1,219,319) $ (904,226) $(2,406,784) $(1,280,994)
=========== =========== =========== ===========
Loss per common share $ (0.13) $ (0.08) $ (0.26) $ (0.11)
=========== =========== =========== ===========
Weighted average shares outstanding 9,216,276 11,849,753 9,216,276 11,207,383
=========== =========== =========== ===========
</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 SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Series D Common Stock Common Stock
Preferred Stock Class A Class B
--------------- ------- -------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 10,120 $ 10 11,569,241 $11,569 634,035 $ 634
Series C Preferred Stock Dividends - - - - - -
Series D Preferred Stock Dividends - - - - - -
Equity issuance costs - - - - - -
Net loss - - - - - -
------ ----- ---------- ------- ------- -----
Balance June 30, 1999 10,120 $ 10 11,569,241 $11,569 634,035 $ 634
====== ===== ========== ======= ======= =====
Additional
Paid-in Accumulated Treasury
Capital Deficit Shares Total
------- ------- ------ -----
<S> <C> <C> <C> <C>
Balance December 31, 1998 $23,336,470 $(6,164,596) $(8,068,594) $ 9,115,493
Series C Preferred Stock Dividends - (570,708) - (570,708)
Series D Preferred Stock Dividends - (305,702) - (305,702)
Equity issuance costs (3,141) - - (3,141)
Net loss - (1,530,374) - (1,530,374)
----------- ----------- ----------- -----------
Balance June 30, 1999 $23,333,329 $(8,571,380) $(8,068,594) $ 6,705,568
=========== ============ =========== ===========
The accompanying notes are an integral part of this consolidated
financial statement.
</TABLE>
3
<PAGE>
GUARDIAN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,530,374) $ (943,992)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 371,744 263,344
Amortization of customer accounts 2,415,305 1,702,703
Amortization of capitalized installation costs 466,499 251,287
Amortization of deferred financing costs 128,861 130,850
Provision for doubtful accounts 237,700 295,831
Provision for inventory losses 30,000 -
Payment of Series C Preferred Stock cash dividends (513,317) -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (424,289) (704,072)
Deposits and other assets (83,206) (596,118)
Accounts payable and accrued expenses (248,869) 179,193
Unearned revenue 387,281 994,512
------------ ----------
Net cash provided by operating activities 1,237,335 1,573,538
------------ ----------
Cash flows from investing activities:
Purchase of fixed assets (873,663) (662,614)
Business acquisitions, net of cash acquired - (14,340,822)
Purchase and placement of customer accounts (1,306,749) (1,665,707)
------------ ----------
Net cash used in investing activities (2,180,412) (16,669,143)
------------ ----------
Cash flows from financing activities:
Payments of long term obligations (345,601) (1,346,068)
Proceeds from line of credit 825,819 12,693,681
Issuance of preferred stock, net of issuance costs (3,141) 3,987,001
------------ ----------
Net cash provided by financing activities 477,077 15,334,614
------------ ----------
Net increase (decrease) in cash and cash equivalents (466,000) 239,009
Cash and cash equivalents, beginning of period 865,857 94,313
------------ ----------
Cash and cash equivalents, end of period $ 399,857 $333,322
============ ==========
Supplemental disclosures:
Interest paid $420,199 $334,338
Non cash investing and financing activities:
Issuance of Class A common stock in consideration forbusiness acquisitions - 5,205,157
Stock dividends on Series A and Series B preferred stock - 337,002
Contract holdbacks applied against accounts written off 15,809 37,107
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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 six months ended June 30, 1999, the Company expended $873,663
for the purchase of fixed assets, including subscriber premises equipment
approximating $657,000 and additional system software of approximately
$50,000.
3. CUSTOMER ACCOUNTS
The following is an analysis of the changes in acquired customer
accounts:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period $31,552,324 $ 8,048,495
Purchase of customer accounts from dealers 503,256 2,605,647
Customer accounts acquired in acquisitions - 23,588,827
Internally generated accounts 819,302 2,088,537
Charges against contract holdbacks (15,809) (156,397)
Amortization of capitalized installation costs (466,499) (650,210)
Amortization of customer accounts (2,415,305) (3,972,575)
----------- -----------
Balance, end of period $29,977,269 $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 $107,991 and $95,596 at June 30, 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 June 30, 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 454,988 500,837
---------- ----------
3,065,756 3,111,605
Accumulated amortization (1,246,678) (1,048,349)
---------- ----------
$1,819,078 $2,063,256
========== ==========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Trade accounts payable $691,809 $749,621
Contract holdbacks 107,991 95,596
Preferred dividends payable 592,650 229,558
Accrued expenses 1,449,768 1,652,283
---------- ----------
$2,842,218 $2,727,058
========== ==========
6. LONG TERM OBLIGATIONS
Long term obligations consist of the following:
June 30, December 31,
1999 1998
---- ----
Credit facility with financial institution $6,819,811 $5,993,992
Capital lease obligations 112,941 110,682
Equipment notes payable and other 1,047,930 1,378,819
----------- ----------
7,980,682 7,483,493
Less-current portion (687,771) (683,838)
---------- ----------
$7,292,911 $6,799,655
========== ==========
</TABLE>
In October 1998, the Company amended its $20 million credit facility (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 June 30, 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). At June 30, 1999 $4
million was available. 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 June 30, 1999.
6
<PAGE>
7. SUBSEQUENT EVENTS
In July and August 1999, in accordance with the Stock Repurchase Program
authorized by the Board of Directors in October 1998, the Company purchased
102,200 shares of its Class A Voting Common Stock, par value $.001.
7
<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. The Company has two core
strategies; (1) generating monitoring contracts through its own sales and
installation efforts and (2) acquiring alarm monitoring contracts. The first
core strategy requires a cost infrastructure that results in lower operating
margins than are achievable by companies that only acquire and service alarm
monitoring contracts. In order to pursue the second core strategy of acquiring
alarm monitoring contracts the Company has chosen to issue yield-bearing
instruments (such as senior debt or preferred stock). The Company's present
amortization policy for those acquired contracts results in significant
amortization costs. The issuance of yield-bearing instruments results in related
interest and dividend expense. The Company believes that these strategies, which
emphasize creating long-term value over short-term net income, will result in
the Company's recording of net losses until such time as (i) the Company's cash
flow from its increased customer base allows it to reduce significantly its
indebtedness and related interest costs; and (ii) the Company's amortization
expense, through the passage of time and recognition of account losses, is
reduced.
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, approximately 40% of the Company's installation
activity now generates favorable gross margins because competition in the
8
<PAGE>
high-end commercial market is based less on price and more on the ability of
competitors to design, deliver, and maintain sophisticated security systems.
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 the Company. Items excluded from
EBITDA are significant components in understanding and assessing the financial
performance of the Company. The Company believes presentation of EBITDA enhances
an understanding of 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 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. The
Company's computation of EBITDA may not be comparable to other similarly titled
measures of other companies. In the three months and six months ended June 30,
1999, the Company incurred certain legal and other professional expenses related
to terminated acquisition activity as well as other related fees in the amount
of $66,128, which are of a non-recurring nature. EBITDA for the three months and
six months ended June 30, 1999 would have been $910,564 and $1,839,019,
respectively, without these expenses. The following table provides a calculation
of EBITDA for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
-----------
<S> <C> <C> <C> <C>
Net loss $ (777,536) $(701,880) $(1,530,374) $ (943,992)
Plus:
Amortization of customer contracts 1,180,388 1,101,639 2,415,305 1,702,703
Depreciation and amortization 181,064 140,372 371,744 263,344
Interest expense and other 260,520 346,884 516,216 582,154
---------- --------- ------------ ----------
EBITDA $844,436 $887,015 $ 1,772,891 $1,604,209
========== ========= ============ ==========
</TABLE>
9
<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 June 30, 1999 and 1998 was approximately $961,000
and $769,000, 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 six months ended June 30, 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Monitoring 62.8 62.6 63.5 64.1
Installation and service 37.2 37.4 36.5 35.9
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Monitoring 11.0 14.4 11.6 14.1
Installation and service 29.0 23.2 28.4 23.9
General and administrative 41.4 37.9 40.0 36.3
\ ----- ----- ----- -----
81.4 75.5 80.0 74.3
----- ----- ----- -----
Income before interest expense, amortization and
depreciation 18.6 24.5 20.0 25.7
----- ----- ----- -----
Interest expense 5.7 9.6 5.8 9.3
Amortization of customer contracts 26.0 30.4 27.2 27.3
Depreciation and amortization 4.0 3.9 4.2 4.2
----- ----- ----- -----
35.7 43.9 37.2 40.8
----- ----- ----- -----
Net loss (17.1) (19.4) (17.2) (15.1)
====== ====== ===== =====
</TABLE>
10
<PAGE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue. Total revenues for the six months ended June 30, 1999
increased 43% to approximately $8.9 million from approximately $6.2 million
during the corresponding period in the prior year. Monitoring revenues for the
six months ended June 30, 1999 increased to approximately $5.6 million, or 41%,
from approximately $4.0 million during the corresponding period of the prior
year. Installation and service revenues for the six months ended June 30, 1999
increased by 45% to approximately $3.2 million, compared to approximately $2.2
million during the corresponding period of the prior year. Total retail
subscribers approximated 23,400 at June 30, 1999, compared to 18,900 at June 30,
1998, a net increase of 24%. The increase in revenues and number of subscribers
in the second quarter of 1999 from the second quarter of 1998 is 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) and to increased efforts in the Company's internal installation
operations.
Operating Expenses. Total operating expenses, excluding depreciation
and amortization, for the six months ended June 30, 1999 increased 50% to
approximately $3.5 million, compared to approximately $2.4 million during the
corresponding period in the prior year. Monitoring expenses increased 18% to
approximately $1.0 million, compared to approximately $878,000 during the
corresponding period in the prior year. As a percentage of monitoring revenues
during the six months ended June 30, 1999, monitoring expenses were 18%,
compared to 22% during the corresponding period in the prior year. The increase
in monitoring costs in absolute terms was a result of the 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 six months ended June 30, 1999 increased by 69% to
approximately $2.5 million, compared to approximately $1.5 million 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 78% during the six months ended June 30,
1999, compared to 67%, during the corresponding period in the prior year. Costs
as a percentage of sales increased because the Company derived a larger
percentage of sales from lower revenue / higher cost sales to homeowners and
builders in the six months ended June 30, 1999 compared to the six months ended
June 30, 1998.
Gross Profit. Total gross profit, defined as total revenues less
monitoring and installation and service costs, increased by 38% to approximately
$5.3 million during the six months ended June 30, 1999, compared to
approximately $3.9 million during the corresponding period in the prior year.
Gross profit from monitoring revenues increased by 48% to approximately $4.6
million during the six months ended June 30, 1999, compared to approximately
$3.1 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
decreased to approximately $670,000 during the six months ended June 30, 1999,
from approximately $699,000 during the corresponding period in the prior year,
partly due to the costs associated with the increased efforts in the Company's
internal installations operations in residential and new home construction
markets.
Selling, General and Administrative. Selling, general and
administrative costs ("SG&A") increased by 57% to approximately $3.6 million
during the six months ended June 30, 1999, compared to approximately $2.3
million 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 and to
recognition of certain legal and other professional expenses related to
terminated acquisition activity and other related expenses.
11
<PAGE>
Amortization of Customer Contracts. Amortization of customer contracts
increased by 42% to approximately $2.4 million during the six months ended June
30, 1999, compared to approximately $1.7 million during the corresponding period
in the prior year. The increase in such costs resulted from the increase in the
gross amount of capitalized customer contracts, primarily attributable to 1998
acquisitions ($32.2 million at June 30, 1999 from $28.0 million at June 30,
1998).
Depreciation and Amortization. Depreciation and amortization increased
by 41% to approximately $372,000 during the six months ended June 30, 1999,
compared to approximately $263,000 during the corresponding period in the prior
year. Such costs include depreciation of property and equipment (the gross
balance of which increased to approximately $4.1 million at June 30, 1999 from
approximately $2.5 million at June 30, 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 1998 acquisitions, which is being amortized over
10 years)), and amortization of certain other intangible assets.
Interest Expense. Interest expense decreased 11% to approximately
$516,000 during the six months ended June 30, 1999, compared to approximately
$582,000 during the corresponding period in the prior year. The decrease in
interest expense resulted from reduced borrowings under the Renewed Credit
Facility. Total borrowings under the Renewed Credit Facility decreased to
approximately $6.8 million at June 30, 1999 from approximately $12.2 million at
June 30, 1998, 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 six months ended
June 30, 1999 was approximately $2.4 million, or $(0.26) per share, compared to
a net loss of approximately $1.3 million, or $(0.11) per share, during the
corresponding period of the prior year.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenue. Total revenues for the three months ended June 30, 1999
increased 26% to approximately $4.5 million from approximately $3.6 million
during the corresponding period in the prior year. Monitoring revenues for the
three months ended June 30, 1999 increased to approximately $2.9 million, or
26%, from approximately $2.3 million during the corresponding period of the
prior year. Installation and service revenues for the three months ended June
30, 1999 increased by 25% to approximately $1.7 million, compared to
approximately $1.4 million during the corresponding period of the prior year.
Total retail subscribers approximated 23,400 at June 30, 1999, compared to
18,900 at June 30, 1998, a net increase of 24%. The increase in monitoring
revenues and number of subscribers in the second quarter of 1999 from the second
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). The increase in installation and
service revenues in the second quarter of 1999 compared to the prior year's
quarter is attributable to the Company's emphasis on growth by internal sales
efforts rather than growth by acquisition.
Operating Expenses. Total operating expenses, excluding depreciation
and amortization, for the three months ended June 30, 1999 increased 33% to
approximately $1.8 million, compared to approximately $1.4 million during the
corresponding period in the prior year. Monitoring expenses decreased 4% to
approximately $499,000, compared to approximately $521,000 during the
corresponding period in the prior year. As a percentage of monitoring revenues
during the three months ended June 30, 1999, monitoring expenses were 17%,
compared to 23% during the corresponding period in the prior year. The decrease
12
<PAGE>
in monitoring costs was a result of decreased payroll costs in the central
monitoring station. Installation and service costs during the three months ended
June 30, 1999 increased by 57% to approximately $1.3 million, compared to
approximately $842,000 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 78%
during the three months ended June 30, 1999, compared to 62%, during the
corresponding period in the prior year. Costs as a percentage of sales increased
because the Company derived a larger percentage of sales from lower revenue /
higher cost sales to homeowners and builders in the quarter ended June 30, 1999
compared to the quarter ended June 30, 1998.
Gross Profit. Total gross profit, defined as total revenues less
monitoring and installation and service costs, increased by 21% to approximately
$2.7 million during the three months ended June 30, 1999, compared to
approximately $2.3 million during the corresponding period in the prior year.
Gross profit from monitoring revenues increased by 35% to approximately $2.4
million during the three months ended June 30, 1999, compared to approximately
$1.7 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
decreased to approximately $353,000 during the three months ended June 30, 1999,
from approximately $489,000 during the corresponding period in the prior year,
partly due to the costs associated with the increased efforts in the Company's
internal installations operations.
Selling, General and Administrative. Selling, general and
administrative costs ("SG&A") increased by 37% to approximately $1.9 million
during the three months ended June 30, 1999, compared to approximately $1.4
million 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 and to
recognition of certain legal and other professional expenses related to
terminated acquisition activity and related expenses.
Amortization of Customer Contracts. Amortization of customer contracts
increased by 7% to approximately $1.2 million during the three months ended June
30, 1999, compared to approximately $1.1 million during the corresponding period
in the prior year. The increase in such costs resulted from the increase in the
gross amount of capitalized customer contracts ($32.2 million at June 30, 1999
from $28.0 million at June 30, 1998).
Depreciation and Amortization. Depreciation and amortization increased
by 29% to approximately $181,000 during the three months ended June 30, 1999,
compared to approximately $140,000 during the corresponding period in the prior
year. Such costs include depreciation of property and equipment (the gross
balance of which increased to approximately $4.1 million at June 30, 1999 from
approximately $2.5 million at June 30, 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 decreased 25% to approximately
$261,000 during the three months ended June 30, 1999, compared to approximately
$347,000 during the corresponding period in the prior year. The decrease in
interest expense resulted from reduced borrowings under the Renewed Credit
Facility. Total borrowings under the Renewed Credit Facility decreased to
approximately $6.8 million at June 30, 1999 from approximately $12.2 million at
June 30, 1998, 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.
13
<PAGE>
Net Loss. Net loss applicable to common stock for the three months
ended June 30, 1999 was approximately $1.2 million, or $(0.13) per share,
compared to a net loss of approximately $904,000, or $(0.08) per share, during
the corresponding period of the prior year.
Liquidity and Capital Resources
As of June 30, 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 (1) the Company's
existing $20.0 million Renewed Credit Facility with Heller, subject to
compliance with the provisions of the debt covenants in the Renewed Credit
Facility, and (2) recurring revenue from its security monitoring customer base,
which generated $1.8 million of EBITDA in the six months ended June 30, 1999. At
June 30, 1999, there was $4 million of availability under the Renewed Credit
Facility. Cash flow from operating activities was $1.2 million for the six
months ended June 30, 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 believes it was in compliance
with all such covenants as of June 30, 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.
In July and August 1999, the Company commenced its Stock Repurchase
Program by repurchasing 102,200 shares of its Class A Voting Common Stock, par
value $.001.
Liquidity. Net cash provided by operating activities during the six
months ended June 30, 1999 was approximately $1.2 million. The Company incurred
a net loss of approximately $1.5 million 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 $3.4 million, bad debt and inventory provisions of approximately
$268,000, cash outflows of approximately $513,000 related to dividend payments
on preferred stock, cash outflows of approximately $507,000 related to increases
in accounts receivable and other assets offset by cash inflows of approximately
$138,000 related to net increases in liabilities.
Net cash used in investing activities was approximately $2.2 million
during the three months ended June 30, 1999 and was comprised of approximately
$1.3 million used in the purchase and placement of customer accounts and the
purchases of fixed assets of approximately $874,000 which includes equipment
under lease at customer premises of approximately $657,000.
14
<PAGE>
Net cash provided by financing activities was approximately $477,000
during the six months ended June 30, 1999, consisting of proceeds under
borrowings from Heller of approximately $826,000, reduced by repayments to
Heller and other long-term debt of approximately $346,000 and costs related to
the 1998 preferred stock issuance of approximately $3,000. The Company's cash
balance was $399,857 as of June 30, 1999.
Total shareholders' equity was $6,705,568 at June 30, 1999, decreasing
by a net amount of $2,409,925 during the six months ended June 30, 1999. The net
decrease resulted from the payment and accrual of dividends on the Company's
preferred stock and the net loss of approximately $1.5 million.
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.
indirectly holds a significant investment in 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
The Company 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.
The Company 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. The
Company 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 legacy general ledger and
accounts payable programs are no longer being offered. The Company is in the
final stages of implementing Year 2000 compliant general ledger and accounts
payable software and those stages will be completed by September 1999. The
15
<PAGE>
Company's other significant monitoring station resides at its Mutual subsidiary
in New York. Testing of the New York site MAS software for Y2K compliance was
successfully completed in July 1999.
Certain non-information technology-related ("IT") processes are of
critical importance to the Company'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
o Develop written contingency plan and policy Completed
o Update contingency plan September 1999
IV. Remediation and Testing August 1999
o Corrective application and sample testing
o Completion of MAS software testing - Hollywood
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 June 30, 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
16
<PAGE>
the most reasonable likely worst case scenario actually occurring is reduced to
a minimum level.
Contingency Plans
- -----------------
As of June 30, 1999, the Company had developed a contingency plan. An
updated contingency plan will be created by September 1999. In the event of
failure of the Company's primary monitoring process, the Company 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 testing phases described above, revisions may be
necessary.
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. The Company has established procedures in its
due diligence investigations of acquisition candidates 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.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting was held on June 21, 1999. The following
number of votes were cast for the matters indicated:
1. Election of Board of Directors
Director For Withheld
-------- --- --------
Harold Ginsburg 6,772,501 8,470
Richard Ginsburg 6,771,501 9,470
Sheilah Ginsburg 6,772,501 8,470
Darius G. Nevin 6,772,501 8,470
William Remington 6,772,501 8,470
Douglas T. Lake 6,772,501 8,470
Joel A. Cohen 6,773,871 7,100
David Heidecorn 6,773,871 7,100
2. Ratification of Arthur Andersen LLP as the independent accountants
for the Company for the year ending December 31, 1999.
For Against Abstain Non-vote
--- ------- ------- --------
6,774,500 1,000 5,471 -
3. Approval of the 1999 Stock Option Plan and ratification of
non-plan grants of stock options.
For Against Abstain Non-vote
--- ------- ------- --------
4,657,672 415,794 4,135 1,703,370
4. Approval of a change in domicile of the Company from Nevada to
Florida.
For Against Abstain Non-vote
--- ------- ------- --------
5,021,119 4,000 52,482 1,703,370
Item 5. Other Information
Pursuant to the approval of Proposal 4, the Company filed a Certificate of
Dissolution, with the State of Nevada on July 9, 1999. The Florida Articles of
Incorporation were filed on July 8, 1999 with the Florida Secretary of State.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
3(i) Articles of Incorporation dated July 7, 1999 filed with the state
of Florida on July 8, 1999
3(ii) Amended and Restated By-Laws of the Company incorporated by
referencecto Exhibit 3(ii) of the Company's Quarterly Report on
Form 10-QSB filed as of November 14, 1997
18
<PAGE>
4(a) Specimen Stock Certificate
10(a) 1999 Stock Option Plan of Guardian International, Inc.
incorporated by reference to Exhibit A of the Company's
Schedule 14-A filed May 27, 1999.
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 June 30,
1999.
19
<PAGE>
SIGNATURES
----------
In accordance with Section 12 of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GUARDIAN INTERNATIONAL, INC.
By: /s/ DARIUS G. NEVIN
------------------------------------------
Darius G. Nevin
Chief Financial Officer and Vice President
Date: August 13, 1999
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3(i) Articles of Incorporation dated July 7, 1999 filed with the state
of Florida on July 8, 1999
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
10(a) 1999 Stock Option Plan of Guardian International, Inc.
incorporated by reference to Exhibit A of the Company's Schedule
14-A filed May 27, 1999.
27 Financial Data Schedule (for SEC use only)
21
ARTICLES OF INCORPORATION
OF
GUARDIAN INTERNATIONAL, INC.
(a Florida corporation)
ARTICLE I
Name of Corporation
-------------------
The name of the corporation is Guardian International, Inc. (the
"Corporation").
ARTICLE II
Address of Corporation
----------------------
The principal place of business and mailing address of the Corporation
is:
3880 North 28th Terrace
Hollywood, Florida 33020
ARTICLE III
Capital Stock
-------------
Section 1. Total Authorized Shares
-----------------------
The amount of the total authorized capital stock of the Corporation is
131,000,000 shares, consisting of (i) 100,000,000 shares of `Class A Voting
Common Stock', par value $.001 per share; (ii) 1,000,000 shares of `Class B
Nonvoting Common Stock', par value $.001 per share; and (iii) 30,000,000 shares
of Preferred Stock, par value $.001 per share.
Section 2. Class B Common Stock
--------------------
Except as otherwise provided herein all shares of Class A
Voting Common Stock and Class B Nonvoting Common Stock will be identical and
will entitle the holders thereof to the same rights and privileges.
(a) Voting Rights. The holders of Class A Voting Common Stock
will be entitled to one (1) vote per share on all matters to be voted on by the
Corporation's stockholders, and except as otherwise required by law, the holders
of Class B Nonvoting Common Stock will have no right to vote their shares of
Class B Nonvoting Common Stock on any matters to be voted on by the
Corporation's stockholders.
(b) Dividends. When and as dividends are declared thereon,
whether payable in cash, property or securities of the Corporation, the holders
of Class A Voting Common Stock and the holders of Class B Nonvoting Common Stock
will be entitled to share ratably according to the number of shares of Class A
Voting Common Stock or Class B Nonvoting Common Stock held by them, in such
dividends; provided, that if dividends are declared which are payable in shares
of Class A Voting Common Stock or Class B Nonvoting Common Stock, dividends will
be declared which are payable at the same rate on both classes of common stock,
1
<PAGE>
and the dividends payable in shares of Class A Voting Common Stock to holders of
Class A Voting Common Stock, and the dividends payable in shares of Class B
Nonvoting Common Stock will be payable to the holders of Class B Nonvoting
Common Stock.
(c) Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of Class A Voting Common Stock and Class B Nonvoting Common Stock
shall be entitled to share ratably, according to the number of shares of Class A
Voting Common Stock or Class B Nonvoting Common Stock held by them, in the
remaining assets of the Corporation available for distribution to its
stockholders.
(d) Conversion of Class B Nonvoting Common Stock.
---------------------------------------------
i. At any time and from time to time, each record
holder of Class B Nonvoting Common Stock will be entitled to convert any and all
of the shares of such holder's Class B Nonvoting Common Stock into the same
number of shares of Class A Voting Common Stock at holder's election, provided,
that each holder of Class B Nonvoting Common Stock shall only be entitled to
convert any share or shares of Class B Nonvoting Common Stock to the extent that
after giving effect to such conversion such holder or its affiliates shall not
directly or indirectly, own, control or have power to vote a greater quantity of
securities of any kind issued by the Corporation than such holder and its
affiliates are permitted to own, control or have power to vote under any law or
under any regulation, rule or other requirement of any governmental authority at
any time applicable to such holder and its affiliates.
ii. Each conversion of shares of Class B Nonvoting
Common Stock into shares of Class A Voting Common Stock will be effected
by the surrender of the certificate or certificates representing the shares to
be converted at the principal office of the Corporation at any time during
normal business hours, together with a written notice by the holder of such
Class B Nonvoting Common Stock stating that such holder desires to convert the
shares, or a stated number of the shares, of Class B Nonvoting Common Stock
represented by such certificate or certificates into Class A Voting Common Stock
and a written undertaking that upon such conversion such holder and its
affiliates will not directly or indirectly own, control or have the power to
vote a greater quantity of securities of any kind issued by the Corporation than
such holders and its affiliates are permitted to own, control or have the power
to vote under any applicable law, regulation, rule or other governmental
requirement. Such conversion will be deemed to have been effected as of the
close of business on the date on which certificate or certificates have been
surrendered and such notice has been received, and at such time the rights of
the holder of the converted Class B Nonvoting Common Stock as such holder will
cease and the person or persons in whose name or names the certificate or
certificates for shares of Class A Voting Common Stock are to be issued upon
such conversion will be deemed to have become the holder or holders of record of
the shares of Class A Voting Common Stock represented thereby.
iii. Promptly after such surrender and the receipt of
such written notice, the Corporation will issue and deliver in
accordance with the surrendering holder's instructions (x) the certificate or
certificates for the Class A Voting Common Stock issuable upon such conversion
and (y) a certificate representing any Class B Nonvoting Common Stock which was
represented by the certificate or certificates delivered to the Corporation in
connection with such conversion but which was not converted.
iv. If the Corporation in any manner subdivides or
combines the outstanding shares of one class of either Class A Voting
Common Stock or Class B Nonvoting Common Stock, the outstanding shares of the
other class will be proportionately subdivided or combined.
2
<PAGE>
v. In the case of, and as a condition to, any capital
reorganization of, or any reclassification of the capital stock of, the
Corporation (other than a subdivision or combination of shares of Class A Voting
Common Stock or Class B Nonvoting Common Stock into a greater or lesser number
of shares [whether with or without par value] or a change in the par value of
Class A Voting Common Stock or Class B Nonvoting Common Stock or from par value
to no par value) or in the case of, and as a condition to, the consolidation or
merger of the Corporation with or into another corporation (other than a merger
in which the Corporation is the continuing corporation and which does not result
in any reclassification of outstanding shares of Class A Voting Common Stock or
Class B Nonvoting Common Stock), each share of Class B Nonvoting Common Stock
shall be convertible into the number of shares of stock or other securities or
property receivable upon such reorganization, reclassification, consolidation or
merger by a holder of the number of shares of Class A Voting Common Stock of the
Corporation into which such shares of Class B Nonvoting Common Stock were
convertible immediately prior to such reorganization, reclassification,
consolidation or merger; and, in any such case, appropriate adjustment shall be
made in the application of the provisions set forth in this paragraph with
respect to the rights and interests thereafter of the holders of Class B
Nonvoting Common Stock to the end that the provisions set forth in this
paragraph (including provisions with respect to the conversion rate) shall
thereafter be applicable, as nearly as they reasonably may be, in relation to
any shares of stock or other securities or property thereafter deliverable upon
the conversion of the shares of Class B Nonvoting Common Stock.
vi. The shares of Class B Nonvoting Common Stock
which are converted into shares of Class A Voting Common Stock as provided
herein shall not be reissued.
vii. The Corporation will at all times reserve and
keep available out of its authorized but unissued shares of Class A Voting
Common Stock or its treasury shares, solely for the purpose of issue upon
conversion of the Class B Nonvoting Common Stock as provided above, such number
of Class A Voting Common Stock as shall then be issuable upon the conversion of
all then outstanding shares of Class B Nonvoting Common Stock (assuming that all
such shares of Class B Nonvoting Common Stock are held by persons entitled to
convert such shares into Class A Voting Common Stock).
viii. The issuances of certificates for Class A
Voting Common Stock upon the conversion of Class B Nonvoting Common Stock will
be made without charge to the holders of such shares for any issuance tax in
respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of Class A Voting Common Stock. The
Corporation will not close its books against the transfer of Class B Nonvoting
Common Stock or Class A Voting Common Stock issued or issuable upon the
conversion of Class B Nonvoting Common Stock in any manner which would interfere
with the timely conversion of Class B Nonvoting Common Stock.
Section 3. Preferred Stock
---------------
(a) Shares of Preferred Stock may be issued from time to time
in one or more series as may from time to time be determined by the Board of
Directors, each of said series to be distinctly designated. All shares of any
one series of Preferred Stock shall be alike in every particular, except that
there may be different dates from which dividends, if any, thereon shall be
cumulative, if made cumulative. The voting powers and the preferences and
relative, participating, optional and other special rights of each such series,
and the qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other series at any time outstanding; and the Board of
Directors of the Corporation is hereby expressly granted authority to fix by
resolution or resolutions adopted prior to the issuance of any shares of a
particular series of Preferred Stock, the voting powers and the designation,
preferences and relative, optional and other special rights, and the
3
<PAGE>
qualifications, limitations and restrictions of such series, including, but
without limiting the generality of the foregoing, the following:
i. Designation and Number. The distinctive
designation of, and the number of shares of Preferred Stock which shall
constitute such series, which number may be increased (except where otherwise
provided by the Board of Directors) or decreased (but not below the number of
shares thereof then outstanding) from time to time by like action by the Board
of Directors;
ii. Dividends. The rate and times at which, and the
terms and conditions on which, dividends, if any, on Preferred Stock of such
series shall be paid, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes, or series of
the same or other classes of stock and whether such dividends shall be
cumulative or noncumulative;
iii. Conversion Privileges. The right, if any, of the
holders of Preferred Stock of such series to convert the same into or exchange
the same for, shares of any other class or classes, or of any series of the same
or any other class or classes of stock of the Corporation and the terms and
conditions of such conversion or exchange;
iv. Redemption. Whether or not Preferred Stock of
such series shall be subject to redemption, and the redemption price or prices
and the time or times at which, and the terms and conditions on which, Preferred
Stock of such series may be redeemed;
v. Liquidation. The rights, if any, of the holders of
Preferred Stock of such series upon the voluntary or involuntary liquidation,
merger, consolidation, distribution or sale of assets, dissolution or winding
up, of the Corporation;
vi. Sinking Fund Requirements. The terms of the
sinking fund or redemption or purchase account, if any, to be provided for the
Preferred Stock of such series; and
vii. Voting Rights. The voting powers, if any, of the
holders, of such series of Preferred Stock which may, without limiting
the generality of the foregoing, include the right, voting as a series or by
itself or together with other series of Preferred Stock or all series of
Preferred Stock as a class, to elect one or more directors of the Corporation if
there shall have been a default in the payment of dividends on any one or more
series of Preferred Stock or under such other circumstances and on such
conditions as the Board of Directors may determine.
(b) The relative powers, preferences and rights of each series
of Preferred Stock in relation to the powers, preferences and rights of each
other series of Preferred Stock shall, in each case, be as fixed from time to
time by the Board of Directors in the resolution or resolutions adopted pursuant
to authority granted in paragraph 3(a) of this Article FOURTH and the consent,
by class or series vote or otherwise, of the holders of such of the series of
Preferred Stock as are from time to time outstanding shall not be required for
the issuance by the Board of Directors of any other series of Preferred Stock
whether or not the powers, preferences and rights of such other series shall be
fixed by the Board of Directors as senior to, or on a parity with, the powers,
preferences and rights of such outstanding series, or any of them; provided,
however, that the Board of Directors may provide in the resolution or
resolutions as to any series of Preferred Stock adopted pursuant to paragraph
3(a) of this Article FOURTH that the consent of the holders of a majority (or
such greater proportion as shall be therein fixed) of the outstanding shares of
such series voting therein shall be required for the issuance of any or all
other series of Preferred Stock.
4
<PAGE>
4. Subject to the provisions of paragraphs 2 and 3, shares of Common
Stock or any series of Preferred Stock may be issued from time to time as the
Board of Directors of the Corporation shall determine and on such terms and for
such consideration as shall be fixed by the Board of Directors.
5. The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased from time
to time by the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote thereon;
That the number of shares of the Corporation outstanding and entitled
to vote on an amendment to the Articles of Incorporation is 6,496,804 shares;
that the said change(s) and amendment have been consented to and approved by a
majority of the stockholders holding at least a majority of each class of stock
outstanding and entitled to vote thereon.
ARTICLE IV
Initial Registered Agent and Office Address
-------------------------------------------
The street address of the registered office of the Corporation is 3880
North 28th Terrace Hollywood, Florida 33020 and the name of the registered agent
of the Corporation at that address is Richard Ginsburg.
ARTICLE V
Incorporator
------------
The name and address of the incorporator to these Articles of
Incorporation are:
Richard Ginsburg
Guardian International, Inc.
3880 N. 28th Terrace
Hollywood, Florida 33020
ARTICLE VI
Board of Directors
------------------
The affairs of the Corporation shall be managed by a Board of Directors
consisting of no less than one director. The number of directors may be
increased or decreased from time to time, in accordance with the Bylaws of the
Corporation, but shall never be less than one. The manner of election of
directors shall be regulated by the Bylaws.
ARTICLE VII
Indemnification of Directors and Officers
-----------------------------------------
Section 1. Indemnification.
----------------
(a) Except as provided below, the Corporation (and any successor to the
Corporation by merger or otherwise) shall, and does hereby, indemnify, to the
fullest extent permitted or authorized by current or future legislation or
current or future judicial or administrative decisions (but, in the case of any
such future legislation or decisions, only to the extent that it permits the
Corporation to provide broader indemnification rights than permitted prior to
5
<PAGE>
such legislation or decision), each officer and director of the Corporation
(including the heirs, executors, administrators and estate of the person) who
was or is a party, or is threatened to be made a party, or was or is a witness,
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative and any appeal therefrom
(collectively, a "Proceeding"), against all liability (which for purposes of
this Article includes all judgments, settlements, penalties and fines) and
costs, charges, and expenses (including attorneys' fees) asserted against him or
incurred by him by reason of the fact that the person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including serving as a
fiduciary of an employee benefit plan).
(b) Notwithstanding the foregoing, except with respect to the
indemnification specified in the third sentence of Section 3 of this Article,
(i) the Corporation shall indemnify a person entitled to indemnification under
Section 1(a) in connection with a Proceeding (or part thereof) initiated by an
indemnified person only if authorization for the Proceeding (or part thereof)
was not denied by the Board of Directors of the Corporation within 60 days after
receipt of notice thereof from the indemnified person and (ii) the Corporation
shall not be required to indemnify or advance costs to any director or officer
(or such person's heirs, executors, administrators or estate) in an action in
which such person is an adverse party to the Corporation.
Section 2. Advance of Costs, Charges and Expenses. Costs, charges and
expenses (including attorneys' fees) incurred by a person referred to in Section
1(a) of this Article in defending a Proceeding may be paid by the Corporation to
the fullest extent permitted or authorized by current or future legislation or
current or future judicial or administrative decisions (but, in the case of any
future legislation or decisions, only to the extent that it permits the
Corporation to provide broader rights to advance costs, charges and expenses
than permitted prior to the legislation or decisions) in advance of the final
disposition of the Proceeding, upon receipt of an undertaking reasonably
satisfactory to the Board of Directors (the "Undertaking") by or on behalf of
the indemnified person to repay all amounts so advanced if it is ultimately
determined that such person is not entitled to be indemnified by the Corporation
as authorized in this Article; provided that, in connection with a Proceeding
(or part thereof) initiated by such person (except a Proceeding authorized by
Section 3 of this Article), the Corporation shall pay the costs, charges and
expenses in advance of the final disposition of the Proceeding only if
authorization for the Proceeding (or part thereof) was not denied by the Board
of Directors of the Corporation within 60 days after receipt of a request for
advancement accompanied by an Undertaking. A person to whom costs, charges and
expenses are advanced pursuant to this Article shall not be obligated to repay
pursuant to the Undertaking until the final determination of (a) the pending
Proceeding in a court of competent jurisdiction concerning the right of that
person to be indemnified or (b) the obligation of the person to repay pursuant
to the Undertaking. The Board of Directors may, upon approval of the indemnified
person, authorize the Corporation's counsel to represent the person in any
action, suit or proceeding, whether or not the Corporation is a party to the
action, suit or proceeding.
Section 3. Procedure For Indemnification. Any indemnification or
advance under this Article shall be made promptly, and in any event within 60
days after delivery of the written request of the director or officer. The right
to indemnification or advances as granted by this Article shall be enforceable
by the director or officer in any court of competent jurisdiction if the
Corporation denies the request under this Article in whole or in part, or if no
disposition of the request is made within the 60-day period after delivery of
the request. The requesting person's costs and expenses incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any action shall also be indemnified by the Corporation. It shall be a
defense available to the Corporation to assert in the action that
indemnification is prohibited by law or that the claimant has not met the
standard of conduct, if any, required by current or future legislation or by
6
<PAGE>
current or future judicial or administrative decisions for indemnification (but,
in the case of future legislation or decision, only to the extent that the
legislation does not impose a more stringent standard of conduct than permitted
prior to the legislation or decisions). The burden of proving this defense shall
be on the Corporation. Neither the failure of the Corporation to have made a
determination (prior to the commencement of the action) that indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct, if any, nor the fact that there has been an actual
determination by the Corporation that the claimant has not met the applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
Section 4. Indemnification Not Exclusive; Survival of Indemnification;
Other Indemnification. The indemnification provided by this Article shall not be
deemed exclusive of any other rights to which those indemnified may now or
hereafter be entitled under any statute, agreement, vote of stockholders or
disinterested directors or recommendation of counsel or otherwise, both as to
actions in the person's capacity as an officer or director and as to actions in
another capacity while still an officer or director, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the estate, heirs, beneficiaries, executors and administrators of such a
person. All rights to indemnification under this Article shall be deemed to be a
contract between the Corporation and each director and officer of the
Corporation described in Section 1 of this Article who serves or served as such
at any time while this Article is in effect. Any repeal or modification of this
Article or any repeal or modification of relevant provisions of the Florida
Business Corporation Act or any other applicable laws shall not in any way
diminish the rights to indemnification of such director or officer or the
obligations of the Corporation arising hereunder for claims relating to matters
occurring prior to the repeal or modification. The Board of Directors of the
Corporation shall have the authority, by resolution, to provide for
indemnification of agents of the Corporation and for such other indemnification
of the directors and officers of the Corporation as it deems appropriate.
Section 5. Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (including serving as a fiduciary of an
employee benefit plan), against any liability asserted against him and incurred
by him in any such capacity or arising out of his status as such, whether or not
the Corporation would have the power to indemnify him against such liability
under the provisions of this Article or the applicable provisions of the Florida
Business Corporation Act.
Section 6. Savings Clause. If this Article or any portion is
invalidated or held to be unenforceable on any ground by a court of competent
jurisdiction, the Corporation shall nevertheless indemnify each director and
officer of the Corporation described in Section 1 of this Article to the fullest
extent permitted by all applicable portions of this Article that have not been
invalidated or adjudicated unenforceable, and as permitted by applicable law.
The incorporator executed these Articles of Incorporation the 7th day
of July, 1999.
/s/RICHARD GINSBURG
-------------------
Richard Ginsburg
7
<PAGE>
CERTIFICATE DESIGNATING THE NAME AND OFFICE ADDRESS
OF REGISTERED AGENT UPON WHOM PROCESS MAY BE SERVED
Name of Corporation: Guardian International, Inc.
Name and Office
Address of
Registered Agent: Richard Ginsburg
Guardian International, Inc.
3880 North 28th Terrace
Hollywood, Florida 33020
I agree to act as initial registered agent to accept service of process
for the corporation named above at the place designated in this certificate. I
agree to comply with Section 607.0505, Florida Statutes, and all other statutes
relating to the proper and complete performance of my duties. I am familiar with
and accept the obligations of my position as registered agent.
/s/RICHARD GINSBURG
-------------------
Richard Ginsburg
July 7, 1999
8
[LOGO]
GUARDIAN INTERNATIONAL
COMMON STOCK
CUSIP 401376 10 8
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER
SHARE OF
GUARDIAN INTERNATIONAL, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar. Witness the facsimile seal of the Corporation and the facsmile
signatures of its duly authorized officers.
/s/ illegible [CORPORATE SEAL] /s/ illegible
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
<PAGE>
GUARDIAN INTERNATIONAL, INC.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT as tenants by the entireties (Cust) (Minor)
JT TEN as joint tenants with right Act
of survivorship and not as tenants (State)
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,_______hereby sell, assign and transfer into
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE THE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
__________________________________________________________________________shares
of the capital stock represented by the within certificate, and do hereby
irrevocable constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated______________
NOTICE: _______________________________________________________________________
THE SIGNATURE TO THIS ASSIGNEMENT MUST CORRESPOND WITH THE NAME
ASSIGNED UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION
Signature(s) Guaranteed:
______________________________________________________________________________
THE SIGNATURES, SHOULD BE GUARANTEED BY THE FINANCIAL GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE MEDIALLION PROGRAM, PURSUANT TO S.E.C. RULE
17Ad-15.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FIANNCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 399,857
<SECURITIES> 0
<RECEIVABLES> 2,847,520
<ALLOWANCES> 581,125
<INVENTORY> 403,114
<CURRENT-ASSETS> 3,337,515
<PP&E> 4,095,670
<DEPRECIATION> 995,694
<TOTAL-ASSETS> 38,368,691
<CURRENT-LIABILITIES> 6,604,992
<BONDS> 7,292,911
0
10
<COMMON> 12,203
<OTHER-SE> 6,693,355
<TOTAL-LIABILITY-AND-EQUITY> 38,368,691
<SALES> 3,241,582
<TOTAL-REVENUES> 8,877,656
<CGS> 2,516,225
<TOTAL-COSTS> 3,548,153
<OTHER-EXPENSES> 3,318,912
<LOSS-PROVISION> 237,700
<INTEREST-EXPENSE> 516,216
<INCOME-PRETAX> (1,530,374)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,530,374)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,530,374)
<EPS-BASIC> (0.26)
<EPS-DILUTED> 0
</TABLE>
