Financial Information

REVIEW OF OPERATIONS

Total revenue increased from 2003 to 2004 by $2,464,040 or 21%, primarily reflecting the increase in MRR. MRR increased by approximately $2,097,000 or 19% in the same period. Over the same period the average number of subscribers during the year increased from approximately 37,300 to 44,000, up 19%. The balance of the net change was due mainly to increase in amortization of deferred revenue from sales of add-on equipment options, which comprised approximately 7% of total revenue.

Cost of sales increased by $92,408 or 3% from 2003 to 2004. Direct costs decreased as a result of the company’s acquisition of certain franchise rights, resulting in elimination of fees paid to franchisees. The cost of acquisition of the rights is being amortized over the respective remaining franchise terms, resulting in a partially offsetting increase in amortization expense.

Certain costs of the burglar alarm company’s central monitoring station are relatively fixed and therefore the per-account cost is decreasing as economies of scale are realized from an expanding account base. The company is vertically integrated and manufactures, installs, monitors and services AlarmVoice alarm systems. The alarm system facilitates live two-way voice communication with the Central Station thereby offering immediate response and/or assistance in certain emergencies. The Central Station is located at the home alarm monitoring Company’s head office in Toronto from which the subscriber accounts are monitored.

Gross margin increased from 2003 to 2004 by $2,371,632 or 27%, due primarily to greater operating efficiency of the central monitoring station. Gross margin as a percentage of total revenue increased from 74% to 79% which is consistent with increased efficiency of operations, and consistent with the decrease in the per-account monitoring cost as the account base has increased.

General, Administrative & Selling expenses increased from 2003 to 2004 by $979,464 or 27%. Of this increase, an increase of $489,000 (21% increase) was due to the increase in number of employees and yearly salary increases. Total salaries expense increased due to recruitment of additional employees to replace franchisees and increase capacity in connection with the franchise rights acquired. In addition the company minimizes reliance on outsourcing and subcontracts, resulting in increased recruiting of employees to staff all aspects of its manufacturing, marketing and distribution activities, thereby better controlling the quality of service provided to customers. Sales representatives manage leads and book the driveway alarm installations, while other employees and associates located throughout the country are responsible for the installation and service to subscribers. The alarm monitoring Company recorded stock-based compensation expense of $105,000 in 2004 in accordance with the adoption of the new policy. No expense was recorded in 2003 in accordance with GAAP at that time, thus contributing to the total increase in expenses in 2004. The fair value of stock options granted in 2004 is determined based on the Black- Scholes option pricing model.

The balance of increase was due to occupancy expense and miscellaneous office and general expenses.

Amortization expenses include amortization of the cost of revenue equipment, deferred direct-response marketing charges and franchise rights. Amortization of revenue equipment is calculated on a straight line basis over the ten year estimated life of the equipment consisting of wireless security systems installed in subscriber homes. This amount increased by $205,161 or 16%, reflecting the increase in the total number of subscribers with monitored systems. Amortization of deferred direct-response marketing charges, which is calculated over the four-year term of the subscriber contracts to which they relate, correspondingly increased by $523,578 or 32%. Amortization of intangible assets increased by $150,771 due to new acquisitions of franchise rights.

Interest expense decreased by $64,725, reflecting the decreased average borrowings requirements in 2004 as compared to 2003. The company closed two private placements during the year resulting in additional capital in the company to finance growth and working capital. The company has also controlled the use of debt financing for new growth in subscriber accounts by maintaining a low cost of creation relative to the industry. The company uses an organic growth model to build the account base as opposed to acquiring existing accounts, and this has proved effective in reducing the debt-to-equity ratio in the company.

The company’s effective tax rate was higher than the statutory rate of 36.12% due mainly to the effect of nondeductible amortization of intangible assets. In addition, in 2004 there was an offsetting gain from a net decrease in the statutory tax rates compared to the prior year.

For income tax purposes the company is able to deduct certain deferred charges in excess of the expense amounts recorded for accounting purposes, resulting in timing differences that are expected to reverse in future. Accordingly the company has recorded a liability for future income taxes expected to be paid in connection with the timing differences. The future tax liability is reduced by future income tax assets resulting from certain opposite timing differences, which result from the accounting deferral and amortization of sales revenue that are included in taxable income immediately at the time that the sale is completed. These differences are also expected to reverse in the future.

In addition, certain share issuance costs incurred in 2004 are deductible from taxable income over a period of five years, resulting in timing differences and a future tax asset of approximately $140,000.

The tax effects of the significant components of temporary differences giving rise to the future tax assets and liabilities are as follows for the years 2002-2004, after restating the prior years for the change in accounting policy in 2004.