Financial Information
OFF-BALANCE SHEET FINANCINGThe company did not have any off-balance sheet arrangements or obligations other than the operating leases disclosed above.
SUBSEQUENT EVENTOn January 11, 2006, 60,000 outstanding stock options that had vested were exercised at a price of $0.85 per share.
On November 29, 2005, the Company entered into a conditional Agreement of Purchase and Sale for land and building in the amount of $1,880,000.
TRENDS RISKS AND UNCERTAINTIESIn addition to general economic factors the company’s business is subject to a number of risk factors including consumer behaviors, technological changes, and competition as further described below. The company has certain business risks linked to collection of receivables and subscriber attrition risk, which management believes is manageable.
Competition: The security industry is highly competitive and fragmented. The company may encounter competition from other residential alarm system distributors and/or installers having established marketing and distribution networks and/or greater financial resources. As well, new developments may create new competition. Other than competitive advantages that the company may enjoy as a result of market penetration and brand recognition, there will not be any significant barriers to the entry into this market by competitors.
Dependence on Key Personnel: The company is highly dependent on its ability to attract and retain highly skilled personnel such as its president, Mr. Joel Matlin. The company has entered into a management agreement with Mr. Matlin, which includes a non-competition covenant. The loss of Mr. Matlin could have a negative impact on the company or on the further development and/or marketing of the company’s products. However, as additional personnel are hired, the dependence on Mr. Matlin will be reduced. In the interim, there could be a disruption of the company’s operations if Mr. Matlin leaves or otherwise becomes unavailable to render services to the company.
Possible Adverse Effect of “False Alarm” Ordinances: Significant concern has arisen in certain municipalities about the high incidence of “false alarms”. This concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain security monitoring services. A number of municipalities have considered and are considering adopting various measures aimed at reducing the number of false alarms. The company has determined that the most appropriate and cost-effective method to address these measures is to retain a private dispatch residential security response team to respond to the alarm signals.
The nature of the services provided by AlarmForce residential security in both Canada and the US markets potentially exposes it to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses. Most of the company’s subscriber agreements and other agreements pursuant to which it distributes its products and services contain provisions limiting liability to subscribers in an attempt to reduce this risk. However, in the event of litigation with respect to such matters, there can be no assurance that these limitations will be enforced and the costs of such litigation could have an adverse effect on the company.
CRITICAL ACCOUNTING ESTIMATESThe preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based on management’s historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources
Management believes that the accounting policies that require estimation of the useful lives of long-lived assets, the recoverable values of the assets and measurement of impairment of the assets, are most affected by judgments and estimates used in the preparation of the financial statements. For a detailed description of these and other accounting policies, please refer to the company’s 2005 annual financial statements.
Costs incurred to create long-term subscriber accounts are capitalized and amortized over the estimated useful lives of the respective assets, which principally includes revenue equipment and intangible assets consisting of franchise rights. The carrying value of the assets depends on the estimate made of useful life, which is the period over which the assets are written off. Revenue equipment, which the company continues to own during and after the term of the subscriber agreement, is written off over the estimated ten-year useful life of the security systems. The use of wireless technology makes the relocation of systems much more cost-effective than traditional wired systems, allowing the company to relocate or re-deploy the equipment if necessary. Franchise rights are written off over the remaining terms of the respective franchise agreements.
The company follows the recommendations of CICA Handbook Section 3063, “Impairment of Long-Lived Assets”. The company reviews for impairment the value of long-lived assets including revenue equipment and intangible assets on a regular basis, at least annually. The value is reviewed more frequently if events or changes in circumstances indicate that the carrying value exceeds fair value, as determined by the undiscounted future cash flows expected from the related subscriber accounts after normal attrition. If the sum of the undiscounted future cash flow expected from the subscriber agreements and eventual disposition of assets is less than the carrying amount, the group of assets is considered to be impaired, and an impairment loss is recorded, measured as the amount by which the carrying amount of the group of assets exceeds its estimated fair market value.
