Financial Information

5. RESULTS OF OPERATIONS (continued)

Gross margin

Gross Profit was $23,346,082 for the fiscal year 2008 compared to $20,005,802 in fiscal 2007, which was an increase of $3,340,280 or 17%. Gross margin as a percentage of total revenue decreased to 78% in 2008, compared to 80% in 2007.Management expects the gross profit margins to increase going forward as target staffing requirements are fulfilled and scale efficiencies obtained over the growing subscriber accounts.

Selling General and Administrative Expenses (“SG & A”)

SG&A Expenses are $15,938,435 for 2008 compared to $15,257,901 in 2007 which was a marginal increase of $680,534 or 4%.

Selling Expenses are $10,563,991 for 2008 compared to $10,949,615 in 2007, a decrease of $385,624 or 4%. This is predominantly due to a decrease in market expenditures of $540,247 due to cost reductions in negotiating advertising contracts required to establish brand recognition throughout Canada and the U.S. These advertising expenditures in the form of radio, television, print and other media uniquely introduce the benefits of the Company’s products and services. Selling Expenses excluding marketing costs remained relatively stable at $154,623 or 10% in 2008 as compared to $154,838 or 11% in 2007. This is due to the Company fulfilling its sales staffing requirements in 2007.

Administrative Expenses totaled $5,374,444 for 2008 compared to $4,308,286 in 2007, an increase of $1,066,158 or 25%. Aside from general wage augmentations, the increase in administrative expenses is due to additional customer care and support staff required to handle inbound non emergency calls typically regarding service, billing and other alarm related issues. In an effort to maintain high levels of customer satisfaction, the customer care department recently extended its hours of operation.

Other expenses

Amortization of Property Plant and Equipment was $2,367,729 for the fiscal year 2008 compared to $1,922,644 in fiscal 2007, an increase of $445,085 or 23%. This increase mainly reflects additions made to the rental equipment in 2008 due to the subscriber growth. Rental equipment refers to alarm equipment installed at a subscriber’s location that remains the property of the Company. This equipment is capitalized under rental equipment as it is expected to have a longer useful life than the term of the customer agreement.

Interest expense was $90,131 for the fiscal year 2008 compared to $102,258 in fiscal 2007 a decrease of $12,127 or 12%. The Company did not obtain any new loans in 2008, thereby reducing the interest expense for 2008. The Company strictly controls the use of debt financing for new subscriber growth and uses an organic growth model to build the account base as opposed to growth by acquisition. This has proved effective in reducing the Company’s debt to equity ratio.

Foreign exchange loss

The Company is exposed to currency risk due to its US limited partnership, AlarmForce Limited Partnership, and also a certain portion of the Company’s purchases are in US currency, resulting in US dollar-denominated accounts payable. These activities result in exposure to fluctuations in foreign currency rates as the Company adjusts its foreign exchange rate annually. As at October 31, 2008, the Company experienced a foreign exchange loss of $189,275 from the strengthening US dollar. The Company has not deemed it necessary to utilize any financial instruments or cash management policies to mitigate risk.

Income taxes

The future tax liability is reduced by future income tax assets resulting from certain opposite timing differences, which stems from the accounting deferral and amortization of sales revenue that are immediately recognized in taxable income at the time the sale is completed. These differences are also expected to reverse in the future.

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 2006-2008:

	2008 $	2007 $	2006 $
Future tax liability for intangible assets and other depreciable assets	646,000	1,214,000	1,607,000
Future tax assets arising from deferred revenue and other miscellaneous items	(1,110,000)	(1,001,000)	(852,000)
Net future tax liability(asset)	(464,000)	213,000	755,000

Operating results by business segments

The Company operated primarily in only one reporting segment in Canada, which is the monitoring of residential security systems. At the present time, the Company’s US revenue does not represent a significant geographic segment at 8% of consolidated revenue.