Financial Information

4. SELECTED ANNUAL INFORMATION

The following summary of selected audited financial information is derived from, and should be read in conjunction with, the Company’s audited financial statements, including the notes thereto, for the years ended October 31, 2009, 2008, and 2007:

Annual Information

	2009	2008	2007
Subscriber base	102,400	91,000	79,200
	$	$	$
OPERATIONS:
Total revenue	34,133,361	29,942,385	25,136,125
Gross margin	26,101,308	23,346,082	20,005,802
EBITDA***	9,057,490	7,218,372	4,962,351
Income before income taxes	5,673,140	3,885,740	2,105,091
Net income	3,780,061	2,610,585	1,280,172
Cash flow from operating activities	6,467,452	6,812,715	2,737,038
Basic earnings per share	0.31	0.22	0.11
Diluted earnings per share	0.31	0.22	0.11
Diluted EBITDA*** per share	0.74	0.61	0.39
FINANCIAL POSITION:
Total assets	33,072,558	29,311,049	25,251,571
Total long-term debt**	1,179,168	1,454,167	1,759,369
Shareholders’ equity	23,743,081	19,582,560	16,839,675
Debt/Equity ratio**	0.05	0.07	0.10
Debt** per subscriber account	12	16	22

** Includes building loan and revolving term loans (see Long-term Debt section)
*** Earnings Before Interest Tax Depreciation and Amortization is a key performance indicator in the security industry and should not be interpreted as GAAP earnings.

RECONCILIATION OF GAAP EARNINGS TO ADJUSTED EBITDA

EBITDA is defined as earnings before interest expenses, income taxes, depreciation and amortization. EBITDA is a standard measure used in the security industry to assist in understanding and comparing operating results and is often referred to by our competitors. Management views EBITDA as an important measure of operating performance of the Company. Yet, since it does not have any standardized meaning defined by Canadian GAAP, it may not be considered in isolation of GAAP measures such as net income/loss or cash flows, as a measure of liquidity. Management believes, however, that it is an important measure as it allows the Company to assess its ongoing business without the impact of depreciation or amortization expenses. Since EBITDA is not a defined term under Canadian GAAP, it is unlikely to be comparable to similar measures presented by other issuers.

Most companies in the residential security industry purchase subscriber accounts and capitalize those acquisition costs amortizing them over the term of the subscriber contract. AlarmForce is one of the few companies whose growth is internally generated and therefore the accounting treatment is not directly comparable. AlarmForce’s annual budget for marketing expenditures has increased steadily, reflecting acceleration of new subscriber account creation and due to the discretionary nature of the marketing budget the Company provides the following reconciliation of adjusted EBITDA to GAAP net income figures reported for the years ended October 31, 2009, 2008 and 2007:

	2009 $	2008 $	2007 $
Net income	3,780,061	2,610,585	1,280,172
Add: income taxes	1,893,079	1,275,155	824,919
Income before income taxes	5,673,140	3,885,740	2,105,091
Add:
Amortization of property, plant and equipment	2,425,581	2,367,729	1,922,644
Amortization of intangible assets	885,936	866,315	822,767
Amortization of deferred charges	2,730	8,457	9,591
Interest expense	70,103	90,131	102,258
EBITDA	9,057,490	7,218,372	4,962,351
Add: marketing expenditures	9,061,959	8,823,086	9,363,333
Adjusted EBITDA	18,119,449	16,041,458	14,325,684