Financial Information
Consolidated Financial Statements For the Second Quarter Ended April 30, 2008
To Our Shareholders:
We are pleased to report the results for AlarmForce’s second quarter and cumulative first six months of the 2008 fiscal year. For the six months ended April 30, 2008 we achieved a net increase in subscribers of approximately 6,200 accounts. This net increase was 20% higher than the net increase for the comparative six months in 2007, and it brings our total account base to 85,400 subscribers, up by 20% over the account base a year ago.
As a result of the growth in home security subscribers, AlarmForce revenues for the second quarter reached a record-setting level of $7,317,000, the highest quarterly revenue in the company’s history. This increase brought total revenues for the fi rst six months of 2008 to $14,416,000, up by 20% over the fi rst six months of 2007.
One of the key developments during the second quarter was the launch of AlarmCare, our 24-hour personal emergency response system. Building the capacity for the rollout of the AlarmCare service to home alarm subscribers required an increased use of resources in the quarter, including quality control, brand-building and launch. This was refl ected in an increase in expenses, and also contributed to the fact that our second quarter subscriber increases did not exceed the record set in the immediately preceding quarter. Currently, AlarmCare branding has moved past the start-up phase and our course has resumed to allow us to increase our margins in future quarters.
Having successfully completed the launch of AlarmCare, we look ahead to revenue growth in all the current markets that we service in Canada and the US. Retirees represent one of the fastest growing segments of the population and we are excited to add this to AlarmForce’s recurring revenue business.
Results of operations
Together with the increase in revenue to a new record level, income before taxes for the six months was up by 37%, while Net income was up by 43%, relative to the comparative period. Also showing an increase was EBITDA, a performance measure used in the security industry, up by 27%. Included in EBITDA is the effect of the marketing expenditure which is a major driver of the company’s growth engine. The effect of increased marketing expenses results in a charge, thus reducing the operating income. Excluding marketing expenses, EBITDA increased from $6.6 million to $7.5 million for the six months, refl ecting the increase in recurring revenues and cash fl ows. Cash fl ows from operations increased by 34% from $1,672,000 to $2,233,000 for the six months.
We are pleased to report that we are continuing to fund our growth entirely from operating cash fl ows. This means that every residential subscriber account added increases the asset value of the company, and therefore the underlying value of our shareholders’ investment in the company. Expanding the account base at a record level without a corresponding increase in debt, is one of our key objectives. Our total debt decreased during the period and our debt per subscriber decreased to $19 per account from $22 at the end of 2007. By continuing to grow our subscriber base organically, we expect to continue to grow more profi tably than the industry average.
Outlook and Resources
Our future outlook is immensely positive. Favourable demographic trends continue to provide impetus for growth in the residential alarm business. Several important factors are driving an increased level in home ownership, including immigration and strong population growth, increased urbanization, longer life expectancy rates, smaller households, and more second homes for the baby boom generation. All these factors will have a far-reaching and highly benefi cial effect on demand for our subscriber services.
The company’s total outstanding balance of debt at April 30, 2008 amounted to $1,604,000, consisting of a fi xed rate term loan for purchase of property acquired by the Company in March 2006 and revolving bank loans. This refl ects a reduction in our debt of approximately $154,000 over the last six months, a trend which we expect to continue, and we are confi dent that the company’s cash resources and credit facilities are adequate for the foreseeable future.
We are optimistic of achieving another record-setting year for our subscriber account base and total revenue in 2008. In closing I would like to thank you for your continuing support and confi dence in AlarmForce.
Respectfully submitted on behalf of the Board of Directors
Joel Matlin
President and CEO
Unaudited Consolidated Balance Sheet As At April 30, 2008
(With comparative figures for the fiscal year ended Oct. 31, 2007)
| April 30, 2008 | October 31, 2007 | |
| ASSETS Current | ||
| Cash and cash equivalents | $3,144,540 | $2,480,014 |
| Accounts receivable | 567,315 | 349,068 |
| Income taxes recoverable | – | 37,081 |
| Inventory | 2,754,486 | 2,904,970 |
| Prepaid expenses & other assets | 74,519 | 23,878 |
| 6,540,860 | 5,795,011 | |
| Deferred charges | 6,958 | 11,187 |
| Future income taxes | 364,500 | – |
| Property, plant & equipment (note 3) | 15,990,312 | 15,500,818 |
| Intangible assets | 3,511,396 | 3,944,555 |
| $26,414,026 | $25,251,571 | |
| LIABILITIES Current | ||
| Accounts payable and accrued liabilities | $2,525,695 | $3,099,503 |
| Unearned revenue | 661,695 | 666,295 |
| Income taxes payable | 459,265 | – |
| Current portion of long-term debt (note 4) | 300,001 | 305,202 |
| 3,946,656 | 4,071,000 | |
| Deferred revenue | 2,987,435 | 2,673,729 |
| Long-term debt (note 4) | 1,304,167 | 1,454,167 |
| Future income taxes | – | 213,000 |
| $8,238,258 | $8,411,896 | |
| SHAREHOLDERS’ EQUITY | ||
| Share capital (note 5) | 12,315,685 | 12,183,385 |
| Paid-in capital - options | 202,140 | 202,140 |
| Retained earnings | 5,657,943 | 4,454,150 |
| 18,175,768 | 16,839,675 | |
| $26,414,026 | $25,251,571 |
See accompanying notes to unaudited consolidated financial statements.
Unaudited ConsolidatedStatement of Income For Three Months Ended January 31, 2009
(With comparative figures for six months ended Jan. 31, 2008)
| Three months ended April 30 | Six months ended April 30 | |||
| 2008 | 2007 | 2008 | 2007 | |
| Sales | $7,317,399 | $6,177,635 | $14,416,266 | $12,025,555 |
| Cost of Sale | 1,852,934 | 1,433,110 | 3,406,401 | 2,682,573 |
| Gross Profit | 5,464,465 | 4,744,525 | 11,009,865 | 9,342,982 |
| Expenses Selling | 2,635,951 | 2,565,154 | 5,056,194 | 4,731,553 |
| General & administrative | 1,235,605 | 1,073,047 | 2,324,823 | 1,913,508 |
| 3,871,556 | 3,638,201 | 7,381,026 | 6,645,061 | |
| Income from operations before other expenses: |
1,592,909 | 1,106,324 | 3,628,839 | 2,697,921 |
| Other expenses: Amortization: Property, plant & equipment |
525,734 | 429,969 | 1,056,976 | 877,247 |
| Deferred charges | 2,115 | 2,398 | 4,229 | 4,796 |
| Intangible assets | 216,579 | 199,095 | 433,159 | 389,545 |
| Interest | 22,801 | 27,450 | 48,967 | 45,393 |
| Foreign exchange loss | 61,464 | 14,246 | 261,221 | 46,672 |
| 828,693 | 673,158 | 1,804,552 | 1,363,653 | |
| Income before income taxes |
764,216 | 433,166 | 1,824,287 | 1,334,268 |
| Income taxes (note 6) | 240,494 | 159,000 | 620,494 | 494,000 |
| Net Income for the period | $523,722 | $274,166 | 1,203,793 | 840,268 |
| Basic Earnings per Share (note 7) |
$0.04 | $0.02 | $0.10 | $0.07 |
| Fully Diluted Earnings per Share (note 7) |
$0.04 | $0.02 | $0.10 | $0.07 |
UNAUDITED CONSOLIDATED STATEMENT OF RETAINED EARNINGS
For the six months ended April 30, 2008
| 2008 | 2007 | 2008 | 2007 | |
| Retained earnings, beginning of period |
$5,134,221 | $3,740,080 | $4,454,150 | $3,173,978 |
| Net income for the period | 523,722 | 274,166 | 1,203,793 | 840,268 |
| Retained Earnings, end of period |
$5,657,943 | $4,014,246 | $5,657,943 | $4,014,246 |
See accompanying notes to unaudited consolidated financial statements.
Unaudited Consolidated Statement of Cash Flows For Six Months Ended April 30, 2008
(With comparative figures for six months ended April 30, 2007)
| Three months ended April 30 | Six months ended April 30 | |||
| 2008 | 2007 | 2008 | 2007 | |
| OPERATING ACTIVITIES Net Income for the period |
$523,722 | $274,167 | $1,203,793 | $840,268 |
| Items not involving cash: Amortization: | 525,734 | 429,969 | 1,056,976 | 877,247 |
| Deferred charges | 2,115 | 2,398 | 4,229 | 4,796 |
| Intangible Assets | 216,579 | 199,095 | 433,159 | 389,545 |
| Future income taxes | (378,000) | 133,000 | (577,500) | 118,000 |
| Stock Compensation | – | 8,422 | – | 12,632 |
| Income from operations before other expenses: | 1,592,909 | 1,106,324 | 3,628,839 | 2,697,921 |
| 890,150 | 1,047,051 | 2,120,657 | 2,242,488 | |
| Change in non-cash components of working capital: Accounts receivable |
(109,125) | (344) | (218,248) | (974) |
| Inventory | 185,294 | 312,918 | 150,484 | 165,993 |
| Prepaid expenses & other assets | 27,820 | 20,404 | (50,641) | (65,388) |
| Accounts payable & accrued liabilities | (466,252) | (52,593) | (573,808) | (325,592) |
| Unearned revenue | – | – | (4,600) | (122) |
| Income taxes | 190,507 | 26,000 | 496,346 | (614,000) |
| Deferred revenue | 146,696 | 45,084 | 313,706 | 70,334 |
| (25,060) | 3 51,469 | 113,239 | (569,749) | |
| 865,090 | 1,398,520 | 2,233,896 | 1,672,739 | |
| INVESTING ACTIVITIES Additions to property, plant & equipment | (801,090) | (837,512) | (1,546,470) | (1,598,788) |
| Additions to intangible assets | 55,000 | (1,350,000) | – | (1,350,000) |
| (746,090) | (2,187,512) | (1,546,470) | (2,948,788) | |
| FINANCING ACTIVITIES Repayment of fi xed rate term loan |
(12,500) | (12,500) | (25,000) | (25,000) |
| Increase/(decrease) in long-term debt | (62,500) | 877,909 | (130,200) | 767,917 |
| Proceeds from issue of share capital | 132,300 | – | 132,300 | – |
| 57,300 | 865,409 | (22,900) | 742,917 | |
| Change in cash and cash equivalents | 176,300 | 76,417 | 664,526 | (533,132) |
| Cash and cash equivalents, beginning of period | 2,968,240 | 3,299,761 | 2,480,014 | 3,909,309 |
| Cash and cash equivalents, end of period | $3,144,540 | $3,376,178 | $3,144,540 | $3,376,177 |
| Cash and cash equivalents for the Company are as follows: Cash |
$1,139,829 | $492,100 | $1,139,829 | $ 492,100 |
| Guaranteed investment certificates | $2,004,711 | $2,884,077 | $2,004,711 | $2,884,077 |
| $3,144,540 | $3,376,177 | $3,144,540 | $3,376,177 | |
| Supplemental cash flow information: Interest paid |
$22,801 | $ 27,450 | $48,967 | $45,393 |
| Income taxes paid | $427,792 | – | $701,454 | $990,000 |
See accompanying notes to unaudited consolidated financial statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED APRIL 30, 2008 (Unaudited)
AlarmForce Industries.,Inc (the "Company") is a public company whose shares are listed on the Toronto Stock Exchange. The Company provides security alarm monitoring and related services to residential and commercial subscribers throughout Canada and in selected states of the United States of America. The Company is a leading provider of two-way voice alarm systems and monitoring services and was incorporated under the laws of Canada on November 16, 1988.
1. BASIS OF PRESENTATION
The management of AlarmForce Industries Inc. has prepared these interim consolidated financial statements in accordance with Canadian Generally Accepted Accounting Principles (GAAP). Disclosure of the interim financial statements does not conform in all respects to the requirements of GAAP for annual statements. The notes presented in these interim financial statements include only signifi cant events and transactions and do not include all matters normally disclosed in the Company’s audited annual financial statements. These interim financial statements have not been audited or reviewed by the Company’s independent auditors. These statements follow the same accounting policies and methods as the most recent annual audited financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2007. In the opinion of management, all adjustments considered necessary for fair presentation have been included in these interim consolidated financial statements. Operating results for the six months ended April 30, 2008, are not necessarily indicative of the results that may be expected for the year ending October 31, 2008.
2. ACCOUNTING POLICY DEVELOPMENTS
i) International Financial Reporting Standards (IFRS): In 2006, Canada’s Accounting Standards Board adopted a strategy of converging Canadian generally accepted accounting principles for publicly accountable enterprises with International Financial Reporting Standards (IFRS). The Company will be required to report using these converged standards for interim and annual financial statements for fi scal years commencing on or after January 1, 2011. The Company is currently in the process of evaluating the impacts of this convergence on the consolidated financial statements.
(ii) Financial Instruments – Disclosure and Presentation: In December 2006, the CICA issued Section 3862, “Financial Instruments Disclosures,” and Section 3863, “Financial Instruments, presentation.” These standards provide additional guidance on disclosing risks related to recognized and unrecognized financial instruments and how those risks are managed. This Section applies to interim and annual financial statements of the Company commencing 2008 fi scal year. See note 8 regarding additional disclosure.
(iii) Capital disclosures: CICA issued Handbook Section 1535, Capital Disclosures, which provides standards for disclosures regarding a company’s capital and how it is managed. Enhanced disclosure with respect to the objectives, policies and processes for managing capital and quantitative disclosures about what a company regards as capital is required. These recommendations are effective for fi scal years beginning on or after October 1, 2007 and, therefore, apply to the Company. The Company’s objectives in managing capital are to ensure suffi cient liquidity to pursue its strategy of organic growth and to deploy capital to provide an appropriate return on investment to its shareholders. The capital structure of the Company consists principally of shareholder’s equity comprised of retained earnings and share capital. The Company’s strategy is to minimize the use of debt fi nancing to fund growth and manage its capital structure in light of economic conditions and the risk characteristics of the underlying assets. The Company’s primary uses of capital are to fi nance non-cash working capital requirements and capital expenditures, which are currently funded from its internally generated cash fl ows. The Company is not subject to any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital.
(iv) Inventory: In June 2007, the CICA issued Section 3031, “Inventories” resulting from the convergence with IFRS, which requires inventory to be measured at lower of cost and net realizable value. The standard also provides guidance on the costs that can be capitalized. In addition, previous inventory write-downs are now allowed to be reversed if the economic circumstances have changed to support an increased inventory value. The standard is effective for our annual and interim periods beginning on or after January 1, 2008 and, therefore does apply to the Company. The Company is not affected by these new recommendations.
3. PROPERTY, PLANT AND EQUIPMENT
| April 30, 2008 | October 31, 2007 | |||
| Cost $ |
Accumulated Amortization $ |
Cost $ |
Accumulated Amortization $ |
|
| Land Building Rental equipment |
600,000 2,208,587 20,540,697 |
– 219,954 7,521,252 |
600,000 2,208,069 19,494,802 |
– 164,752 7,023,290 |
| Computer equipment Computer software Furniture & fixtures Moulding equipment |
678,676 357,583 376,876 57,386 |
537,363 245,458 248,080 57,386 |
652,714 335,075 375,358 57,386 |
514,074 229,644 233,938 56,888 |
| Net book value | 24,819,805
15,990,312 |
8,829,493 | 23,723,404 15,500,818 |
8,222,586 |
4. LONG-TERM DEBT
| April 30, 2008 $ | October 31, 2007 $ | |
| Fixed rate term loan Revolving term loans |
895,834 708,334 |
920,834 838,535 |
| Less: Current portion | 1,604,168 300,001 |
1,759,369 305,202 |
| 1,304,167 | 1,454,167 |
The Company has credit facilities in the aggregate amount of approximately $4,800,000. Loans made under the respective facilities are repayable over various terms, in monthly installments of principal plus interest at the prime rate plus 0.75% per annum, pursuant to individual contract periods. The Company’s debt consists of a fi xed rate term loan in the amount of $1,000,000 obtained in 2006 to fi nance the acquisition of property consisting of land and building, as well as another term loan of $1,000,000 acquired to fi nance the purchase of franchise rights. These loans are repayable (principal and interest) in monthly installments, at various interest rates. A general assignment of book debts, a general security agreement, and an assignment of the proceeds of a $300,000 life insurance policy have been pledged as collateral.
5. SHARE CAPITAL
The Company is authorized to issue an unlimited number of common shares.
The changes in the issued common shares of the Company during the second quarter ended April 30, 2008 are as follows:
| Number of Shares | Value $ | |
| Balance, October 31, 2006 For cash pursuant to option plan | 12,088,788 10,000 |
12,145,585 37,800 |
| Balance, October 31, 2007 Issued during the period ended April 30, 2008: For cash pursuant to stock option plan | 12,098,788
35,000 |
12,183,385
132,300 |
| Balance, April 30, 2008 | 12,133,788 | 12,315,685 |
Stock Option plan:
The Company has an incentive stock option plan in place for its directors, offi cers and employees. Options may be granted for a period not exceeding fi ve years at an option price not less than the market price of the shares at the time the option is granted. The maximum number of common shares which may be set aside for issue under the plan is 2,250,000, provided that, from time to time, such number may be increased subject to approval of the shareholders of the Company. The maximum number of common shares that may be reserved for issuance to any one person under the plan is 5% of the common shares outstanding at the time of the grant, less the number of shares reserved for issuance to such person.
The changes in the outstanding stock options of the Company as at April 30, 2008 are as follows:
| Options | April 30, 2008 Weighted average exercise price $ |
|
| Balance, October 31, 2006 For cash pursuant to option plan | 190,000 | 3.78 |
| Balance, October 31, 2007 Issued during the period ended April 30, 2008: For cash pursuant to stock option plan | Nil (35,000) Nil |
3.78 |
| Balance, end of period (i) Less options not vested (ii) |
155,000 0 | 3.78 |
| Exercisable, end of period | 155,000 |
The remaining contractual life and exercise price of options outstanding and options exercisable as at April 30, 2008 are as follows:
| Number of Options Outstanding |
Remaining Contractual Life (Years) |
Exercise Price $ |
Number of Options Exercisable |
| 155,000 | 1.25 | 3.78 | 155,000 |
Vesting of options:
(i) Outstanding options are subject to vesting provisions under which 25% of the total options granted vest immediately at the date of the grant, and a further 25% after each of the fi rst, second and third anniversaries.
(ii) All options have fully vested.
| April 30, 2008 $ | April 30, 2007 $ | |
| Current income tax Future income tax |
1,197,994 (577,500) |
376,000 118,000 |
| 620,494 | 494,000 |
7. EARNINGS PER SHARE
The following table sets forth the calculation of the basic earnings and diluted earnings:
| April 30, 2008 | April 30, 2007 | |
| Basic earnings available to common shareholders Weighted average number of common shares outstanding – basic Basic earnings per share | $1,203,793 12,100,629 $0.10 |
$840,268 12,088,788 $0.07 |
| Weighted average number of common shares
outstanding Assumed exercise of outstanding dilutive options Shares purchased from proceeds of assumed exercise of options |
12,100,629
155,000 (97,650) |
12,088,788
200,000 (124,959) |
| Weighted average number of common shares outstanding – dilutive |
12,157,979 | 12,163,829 |
| Fully diluted earnings per share | $0.10 | $0.07 |
Basic net income per common share is determined using the weighted-average number of common shares outstanding during the respective period. The treasury stock method is used to compute the dilutive effect of options.
8. FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt.
(a) Fair value
The carrying value of the Company’s financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value due to their immediate or short-term maturity. The carrying value of the long-term debt approximates fair value as it bears interest at market rate.
(b) Credit risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, accounts receivable and long-term debt.
Cash and cash equivalents are maintained at major financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal credit risk.
Credit risk from accounts receivable encompasses the default risk of subscribers and franchisees. Credit risk on accounts receivable is minimized as a result of the constant review and evaluation of subscriber account balances beyond a particular age and credit limit. Franchise account balances are secured by the franchisees’ share of the monitoring. The Company does not believe that there is signifi cant credit risk arising from its subscribers and franchisees, as it does not rely on any one major account. The Company also maintains an allowance for doubtful accounts at an estimated amount, allocating sufficient protection against losses resulting from collecting less than full payments from its receivables.
(c) Interest rate risk
The only financial instruments that expose the Company to interest rate risk are its cash, cash equivalents, and long term debt. The Company’s objective of managing its cash and cash equivalents are to ensure suffi cient funds are maintained on hand at all times to meet day to day requirements and to place any amounts which are considered in excess of day to day requirements in redeemable Guaranteed Investment Certifi cates (GIC) so they can earn interest. The Company only uses high quality commercial banks to ensure that access to the amounts placed can be obtained on short notice.
The Company is exposed to fluctuations in interest rates in regard to long term debt consisting of a revolving term loan, bearing interest at prime plus 0.75% and a fi xed rate term loan bearing interest at 5.58% per annum. The Company has not deemed it necessary to use derivative financial instruments to reduce exposure to interest risk.
(d) Foreign currency risk
The Company is exposed to currency risk due to its fully integrated US limited partnership. 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. The Company does not utilize any financial instruments or cash management policies to mitigate the risks arising from changes in foreign currency rates.
MANAGEMENT DISCUSSION AND ANALYSIS
1. INTRODUCTION
The following management’s discussion and analysis, of operating results and financial position for the six months ended April 30, 2008 is supplementary to, and should be read in conjunction with the interim consolidated financial statements for the quarter, which have not been audited or reviewed by the Company’s independent auditors. The interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada and all amounts, unless otherwise indicated, are expressed in Canadian dollars. Disclosures in the interim statements do not conform in all respects to GAAP for annual statements. These statements follow the same accounting policies and methods as the most recent audited annual statements and should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2007. The audited consolidated financial statements and management’s discussion and analysis for the year ended October 31, 2007 were reviewed and approved by the Company’s Audit Committee and the Board of Directors.
Operating results for the six months ended April 30, 2008 are not necessarily indicative of the results that may be expected for the full year ending October 31, 2008. The following discussion is comprised of signifi cant updates since management’s discussion and analysis reported for the year ended October 31, 2007.
2. FORWARD–LOOKING STATEMENTS
This Management’s discussion and analysis contains statements about expected future events and financial and operating results of AlarmForce Industries Inc. that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. These forwardlooking statements are based on current expectations. There is substantial risk that forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on the Company’s forward-looking statements as a number of factors including economic conditions, technological change, regulatory change, and competitive factors, could cause actual future results, conditions, actions or events to differ materially from targets, expectations, estimates or intentions expressed in the forward-looking statements; many of which are beyond the Company’s control.
Future events and results may vary signifi cantly from what the Company currently foresees. We are under no obligation to update or alter the forward-looking statements whether as a result of new information, future events or otherwise. For a more detailed discussion of factors that may affect actual results, see the section entitled “Trends, Risks and Uncertainties”.
3. OVERVIEW
In the second quarter of 2008, the Company reported 19% growth in Revenue and 15% increase in Gross Profi t. This is primarily attributable to subscriber growth and improved effi ciencies from providing recurring monitoring services to a larger subscriber account base. As compared to the same period in 2007, subscribers increased by 4% or 2,800 bringing the total number of monitored subscribers to 85,400. Approximately 8% of the Company’s subscriber accounts are located within the United States.
The Company plans to continue growing organically by marketing and distributing its unique technologies and creating awareness through advertising programs in all the major centers across Canada and selected centers in the United States. The Company has not acquired any monitoring accounts or blocks of accounts from dealers, but has increased its account size by solely internal account creation. The cost for the Company to create a new account under its existing programs is much lower than the comparable cost to acquire an existing account, individually or en bloc.
The Company currently installs and services all major centers in Canada and 7 major American centers. Over the next several years, the Company will establish brand recognition by aggressively advertising to these markets by radio, television, print and other media introducing the benefi ts of the Company’s two-way voice alarm system.
On April 1, 2008, the Company commenced advertising its newest service under the brand name AlarmCare. This Personal Emergency Response System or more commonly known as PERS system is not a security system. It cannot be turned on or off as it is always active to provide assistance in the event of a crisis situation. Although these systems in general are diverse in scope, AlarmCare is specifi cally tailored to the market segment consisting of elderly and those requiring medical attention. Vital pertinent medical information is maintained and relayed to the responding authorities in the event of a medical emergency. The AlarmCare system required only nominal changes to infrastructure as the base controller is identical to the alarm security controller with some minor changes to hardware and software.
4. RECONCILIATION OF EBITDA TO GAAP EARNINGS
EBITDA is defi ned as earnings before interest expenses, income taxes, depreciation and amortization. EBITDA is a standard measure used in the security system 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; however since it does not have any standardized meaning defi ned by Canadian GAAP, it may not be considered in isolation of GAAP measures such as net income/loss or cash fl ows, 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 defi ned 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, refl ecting 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 fi gures reported for the six months ended April 30, 2008 and the comparative six months of 2007 below:
| April, 2008 $ | April, 2007 $ | |
| EBITDA Add: marketing expenditures |
3,367,618 4,205,748 |
2,651,249 3,987,668 |
| 7,573,366 | 6,638,917 | |
| EBITDA (excl. marketing expenditures) | 7,573,366 | 6,638,917 |
| Less: Amortization of property, plant and equipment Amortization of intangible assets Amortization of deferred charges Interest expense |
1,056,976 433,159 4,229 48,967 |
877,247 389,545 4,796 45,393 |
| Income before income taxes Less income taxes |
1,824,287 620,494 |
1,334,268 494,000 |
| Net income | 1,203,793 | 840,268 |
5. REVIEW OF OPERATIONS: SIX MONTHS ENDED APRIL 30, 2008
Sales
Sales for the six months were $14,416,266 compared to $12,025,555 in the comparative period of 2007, which is an increase of $2,390,711 or 20%. This increase is primarily attributable to monthly recurring monitoring services generated from the additional subscribers. The Company’s account base increased by 2,800 in the fi rst six months of 2008, a 4% increase when compared to the same period in 2007. 90% of the Company’s revenue consists of monthly recurring monitoring revenue.
Cost of salesCost of sales for the six months were $3,406,401 compared to $2,682,573 in the corresponding period of 2007, a total increase of $723,828 or 27%. The increase is due to additional technical support staff and general wage augmentations to accommodate the growing subscriber accounts.
Gross margin
Gross Profi t margin in the six months rose to $11,009,865 compared to $9,342,982 in the corresponding period of 2007, which is an increase of $1,666,883 or 18%. Gross margin as a percentage of total revenue decreased marginally to 76% from 78% in the corresponding period of 2007. Management expects this margin to be 78% by the end of the fi scal year as target staffi ng requirements are met and scale effi ciencies are normalized over the growing subscriber accounts.
Selling, General and Administrative Expenses (“SG&A”)
SG&A Expenses were $7,381,026 in the fi rst six months of 2008 as compared to $6,645,061 in the corresponding period of 2007 which is an increase of $735,965 or 11%. Selling Expenses were $5,056,194 for the fi rst six months of 2008 compared to $4,731,553 in the same period of 2007, an increase of $324,641 or 7%. This increase was due, in part, to additional marketing expenditures to advertise the AlarmCare system in Canada and in selected centers in the United States. Selling Expenses excluding marketing costs increased by $106,561 or 14%. Aside from general wage augmentations, the increase is primarily due to additional sales and marketing staff required to handle inbound sales. Administrative Expenses were $2,324,832 for the fi rst six months of 2008 as compared to $1,913,508 in the corresponding period of 2007, which is an increase of $411,324 or 21%. Aside from general wage augmentations, the increase in administrative expenses is due to the additional customer care and support staff required to handle inbound non emergency calls typically regarding service, billing and other driveway alarm related issues. In an effort to maintain high levels of customer satisfaction, the Customer Care Department has recently extended its hours of operation to ensure that requests are being handled promptly at the time of the initial call.
Other expenses
Amortization of Property Plant and Equipment was $1,056,976 for the six months of 2008 as compared to $877,247 in the same period of 2007, which is an increase of $179,729 or 20%. This increase mainly refl ects additions made to the rental equipment due to the subscriber growth. Interest expense was $48,967 for the fi rst six months of 2008 as compared to $45,393 in the same period in 2007, which is a nominal increase of $3,574 or 8%. This slight increase is due to the revolving term loan obtained in March 2007 to fi nance the acquisition of franchise rights in Huronia for $1,000,000 payable over a period of 48 months. AlarmForce manages to control the use of debt fi nancing for new growth in subscriber accounts by maintaining a lower cost of creation. The Company uses an organic growth model to build the account base as opposed to acquiring existing accounts, and this has proven effective in reducing the debtto- equity ratio of the Company.
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 fl uctuations in foreign currency rates as the Company adjusts its foreign
| April 2008 | January 2008 | October 2007 | |
| Change in subscriber base | 2,800 | 3,400 | 4,300 |
| OPERATIONS: | |||
| $ | $ | $ | |
| Total revenue | 7,317,399 | 7,098,867 | 6,662,915 |
| Income before taxes | 764,216 | 1,060,071 | 641,545 |
| Net income | 523,722 | 680,071 | 358,626 |
| Basic earnings per share | 0.04 | 0.06 | 0.03 |
| Fully diluted earnings per share | 0.04 | 0.06 | 0.03 |
| FINANCIAL POSITION: | |||
| Total assets | 26,414,026 | 25,975,553 | 25,251,571 |
| Shareholders’ equity | 18,175,768 | 17,519,746 | 16,839,675 |
exchange rate annually. As at April 30, 2008, the Company experienced a foreign exchange loss of $261,221 resulting from a reduction in the foreign exchange rate.
Income taxes
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 immediately recognized in taxable income at the time that the sale is completed. These differences are also expected to reverse in the future.
Operating results by business segment
The Company operated primarily in only one reporting segment in Canada, which is the monitoring of residential security systems. The Company’s US subscribers do not represent a significant geographic segment (currently at 8%) at the present time.
6. SUMMARY OF QUARTERLY RESULTS
The following table sets out selected fi nancial information for the Company for the eight most recently completed quarters up to April 30, 2008, prepared in accordance with Canadian GAAP and expressed in Canadian currency:
| July 2007 | April 2007 | January 2007 | October 2006 | July 2006 |
| 3,500 | 2,700 | 2,400 | 2,200 | 2,500 |
| $ | $ | $ | $ | $ |
| 6,447,655 | 6,177,635 | 5,847,920 | 5,544,640 | |
| 129,278 | 433,167 | 901,101 | 838,200 | 358,232 |
| 81,278 | 274,167 | 566,101 | 440,839 | 224,232 |
| 0.01 | 0.02 | 0.05 | 0.04 | 0.02 |
| 0.01 | 0.02 | 0.05 | 0.04 | 0.02 |
| 25,825,876 | 24,712,357 | 23,421,288 | 23,880,550 | 22,376,117 |
| 16,481,050 | 16,361,972 | 16,087,805 | 15,521,703 | 15,080,864 |
7. LIQUIDITY AND CAPITAL RESOURCES For further information, contact:
As at April 30, 2008, the Company had cash and cash equivalents of $3,144,540 and unused credit facilities of approximately $4,800,000 available for future operating and capital requirements.
As at April 30, 2008, the Company’s assets totalled $26,414,026 of which the majority represented revenue generating capital assets including tangible and intangible assets. The outstanding debt at April 30, 2008 consisted of a $895,834 fi xed rate term loan for purchase of the property acquired in March 2006, and revolving bank loans of $708,334 under credit facilities that are available to be used by the Company to fi nance the growth in the subscriber base, which in turn will contribute to additional recurring revenues and cash fl ows. There were no additional loans acquired in 2008.
The cash fl ows from operations and fi nancing activities, and cash fl ows used in fi nancing and investing activities for the six months of 2008 and the comparative 2007 period are summarized below.
| April, 2008 $ | April, 2007 $ | |
| Cash fl ow from operations | 2,233,896 | 1,672,739 |
| Cash fl ow from (used in) fi nancing activities | (22,900) | 742,917 |
| Cash fl ow used in investing activities | (1,546,470) | (2,948,788) |
The Company’s cash fl ow from operations increased due to timing differences in corporate tax payments. The cash fl ow used in fi nancing activities decreased due to repayments of various bank loans. The Company did not enter into any new loan agreements in the second quarter of 2008.
The Company expects to continue investing signifi cantly in growth of the subscriber base, through marketing programs and in the installation of new security systems in subscriber homes. Security systems are installed under three-year contracts, which are subsequently renewable annually. The Company manufactures the equipment that it installs and the manufacturing process involves purchasing various key components from foreign and domestic manufacturers, and utilizing local subcontractors in certain parts of the manufacturing process. The Company’s manufacturing operations are housed in Toronto where the alarm systems are manufactured. In addition to the standard system, the Company also manufactures AlarmPlus telephone line-cut technology that is available exclusively to subscribers of AlarmForce, which is the only Canadian alarm company that manufactures and installs AlarmPlus.
8. OUTSTANDING SHARE CAPITAL
The Company is authorized to issue an unlimited number of common shares. The issued common shares of the Company are summarized as follows:
| Number of Shares | Value $ | |
| Balance, October 31, 2007 | 12,098,788 | 12,183,385 |
| Issued during the period | 35,000 | 132,300 |
| Balance, Apr 30 and Jun 6, 2008 | 12,133,788 | 12,315,685 |
The Company is committed to issuing 155,000 common shares under options that were outstanding at April 30, 2008. Exercise prices under the options and the remaining life of options are summarized below.
| Expiry Date | Number of Shares | Remaining Contractual Life (Years) |
Exercise Price |
| July 17, 2009 | 155,000 | 1.25 | $3.78 |
9. DIVIDEND POLICY
The Company does not currently have a policy of declaring or paying dividends on its common shares and intends to retain future earnings for use in its business and does not anticipate paying dividends in the foreseeable future. Any determination to pay any future dividends will remain at the discretion of the board of directors of the Company and will be made based on the financial condition and other factors deemed relevant by the board of the directors. The Company has not paid any dividends since its incorporation.
The existing cash reserves, cash from operations and credit facilities are believed to be adequate to fi nance growth as well as operating requirements in the foreseeable future.
Investors Relations Dept.
10. COMMITMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes in commitments or contractual obligations from those presented in the most recent annual financial statements.
11. OFF-BALANCE SHEET FINANCING
The Company did not have any off-balance sheet arrangements or obligations other than the operating leases presented in the most recent annual financial statements.
12. RELATED PARTY TRANSACTIONS
The Company did not have any related party transactions as defi ned in the CICA recommendations.
13. CRITICAL ACCOUNTING ESTIMATES
The 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 2007 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 tenyear 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 the value of long-lived assets for impairment 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 fl ows expected from the related subscriber accounts after normal attrition. If the sum of the undiscounted future cash fl ow 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. The estimate of the Company’sallowance for doubtful accounts could materially change from period to period, since this allowance is a function of the variations in the Company’s accounts receivable, which occurs on a month- to-month basis.
14. ACCOUNTING POLICIES
(i) International Financial Reporting Standards (IFRS) In 2006, Canada’s Accounting Standards Board adopted a strategy of converging Canadian generally accepted accounting principles for publicly accountable enterprises with International Financial Reporting Standards (IFRS). The Company will be required to report using these converged standards for interim and annual financial statements for fi scal years commencing on or after January 1, 2011. The Company is currently in the process of evaluating the impacts of this convergence on the consolidated financial statements.
(ii) Financial Instruments– Disclosure and Presentation: In December 2006, the CICA issued Section 3862, “Financial Instruments Disclosures,” and Section 3863, “Financial Instruments, presentation.” These standards provide additional guidance on disclosing risks related to recognized and unrecognized financial instruments and how those risks are managed. This Section applies to interim and annual financial statements of the Company commencing 2008 fi scal year. See note 8 of the interim consolidated financial statements regarding additional disclosure.
(iii) Capital disclosures: CICA issued Handbook Section 1535, Capital Disclosures, which provides standards for disclosures regarding a company’s capital and how it is managed. Enhanced disclosure with respect to the objectives, policies and processes for managing capital and quantitative disclosures about what a company regards as capital is required. These recommendations are effective for fi scal years beginning on or after October 1, 2007 and, therefore, apply to the Company. The Company’s objectives in managing capital are to ensure suffi cient liquidity to pursue its strategy of organic growth and to deploy capital to provide an appropriate return on investment to its shareholders. The capital structure of the Company consists principally of shareholder’s equity comprised of retained earnings and share capital. The Company’s strategy is to minimize the use of debt fi nancing to fund growth and manage its capital structure in light of economic conditions and the risk characteristics of the underlying assets. The Company’s primary uses of capital are to fi nance non-cash working capital requirements and capital expenditures, which are currently funded from its internally generated cash flows.The Company is not subject to any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital.
(iv) Inventory: In June 2007, the CICA issued Section 3031, “Inventories” resulting from the convergence with IFRS, which requires inventory to be measured at lower of cost and net realizable value. The standard also provides guidance on the costs that can be capitalized. In addition, previous inventory write-downs are now allowed to be reversed if the economic circumstances have changed to support an increased inventory value. The standard is effective for our annual and interim periods beginning on or after January 1, 2008 and, therefore does apply to the Company. The Company is not affected by these new recommendations.
15. DISCLOSURE CONTROLS AND PROCEDURES
As defi ned in Multilateral Instrument 52-109, disclosure controls and procedures mean controls and other procedures designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Offi cer (CEO) and the Chief Financial Offi cer (CFO), on a timely basis and in accordance with securities legislation.
As of the period ended April 30, 2008, the CEO and CFO have reviewed and evaluated the Company’s disclosure controls and procedures, and based upon that review and evaluation, concluded that there have been no changes to those disclosure controls and procedures since October 31, 2007, and they meet the requirements thereof.
16. TRENDS, RISKS AND UNCERTAINTIES
In 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 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 advantagesthat the Company may enjoy as a result of market penetration and brand recognition, there will not be any signifi cant barriers to the entry into this market by competitors.
Dependence on Key Personnel: The Company is highly dependent on the experience and personal efforts of management to promote and sell the Company’s products and services, and to manage its operations and growth. The future success of AlarmForce is dependent on the management of the Company. The departure of any of the operations or management personnel or their inability to continue being functional could have a material adverse effect on the Company’s business, financial condition, liquidity and operating results.
Possible Adverse Effect of “False Alarm” Ordinances: Signifi cant 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 security response team to respond to the alarm signals.
Failure to respond to alarm activations: The nature of the alarm services provided by AlarmForce potentially exposes greater risks of liability for employee acts or omissions or system failures. The Company’s subscriber 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.
Technology obsolescence: Our subscribers’ monitoring service depends upon the use of wireless technology. We may be required to implement new technology, which could require signifi cant expenditures. We may not be able to successfully implement new technologies or adapt existing technologies to changing market demands within the specifi ed time frames. If we are unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.
18. OUTLOOK
The Company expects continued growth in revenues as it expands its subscriber monitored account base using its mass marketing model and brand recognition, focusing on giving the customer the best value possible through its infrastructure of manufacturing capabilities, customer-focused team culture and financial capital base. The Company is committed to differentiating its position in the industry and controlling all aspects of subscriber service delivery. The central station will continue to maintain the most advanced two-way voice home security capabilities in the areas that the Company operates in.
Management believes that the Company is well positioned to grow the subscriber account base in the foreseeable future, given that the fundamental drivers for the residential alarm industry are considered sound. These are represented by fi ne-tuning of the low-cost approach, false alarm minimization and up market features, which are expected to be strong drivers and will continue to differentiate the company’s technology and innovative approach.
Additional information on the Company can be found in other information fi led with Canadian regulators on SEDAR at www.sedar.com.
