Financial Information

ALARMFORCE INDUSTRIES INC. CONSOLIDATED BALANCE SHEET AS AT JULY 31, 2009
(With comparative figures for the fiscal year ended October 31, 2008)

	(UNAUDITED)
	Jul 31, 2009	Oct 31, 2008
ASSETS Current	$	$
Cash and cash equivalents	6,580,899	5,408,362
Accounts receivable	471,186	427,342
Inventory	3,229,801	3,064,025
Prepaid expenses & other assets	50,048	21,796
	10,331,934	8,921,525
Deferred charges	682	2,730
Future income taxes (note 8)	828,500	464,000
Property, plant & equipment (note 4)	18,133,757	16,844,560
Intangible assets (note 5)	2,538,369	3,078,234
	31,833,242	29,311,049
LIABILITIES Current
Accounts payable and accrued liabilities	2,908,068	3,763,078
Unearned revenue	716,813	706,569
Income taxes payable	697,145	491,332
Current portion of long-term debt (note 6)	300,000	300,000
	4,622,026	5,260,979
Deferred revenue	3,252,928	3,313,343
Long-term debt (note 6)	929,168	1,154,167
	8,804,122	9,728,489
SHAREHOLDERS’ EQUITY
Share capital (note 7)	12,769,584	12,315,685
Contributed surplus	95,101	202,140
Retained earnings	10,164,435	7,064,735
	23,029,120	19,582,560
	31,833,242	29,311,049

See accompanying notes to unaudited interim consolidated financial statements.

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED JULY 31, 2009
(With comparative figures for the nine months ended July 31, 2008)

Three months ended
	January 31, 2009	Jul. 31, 2008
	$	$
Revenues	8,527,693	7,577,109
Cost of sales	1,298,542	1,880,156
Gross profit	7,229,151	5,696,953
Expenses
Selling	2,729,812	2,521,940
General and administrative	1,405,424	1,562,725
Amortization:
Property, plant and equipment	779,576	502,958
Deferred charges	682	2,114
Intangible assets	224,428	216,580
Interest	14,656	21,158
Foreign exchange loss/(gain)	(9,448)	30,261
	1,009,894	773,071
Income before income taxes	2,084,021	839,217
Income taxes (note 8)	663,315	285,291
Net income and comprehensive income for the period	1,420,706	553,926
Basic earnings per share (note 9)	0.12	0.05
Diluted earnings per share (note 9)	0.12	0.05

Nine months ended
	Jul. 31, 2009	Jul. 31, 2008
	$	$
Revenues	25,277,269	21,993,375
Cost of sales	5,386,839	5,286,557
Gross profit	19,890,430	16,706,818
Expenses
Selling	8,306,343	7,578,134
General and administrative	4,237,928	3,887,557
Amortization:
Property, plant and equipment	2,159,895	1,559,934
Deferred charges	2,047	6,343
Intangible assets	657,587	649,739
Interest	47,716	70,125
Foreign exchange loss/(gain)	(129,910)	291,482
	15,281,606	14,043,314
Income before income taxes	4,608,824	2,663,504
Income taxes (note 8)	1,509,124	905,785
Net income and comprehensive income for the period	3,099,700	1,757,719
Basic earnings per share (note 9)	0.26	0.15
Diluted earnings per share (note 9)	0.26	0.15

See accompanying notes to unaudited interim consolidated financial statements.

CONSOLIDATED STATEMENT OF RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED JULY 31, 2009
(With comparative figures for the nine months ended July 31, 2008)

Three months ended
	Jul. 31, 2009	Jul. 31, 2008
Retained earnings, beginning of period	8,743,729	5,657,943
Net income and compehensive income for the period	1,420,706	553,926
Retained earnings, end of period	10,164,435	6,211,869

Nine months ended
	Jul. 31, 2009	Jul. 31, 2008
Retained earnings, beginning of period	7,064,735	4,454,150
Net income and compehensive income for the period	3,099,700	1,757,719
Retained earnings, end of period	10,164,435	6,211,869

See accompanying notes to unaudited interim consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2009
(With comparative figures for the nine months ended July 31, 2008)

Three months ended
	Jul. 31, 2009	Jul. 31, 2008
OPERATING ACTIVITIES	$	$
Net income for the period	1,420,706	553,926
Items not involving cash
Amortization
Property, plant and equipment	779,577	502,958
Deferred charges	682	2,114
Intangible assets	224,428	216,580
Future income taxes	(311,500)	86,775
	2,113,893	1,362,353
Change in non-cash components of working capital
Accounts receivable	(91,793)	145,304
Inventory	(89,399)	403,661
Prepaid expenses and other assets	28,252	27,821
Accounts payable and accrued liabilities	(37,655)	(36,491)
Unearned revenue	-	-
Income taxes	764,458	(152,211)
Deferred revenue	21,372	185,461
	595,235	573,545
	2,709,128	1,935,898
INVESTING ACTIVITIES
Additions to property, plant and equipment	(1,285,490)	(704,724)
Additions to intangible assets	(117,718)	-
	(1,403,208)	(704,724)
FINANCING ACTIVITIES
Repayment of fixed rate term loan	(12,500)	(12,500)
(Decrease) in long-term debt	(62,500)	(62,500)
Proceeds from issue of share capital	491,400	-
Purchase of shares for cancellation	-	-
	416,400	(75,000)
Change in cash and cash equivalents	1,722,320	1,156,174
Cash and cash equivalents, beginning of the period	4,858,579	3,144,540
Cash and cash equivalents, end of the period	6,580,899	4,300,714
Cash and cash equivalents for the Company are as follows:
Cash	2,989,711	2,296,003
Cash equivalents	3,591,188	2,004,711
	6,580,899	4,300,714
Supplemental cash flow information:
Interest paid	14,656	28,981
Income taxes paid	210,357	820,985

Nine months ended
	Jul. 31, 2009	Jul. 31, 2008
OPERATING ACTIVITIES	$	$
Net income for the period	3,099,700	1,757,719
Items not involving cash
Amortization
Property, plant and equipment	2,159,895	1,559,934
Deferred charges	2,047	6,343
Intangible assets	657,587	649,739
Future income taxes	(364,500)	(490,725)
	5,554,729	3,483,010
Change in non-cash components of working capital
Accounts receivable	(43,844)	(72,944)
Inventory	(165,776)	554,145
Prepaid expenses and other assets	(28,252)	(22,820)
Accounts payable and accrued liabilities	(855,010)	(610,299)
Unearned revenue	10,244	(4,600)
Income taxes	205,813	344,135
Deferred revenue	(60,415)	499,167
	(937,240)	686,784
	4,617,489	4,169,794
INVESTING ACTIVITIES
Additions to property, plant and equipment	(3,449,095)	(2,251,194)
Additions to intangible assets	(117,718)	-
	(3,566,813)	(2,251,194)
FINANCING ACTIVITIES
Repayment of fixed rate term loan	(37,500)	(37,500)
(Decrease) in long-term debt	(187,499)	(192,700)
Proceeds from issue of share capital	491,400	132,300
Purchase of shares for cancellation	(144,540)	-
	121,861	(97,900)
Change in cash and cash equivalents	1,172,537	1,820,700
Cash and cash equivalents, beginning of the period	5,408,362	2,480,014
Cash and cash equivalents, end of the period	6,580,899	4,300,714
Cash and cash equivalents for the Company are as follows:
Cash	2,989,711	2,296,003
Cash equivalents	3,591,188	2,004,711
	6,580,899	4,300,714
Supplemental cash flow information:
Interest paid	47,716	70,125
Income taxes paid	1,667,811	1,052,181

See accompanying notes to unaudited interim consolidated financial statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2009
(Unaudited)

1. BASIS OF PRESENTATION

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 provider of two-way voice alarm systems and monitoring services and was incorporated under the laws of Canada on November 16, 1988.

The management of the Company 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 significant 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, 2008.

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 nine months ended July 31, 2009, are not necessarily indicative of the results that may be expected for the year ending October 31, 2009.

2. ACCOUNTING POLICY DEVELOPMENTS

(i) Goodwill and Intangible Assets: In February 2008, the Canadian Institute of Chartered Accountants (CICA) issued Section 3064, "Goodwill and Intangible Assets". The new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new Section is applicable to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. This new Section does not have any impact on the Company's consolidated financial statements.

(ii) General Standards on Financial Statement Presentation: In June 2007, the CICA Handbook Section 1400, "General Standards on Financial Statement Presentation", has been amended toinclude requirements to assess and disclose an entity's ability to continue as a going concern. The changes are effective for interim and annual financial statements beginning on or after January 1, 2008. This new Section does not have any impact on the Company's consolidated financial statements.

(iii)Inventory: In June 2007, the CICA issued Section 3031, "Inventories" resulting from the convergence with International Financial Reporting Standards (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. This new Section does not have any impact on the Company's consolidated financial statements.

(iv) 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 IFRS. The Company will be required to report using these converged standards for interim and annual financial statements for fiscal years commencing on or after January 1, 2011. The Company is in the planning phase of this conversion and is currently in the process of evaluating the impacts of this convergence on the consolidated financial statements.

(v) Business Combinations: Section 1582, "Business Combinations", will be applicable to business combinations for which the acquisition date is on or after the Company's fiscal years beginning January 1, 2011. Early adoption is permitted. This Section improves the relevance,reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. The Company has not yet determined the impact of the adoption of this new standard on its consolidated financial statements.

(vi) Consolidated Financial Statements: Section 1601, "Consolidated Financial Statements" will be applicable to financial statements relating to the Company's fiscal years beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for the preparation of consolidated financial statements. The Company has not yet determined the impact of the adoption of this new standard on its consolidated financial statements.

(vii) Non-Controlling Interests: Section 1602, "Non-controlling Interests" will be applicable to financial statements relating to the Company's fiscal years beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for noncontrolling interests in a subsidiary in consolidated financial statements subsequent to a business combination. The Company has not yet determined the impact of the adoption of this new standard on its consolidated financial statements.

3. CAPITAL STRUCTURE

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 financing 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 finance 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. The Company's objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth and to deploy capital to provide an appropriate return on investment to its shareholders.

The Company manages the capital structure and makes adjustments to it in light of economic conditions. In order to maintain or adjust the capital structure, the Company may purchase shares for cancellation, issue new shares, issue new debt or issue new debt to replace existing debt with different characteristics.

4.PROPERTY, PLANT AND EQUIPMENT

	July 31, 2009		October 31, 2008
	Cost	Accumulated Amortization	Cost	Accumulated Amortization
	$	$	$	$
Land	600,000	-	600,000	-
Building	2,304,624	361,347	2,262,296	276,511
Rental equipment	24,541,040	9,454,640	22,027,645	8,291,238
Computer equipment	892,113	646,093	853,713	585,816
Computer software	408,451	291,084	373,772	267,078
Furniture & fixtures	401,798	281,400	384,751	263,162
Vehicles	30,809	10,514	30,809	4,621
Moulding equipment	57,386	57,386	57,386	57,386
	29,236,221	11,102,464	26,590,372	9,745,812
Net book value	18,133,757		16,844,560

5. INTANGIBLE ASSETS

On June 1, 2009, the Company acquired certain franchise rights from a franchisee situated in Eastern Ontario. Total consideration for the rights amounted to $ 117,720 and was financed from working capital.

6. LONG-TERM DEBT

	July 31, 2009	October 31, 2008
	$	$
Fixed rate term loan	833,334	870,834
Revolving term loans	395,833	583,333
	1,229,167	1,454,167
Less: Current portion	300,000	300,000
	929,167	1,154,167

The following are the details of the above loans:

1. Fixed rate term loan in the amount of $1,000,000 was acquired in 2006 to finance the acquisition of property consisting of land and building. The loan is repayable (principal and interest) in monthly repayments of $4,167 bearing an interest rate of 5.58% per annum. The loan is due March 2016. This loan has been secured by the Company's land and building.

2. Revolving term loan in the amount of $1,000,000 was acquired in March 2007 to finance the purchase of franchise rights. The loan is repayable (principal and interest) in monthly instalments of $20,833 over a period of 48 months at a bank rate of prime rate plus 0.25% per annum. The prime rate was 2.25% as at July 31, 2009. 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.

The Company has total credit facilities in the amount of approximately $5,800,000, of which $5,400,000 is available (2008 - $5,200,000).

7. 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 nine months ended July 31, 2009 are as follows:

	Number of Shares	Value $
Balance, October 31, 2007	12,098,788	12,183,385
For cash pursuant to option plan	35,000	132,300
Balance, October 31, 2008	12,133,788	12,315,685
Issued during the period ended July 31, 2009:
For cash pursuant to stock option plan	130,000	491,400
Cancelled through normal course issuer bid:
Purchased for cancellation	(37,130)	(37,501)
Balance, July 31, 2009	12,226,658	12,769,584

Normal course issuer bid

In December 2008, the Toronto Stock Exchange accepted the Company's notice of intention to make a Normal Course Issuer Bid. Under this bid, the Company is entitled to purchase, for cancellation, up to 350,000 common shares outstanding, which commenced on December 22, 2008 and will terminate on December 21, 2009. The excess of the purchase price over the average stated value of shares purchased for cancellation was charged to contributed surplus. The Company made the following purchases during the nine months ended July 31, 2009:

Purchase Price
	Number of shares	Paid	Charged to share capital	Charged to contributed surplus
		$	$	$
Common shares purchased for cancellation
During the period	37,130	144,540	37,501	107,039
Total	37,130	144,540	37,501	107,039

 

7.SHARE CAPITAL

Stock Option Plan

The Company has an incentive stock option plan in place for its directors, officers and employees. Options may be granted for a period not exceeding five 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 issuance 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 during the nine months ended July 31, 2009 are as follows:

	Number of Options	July 31, 2009 Weighted average exercise price	Number of Options	October 31, 2008 Weighted average exercise price
		$		$
Balance, beginning of period	155,000	3.78	200,000	3.78
Granted	Nil	-	Nil	-
Exercised	(130,000)	3.78	(10,000)	3.78
Cancelled	(25,000)	3.78	Nil	-
Balance, end of period (i)	Nil	3.78	190,000	3.78
Less options not vested (ii)	Nil	-	Nil	-
Exercisable, end of period	Nil		190,000

There were no options outstanding as at July 31, 2009.

8.INCOME TAXES

	July 31, 2009	July 31, 2008
	$	$
Current income tax	1,873,624	1,396,510
Future income tax	(364,500)	(490,725)
	1,509,124	905,785

9.EARNINGS PER SHARE

The following table sets forth the calculation of the basic and diluted earnings per share:

	July 31, 2009	July 31, 2008
Basic earnings available to common shareholders	$3,099,700	$ 1,757,719
Weighted average number of common shares outstanding – basic	12,122,371	12,111,762
Basic earnings per share	$ 0.26	$ 0.15
Weighted average number of common shares outstanding	12,122,371	12,111,762
Assumed exercise of outstanding dilutive options	Nil	155,000
Shares purchased from proceeds of assumed exercise of options	Nil	(100,670)
Weighted average number of common shares outstanding – dilutive	12,122,371	12,166,092
Diluted earnings per share	$ 0.26	$ 0.15

 

10. SUBSEQUENT EVENT

On August 8, 2009, the Company granted stock options to purchase up to 100,000 common shares of the Company at an exercise price of $4.75 per common share. These options are subject to vesting provisions under which 20% of the total options granted will vest immediately on the date of the grant. A further 20% will vest on each of the next four anniversaries. The options will expire on August 8, 2014.

11. FINANCIAL INSTRUMENTS

Section 3855 requires all financial assets and liabilities to be classified into one of the following five categories: held for trading; held-to-maturity; loans and receivables; available-for-sale financial assets; and other financial liabilities. All financial instruments are measured on the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and recognition of the changes in fair value of financial instruments depends upon their initial classifications:

Held-for-trading financial assets - are measured at fair value with subsequent changes in fair value recognized in current period net income.

Held-to-maturity assets, loans and receivables and other financial liabilities - are initially measured at fair value and subsequently measured at amortized cost with changes recognized in current period net income.

Available-for-sale financial assets - are measured at fair value with subsequent gains and losses included in other comprehensive income until the asset is removed from the balance sheets.

The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and long-term debt. The Company measures its cash and cash equivalents as held-for-trading, its accounts receivable as loans and receivables, and its accounts payables and accrued liabilities, and long-term debt as other financial liabilities.

(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 and accounts receivable.

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 significant 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 long-term debt. The Company is marginally exposed to fluctuations in interest rates with regards to a longterm debt consisting of a revolving term loan, bearing interest at the bank's prime plus 0.25% per annum. The Company is sensitive to fluctuations in interest risk such that a 2% increase or decrease in interest rates would result in a respective $9,500 decrease or increase, to the Company's income before taxes for the nine months ended July 31, 2009. The Company has not deemed it necessary to use derivative financial instruments to reduce exposure to interest rate 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 and accrued liabilities. These activities result in exposure to fluctuations in foreign currency rates between the US dollar and the Canadian dollar. The Company's sensitivity to these foreign currency fluctuations is such that a 10% strengthening or weakening of the US dollar would result in a respective $150,265 increase or decrease to the Company's income before taxes for the nine months ended July 31, 2009. The Company does not
deem it necessary to utilize any financial instruments or cash management policies to mitigate the risks arising from changes in foreign currency rates.