July 28, 2006
Mr. Adam Washecka
United States Securities & Exchange Commission
100 F. Street, N.E.
Washington, DC 20549
Re: File No. 000-50343
Integrated Alarm Services Group, Inc.
Form 10-K for Fiscal Year Ended December 31, 2005, Filed March 16, 2006
Form 10-Q for Fiscal Quarter Ended March 31, 2006
Dear Mr. Washecka:
We are providing our responses to the comments issued in your letter of June 22, 2006. The Company’s responses to your comments are numbered to coincide with the numbering in your comment letter. References in this letter to the Company, we or us refer to Integrated Alarm Services Group, Inc. ("IASG").
1. We refer to the 2nd paragraph on page 21 where you disclose that your trailing annual end-user growth rates in the wholesale monitoring segment, including acquisitions were 12.3%, 31.7% and 1.2%. Given your disclosure on the top of page F-28 that all goodwill on acquisitions completed in 2004 and 2005 was recorded in the alarmmonitoring retail services segment, please revise to clearly disclose why you believe it is appropriate to include acquisitions in your discussion of the wholesale business segment.
Response: On page 21, the table presenting “summary of end-user accounts” includes a line titled “end-users acquired”. This item includes accounts added by the wholesale segment as well as accounts added by the retail segment where the wholesale segment will provide monitoring services to the end-users. If the end-users acquired were not isolated, the implied ‘organic growth’ of the wholesale segment would be materially overstated.
In terms of the disclosure (page F-28) that all goodwill on acquisitions completed in 2004 and 2005 was recorded in the alarm monitoring retail services segment, there were no acquisitions in those years that included only wholesale accounts. One acquisition in 2004 (NACC) and one acquisition in 2005 (FSS) included both wholesale and retail assets. The majority of the assets acquired in both of these business acquisitions were principally retail segment assets (NACC acquisition - retail assets $31.6 million and wholesale assets $16.8 million and FSS acquisition - retail assets $19.6 million and wholesale assets $3.7 million).
We have determined that based on the relative fair value of the assets acquired from the aforementioned business acquisitions that approximately $1.2million of goodwill recorded in the retail segment should have been recorded in the wholesale segment. This reclass between retail and wholesale segments would not result in any impairment under our FAS 142 impairment test performed in 2005. Accordingly, we plan to record this reclass in our FAS 142 impairment test performed in the third quarter of 2006.
2. Further, refer to the last sentence of this paragraph and tell us and disclose whether these amounts represent all of the monitoring contracts that are owned by your retail monitoring segment. Please also disclose why you believe it is appropriate to include these amounts within the wholesale business segment discussion.
Response: The number of accounts disclosed is the majority of the retail segment accounts that are owned. In some cases when we acquire retail accounts, it is necessary for technical or business reasons to continue to use a third party monitoring station to provide the monitoring service. These retail accounts monitored at other central stations would not be included in the numbers presented.
The wholesale segment provides monitoring services to the retail segment's customer and bills the retail segment approximately $3 per customer monitored. The retail segment holds the contract with the end customer and bills the end customer the monthly contractual amount which generally approximates $30 per customer. The $3 represents intercompany revenue earned by the wholesale segment and therefore we believe it is appropriate to also include these intercompany accounts within the wholesale business segment.
We will expand our disclosure in future filings to clarify this by stating the following in the aforementioned paragraph " End-users acquired includes accounts purchased by the wholesale segment and customers acquired by the retail segment. The number of end-users included in the total that are owned by us are xxx, the remainder are third party owned.
3. Please expand your disclosure to discuss the trends and conditions that caused your trailing annual end-user account growth rates in the wholesale segment, excludingcquisitions, to be (3.2%), (6.1%), and (7.4%) for 2003, 2004 and 2005. To the extent possible, discuss whether you expect these trends and conditions to continue into the future.
Response: We note that it is difficult to isolate the various trends of the wholesale segment growth rate. Within the customer base there is a turnover of accounts in excess of 20% a year. We lose some dealers as customers and we acquire new dealers. Dealers we retain lose some of their customers and install new systems to obtain new customers. Dealers sometimes maintain relationships at more than one central station and move customers back and forth due to price or other considerations. Our systems are not designed to track this data and we would not have a reasonable way to validate information obtained from dealers.
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We have added and trained sales staff to significantly increase our efforts to obtain new dealers as customers and increase our cross-selling to existing customers. We anticipate that if we do not cut back our sales efforts we will move the growth rate into positive territory but we believe it is too early to validate the results of our efforts.
4. We refer to the 4th paragraph on page 33 where you indicate that you have approximately $3,053,000 in your wholesale monitoring segment. Please tell us whether this figure includes payments received from your retail monitoring segment. If so, please revise to disclose the amount that represents inter-company recurring monthly revenue.
Response: The $3,053,000 of recurring monthly revenue disclosed in the liquidity section for the wholesale monitoring segment does include $400,000 of revenue or payments received from the retail monitoring segment. In future filings we will disclose that the wholesale monitoring segment recurring monthly revenue amount includes inter-company recurring monthly revenue from the retail segment in the amount of $XXX.
5. Please explain to us what the line item Deferred customer acquisition revenue represents in the operating activities section.
Response: Deferred customer acquisition revenue represents upfront non-refundable deposits from certain bundled arrangements described in the fourth paragraph of our revenue recognition policy on page F-9. In future filings, we will add clarity by changing the descriptor to "Deferred revenue - bundled arrangements".
6. Please revise to discuss your revenue recognition policy for your acquired customer contracts. Further, tell us and clarify your disclosure to indicate whether you provide the monitoring services for all of the end users of these acquired customer contracts.
Response: The first paragraph on page F-9 under Revenue Recognition discloses the revenue recognition policy for our acquired customer contracts. In future filings we will modify the first sentence of the first paragraph to add clarity as follows: IASI provides monitoring services to customers under contracts (including contracts acquired from dealers, other third parties or in business acquisitions or under foreclosure) with typical terms ranging from one to five years in duration. The fourth paragraph discloses the additional accounting required where we perform the installation.
We provide the monitoring services for over 95% of the end-users of the acquired customer contracts. The number of acquired customer contracts where we do not provide the monitoring is not significant however we will disclose in future filings the following modification to our revenue recognition disclosure: "Certain owned customer contracts are being monitored by third party monitoring service providers. We recognize revenue from these contracts as the monitoring service is being provided.
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7. We note your disclosure on page F-9 that in most cases loans are foreclosed and valued at the lower of cost or fair value of the customer contracts that you take ownership of. We also note in the 3rd paragraph on page 6 that you generally require Dealers to whom you provide alarm monitoring contract financing to use your monitoring services for the contracts that they continue to own. Since it appears that you already have the right to the cash flows of the alarm monitoring contracts that you take ownership of, it is unclear to us how these alarm monitoring contracts have value to you upon determining that the loans are impaired. Please clarify for us in your response letter.
Response: The following will outline the possible customer contracts owned by a dealer who is a loan (note receivable) customer:
(a) Customer’s contract is pledged as collateral for the loan.
(b) Customer’s contract is not collateral but we provide monitoring services.
(c) Customer’s contract is not collateral and a third party provides monitoring.
If a dealer loan has an outstanding balance, we evaluate the (a) contracts for collateral value (performing recurring monthly revenue at a market multiple). If the dealer defaults on a loan, we take ownership of the (a) contracts thru foreclosure. The lower of cost or fair value gets added to customer contracts on our balance sheet and the loan (note) is removed from our books. Any loss is recognized immediately. The former loan is not disclosed in our discussion of notes receivable and collateral. As disclosed in note 2, we have not incurred a loss in a foreclosed loan since 2003.
The loan customer who is in good standing would generally have been required to move his (c) customers to a (b) status upon entering into the loan agreement. The (b) contracts are an additional source of revenue from an existing loan customer.
We will provide the following disclosure in future filings to add clarity to our disclosure on page F-9 by adding the following to the last sentence on that page. When a dealer becomes delinquent, the Company generally forecloses on, and takes ownership of, the portfolio of customer’s monitoring contracts resulting in an increase in customer contracts and a decrease in notes receivable.”
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8. Please explain to us your basis for amortizing deferred customer acquisition costs over the life of the customer relationship to the extent of deferred revenue and over the term of the contract for costs in excess of deferred revenue. Reference all pertinent, authoritative US GAAP literature that supports your accounting policy.
Response: Our accounting policy for certain, bundled arrangements, has been to capitalize all direct and incremental costs for new customers. These costs are amortized accordingly: 1) costs up to but not exceeding the deferred revenue (up front non-refundable payment) for a particular contract are amortized over the average customer relationship period (generally twelve years, the same period as the related deferred revenue) and 2) anycosts exceeding the deferred revenue for a particular contract are amortized over the average original contract term (generally three - five years) both periods beginning upon the completion of the installation. Recurring monthly revenue is recognized as service is performed. Our basis to defer costs in excess of deferred revenue is the authoritative guidance of FAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases and SAB 104 Revenue Recognition in Financial Statements. These amounts are deemed realizable because of the multi-year contracts and our intent to enforce these contracts. Our basis for amortizing deferred customer acquisition costs is paragraph 4 of Technical Bulletin 90-1, and SAB Topic 13F Question 5 which indicates that "When both costs and revenue (in an amount equal to or greater than the costs) are deferred, the Staff believes that the capitalized costs should be charged to expense proportionately and over the same period that deferred revenue is recognized as revenue".
9. Please tell us how many reporting units you have identified and how you determined these reporting units using the guidance of SFAS 142.
Response: We have two reporting units which are consistent with our segments. As discussed in question 13, the Chief Operating Decision Maker (CODM), (in our case the CEO) allocates resources on the basis of segments, for which we have concluded two segments, wholesale and retail. In determining our reporting units we followed the authoritative guidance of paragraphs 30 and 31 of FAS No. 142, Goodwill and Other Intangible Assets (FAS 142). FAS 142 defines a reporting unit as either an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of the component. However, two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. Accordingly for the purposes of FAS 142 (and in connection with FAS 131) we have identified two operating segments (wholesale and retail) as discrete financial information is available and our CEO regularly reviews the operating results and related financial data.
No level below the wholesale operating segment exists (e.g. no discrete financial information exists below the operating segment), accordingly the wholesale operating segment is the reporting unit. Although certain discrete financial information for retail commercial and retail residential contracts was collected and reported to the CODM and the retail segment manager starting in late December 2005, primarily for our investment banker (see response to question 13 for further discussion) we do not believe they are separate components. Even if one were to consider the residential and commercial branches as two individual components, we believe that these components would meet the aggregation criteria under EITF D-101, Clarification of Reporting Unit Guidance In Paragraph 30 of FASB Statement No. 142, based on the following:
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| · | In allocating resources to grow the retail business, the CODM and other managers determine the sales and marketing commitment to make in a given territory based |
upon competitive pressure in the territory and expected pricing/profitability.
| · | Most decisions made over budget allocations for ongoing service and support functions are based upon projected recurring monthly revenue and are not influenced by customer type. Since generating RMR internally with our employees is significantly cheaper than purchasing customer accounts from dealers, we support internal growth initiatives within our existing territories before purchasing accounts externally. The customer type would not influence the internal growth decision. |
| · | The territories of the residential and commercial branches overlap and both install alarm systems in small business applications. They often pool their resources for various training needs. Personnel management needs are provided by employees that split their time between locations and the locations split the payroll and other costs. Parts and alarm system components are purchased from the same major suppliers. Both branches have similar licensing needs to install alarm systems. Monitoring services are provided to both by our wholesale segment from the same physical location and at prices that approximate $3 per account per month. The two division heads report to the President of the retail subsidiary who in turn reports to the CODM. |
| · | Employees are transferred between divisions when there is a business need. Skill sets required for most jobs are similar. The payroll system is a shared system. Billing and customer service will be integrated into the same platform over the next nine months. |
Due to the above, we believe that the goodwill should be tested for recovery at the retail operations level and not at the residential and commercial branch level which work in concert and are interdependent.
Refer to our response to question 13 for our discussion regarding our operating segments.
Paragraph 30 of FAS 142, includes a number of characteristics that must be present for a component of an operating segment to be a reporting unit. The FASB staff believes that how an entity manages its operations and how an acquired entity is integrated with the acquiring entity are key to determining the reporting units of the entity. As noted in the basis for conclusions of FAS 142, "The Board's intent was that a reporting unit would be the level of internal reporting that reflects the way an entity manages its business or operations and to which goodwill naturally would be associated." "That approach reflects the Board's belief that the information an entity reports for internal use will reflect the way the overall entity is managed." When we make an acquisition, such operations are fully integrated into the retail or wholesale operating segments (reporting units). As mentioned above and discussed further in our response to question 13, the commercial information was primarily collected and reported for our investment banker, but is not the manner in which we manage our business. The primary focus since going public has been the acquisition of retail contract portfolios.
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10. Please expand your disclosure on page F-27 to indicate the amount of the "bonus buy-out" liability that you have accrued as of December 31, 2005 or tell us why you do not believe that disclosure is necessary. Further, if you believe there is a reasonable possibility that a loss exists in excess of the amount accrued, disclose the possible additional loss or range of possible additional losses in accordance with paragraph 10 of SFAS 5.
Response: The amount of the “bonus buy-out” accrued as of December 31, 2005 was $585,000 which we believe is the probable amount in accordance with the agreement. We do not believe the disclosure of the amount is significant to the financial statements. The plaintiff seeks $2,192,000 which would include a favorable determination to him both that his termination was not for cause and that his employment agreement was orally amended to change certain bonus provisions to his favor. The company has accrued a $585,000 expense based upon an outcome that the termination was for cause, without offset for the company’s counterclaims against the plaintiff relating to the use of the company’s facilities, employees and overhead for an unauthorized, unrelated business. The litigation is presently in the discovery stage. The possible additional loss would be the $2,192,000 sought less the $585,000 already accrued. We believe the maximum loss is determinable from the information provided in the footnote.
11. In accordance with paragraph 51b. of SFAS 141, please revise to disclose the primary reasons for each acquisition, including a description of the factors that contributed to a purchase price that results in recognition of goodwill. Provide us with thisinformation in your response letter.
Response: The primary purpose of all our acquisitions is to increase recurring monthly revenue in our retail segment and/or our wholesale segment. The specific acquisitions are a matter of timing and price.
In each case, goodwill was primarily due to the negotiated arms length price being higher than the fair value of the net assets acquired as determined by our independent valuation consultants and reviewed by management. Each of the three acquisitions (FSS, Alliant and NACC) had established assembled workforces and offered us expected synergies when combined with our operations.
We will revise our disclosure in subsequent filings to incorporate the aforementioned in accordance with paragraph 51b of FAS 141 as follows:
FSS & NACC
These acquisitions brought to the Company established markets of alarm dealers who required financing. They also owned portfolios of residential customer contracts, provided monitoring to dealers on a wholesale basis and had an assembled workforce.
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ALLIANT
Alliant brought to the Company an established regional market of residential and commercial customer contracts. It also had an assembled workforce to provide service as well as to install new alarm systems and expand the operations of the business.
12. Tell us how you determined the acquisitions of certain assets of Alliant Protection Services, Inc. and Emergency Response Network, Inc., as disclosed on pages F-30 and F-32 respectively, were business combinations pursuant to SFAS 141. We refer you to paragraph 9 of SFAS 141 and EITF Issue No. 98-3 for guidance.
Response: Purchase of Alliant Protection Services, Inc. (Alliant).
This transaction was the purchase of a business that was being sold due to filing bankruptcy. The sale of the business was being managed by an appointed trustee. The business included Commercial and Residential RMR, installation and service capability, an older truck fleet, computer systems and employees. The day to day business was being managed by the trustee prior to our purchase.
Due to the bankruptcy, the transaction was structured as an asset purchase. The 40 plus employees were put on our payroll at the time of purchase of the assets. Prior to our cquisition of Alliant, it was operating as a business. We acquired the entire business, other than the Trustee who was assigned to oversee the operations while in bankruptcy.
In determining whether the Alliant was a business, we considered Inputs, Processes and Outputs as outlined in EITF 98-3. Alliant was a completely functioning business until nd after it filed for bankruptcy. Inputs, processes and output included customer contracts (intangible assets), truck fleet and approximately 40 employees who were executing the day to day operations, computer systems (e.g. accounting and other), operational processes, access to customers through continuity of brand name, an employee group to perform nstallation ervices which had the ability to obtain access to customers that purchase our service. Accordingly, we concluded that Alliant is a business because it contains all the inputs and processes necessary for it to conduct normal operations after the acquisition, which includes the ability to sustain a revenue stream by providing its outputs to customers. In order to streamline the Alliant operations, it was fully integrated into the retail segment of our business.
Purchase of 100% of the outstanding stock of AHS and related operating assets of Emergency Response Network, Inc. (ERN) collectively referred to as ERN.
This transaction was the purchase of a business that was being sold due to our willingness to pay a premium for the business and offer the owner an employment contract. The business included Residential RMR, installation and service capability, an older truck fleet, computer systems, and employees who performed the day to day operating activities. The day to day business was being managed by the owner prior to our purchase who was hired in connection with the acquisition. The business had operated as a stand-alone business prior to the purchase.
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In determining whether the ERN was a business, we considered Inputs, Processes and Outputs as outlined in EITF 98-3. Inputs, processes and output included customer contracts (intangible assets), truck fleet and over 40 employees who were executing the day to day operations (including installation services employees), computer systems (e.g. accounting and other), operational processes, access to customers through continuity of brand name, an employee group to perform installation services which had the ability to obtain access to customers that purchase our service. Accordingly, we concluded that ERN is a business because it contains all the inputs and processes necessary for it to conduct normal operations after the acquisition, which includes the ability to sustain a revenue stream by providing its outputs to customers.
The transaction was structured as a combination asset and stock purchase all with the same party and negotiated at the same time. The 43 employees were put on our payroll at the time of purchase of the assets and AHS, Inc. subsidiary. Other Company assets were transferred to this location and additional employees hired.
AHS was licensed to install security monitoring systems and sold the contracts to ERN upon completion of the installation. ERN provided all services to the customers whose contracts it owned. Operation as two corporations provided lenders with increased comfort that the collateral of their loans was protected.
Based upon the above, ERN has been treated as a business acquisition. Subsequent to the acquisition, ERN was fully integrated into our business.
13. We note from your disclosure here and on page 17 that your alarm-monitoring retail services segment (retail segment) provides both 1) working capital to independent alarm-monitoring dealers and 2) customer service, billing and collection functions to your portfolio of accounts. Given the distinction between these two areas and the apparent significance of each to your overall business strategy, it is unclear to us why your chief operating decision maker (CODM) does not review the operating results and assess performance of each separately. Please clarify for us in your response letter. In addition, please identify for us your chief operating decision maker and provide us with an example of the reports that this function reviews when making decisions about resources to be allocated and when assessing performance.
Response: In addition to monitoring which produces approximately 99% of the retail segment revenue, the retail segment also provides both, 1) working capital to independent alarm monitoring dealers and 2) customer service, billing and collection functions to our portfolio of accounts. We have determined that our Chief Executive Officer is our CODM as he is responsible for reviewing financial data in order to allocate resources and assess the performance of our two segments. Historically, separate discrete information related to providing working capital to independent alarm monitoring dealers and customer service, billing and collection services has not been provided to our CODM. Further revenue from each of these revenue sources were not significant to total revenue (customer service, billing and collection revenue was approximately 1.0 % of total revenue in 2005 and 1.0 % in Q1 of 2006).
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Discrete financial information regarding the lending activities is not maintained; instead it is integrated into the Retail Segment. The majority of notes receivable were the result of the acquisitions of NACC in 2004 and FSS in 2005. Of the $25 million of notes acquired in the November 2004 NACC acquisition, one dealer repaid their entire $17million in notes in early 2005. The notes receivable outstanding at December 31, 2005 represented only 5.9% of total assets. Excluding these two acquisitions, our loans to new dealers have been limited to $2million loaned in 2005.
Customer billing and collection (although insignificant to our consolidated financial statements) is a normal part of our retail segment business. We perform most of these services on accounts owned by this segment but we also perform these services for loan customers and some smaller dealers on a third-party basis. We do not maintain discrete financial information of these activities. Instead such financial data is fully integrated into the retail segment which is reviewed by the CODM.
Working capital provided to alarm monitoring dealers (although insignificant to our consolidated financial statements) is a normal part of our retail segment business. The largest single cost of the lending function is cost of capital; i.e. interest expense. We have not traditionally allocated interest expense to our divisions but include it as a corporate function. The second largest cost of the lending function is customer service and billing activities for the lenders customers. As the customers and their contracts are collateral for the loans, we provide billing and lock box services to assure our ability to protect our collateral. These customer service and billing services are not significant and are co-mingled with the same services we provide to our own portfolio of accounts. We do not allocate the costs between the owned accounts and the collateral accounts, as all costs are fully integrated (no separate discrete financial information exists of the activities related to the working capital provided to alarm monitoring dealers) into the retail segment report that is reviewed by the CODM.
The chief operating decision maker from the time we went public in 2003 until May 31, 2006 was Timothy M. McGinn, former Chief Executive Officer. The new Chief Executive Officer effective June 1, 2006 is Charles T. May. We have attached an example of the quarterly reporting package (Exhibit A) that the CEO reviews when assessing performance.
In 2005, Management began discussing with investment bankers strategies that would increase shareholder value which included a possibility of selling a portion of our customer contracts. The investment bankers suggested that a portfolio of exclusively commercial customer contracts might be marketable at a much higher multiple than a business that contained both commercial and residential contracts. As a result of discussions with the investment bankers, Management began transferring responsibility for the residential contracts owned by the PSI (wholly owned partnership acquired in 2003) branch to a retail residential branch so that PSI operations would only contain commercial contracts. In order to provide our investment banker with discrete financial information from our commercial contracts, we started to collect and report discrete financial information for the residential and commercial
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branches of our retail segment to our CODM and segment manager. The change in discrete financial information was first collected and reported on forthe month of November 2005 to our CODM in late December 2005 and to our Board of Directors in 2006 (See Q4-2005 Report dated March 21, 2006 in Exhibit A attached). Separate discrete financial information on the commercial and residential divisions is not available prior to the fourth quarter results presented to our CODM in late December 2005 and to the Board of Directors in 2006. Although this approach has attracted potential buyers for the commercial contracts, these efforts have not resulted in a transaction. However, it should be noted that although our internal reporting was modified in conjunction with our sales efforts our CODM and segment manager continue to measure operating performance and allocate resources based on the total retail segment and not based on the breakout of commercial and residential branches. Further demonstration of this was discussed on our response to question 9 and can be further supported by the following:
The primary capital expenditure is the purchase of additional customer contracts from dealers and other sources. These are purchased on an “as available” basis with little consideration if they are residential or commercial. Equipment purchases, primarily computer, are done on the basis of how many accounts are currently serviced and anticipated growth over the next two years. Some of the shared services between these divisions include employee cost, telephone, insurance and equipment lease payments. When reviewing operating results for the month, the branch heads will meet with the President of the retail subsidiary who in turn will meet with the CODM to discuss the major trends in the segment.
Currently PSI is operating as a commercial only retail branch. We have new executive management effective June 1, 2006. We are currently reviewing the structure of PSI. Management believes the branch structure which combined both commercial and residential contracts was a more efficient operation and is considering returning to that decentralized form of operation. If we return to the branch structure, discrete financial information will not be available for commercial and residential operations. We will not make any decisions on changing the structure until we complete the 2007 planning and budget process.
PSI was transformed into a commercial only branch to be ready for a possible sale. PSI is not currently for sale and we are in the process of deciding to run it as currently operating or returning it to an integrated retail branch operation. Until this process is complete early in 2007, we do not believe we should change our approach to goodwill evaluation or segment reporting. We believe that our operating segments are retail and wholesale as supported by the above discussion. Our business strategy for the retail segment has been to grow the retail operating segment by acquiring retail contracts, leveraging our existing infrastructure and capacity to service significantly more monitoring contracts at minimal incremental costs, and to efficiently run our branches. If it is determined by the CODM that the residential and commercial branches should be managed separately in the future, we will reevaluate our FAS 131 operating segments and FAS 142 reporting units.
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In future filings we plan to revise our disclosure of our segments descriptions to add clarity. Our planned disclosure revisions for Note 15 Segment and Related Information is as follows:
15. Segment and Related Information
IASG has two reportable segments: Alarm-Monitoring wholesale services and Alarm-Monitoring retail services. The Company has determined its reportable segments based on its method of internal reporting which is used by management for making operational decisions and assessing performance.
The alarm-monitoring wholesale services segment provides monitoring services to a broad range of independent alarm-monitoring dealers. The alarm-monitoring retail services segment provides monitoring services to its end customers, working capital to independent alarm-monitoring dealers and customer service and billing and collection services to our portfolio of accounts. This is accomplished by purchasing alarm monitoring contracts from the dealer or by providing loans using the dealer's alarm monitoring contracts as collateral. IASI provides monitoring services (through IASG and other non-affiliated entities) to its customers through the wholesale segment.
The accounting policies of each of the segments are the same as those described in the summary of significant accounting policies, as outlined in Note 2. Management has determined that an appropriate measure of the performance of its operating segments would be made through an evaluation of each segment's income (loss) before income taxes. Accordingly, the Company's summarized financial information regarding the Company's reportable segments is presented through income (loss) before income taxes for the years ended December 31, 2003, 2004 and 2005.
14. Further, we note on page 8 that you also provide equipment sales without monitoring, commercial and residential bundled arrangements and an equipment discount program. Please tell us which segment you include these functions in and how you made this determination using the guidance of paragraph 10 of SFAS 131.
Response: The equipment discount program is offered free of charge to our wholesale segment customers (dealers) as an incentive for them to use us as their monitoring central station. We are able to negotiate significant discounts with equipment manufacturers due to the collective market share of our dealer customer base. The customer deals directly with the equipment manufacturer and obtains the discount by indicating its relationship with us.
Equipment sales without monitoring and commercial and residential bundled arrangements are all services provided by our retail segment. All of these services are provided on a customer-by-customer basis and are installed by our employees. These are services also provided by our wholesale (dealer) customers. We compete with our wholesale customers to provide these services. We do not sell equipment to our wholesale customers.
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We do not maintain separate discrete information for equipment sales without monitoring. As a result our CODM does not have such discrete data to review to allocate resources and assess performance of such activities; accordingly this is not deemed a segment. Further, these activities are not significant (represent 2.7% of total revenue).
In closing, we acknowledge that:
| · | The Company is responsible for the adequacy and accuracy of the disclosure in the filings. |
| · | Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and |
| · | The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Please contact me for any additional clarification that is needed. It is the Company’s belief that disclosures in reports already filed with the Commission are adequate and there is no need to amend prior filings.
Sincerely,
/s/ Michael T. Moscinski
Michael T. Moscinski
Chief Financial Officer
mtm:cb
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EXHIBIT "A"
INTEGRATED ALARM SERVICES GROUP, INC.
Q2—2005
FINANCIAL STATEMENTS
BOARD OF DIRECTORS MEETING, AUG 15, 2005
| INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||
| Q2-2005 YTD (BY SEGMENT) | |||||||||||||
| ($000's) | |||||||||||||
| WHOLESALE | RETAIL | CORPORATE | CONSOLIDATED (INC. ELIMINATIONS) | ||||||||||
| REVENUE: | |||||||||||||
| MONITORING FEES | $ | 17,982 | $ | - | $ | - | $ | 15,572 | |||||
| REVENUE FROM CUSTOMER ACCOUNTS | - | 29,701 | - | 29,701 | |||||||||
| RELATED PARTY MONITORING | 67 | - | - | 67 | |||||||||
| SERVICE / INSTALLATION / OTHER | 4 | 3,802 | - | 3,806 | |||||||||
| TOTAL REVENUE | 18,053 | 33,503 | - | 49,146 | |||||||||
| COST OF REVENUE / DIRECT EXPENSES | 12,631 | 10,527 | - | 20,748 | |||||||||
| DIRECT MARGIN | 5,422 | 22,976 | - | 28,398 | |||||||||
| OPERATING EXPENSES: | |||||||||||||
| SALES & MARKETING | 855 | 1,663 | - | 2,518 | |||||||||
| DEPRECIATION & AMORTIZATION | 2,863 | 10,393 | - | 13,256 | |||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | 434 | 8 | - | 442 | |||||||||
| GENERAL & ADMINISTRATION | 1,270 | 8,050 | 4,841 | 14,161 | |||||||||
| TOTAL OPERATING EXPENSES | 5,422 | 20,114 | 4,841 | 30,377 | |||||||||
| INCOME / (LOSS) FROM OPERATIONS | - | 2,862 | (4,841 | ) | (1,979 | ) | |||||||
| OTHER INCOME / (LOSS) | - | - | - | - | |||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | (556 | ) | (556 | ) | |||||||
| INTEREST EXPENSE | (11 | ) | (27 | ) | (8,449 | ) | (8,487 | ) | |||||
| INTEREST INCOME | - | 2,133 | 245 | 2,378 | |||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | (11 | ) | 4,968 | (13,601 | ) | (8,644 | ) | ||||||
| TAXES | 72 | 2 | 208 | 282 | |||||||||
| NET INCOME / LOSS) | $ | (83 | ) | $ | 4,966 | $ | (13,809 | ) | $ | (8,926 | ) | ||
| EBITDA | $ | 2,863 | $ | 15,388 | $ | (4,596 | ) | $ | 13,655 |
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| INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||
| Q2-2005 YTD (BY RETAIL SEGMENT ONLY) | |||||||||||||
| ($000's) | |||||||||||||
| ALBANY | PSI (INC. APEX) | LAS VEGAS (INC. NACC-RETAIL) | RETAIL SEGMENT - TOTAL | ||||||||||
| REVENUE: | |||||||||||||
| REVENUE FROM CUSTOMER ACCOUNTS | $ | 9,047 | $ | 7,929 | $ | 12,725 | $ | 29,701 | |||||
| SERVICE / INSTALLATION / OTHER | - | 2,991 | 811 | 3,802 | |||||||||
| TOTAL REVENUE | 9,047 | 10,920 | 13,536 | 33,503 | |||||||||
| COST OF REVENUE / DIRECT EXPENSES | 2,383 | 5,579 | 2,565 | 10,527 | |||||||||
| DIRECT MARGIN | 6,664 | 5,341 | 10,971 | 22,976 | |||||||||
| OPERATING EXPENSES: | |||||||||||||
| SALES & MARKETING | 7 | 1,211 | 445 | 1,663 | |||||||||
| DEPRECIATION & AMORTIZATION | 5,910 | 2,824 | 1,659 | 10,393 | |||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | - | 8 | - | 8 | |||||||||
| GENERAL & ADMINISTRATION | 2,427 | 2,137 | 3,486 | 8,050 | |||||||||
| TOTAL OPERATING EXPENSES | 8,344 | 6,180 | 5,590 | 20,114 | |||||||||
| INCOME / (LOSS) FROM OPERATIONS | (1,680 | ) | (839 | ) | 5,381 | 2,862 | |||||||
| OTHER INCOME / (LOSS) | - | - | - | - | |||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | - | |||||||||
| INTEREST EXPENSE | (2 | ) | (25 | ) | - | (27 | ) | ||||||
| INTEREST INCOME | 248 | - | 1,885 | 2,133 | |||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | (1,434 | ) | (864 | ) | 7,266 | 4,968 | |||||||
| TAXES | - | - | 2 | 2 | |||||||||
| NET INCOME / LOSS) | $ | (1,434 | ) | $ | (864 | ) | $ | 7,264 | $ | 4,966 | |||
| EBITDA | $ | 4,478 | $ | 1,985 | $ | 8,925 | $ | 15,388 |
3
| INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||||||||||||||||||||||||||
| Q2-2005 vs Q1-2005 QTD INCOME STATEMENT (BY SEGMENT) | |||||||||||||||||||||||||||||||||||||
| ($000's) | |||||||||||||||||||||||||||||||||||||
| WHOLESALE | RETAIL | CORPORATE | CONSOLIDATED (INC. ELIMINATIONS) | ||||||||||||||||||||||||||||||||||
| Q2-2005 | Q1-2005 | CHANGE | Q2-2005 | Q1-2005 | CHANGE | Q2-2005 | Q1-2005 | CHANGE | Q2-2005 | Q1-2005 | CHANGE | ||||||||||||||||||||||||||
| REVENUE: | |||||||||||||||||||||||||||||||||||||
| MONITORING FEES | $ | 8,978 | $ | 9,004 | $ | (26 | ) | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 7,750 | $ | 7,822 | $ | (72 | ) | |||||||||||
| REVENUE FROM CUSTOMER ACCOUNTS | - | - | - | 15,419 | 14,282 | 1,137 | - | 15,419 | 14,282 | 1,137 | |||||||||||||||||||||||||||
| RELATED PARTY MONITORING | 34 | 33 | 1 | - | - | - | - | 34 | 33 | 1 | |||||||||||||||||||||||||||
| SERVICE / INSTALLATION / OTHER | 4 | - | 4 | 1,480 | 2,321 | (841 | ) | - | 1,484 | 2,321 | (837 | ) | |||||||||||||||||||||||||
| TOTAL REVENUE | 9,016 | 9,037 | (21 | ) | 16,899 | 16,603 | 296 | - | - | - | 24,687 | 24,458 | 229 | ||||||||||||||||||||||||
| COST OF REVENUE / DIRECT EXPENSES | 6,455 | 6,176 | 279 | 5,235 | 5,292 | (57 | ) | - | - | - | 10,462 | 10,286 | 176 | ||||||||||||||||||||||||
| DIRECT MARGIN | 2,561 | 2,861 | (300 | ) | 11,664 | 11,311 | 353 | - | - | - | 14,225 | 14,172 | 53 | ||||||||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||||||||||||||||
| SALES & MARKETING | 539 | 316 | 223 | 820 | 843 | (23 | ) | - | - | - | 1,359 | 1,159 | 200 | ||||||||||||||||||||||||
| DEPRECIATION & AMORTIZATION | 1,422 | 1,441 | (19 | ) | 5,720 | 4,673 | 1,047 | - | - | - | 7,142 | 6,114 | 1,028 | ||||||||||||||||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | 412 | 22 | 390 | 30 | (22 | ) | 52 | - | - | - | 442 | - | 442 | ||||||||||||||||||||||||
| GENERAL & ADMINISTRATION | 641 | 629 | 12 | 4,340 | 3,710 | 630 | 3,039 | 1,802 | 1,237 | 8,020 | 6,141 | 1,879 | |||||||||||||||||||||||||
| TOTAL OPERATING EXPENSES | 3,014 | 2,408 | 606 | 10,910 | 9,204 | 1,706 | 3,039 | 1,802 | 1,237 | 16,963 | 13,414 | 3,549 | |||||||||||||||||||||||||
| INCOME / (LOSS) FROM OPERATIONS | (453 | ) | 453 | (906 | ) | 754 | 2,107 | (1,353 | ) | (3,039 | ) | (1,802 | ) | (1,237 | ) | (2,738 | ) | 758 | (3,496 | ) | |||||||||||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | - | - | - | (282 | ) | (274 | ) | (8 | ) | (282 | ) | (274 | ) | (8 | ) | |||||||||||||||||||
| INTEREST EXPENSE | (5 | ) | (6 | ) | 1 | (13 | ) | (14 | ) | 1 | (4,283 | ) | (4,166 | ) | (117 | ) | (4,301 | ) | (4,186 | ) | (115 | ) | |||||||||||||||
| INTEREST INCOME | - | - | - | 1,011 | 1,122 | (111 | ) | 113 | 133 | (20 | ) | 1,124 | 1,255 | (131 | ) | ||||||||||||||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | (458 | ) | 447 | (905 | ) | 1,752 | 3,215 | (1,463 | ) | (7,491 | ) | (6,109 | ) | (1,382 | ) | (6,197 | ) | (2,447 | ) | (3,750 | ) | ||||||||||||||||
| TAXES | (11 | ) | 82 | (93 | ) | 1 | 1 | - | 151 | 57 | 94 | 141 | 140 | 1 | |||||||||||||||||||||||
| NET INCOME / LOSS) | $ | (447 | ) | $ | 365 | $ | (812 | ) | $ | 1,751 | $ | 3,214 | $ | (1,463 | ) | $ | (7,642 | ) | $ | (6,166 | ) | $ | (1,476 | ) | $ | (6,338 | ) | $ | (2,587 | ) | $ | (3,751 | ) | ||||
| EBITDA | $ | 969 | $ | 1,894 | $ | (925 | ) | $ | 7,485 | $ | 7,902 | $ | (417 | ) | $ | (2,926 | ) | $ | (1,669 | ) | $ | (1,257 | ) | $ | 5,528 | $ | 8,127 | $ | (2,599 | ) | |||||||
4
| INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||||||||||||||||||||||||||
| Q2-2005 vs Q1-2005 QTD INCOME STATEMENT (RETAIL SEGMENT ONLY) | |||||||||||||||||||||||||||||||||||||
| ($000's) | |||||||||||||||||||||||||||||||||||||
| ALBANY | PSI (INC. APEX) | LAS VEGAS (INC. NACC-RETAIL) | RETAIL SEGMENT - TOTAL | ||||||||||||||||||||||||||||||||||
| Q2-2005 | Q1-2005 | CHANGE | Q2-2005 | Q1-2005 | CHANGE | Q2-2005 | Q1-2005 | CHANGE | Q2-2005 | Q1-2005 | CHANGE | ||||||||||||||||||||||||||
| REVENUE: | |||||||||||||||||||||||||||||||||||||
| REVENUE FROM CUSTOMER ACCOUNTS | $ | 4,799 | $ | 4,248 | $ | 551 | $ | 4,031 | $ | 3,898 | $ | 133 | $ | 6,589 | $ | 6,136 | $ | 453 | $ | 15,419 | $ | 14,282 | $ | 1,137 | |||||||||||||
| SERVICE / INSTALLATION / OTHER | - | - | - | 1,178 | 1,813 | (635 | ) | 302 | 509 | (207 | ) | 1,480 | 2,322 | (842 | ) | ||||||||||||||||||||||
| TOTAL REVENUE | 4,799 | 4,248 | 551 | 5,209 | 5,711 | (502 | ) | 6,891 | 6,645 | 246 | 16,899 | 16,604 | 295 | ||||||||||||||||||||||||
| COST OF REVENUE / DIRECT EXPENSES | 1,244 | 1,139 | 105 | 2,644 | 2,935 | (291 | ) | 1,347 | 1,218 | 129 | 5,235 | 5,292 | (57 | ) | |||||||||||||||||||||||
| DIRECT MARGIN | 3,555 | 3,109 | 446 | 2,565 | 2,776 | (211 | ) | 5,544 | 5,427 | 117 | 11,664 | 11,312 | 352 | ||||||||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||||||||||||||||
| SALES & MARKETING | 7 | - | 7 | 610 | 601 | 9 | 203 | 242 | (39 | ) | 820 | 843 | (23 | ) | |||||||||||||||||||||||
| DEPRECIATION & AMORTIZATION | 3,317 | 2,593 | 724 | 1,571 | 1,253 | 318 | 832 | 827 | 5 | 5,720 | 4,673 | 1,047 | |||||||||||||||||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | - | - | - | 30 | (22 | ) | 52 | - | - | - | 30 | (22 | ) | 52 | |||||||||||||||||||||||
| GENERAL & ADMINISTRATION | 1,333 | 1,094 | 239 | 1,156 | 981 | 175 | 1,851 | 1,635 | 216 | 4,340 | 3,710 | 630 | |||||||||||||||||||||||||
| TOTAL OPERATING EXPENSES | 4,657 | 3,687 | 970 | 3,367 | 2,813 | 554 | 2,886 | 2,704 | 182 | 10,910 | 9,204 | 1,706 | |||||||||||||||||||||||||
| INCOME / (LOSS) FROM OPERATIONS | (1,102 | ) | (578 | ) | (524 | ) | (802 | ) | (37 | ) | (765 | ) | 2,658 | 2,723 | (65 | ) | 754 | 2,108 | (1,354 | ) | |||||||||||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| INTEREST EXPENSE | (1 | ) | (1 | ) | - | (12 | ) | (13 | ) | 1 | - | - | - | (13 | ) | (14 | ) | 1 | |||||||||||||||||||
| INTEREST INCOME | 114 | 134 | (20 | ) | - | - | - | 897 | 988 | (91 | ) | 1,011 | 1,122 | (111 | ) | ||||||||||||||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | (989 | ) | (445 | ) | (544 | ) | (814 | ) | (50 | ) | (764 | ) | 3,555 | 3,711 | (156 | ) | 1,752 | 3,216 | (1,464 | ) | |||||||||||||||||
| TAXES | - | - | - | - | - | - | 1 | 1 | - | 1 | 1 | - | |||||||||||||||||||||||||
| NET INCOME / LOSS) | $ | (989 | ) | $ | (445 | ) | $ | (544 | ) | $ | (814 | ) | $ | (50 | ) | $ | (764 | ) | $ | 3,554 | $ | 3,710 | $ | (156 | ) | $ | 1,751 | $ | 3,215 | $ | (1,464 | ) | |||||
| EBITDA | $ | 2,329 | $ | 2,149 | $ | 180 | $ | 769 | $ | 1,216 | $ | (447 | ) | $ | 4,387 | $ | 4,538 | $ | (151 | ) | $ | 7,485 | $ | 7,903 | $ | (418 | ) | ||||||||||
5
INTEGRATED ALARM SERVICES GROUP, INC. | ||||||||||
BALANCE SHEETS | ||||||||||
($000's) | ||||||||||
| JUN-30-2005 | MAR-31-2005 | DEC-31-2004 | ||||||||
ASSETS | ||||||||||
| CURRENT ASSETS: | ||||||||||
| CASH AND CASH EQUIVALENTS | $ | 25,442 | $ | 26,854 | $ | 31,555 | ||||
| CURRENT PORTION OF NOTES RECEIVABLE | 18,534 | 19,510 | 5,187 | |||||||
| ACCOUNTS RECEIVABLE, NET | 5,615 | 6,738 | 6,290 | |||||||
| INVENTORIES | 1,161 | 1,079 | 1,234 | |||||||
| PREPAID EXPENSES | 1,197 | 1,537 | 1,128 | |||||||
| DUE FROM RELATED PARTY | 129 | 136 | 71 | |||||||
| TOTAL CURRENT ASSETS | 52,078 | 55,854 | 45,465 | |||||||
| PROPERTY AND EQUIPMENT, NET | 7,152 | 7,774 | 7,926 | |||||||
| NOTES RECEIVABLE, NET OF CURRENT PORTION | 1,960 | 5,068 | 22,211 | |||||||
| DEALER RELATIONSHIPS, NET | 32,276 | 33,382 | 34,530 | |||||||
| CUSTOMER CONTRACTS, NET | 90,293 | 93,281 | 85,169 | |||||||
| DEFERRED INSTALLATION COSTS | 8,119 | 7,069 | 5,946 | |||||||
| GOODWILL, NET | 91,557 | 91,194 | 91,434 | |||||||
| DEBT ISSUANCE COSTS, NET | 5,095 | 5,334 | 5,322 | |||||||
| OTHER IDENTIFIABLE INTANGIBLES, NET | 2,764 | 2,909 | 3,054 | |||||||
| RESTRICTED CASH AND CASH EQUIVALENTS | 1,400 | 1,400 | 757 | |||||||
| OTHER ASSETS | 301 | 237 | 270 | |||||||
| TOTAL ASSETS | $ | 292,995 | $ | 303,502 | $ | 302,084 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
| CURRENT LIABILITIES: | ||||||||||
| CURRENT PORTION OF LONG-TERM DEBT | $ | 4,390 | $ | 4,970 | $ | 5,225 | ||||
| CURRENT PORTION OF CAPITAL LEASE OBLIGATIONS | 364 | 375 | 460 | |||||||
| ACCOUNTS PAYABLE | 2,155 | 1,934 | 3,720 | |||||||
| ACCRUED EXPENSES | 9,558 | 13,905 | 9,185 | |||||||
| CURRENT PORTION OF DEFERRED REVENUE | 10,058 | 10,311 | 9,756 | |||||||
| OTHER CURRENT LIABILITIES | 174 | 106 | 161 | |||||||
| TOTAL CURRENT LIABILITIES | 26,699 | 31,601 | 28,507 | |||||||
| LONG-TERM DEBT, NET OF CURRENT PORTION | 125,000 | 125,000 | 125,000 | |||||||
| CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION | 428 | 507 | 575 | |||||||
| DEFERRED REVENUE, NET OF CURRENT PORTION | 5,158 | 4,636 | 4,035 | |||||||
| DEFERRED INCOME TAXES | 1,332 | 1,222 | 1,113 | |||||||
| OTHER LIABILITIES | 7 | 45 | - | |||||||
| DUE TO RELATED PARTY | 6 | 8 | 4 | |||||||
| TOTAL LIABILITIES | 158,630 | 163,019 | 159,234 | |||||||
| STOCKHOLDERS' EQUITY: | ||||||||||
| COMMON STOCK | 25 | 25 | 25 | |||||||
| PAID-IN CAPTIAL | 207,007 | 206,785 | 206,566 | |||||||
| ACCUMULATED DEFICIT | (72,667 | ) | (66,327 | ) | (63,741 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | 134,365 | 140,483 | 142,850 | |||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 292,995 | $ | 303,502 | $ | 302,084 | ||||
6
INTEGRATED ALARM SERVICE GROUP, INC. AND SUBSIDIARIES | ||||||||||
STATEMENTS OF CASH FLOWS | ||||||||||
($000's) | ||||||||||
2005 YTD | Q2-2005 | Q1-2005 | ||||||||
| Cash flows from operating activities: | ||||||||||
| Net income (loss) | $ | (8,925,741 | ) | $ | (6,339,490 | ) | $ | (2,586,251 | ) | |
| Adjustments to reconcile net loss to net cash | ||||||||||
| provided by operating activities: | ||||||||||
| Depreciation and amortization | 13,256,140 | 7,142,532 | 6,113,608 | |||||||
| Amortization of deferred installation costs, net | 252,419 | 143,252 | 109,167 | |||||||
| Amortization of debt issuance costs | 556,081 | 281,881 | 274,200 | |||||||
| Interest expense - non-cash, notes | 440,609 | 221,668 | 218,941 | |||||||
| Provision for bad debts | 642,545 | 603,367 | 39,178 | |||||||
| Deferred income taxes | 218,760 | 109,380 | 109,380 | |||||||
| Earned discount on notes receivable | (614,932 | ) | (297,098 | ) | (317,834 | ) | ||||
| Loss (gain) on sale or disposal of assets | 442,250 | 442,063 | 187 | |||||||
| Changes in assets and liabilities, net of effects of | ||||||||||
| acquisitions and non-cash transactions: | ||||||||||
| Accounts receivable | 31,803 | 518,658 | (486,855 | ) | ||||||
| Inventories | 72,440 | (82,446 | ) | 154,886 | ||||||
| Prepaid expenses | (69,327 | ) | 339,614 | (408,941 | ) | |||||
| Other assets | (30,878 | ) | (64,337 | ) | 33,459 | |||||
| Deferred installation costs | (2,911,035 | ) | (1,450,488 | ) | (1,460,547 | ) | ||||
| Due from/to related parties | (55,751 | ) | 5,986 | (61,737 | ) | |||||
| Accounts payable and accrued expenses | (1,416,543 | ) | (4,497,710 | ) | 3,081,167 | |||||
| Deferred revenue | (31,489 | ) | (426,178 | ) | 394,689 | |||||
| Deferred installation revenue | 1,943,004 | 953,099 | 989,905 | |||||||
| Other liabilities | 20,174 | 29,285 | (9,111 | ) | ||||||
| Net cash provided by operating activities | 3,820,529 | (2,366,962 | ) | 6,187,491 | ||||||
| Cash flows from investing activities: | ||||||||||
| Purchase of property and equipment | (1,004,414 | ) | (478,046 | ) | (526,368 | ) | ||||
| Proceeds from sale of property and equipment | - | - | - | |||||||
| Purchase of customer contracts and dealer relationships | (11,747,576 | ) | (1,808,575 | ) | (9,939,001 | ) | ||||
| Financing of dealer loans | (2,440,292 | ) | (426 | ) | (2,439,866 | ) | ||||
| Repayment of dealer loans | 7,431,491 | 4,316,731 | 3,114,760 | |||||||
| Decrease (increase) in restricted cash | (642,610 | ) | - | (642,610 | ) | |||||
| Business acquisitions, net of cash acquired | (122,621 | ) | (362,718 | ) | 240,097 | |||||
| Net cash used in investing activities | (8,526,022 | ) | 1,666,966 | (10,192,988 | ) | |||||
| Cash flows from financing activities: | ||||||||||
| Payments of obligations under capital leases | (243,461 | ) | (89,554 | ) | (153,907 | ) | ||||
| Repayment of long-term debt | (835,000 | ) | (580,000 | ) | (255,000 | ) | ||||
| Debt issuance costs | (329,118 | ) | (42,863 | ) | (286,255 | ) | ||||
| Net cash used in financing activities | (1,407,579 | ) | (712,417 | ) | (695,162 | ) | ||||
| Net increase (decrease) in cash and cash equivalents for the period | (6,113,072 | ) | (1,412,413 | ) | (4,700,659 | ) | ||||
| Cash and cash equivalents at beginning of period | 31,554,609 | 26,853,950 | 31,554,609 | |||||||
| Cash and cash equivalents at end of period | $ | 25,441,537 | $ | 25,441,537 | $ | 26,853,950 | ||||
7
| INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||||||||||||||
| Q2-2005 vs Q1-2005 QTD INCOME STATEMENT (BY SEGMENT) | |||||||||||||||||||||||||
| ($000's) | |||||||||||||||||||||||||
WHOLESALE | RETAIL | ||||||||||||||||||||||||
YTD | Q2-2005 | Q1-2005 | Q2 vs Q1 CHANGE | YTD | Q2-2005 | Q1-2005 | Q2 vs Q1 CHANGE | ||||||||||||||||||
| COMPENSATION, PAYROLL TAXES AND BENEFITS | 602 | 332 | 270 | 62 | 4,243 | 2,209 | 2,034 | 175 | |||||||||||||||||
| PROFESSIONAL FEES - SARB-OX RELATED | - | - | - | - | - | - | - | - | |||||||||||||||||
| BAD DEBT EXPENSE | 181 | 170 | 11 | 159 | 465 | 348 | 117 | 231 | |||||||||||||||||
| BANK / LOCKBOX / BILLING / COLLECTION FEES | 65 | 30 | 35 | (5 | ) | 528 | 284 | 244 | 40 | ||||||||||||||||
| LEGAL / PROFESSIONAL FEES (EXC. SARB-OX AND ACCTG) | 75 | 37 | 38 | (1 | ) | 192 | 115 | 77 | 38 | ||||||||||||||||
| PROFESSIONAL FEES - ACCOUNTING / AUDIT | - | - | - | - | - | - | - | - | |||||||||||||||||
| RENT, UTILITIES AND BUILDINGS | - | - | - | - | 560 | 287 | 273 | 14 | |||||||||||||||||
| D & O INSURANCE | - | - | - | - | - | - | - | - | |||||||||||||||||
| OTHER INSURANCE | - | - | - | - | 352 | 203 | 149 | 54 | |||||||||||||||||
| POSTAGE & SHIPPING | - | - | - | - | 314 | 167 | 147 | 20 | |||||||||||||||||
| TELEPHONE | - | - | - | - | 305 | 99 | 206 | (107 | ) | ||||||||||||||||
| TRAVEL & ENTERTAINMENT | 57 | 29 | 28 | 1 | 171 | 97 | 74 | 23 | |||||||||||||||||
| TELEMATICS RESERVES | 222 | - | 222 | (222 | ) | - | - | - | - | ||||||||||||||||
| SUPPLIES, OPERATING LEASES AND SERVICE AGREEMENTS | - | - | - | - | 215 | 163 | 52 | 111 | |||||||||||||||||
| BOARD FEES | - | - | - | - | - | - | - | - | |||||||||||||||||
| THIRD PARTY SERVICE / TEMP SERVICES | - | - | - | - | 144 | 89 | 55 | 34 | |||||||||||||||||
| FRANCHISE TAXES | - | - | - | - | - | - | - | - | |||||||||||||||||
| OTHER | 68 | 43 | 25 | 18 | 561 | 279 | 282 | (3 | ) | ||||||||||||||||
| 1,270 | 641 | 629 | 12 | 8,050 | 4,340 | 3,710 | 630 | ||||||||||||||||||
CORPORATE | CONSOLIDATED | ||||||||||||||||||||||||
YTD | Q2-2005 | Q1-2005 | Q2 vs Q1 CHANGE | YTD | Q2-2005 | Q1-2005 | Q2 vs Q1 CHANGE | ||||||||||||||||||
| COMPENSATION, PAYROLL TAXES AND BENEFITS | 1,043 | 639 | 404 | 235 | 5,888 | 3,180 | 2,708 | 472 | |||||||||||||||||
| PROFESSIONAL FEES - SARB-OX RELATED | 1,891 | 1,308 | 583 | 725 | 1,891 | 1,308 | 583 | 725 | |||||||||||||||||
| BAD DEBT EXPENSE | - | - | - | - | 646 | 518 | 128 | 390 | |||||||||||||||||
| BANK / LOCKBOX / BILLING / COLLECTION FEES | - | - | - | - | 593 | 314 | 279 | 35 | |||||||||||||||||
| LEGAL / PROFESSIONAL FEES (EXC. SARB-OX AND ACCTG) | 326 | 243 | 83 | 160 | 593 | 395 | 198 | 197 | |||||||||||||||||
| PROFESSIONAL FEES - ACCOUNTING / AUDIT | 588 | 255 | 333 | (78 | ) | 588 | 255 | 333 | (78 | ) | |||||||||||||||
| RENT, UTILITIES AND BUILDINGS | - | - | - | - | 560 | 287 | 273 | 14 | |||||||||||||||||
| D & O INSURANCE | 410 | 205 | 205 | - | 410 | 205 | 205 | - | |||||||||||||||||
| OTHER INSURANCE | - | - | - | - | 352 | 203 | 149 | 54 | |||||||||||||||||
| POSTAGE & SHIPPING | - | - | - | - | 314 | 167 | 147 | 20 | |||||||||||||||||
| TELEPHONE | 7 | 6 | 1 | 5 | 312 | 105 | 207 | (102 | ) | ||||||||||||||||
| TRAVEL & ENTERTAINMENT | 22 | 15 | 7 | 8 | 250 | 141 | 109 | 32 | |||||||||||||||||
| TELEMATICS RESERVES | - | - | - | - | 222 | - | 222 | (222 | ) | ||||||||||||||||
| SUPPLIES, OPERATING LEASES AND SERVICE AGREEMENTS | - | - | - | - | 215 | 163 | 52 | 111 | |||||||||||||||||
| BOARD FEES | 186 | 112 | 74 | 38 | 186 | 112 | 74 | 38 | |||||||||||||||||
| THIRD PARTY SERVICE / TEMP SERVICES | - | - | - | - | 144 | 89 | 55 | 34 | |||||||||||||||||
| FRANCHISE TAXES | 71 | 37 | 34 | 3 | 71 | 37 | 34 | 3 | |||||||||||||||||
| OTHER | 297 | 219 | 78 | 141 | 926 | 541 | 385 | 156 | |||||||||||||||||
| 4,841 | 3,039 | 1,802 | 1,237 | 14,161 | 8,020 | 6,141 | 1,879 | ||||||||||||||||||
8
INTEGRATED ALARM SERVICES GROUP, INC.
Q3—2005
FINANCIAL STATEMENTS
BOARD OF DIRECTORS MEETING, NOVEMBER 10, 2005
9
INTEGRATED ALARM SERVICES GROUP, INC. | ||||||||||||||||
YR 2005 INCOME STATEMENT, BY QUARTER | ||||||||||||||||
TOTAL / CONSOLIDATED | ||||||||||||||||
| Q1-2005 | Q2-2005 | Q3-2005 | Q4-2005 | YR 2005 | ||||||||||||
| ACTUAL | ACTUAL | PRLM ACT | FORECAST | ACT / FCST | ||||||||||||
| REVENUE | $ | 24,457,935 | $ | 24,687,445 | $ | 24,501,227 | $ | 25,876,248 | $ | 99,522,855 | ||||||
| COST OF REVENUE / DIRECT EXPENSES | 10,110,449 | 10,286,756 | 10,782,007 | 10,771,724 | 41,950,937 | |||||||||||
| DIRECT MARGIN | 14,347,486 | 14,400,689 | 13,719,220 | 15,104,524 | 57,571,919 | |||||||||||
| DIRECT MARGIN, AS % OF REVENUE | 58.7 | % | 58.3 | % | 56.0 | % | 58.4 | % | 57.8 | % | ||||||
| OPERATING EXPENSES: | ||||||||||||||||
| SALES & MARKETING | 1,159,358 | 1,359,115 | 1,223,844 | 1,260,893 | 5,003,210 | |||||||||||
| DEPRECIATION & AMORTIZATION | 6,113,608 | 7,142,531 | 7,613,629 | 7,933,634 | 28,803,403 | |||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | 187 | 442,063 | 332,414 | - | 774,664 | |||||||||||
| GENERAL & ADMINISTRATION | 6,315,157 | 8,196,123 | 6,032,991 | 7,345,459 | 27,889,730 | |||||||||||
| TOTAL OPERATING EXPENSES | 13,588,310 | 17,139,833 | 15,202,878 | 16,539,986 | 62,471,007 | |||||||||||
| INTEREST INCOME | 1,254,669 | 1,123,763 | 1,145,899 | 1,379,874 | 4,904,204 | |||||||||||
| INCOME / (LOSS) FROM OPERATIONS | 2,013,844 | (1,615,381 | ) | (337,759 | ) | (55,588 | ) | 5,116 | ||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | |||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | 274,200 | 281,880 | 282,067 | 285,000 | 1,123,148 | |||||||||||
| INTEREST EXPENSE | 4,185,514 | 4,301,092 | 4,314,105 | 4,069,293 | 16,870,004 | |||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | (2,445,870 | ) | (6,198,354 | ) | (4,933,931 | ) | (4,409,880 | ) | (17,988,035 | ) | ||||||
| TAXES | 140,381 | 141,136 | 94,715 | - | 376,232 | |||||||||||
| NET INCOME / (LOSS) | $ | (2,586,251 | ) | $ | (6,339,489 | ) | $ | (5,028,646 | ) | $ | (4,409,880 | ) | $ | (18,364,267 | ) | |
| EBITDA | $ | 8,127,453 | $ | 5,527,150 | $ | 7,275,870 | $ | 7,878,046 | $ | 28,808,519 | ||||||
| EBITDA, AS % OF REVENUE (EXC. FSS) | 33.2 | % | 22.4 | % | 29.7 | % | 30.4 | % | 28.9 | % |
10
INTEGRATED ALARM SERVICES GROUP, INC. | ||||||||||||||||
YR 2005 INCOME STATEMENT, BY QUARTER | ||||||||||||||||
WHOLESALE SEGMENT | ||||||||||||||||
Q1-2005 | Q2-2005 | Q3-2005 | Q4-2005 | YR 2005 | ||||||||||||
ACTUAL | ACTUAL | PRLM ACT | FORECAST | ACT / FCST | ||||||||||||
| REVENUE | $ | 9,036,784 | $ | 9,016,398 | $ | 9,057,762 | $ | 9,860,094 | $ | 36,971,038 | ||||||
| COST OF REVENUE / DIRECT EXPENSES | 6,000,899 | 6,280,141 | 6,258,883 | 6,003,642 | 24,543,565 | |||||||||||
| DIRECT MARGIN | 3,035,885 | 2,736,258 | 2,798,879 | 3,856,452 | 12,427,474 | |||||||||||
| DIRECT MARGIN, AS % OF REVENUE | 33.6 | % | 30.3 | % | 30.9 | % | 39.1 | % | 33.6 | % | ||||||
| OPERATING EXPENSES: | ||||||||||||||||
| SALES & MARKETING | 316,425 | 539,002 | 340,168 | 350,000 | 1,545,595 | |||||||||||
| DEPRECIATION & AMORTIZATION | 1,440,806 | 1,422,160 | 1,344,956 | 1,505,909 | 5,713,831 | |||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | 22,243 | 412,209 | 197,871 | - | 632,323 | |||||||||||
| GENERAL & ADMINISTRATION | 453,549 | 466,259 | (3,817 | ) | 175,000 | 1,090,991 | ||||||||||
| TOTAL OPERATING EXPENSES | 2,233,023 | 2,839,630 | 1,879,178 | 2,030,909 | 8,982,741 | |||||||||||
| INTEREST INCOME | - | - | - | - | - | |||||||||||
| INCOME / (LOSS) FROM OPERATIONS | 802,862 | (103,373 | ) | 919,701 | 1,825,543 | 3,444,733 | ||||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | |||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | - | - | |||||||||||
| INTEREST EXPENSE | 5,855 | 4,731 | 6,356 | 5,855 | 22,798 | |||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | 797,007 | (108,104 | ) | 913,345 | 1,819,688 | 3,421,935 | ||||||||||
| TAXES | 82,465 | (10,812 | ) | - | - | 71,654 | ||||||||||
| NET INCOME / (LOSS) | $ | 714,541 | $ | (97,293 | ) | $ | 913,345 | $ | 1,819,688 | $ | 3,350,282 | |||||
| EBITDA | $ | 2,243,668 | $ | 1,318,787 | $ | 2,264,657 | $ | 3,331,452 | $ | 9,158,564 | ||||||
| EBITDA, AS % OF REVENUE (EXC. FSS) | 24.8 | % | 14.6 | % | 25.0 | % | 33.8 | % | 24.8 | % |
11
INTEGRATED ALARM SERVICES GROUP, INC. | ||||||||||||||||
YR 2005 INCOME STATEMENT, BY QUARTER | ||||||||||||||||
RETAIL SEGMENT (EXCLUDING PSI AND INCLUDING ALL APEX) | ||||||||||||||||
Q1-2005 | Q2-2005 | Q3-2005 | Q4-2005 | YR 2005 | ||||||||||||
ACTUAL | ACTUAL | PRLM ACT | FORECAST | ACT / FCST | ||||||||||||
| REVENUE | $ | 12,077,261 | $ | 12,841,150 | $ | 12,562,482 | $ | 12,673,056 | $ | 50,153,949 | ||||||
| COST OF REVENUE / DIRECT EXPENSES | 2,907,287 | 3,064,118 | 3,401,748 | 3,875,084 | 13,248,237 | |||||||||||
| DIRECT MARGIN | 9,169,974 | 9,777,032 | 9,160,734 | 8,797,972 | 36,905,712 | |||||||||||
| DIRECT MARGIN, AS % OF REVENUE | 75.9 | % | 76.1 | % | 72.9 | % | 69.4 | % | 73.6 | % | ||||||
| OPERATING EXPENSES: | ||||||||||||||||
| SALES & MARKETING | 315,376 | 250,655 | 255,359 | 248,893 | 1,070,282 | |||||||||||
| DEPRECIATION & AMORTIZATION | 3,663,522 | 4,539,941 | 5,575,228 | 5,590,390 | 19,369,081 | |||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | - | - | 134,543 | - | 134,543 | |||||||||||
| GENERAL & ADMINISTRATION | 2,877,808 | 3,409,034 | 2,964,476 | 3,839,100 | 13,090,419 | |||||||||||
| TOTAL OPERATING EXPENSES | 6,856,706 | 8,199,630 | 8,929,606 | 9,678,383 | 33,664,325 | |||||||||||
| INTEREST INCOME | 1,122,016 | 1,010,933 | 932,271 | 1,270,859 | 4,336,079 | |||||||||||
| INCOME / (LOSS) FROM OPERATIONS | 3,435,284 | 2,588,336 | 1,163,399 | 390,448 | 7,577,466 | |||||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | |||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | - | - | |||||||||||
| INTEREST EXPENSE | - | 1,653 | 85 | - | 1,738 | |||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | 3,435,284 | 2,586,683 | 1,163,314 | 390,448 | 7,575,728 | |||||||||||
| TAXES | 1,093 | 663 | 498 | - | 2,255 | |||||||||||
| NET INCOME / (LOSS) | $ | 3,434,190 | $ | 2,586,019 | $ | 1,162,816 | $ | 390,448 | $ | 7,573,474 | ||||||
| EBITDA | $ | 7,098,806 | $ | 7,128,276 | $ | 6,738,627 | $ | 5,980,838 | $ | 26,946,547 | ||||||
| EBITDA, AS % OF REVENUE (EXC. FSS) | 58.8 | % | 55.5 | % | 53.6 | % | 47.2 | % | 53.7 | % |
12
INTEGRATED ALARM SERVICES GROUP, INC. | ||||||||||||||||
YR 2005 INCOME STATEMENT, BY QUARTER | ||||||||||||||||
PSI (EXCLUDING ALL APEX) | ||||||||||||||||
Q1-2005 | Q2-2005 | Q3-2005 | Q4-2005 | YR 2005 | ||||||||||||
ACTUAL | ACTUAL | PRLM ACT | FORECAST | ACT / FCST | ||||||||||||
| REVENUE | $ | 4,525,870 | $ | 4,058,252 | $ | 4,039,945 | $ | 4,573,098 | $ | 17,197,165 | ||||||
| COST OF REVENUE / DIRECT EXPENSES | 2,384,243 | 2,170,853 | 2,280,338 | 2,122,998 | 8,958,432 | |||||||||||
| DIRECT MARGIN | 2,141,627 | 1,887,399 | 1,759,607 | 2,450,100 | 8,238,733 | |||||||||||
| DIRECT MARGIN, AS % OF REVENUE | 47.3 | % | 46.5 | % | 43.6 | % | 53.6 | % | 47.9 | % | ||||||
| OPERATING EXPENSES: | ||||||||||||||||
| SALES & MARKETING | 527,557 | 569,458 | 628,317 | 662,000 | 2,387,332 | |||||||||||
| DEPRECIATION & AMORTIZATION | 1,009,280 | 1,180,431 | 693,445 | 837,335 | 3,720,491 | |||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | (22,056 | ) | 29,854 | - | - | 7,798 | ||||||||||
| GENERAL & ADMINISTRATION | 831,984 | 931,334 | 752,006 | 848,549 | 3,363,873 | |||||||||||
| TOTAL OPERATING EXPENSES | 2,346,765 | 2,711,077 | 2,073,768 | 2,347,884 | 9,479,494 | |||||||||||
| INTEREST INCOME | - | - | - | - | - | |||||||||||
| INCOME / (LOSS) FROM OPERATIONS | (205,138 | ) | (823,678 | ) | (314,161 | ) | 102,216 | (1,240,761 | ) | |||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | |||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | - | - | |||||||||||
| INTEREST EXPENSE | 13,867 | 11,743 | 11,067 | 10,000 | 46,677 | |||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | (219,005 | ) | (835,421 | ) | (325,228 | ) | 92,216 | (1,287,438 | ) | |||||||
| TAXES | - | - | - | |||||||||||||
| NET INCOME / (LOSS) | $ | (219,005 | ) | $ | (835,421 | ) | $ | (325,228 | ) | $ | 92,216 | $ | (1,287,438 | ) | ||
| EBITDA | $ | 804,142 | $ | 356,753 | $ | 379,284 | $ | 939,551 | $ | 2,479,730 | ||||||
| EBITDA, AS % OF REVENUE | 17.8 | % | 8.8 | % | 9.4 | % | 20.5 | % | 14.4 | % |
13
INTEGRATED ALARM SERVICES GROUP, INC. | ||||||||||||||||
YR 2005 INCOME STATEMENT, BY QUARTER | ||||||||||||||||
CORPORATE | ||||||||||||||||
Q1-2005 | Q2-2005 | Q3-2005 | Q4-2005 | YR 2005 | ||||||||||||
ACTUAL | ACTUAL | PRLM ACT | FORECAST | ACT / FCST | ||||||||||||
| REVENUE (ELIMINATION) | $ | (1,181,980 | ) | $ | (1,228,355 | ) | $ | (1,158,962 | ) | $ | (1,230,000 | ) | $ | (4,799,297 | ) | |
| COST OF REVENUE (ELIMINATION) | (1,181,980 | ) | (1,228,355 | ) | (1,158,962 | ) | (1,230,000 | ) | (4,799,297 | ) | ||||||
| DIRECT MARGIN | - | - | - | - | - | |||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| SALES & MARKETING | - | - | - | - | - | |||||||||||
| DEPRECIATION & AMORTIZATION | - | - | - | - | - | |||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | - | - | - | - | - | |||||||||||
| GENERAL & ADMINISTRATION | 2,151,816 | 3,389,495 | 2,320,326 | 2,482,810 | 10,344,447 | |||||||||||
| TOTAL OPERATING EXPENSES | 2,151,816 | 3,389,495 | 2,320,326 | 2,482,810 | 10,344,447 | |||||||||||
| INTEREST INCOME | 132,653 | 112,829 | 213,628 | 109,015 | 568,125 | |||||||||||
| INCOME / (LOSS) FROM OPERATIONS | (2,019,163 | ) | (3,276,666 | ) | (2,106,698 | ) | (2,373,795 | ) | (9,776,322 | ) | ||||||
| OTHER INCOME / (LOSS) | - | - | - | |||||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | 274,200 | 281,880 | 282,067 | 285,000 | 1,123,148 | |||||||||||
| INTEREST EXPENSE | 4,165,792 | 4,282,965 | 4,296,597 | 4,053,438 | 16,798,792 | |||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | (6,459,155 | ) | (7,841,511 | ) | (6,685,362 | ) | (6,712,232 | ) | (27,698,261 | ) | ||||||
| TAXES | 56,823 | 151,284 | 94,217 | - | 302,324 | |||||||||||
| NET INCOME / (LOSS) | $ | (6,515,978 | ) | $ | (7,992,795 | ) | $ | (6,779,579 | ) | $ | (6,712,232 | ) | $ | (28,000,585 | ) | |
| EBITDA | $ | (2,019,163 | ) | $ | (3,276,666 | ) | $ | (2,106,698 | ) | $ | (2,373,795 | ) | $ | (9,776,322 | ) |
14
INTEGRATED ALARM SERVICES GROUP, INC. | |||||||
CONSOLIDATED BALANCE SHEETS | |||||||
(Unaudited) | |||||||
As of | |||||||
June 30, 2005 | September 30, 2005 | ||||||
| Cash and cash equivalents | $ | 25,441,537 | $ | 9,125,459 | |||
| Current portion of notes receivable | 18,534,027 | 18,558,399 | |||||
| Accounts receivable, net | 5,615,439 | 5,090,801 | |||||
| Inventories | 1,161,345 | 972,249 | |||||
| Prepaid expenses | 1,196,908 | 1,559,597 | |||||
| Due from related parties | 128,617 | 177,716 | |||||
| Total current assets | 52,077,873 | 35,484,221 | |||||
| Property and equipment, net | 7,151,935 | 6,821,060 | |||||
| Notes receivable, net | 1,960,251 | 1,438,470 | |||||
| Dealer relationships, net | 32,276,377 | 31,130,758 | |||||
| Customer contracts, net | 90,292,908 | 85,045,547 | |||||
| Deferred installation costs, net | 8,118,705 | 9,024,975 | |||||
| Goodwill | 91,557,145 | 90,997,206 | |||||
| Debt issuance costs, net | 5,095,126 | 4,838,057 | |||||
| Other identifiable intangibles, net | 2,764,271 | 2,619,282 | |||||
| Restricted cash | 1,399,714 | 757,907 | |||||
| Deposits on acquistions | - | 22,683,192 | |||||
| Other assets | 301,001 | 301,564 | |||||
| Total assets | $ | 292,995,306 | $ | 291,142,239 | |||
Liabilities and Stockholders' Equity | |||||||
| Current liabilities: | |||||||
| Borrowing on line of credit | $ | - | $ | 3,000,000 | |||
| Current portion of long-term debt | 4,390,000 | 4,275,000 | |||||
| Current portion of capital lease obligations | 363,587 | 364,955 | |||||
| Accounts payable | 2,155,471 | 1,356,934 | |||||
| Accrued expenses | 9,558,015 | 11,138,018 | |||||
| Current portion of deferred revenue | 10,058,143 | 9,119,104 | |||||
| Other liabilities | 174,025 | 200,525 | |||||
| Total current liabilities | 26,699,241 | 29,454,536 | |||||
| Long-term debt, net of current portion | 125,000,000 | 125,000,000 | |||||
| Capital lease obligations, net of current portion | 428,441 | 389,815 | |||||
| Deferred revenue, net of current portion | 5,158,212 | 5,748,723 | |||||
| Deferred income taxes | 1,331,538 | 1,399,255 | |||||
| Other liabilities | 6,959 | - | |||||
| Due to related parties | 6,220 | 58,611 | |||||
| Total liabilities | 158,630,611 | 162,050,940 | |||||
| Stockholders' equity: | |||||||
| Preferred stock | - | - | |||||
| Common stock | 24,682 | 24,682 | |||||
| Paid-in capital | 207,006,676 | 207,161,926 | |||||
| Accumulated deficit | (72,666,663 | ) | (78,095,309 | ) | |||
| Treasury stock | |||||||
| Total stockholders' equity | 134,364,695 | 129,091,299 | |||||
| Total liabilities and stockholders' equity | $ | 292,995,306 | $ | 291,142,239 | |||
15
INTEGRATED ALARM SERVICES GROUP, INC.
Q4—2005
FINANCIAL STATEMENTS
BOARD OF DIRECTORS MEETING, MARCH 21, 2006
16
INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||||||||
Q4-2005 vs. Q3-2005 OPERATING RESULTS, BY DIVISION | |||||||||||||||||||
RETAIL | TOTAL / | ||||||||||||||||||
WHOLESALE | RESIDENTIAL | COMMERCIAL | CORPORATE | ELIMINATIONS | CONSOLIDATED | ||||||||||||||
Q4-2005 | |||||||||||||||||||
| REVENUE (ELIMINATION) | $ | 9,294,646 | $ | 13,301,432 | $ | 4,217,697 | $ | - | $ | (1,226,395 | ) | $ | 25,587,380 | ||||||
| COST OF REVENUE (ELIMINATION) | 5,679,576 | 4,971,366 | 2,252,385 | - | (1,226,395 | ) | 11,676,932 | ||||||||||||
| DIRECT MARGIN | 3,615,070 | 8,330,066 | 1,965,312 | - | - | 13,910,448 | |||||||||||||
| 38.9 | % | 62.6 | % | 46.6 | % | 54.4 | % | ||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||
| SALES & MARKETING | 378,122 | 265,987 | 590,199 | - | - | 1,234,308 | |||||||||||||
| DEPRECIATION & AMORTIZATION | 1,500,084 | 5,180,653 | 1,021,677 | - | - | 7,702,415 | |||||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | 50,000 | 32,311 | 175,140 | - | - | 257,451 | |||||||||||||
| GENERAL & ADMINISTRATION | 453,991 | 4,050,575 | 581,849 | 4,284,722 | - | 9,371,137 | |||||||||||||
| TOTAL OPERATING EXPENSES | 2,382,197 | 9,529,527 | 2,368,865 | 4,284,722 | - | 18,565,311 | |||||||||||||
| INTEREST INCOME | - | 1,288,032 | - | 25,963 | - | 1,313,996 | |||||||||||||
| INCOME / (LOSS) FROM OPERATIONS | 1,232,873 | 88,572 | (403,553 | ) | (4,258,759 | ) | - | (3,340,867 | ) | ||||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | ||||||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | 241,630 | - | 241,630 | |||||||||||||
| INTEREST EXPENSE | 2,794 | 1,688 | 13,674 | 4,190,237 | - | 4,208,392 | |||||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | 1,230,079 | 86,885 | (417,227 | ) | (8,690,626 | ) | - | (7,790,889 | ) | ||||||||||
| TAXES | 12,576 | 316 | 173,673 | - | 186,565 | ||||||||||||||
| NET INCOME / (LOSS) | $ | 1,217,503 | $ | 86,568 | $ | (417,227 | ) | $ | (8,864,299 | ) | $ | - | $ | (7,977,454 | ) | ||||
| EBITDA | $ | 2,732,957 | $ | 5,269,226 | $ | 618,124 | $ | (4,258,759 | ) | $ | - | $ | 4,361,548 | ||||||
| EBITDA, AS % OF REVENUE | 29.4 | % | 39.6 | % | 14.7 | % | 17.0 | % | |||||||||||
17
INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||||||||
Q4-2005 vs. Q3-2005 OPERATING RESULTS, BY DIVISION | |||||||||||||||||||
RETAIL | TOTAL / | ||||||||||||||||||
WHOLESALE | RESIDENTIAL | COMMERCIAL | CORPORATE | ELIMINATIONS | CONSOLIDATED | ||||||||||||||
Q3-2005 | |||||||||||||||||||
| REVENUE (ELIMINATION) | $ | 9,057,762 | $ | 12,562,482 | $ | 4,039,945 | $ | - | $ | (1,158,962 | ) | $ | 24,501,227 | ||||||
| COST OF REVENUE (ELIMINATION) | 6,258,883 | 3,226,748 | 2,280,338 | - | (1,158,962 | ) | 10,607,007 | ||||||||||||
| DIRECT MARGIN | 2,798,879 | 9,335,734 | 1,759,607 | - | - | 13,894,220 | |||||||||||||
| 30.9 | % | 74.3 | % | 43.6 | % | 56.7 | % | ||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||
| SALES & MARKETING | 340,168 | 255,359 | 628,317 | - | - | 1,223,844 | |||||||||||||
| DEPRECIATION & AMORTIZATION | 1,344,956 | 5,575,228 | 693,445 | - | - | 7,613,629 | |||||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | 197,871 | 134,543 | - | - | - | 332,414 | |||||||||||||
| GENERAL & ADMINISTRATION | (3,817 | ) | 3,539,476 | 752,006 | 2,320,326 | - | 6,607,991 | ||||||||||||
| TOTAL OPERATING EXPENSES | 1,879,178 | 9,504,606 | 2,073,768 | 2,320,326 | - | 15,777,878 | |||||||||||||
| INTEREST INCOME | - | 932,271 | - | 213,628 | - | 1,145,899 | |||||||||||||
| INCOME / (LOSS) FROM OPERATIONS | 919,701 | 763,399 | (314,161 | ) | (2,106,698 | ) | - | (737,759 | ) | ||||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | ||||||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | 282,067 | - | 282,067 | |||||||||||||
| INTEREST EXPENSE | 6,356 | 85 | 11,067 | 4,296,597 | - | 4,314,105 | |||||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | 913,345 | 763,314 | (325,228 | ) | (6,685,362 | ) | - | (5,333,931 | ) | ||||||||||
| TAXES | - | 498 | 94,217 | - | 94,715 | ||||||||||||||
| NET INCOME / (LOSS) | $ | 913,345 | $ | 762,816 | $ | (325,228 | ) | $ | (6,779,579 | ) | $ | - | $ | (5,428,646 | ) | ||||
| EBITDA | $ | 2,264,657 | $ | 6,338,627 | $ | 379,284 | $ | (2,106,698 | ) | $ | - | $ | 6,875,870 | ||||||
| EBITDA, AS % OF REVENUE | 25.0 | % | 50.5 | % | 9.4 | % | #DIV/0! | 0.0 | % | 28.1 | % | ||||||||
18
INTEGRATED ALARM SERVICES GROUP, INC. | |||||||||||||||||||
Q4-2005 vs. Q3-2005 OPERATING RESULTS, BY DIVISION | |||||||||||||||||||
RETAIL | TOTAL / | ||||||||||||||||||
WHOLESALE | RESIDENTIAL | COMMERCIAL | CORPORATE | ELIMINATIONS | CONSOLIDATED | ||||||||||||||
CHANGE | |||||||||||||||||||
| REVENUE (ELIMINATION) | $ | 236,884 | $ | 738,950 | $ | 177,752 | $ | - | $ | (67,433 | ) | $ | 1,086,153 | ||||||
| COST OF REVENUE (ELIMINATION) | (579,307 | ) | 1,744,618 | (27,953 | ) | - | (67,433 | ) | 1,069,925 | ||||||||||
| DIRECT MARGIN | 816,191 | (1,005,668 | ) | 205,705 | - | - | 16,228 | ||||||||||||
| 8.0 | % | -11.7 | % | 3.0 | % | -2.3 | % | ||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||
| SALES & MARKETING | 37,954 | 10,628 | (38,118 | ) | - | - | 10,464 | ||||||||||||
| DEPRECIATION & AMORTIZATION | 155,128 | (394,575 | ) | 328,232 | - | - | 88,786 | ||||||||||||
| (GAIN) / LOSS ON SALE OF ASSETS | (147,871 | ) | (102,232 | ) | 175,140 | - | - | (74,963 | ) | ||||||||||
| GENERAL & ADMINISTRATION | 457,808 | 511,099 | (170,157 | ) | 1,964,396 | - | 2,763,146 | ||||||||||||
| TOTAL OPERATING EXPENSES | 503,019 | 24,921 | 295,097 | 1,964,396 | - | 2,787,433 | |||||||||||||
| INTEREST INCOME | - | - | - | - | - | 168,097 | |||||||||||||
| INCOME / (LOSS) FROM OPERATIONS | 313,172 | (1,030,588 | ) | (89,392 | ) | (1,964,396 | ) | - | (2,603,108 | ) | |||||||||
| OTHER INCOME / (LOSS) | - | - | - | - | - | - | |||||||||||||
| AMORTIZATION OF DEBT ISSUANCE COSTS | - | - | - | (40,437 | ) | - | (40,437 | ) | |||||||||||
| INTEREST EXPENSE | (3,562 | ) | 1,603 | 2,607 | (106,360 | ) | - | (105,713 | ) | ||||||||||
| INCOME / (LOSS) BEFORE PROVISION FOR INCOME TAXES | 316,734 | (1,032,191 | ) | (91,999 | ) | (1,817,600 | ) | - | (2,456,958 | ) | |||||||||
| TAXES | 12,576 | (182 | ) | - | 79,456 | - | 91,850 | ||||||||||||
| NET INCOME / (LOSS) | $ | 304,158 | $ | (1,032,009 | ) | $ | (91,999 | ) | $ | (1,897,056 | ) | $ | - | $ | (2,548,808 | ) | |||
| EBITDA | $ | 468,300 | $ | (1,425,163 | ) | $ | 238,840 | $ | (1,964,396 | ) | $ | - | $ | (2,514,322 | ) | ||||
| EBITDA, AS % OF REVENUE | 4.4 | % | -10.8 | % | 5.3 | % | -11.0 | % | |||||||||||
19
INTEGRATED ALARM SERVICES GROUP, INC. | ||||||||||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||||||||||
($000's) | ||||||||||||||||
As of | ||||||||||||||||
12/31/2004 | 3/31/2005 | 6/30/2005 | 9/30/2005 | 12/31/2005 | ||||||||||||
| (unaudited) | (unaudited) | (unaudited) | ||||||||||||||
Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 31,555 | $ | 26,854 | $ | 25,442 | $ | 9,125 | $ | 16,239 | ||||||
| Current portion of notes receivable | 5,187 | 19,510 | 18,534 | 18,558 | 6,108 | |||||||||||
| Accounts receivable, net | 6,290 | 6,738 | 5,615 | 5,091 | 5,158 | |||||||||||
| Inventories | 1,234 | 1,079 | 1,161 | 972 | 1,477 | |||||||||||
| Prepaid expenses | 1,127 | 1,537 | 1,197 | 1,560 | 1,084 | |||||||||||
| Due from related parties | 70 | 136 | 129 | 178 | 87 | |||||||||||
| Total current assets | 45,463 | 55,854 | 52,078 | 35,484 | 30,153 | |||||||||||
| Property and equipment, net | 7,927 | 7,774 | 7,152 | 6,821 | 7,843 | |||||||||||
| Notes receivable, net | 22,211 | 5,068 | 1,960 | 1,438 | 10,085 | |||||||||||
| Dealer relationships, net | 34,530 | 33,382 | 32,276 | 31,131 | 33,000 | |||||||||||
| Customer contracts, net | 85,169 | 93,281 | 90,293 | 85,046 | 80,532 | |||||||||||
| Deferred installation costs, net | 5,946 | 7,069 | 8,119 | 9,025 | 7,874 | |||||||||||
| Goodwill | 91,435 | 91,194 | 91,557 | 90,997 | 94,919 | |||||||||||
| Debt issuance costs, net | 5,322 | 5,334 | 5,095 | 4,838 | 4,596 | |||||||||||
| Other identifiable intangibles, net | 3,054 | 2,909 | 2,764 | 2,619 | 2,790 | |||||||||||
| Restricted cash | 757 | 1,400 | 1,400 | 758 | 758 | |||||||||||
| Deposits on acquistions | - | - | - | 22,683 | - | |||||||||||
| Other assets | 270 | 237 | 301 | 302 | 524 | |||||||||||
| Total assets | $ | 302,084 | $ | 303,502 | $ | 292,995 | $ | 291,142 | $ | 273,074 | ||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Borrowing on line of credit | $ | - | $ | - | $ | - | $ | 3,000 | $ | - | ||||||
| Current portion of long-term debt | 5,225 | 4,970 | 4,390 | 4,275 | - | |||||||||||
| Current portion of capital lease obligations | 460 | 375 | 364 | 365 | 350 | |||||||||||
| Accounts payable | 3,720 | 1,934 | 2,155 | 1,357 | 2,306 | |||||||||||
| Accrued expenses | 9,185 | 13,905 | 9,558 | 11,138 | 9,256 | |||||||||||
| Current portion of deferred revenue | 9,756 | 10,311 | 10,058 | 9,119 | 8,724 | |||||||||||
| Other liabilities | 161 | 106 | 174 | 201 | 390 | |||||||||||
| Total current liabilities | 28,507 | 31,601 | 26,699 | 29,455 | 21,026 | |||||||||||
| Long-term debt, net of current portion | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | |||||||||||
| Capital lease obligations, net of current portion | 575 | 507 | 428 | 390 | 461 | |||||||||||
| Deferred revenue, net of current portion | 4,035 | 4,636 | 5,158 | 5,749 | 4,830 | |||||||||||
| Deferred income taxes | 1,113 | 1,222 | 1,332 | 1,399 | 1,582 | |||||||||||
| Other liabilities | - | 45 | 7 | - | - | |||||||||||
| Due to related parties | 4 | 8 | 6 | 58 | 61 | |||||||||||
| Total liabilities | 159,234 | 163,019 | 158,630 | 162,051 | 152,960 | |||||||||||
| Stockholders' equity: | ||||||||||||||||
| Preferred stock | - | - | - | - | - | |||||||||||
| Common stock | 25 | 25 | 25 | 25 | 25 | |||||||||||
| Paid-in capital | 206,566 | 206,785 | 207,007 | 207,162 | 207,162 | |||||||||||
| Accumulated deficit | (63,741 | ) | (66,327 | ) | (72,667 | ) | (78,096 | ) | (86,073 | ) | ||||||
| Treasury stock | - | - | - | (1,000 | ) | |||||||||||
| Total stockholders' equity | 142,850 | 140,483 | 134,365 | 129,091 | 120,114 | |||||||||||
| Total liabilities and stockholders' equity | $ | 302,084 | $ | 303,502 | $ | 292,995 | $ | 291,142 | $ | 273,074 | ||||||
20