EXHIBIT 3 4 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. FINANCIAL STATEMENTS JUNE 30, 1995 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. FINANCIAL STATEMENTS JUNE 30, 1995 TABLE OF CONTENTS PAGE ---- INDEPENDENT AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Balance sheets as of June 30, 1994 and 1995 2 Statements of operations for the years ended June 30, 1994 and 1995 3 Statements of stockholder's equity deficiency for the years ended December 31, 1994 and 1995 4 Statements of cash flows for the years ended June 30, 1994 and 1995 5 Notes to financial statements 6 - 8 Stockholder and Director MSG Security Systems, Inc. T/A American Security Systems, Inc. Elkins Park, Pennsylvania INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheets of MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. as of June 30, 1994 and 1995, and the related statements of operations, stockholder's equity deficiency and cash flows for each of the two years in the period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MSG Security Systems, Inc. T/A American Security Systems, Inc. as of June 30, 1994 and 1995, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. As described in Note 6, in March, 1996, the Company distributed to its stockholder substantially all of its recorded net assets, and all of the outstanding common stock of the Company was sold. Elkins Park, Pennsylvania April 24, 1996 /s/ FISCHBEIN & COMPANY, P.C. 1 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. BALANCE SHEETS ASSETS June 30, ----------------------- 1994 1995 ---------- ---------- CURRENT ASSETS Cash $ 3,244 $ 9,011 Accounts receivable 24,150 37,792 Inventory 5,000 3,500 Prepaid expenses and other current assets 756 605 ---------- ---------- Total current assets 33,150 50,908 PROPERTY AND EQUIPMENT - Net of accumulated depreciation 3,695 2,146 ---------- ---------- $ 36,845 $ 53,054 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY DEFICIENCY CURRENT LIABILITIES Accounts payable $ 10,678 $ 4,248 Accrued expenses and other current liabilities 4,950 11,407 Income taxes payable 3,729 Unearned revenue 37,289 41,399 Due to stockholder 45,000 40,000 ---------- ---------- Total current liabilities 97,917 100,783 STOCKHOLDER'S EQUITY DEFICIENCY Common stock - Par value $1 Authorized 1,000 shares Issued and outstanding 200 shares 200 200 Deficit ( 61,272) ( 47,929) ---------- ---------- ( 61,072) ( 47,729) ---------- ---------- $ 36,845 $ 53,054 ========== ========== See notes to financial statements. Page 2 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. STATEMENTS OF OPERATIONS Year Ended June 30, ----------------------- 1994 1995 ---------- ---------- OPERATING REVENUES Services $ 163,223 $ 151,746 Product sales 116,787 114,044 ---------- ---------- 280,010 265,790 ---------- ---------- DIRECT COSTS Services 59,506 33,411 Product sales 47,296 44,882 ---------- ---------- 106,802 78,293 ---------- ---------- GROSS PROFIT 173,208 187,497 ---------- ---------- OPERATING EXPENSES Selling, general and administrative 192,428 169,115 Interest 1,280 1,310 ---------- ---------- 193,708 170,425 ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) ( 20,500) 17,072 INCOME TAXES (BENEFIT) - Net of tax benefit of $3,427 - 1995 from the use of net operating loss carryforwards 3,729 ---------- ---------- NET INCOME (LOSS) ($ 20,500) $ 13,343 ========== ========== See notes to financial statements. Page 3 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. STATEMENTS OF STOCKHOLDER'S EQUITY DEFICIENCY Common Stock Deficit Total ---------- ---------- ---------- BALANCE - JUNE 30, 1993 $ 200 ($ 40,772) ($ 40,572) Net loss ( 20,500) ( 20,500) ---------- ---------- ---------- BALANCE - JUNE 30, 1994 200 ( 61,272) ( 61,072) Net income 13,343 13,343 ---------- ---------- ---------- BALANCE - JUNE 30, 1995 $ 200 ($ 47,929) ($ 47,729) ========== ========== ========== See notes to financial statements. Page 4 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash Year Ended June 30, ----------------------- 1994 1995 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ($ 20,500) $ 13,343 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation 2,464 1,549 (Increase) decrease in accounts receivable 9,184 ( 13,642) (Increase) decrease in inventory ( 2,500) 1,500 (Increase) decrease in prepaid expenses and other current assets ( 366) 151 Increase (decrease) in accounts payable 617 ( 6,430) Increase in accrued expenses and other current liabilities 653 6,457 Increase in income taxes payable 3,729 Increase in unearned revenue 5,429 4,110 ---------- ---------- Net cash provided by (used in) operating activities ( 5,019) 10,767 CASH FLOWS FROM INVESTING ACTIVITIES - None CASH FLOWS FROM FINANCING ACTIVITIES Decrease in due to stockholder - Net cash used in financing activities ( 5,000) ---------- ---------- NET INCREASE (DECREASE) IN CASH ( 5,019) 5,767 CASH - BEGINNING 8,263 3,244 ---------- ---------- CASH - ENDING $ 3,244 $ 9,011 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest $ 1,280 $ 1,310 See notes to financial statements. Page 5 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business and Concentration of Credit Risk The Company's operations consist principally of the sale, installation and monitoring and maintenance services of security and fire alarm systems for residential and commercial properties in the greater Philadelphia, Pennsylvania area. Accounts receivable are from a large number of customers. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenues under contracts for monitoring and service are deferred and recognized ratably over the contract period. The Company recognizes revenue on the sale of alarm systems when installed. Allowance for Doubtful Accounts An allowance for doubtful accounts is provided by the Company, if necessary, based on historical collection experience and a review of the current status of accounts receivable. At June 30, 1994 and 1995, all uncollectible accounts had been written off and, in the opinion of management, no allowance is necessary. Inventory Inventory, consisting of alarm systems and parts, is stated at the lower of cost (first-in, first-out method) or market. Property and Equipment and Depreciation Property and equipment are stated at cost. Expenditures for additions, renewals and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to operations. Depreciation is provided using the straight-line and declining balance methods over the estimated useful lives of the assets. Page 6 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Also, the tax benefits resulting from the utilization of net operating loss carryforwards are recorded as ordinary income rather than extraordinary income. A valuation allowance is established for deferred tax assets not expected to be realized. The principal differences between the Company's financial reporting and tax bases include accounts receivable and deferred revenue. 2. PROPERTY AND EQUIPMENT 1994 1995 ---------- ---------- Transportation equipment $ 11,590 $ 11,590 Office equipment 4,803 4,803 ---------- ---------- 16,393 16,393 Less accumulated depreciation 12,698 14,247 ---------- ---------- $ 3,695 $ 2,146 ========== ========== 3. DUE TO STOCKHOLDER The balance is due on demand and is noninterest-bearing. Page 7 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 4. INCOME TAXES The differences between the provision for income taxes (benefit) and income taxes (benefit) computed using the federal income statutory tax rate are as follows: Year Ended June 30, ----------------------- 1994 1995 ---------- ---------- Amount computed using the statutory rate ($ 3,075) $ 2,561 Increase (decrease) in taxes resulting from: State taxes - Net of federal taxes 292 2,895 Prior net operating loss carryforwards ( 3,427) Federal tax valuation allowance 2,783 1,700 ---------- ---------- Income tax expense (benefit) $ - $ 3,729 ========== ========== At June 30, 1995, the cumulative temporary differences resulted in net deferred tax assets consisting of: Accounts receivable $ 1,415 Deferred revenue 9,729 Miscellaneous 496 ---------- 11,640 Less valuation allowance ( 11,640) ---------- Deferred tax assets - Net $ - ========== Page 8 MSG SECURITY SYSTEMS, INC. T/A AMERICAN SECURITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 5. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of estimated fair value of all financial instruments for which it is practicable to estimate fair value. The carrying amount of cash approximates its fair value because of its short maturity. It was not deemed practicable to estimate the fair value of the amount due to stockholder since this financial instrument is not readily marketable. 6. SUBSEQUENT EVENT On March 29, 1996, the Company distributed to its stockholder substantially all of its net assets other than monitoring and service contracts, and, simultaneously, all of the outstanding common stock of the Company was sold. Page 9