Exhibit 99.2
Lane Security, Inc. and Subsidiaries
Report on Audit of Consolidated Financial Statements
For the Ten-Month Period Ended October 31, 2003
and the Year Ended December 31, 2002
Report of Independent Auditors
To the Board of Directors
and Stockholder of
Lane Security, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets as of October 31,
2003 and December 31, 2002 and the related consolidated statements of operations
and comprehensive loss, stockholder's equity, and cash flows present fairly, in
all material respects, the consolidated financial position of Lane Security,
Inc. and Subsidiaries (the "Company") at October 31, 2003 and December 31, 2002,
and the results of their operations and their cash flows for the ten-month
period ended October 31, 2003 and the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 and Note 6 to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
/s/PricewaterhouseCoopers LLP
Los Angeles, CA
February 24, 2004
Lane Security, Inc. and Subsidiaries
Balance Sheets
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 230,294 $ 145,081
Accounts receivable, net of allowance for doubtful accounts
of $475,334 in 2003 and $495,499 in 2002 1,806,345 1,657,625
Other receivables 15,686 13,373
Inventories, net of reserve for obsolete inventories of
$226,946 in 2003 and $219,332 in 2002 1,322,240 1,403,321
Prepaid expenses 562,049 497,846
------------ ------------
Total current assets 3,936,614 3,717,246
Property and equipment, net 3,461,574 3,998,873
Intangible assets, net 27,594,589 42,910,376
Goodwill 13,261,400 13,261,400
Investment in nonconsolidated entities 540,081 287,814
Other assets, net 123,926 5,813,623
------------ ------------
Total assets $ 48,918,184 $ 69,989,332
============ ============
Liabilities and Stockholder's equity
Current liabilities:
Accounts payable $ 1,220,178 $ 1,332,903
Contracts payable - 210,534
Accrued liabilities 2,755,409 2,605,132
Unearned revenue 1,459,365 916,800
Current maturities of long-term debt 497,683 576,175
Revolving line of credit 34,450,000 36,250,000
------------ ------------
Total current liabilities 40,382,635 41,891,544
------------ ------------
Long-term liabilities:
Other long-term liabilities - 271,291
Long-term debt, less current maturities 1,072,653 1,310,044
------------ ------------
Total long-term liabilities 1,072,653 1,581,335
------------ ------------
Commitments and contingencies (Note 12)
Minority interest in subsidiary 82,616 116,666
Stockholder's equity
Common stock, $.01 par value; 10,000 shares authorized;
1,000 shares issued and outstanding 10 10
Additional paid-in capital 76,461,317 73,527,963
Accumulated deficit (68,954,929) (46,591,213)
Accumulated other comprehensive loss (126,118) (536,973)
------------ ------------
Total stockholder's equity 7,380,280 26,399,787
------------ ------------
Total liabilities and stockholder's equity $ 48,918,184 $ 69,989,332
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
Lane Security, Inc. and Subsidiaries
Statements of Operations and Comprehensive Loss
For the Ten-Month Period Ended October 31, 2003
and the Year Ended December 31, 2002
- -------------------------------------------------------------------------------
2003 2002
---- ----
Revenues:
Monitoring and service $ 19,923,778 $ 25,721,429
Installation 4,000,063 5,558,734
Other 250,660 302,750
------------ ------------
Total revenues 24,174,501 31,582,913
------------ ------------
Cost of revenues:
Monitoring and service 6,988,376 9,102,144
Installation 3,535,381 4,612,630
Other 347,735 423,258
------------ ------------
Total cost of revenues 10,871,492 14,138,032
------------ ------------
Gross profit 13,303,009 17,444,881
Selling and marketing 2,943,111 3,536,069
General and administrative 6,749,846 10,640,867
Depreciation and amortization 8,546,730 10,086,788
Impairment of assets (Note 6 and 7) 15,164,613 -
------------ ------------
Operating loss (20,101,291) (6,818,843)
Interest expense, net 2,371,475 2,819,366
------------ ------------
Loss before income taxes, minority interest
and cumulative effect of change in
accounting principle (22,472,766) (9,638,209)
Income tax benefit - -
------------ ------------
Loss before minority interest and cumulative
effect of change in accounting principle (22,472,766) (9,638,209)
Minority interest in net loss of subsidiary 109,050 8,341
Cumulative effect of change in accounting principle
(Note 2 and 6) - (8,767,073)
------------ ------------
Net loss (22,363,716) (18,396,941)
Other comprehensive income (loss):
Unrealized gain on derivative instruments 410,855 207,922
------------ ------------
Comprehensive loss $(21,952,861) $(18,189,019)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
Lane Security, Inc. and Subsidiaries
Statements of Stockholder's Equity
For the Ten-Month Period Ended October 31, 2003
and the Year Ended December 31, 2002
- -------------------------------------------------------------------------------
Retained Accumulated
Common Stock Additional Earnings Other
------------------- Paid-In (Accumulated Comprehensive
Shares Amount Capital Deficit) Income (Loss) Total
------ ------ ------------- ------------- --------------- -----
Balance, December 31, 2001 1,000 $ 10 $ 64,168,245 $ (28,194,272) $ (744,895) $ 35,229,088
Capital contribution 9,359,718 9,359,718
Comprehensive income (loss):
Net loss (18,396,941) (18,396,941)
Unrealized gain on
derivative instruments 207,922 207,922
-------------
Comprehensive loss (18,189,019)
------- ------- ------------- ------------- ----------- -------------
Balance, December 31, 2002 1,000 10 73,527,963 (46,591,213) (536,973) 26,399,787
Capital contribution 2,933,354 2,933,354
Comprehensive income (loss):
Net loss (22,363,716) (22,363,716)
Unrealized gain on
derivative instruments 410,855 410,855
-------------
Comprehensive loss (21,952,861)
------- ------- ------------- ------------- ----------- -------------
Balance, October 31, 2003 1,000 $ 10 $ 76,461,317 $ (68,954,929) $ (126,118) $ 7,380,280
======= ======= ============= ============= =========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
Lane Security, Inc. and Subsidiaries
Statements of Cash Flows
For the Ten-Month Period Ended October 31, 2003
and the Year Ended December 31, 2002
- -------------------------------------------------------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $(22,363,716) $(18,396,941)
Cumulative effect of change in accounting principle - 8,767,073
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 8,546,730 10,086,788
Impairment of assets 15,164,613 -
Loss on sale of property and equipment 5,342 2,443
Amortization of loan costs 53,637 5,490
Minority interest in net loss of subsidiary (109,050) (8,341)
Effects of changes in operating assets and liabilities
Accounts and other receivables (210,621) 123,180
Inventories 81,081 (330,876)
Prepaid expenses (224,016) (270,610)
Accounts payable (112,725) 516,300
Accrued liabilities 324,449 (128,079)
Unearned revenue 542,565 (78,233)
------------ ------------
Net cash provided by operating activities 1,698,289 288,194
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (2,339,453) (2,944,295)
Proceeds from sale of property and equipment 5,266 29,352
Purchases of customer contracts - (3,328,352)
Investment in nonconsolidated entity (252,267) (287,814)
Other investing activities 155,907 294,574
------------ ------------
Net cash used in investing activities (2,430,547) (6,236,535)
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt, net (315,883) (367,526)
Net repayment on revolving credit borrowings (1,800,000) (3,000,000)
Capital contributions 2,933,354 9,359,718
------------ ------------
Net cash provided by financing activities 817,471 5,992,192
------------ ------------
Net increase in cash and cash equivalents 85,213 43,851
Cash and cash equivalents, beginning of period 145,081 101,230
------------ ------------
Cash and cash equivalents, end of period $ 230,294 $ 145,081
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,030,131 $ 3,081,125
============ ============
Supplemental disclosure of non-cash financing and investing activities:
Equipment financed under capital leases $ 260,245 $ 324,698
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
1. Organization and Business
Lane Security, Inc. ("Lane Security") and subsidiaries (collectively
referred to as the "Company") is a wholly-owned subsidiary of Lane
Industries, Inc. The consolidated financial statements include the
accounts of Lane Security and its wholly-owned and majority-owned
subsidiaries. All significant intercompany transactions and balances
have been eliminated.
The Company's significant subsidiaries and respective ownership
percentages consisted of the following at October 31, 2003 and December
31, 2002:
Walter Breese, Inc. 100%
Security General Corporation 100
Norco Alarms, Inc. 100
American Burglar & Fire Alarm Company 100
TeleGuard Security Systems, Inc. 100
Alert Alarm Company, Inc. 100
Shield Signal, Inc 100
Everest Video Systems, LLC 50
Lane Security is the sole general partner of Protection Service
Industries, L.P. (the "Partnership"). The limited partners in the
Partnership are the Company's wholly-owned subsidiaries listed above.
The Partnership provides protection services to commercial and
residential customers through alarm system installation, central
station monitoring services, access control and closed circuit
television systems, as well as patrol services. The Partnership
provides protection services to customers in California, Arizona and
New Mexico.
Lane Security also owns a 50% interest in Everest Video Systems, LLC
("Everest"). Everest develops and markets central station monitoring
software solutions for remote video systems.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Provision for
potentially obsolete or slow moving inventory is made based on analysis
of inventory levels and forecasts.
6
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the following estimated useful
lives:
Equipment One to seven years
Vehicles Five years
Furniture and fixtures Seven years
Leasehold improvements Shorter of estimated useful life (normally 3 to 5 years) or term of
lease
Upon retirement or disposal of depreciable assets, the cost and related
accumulated depreciation or amortization are removed from the accounts,
and the resulting gain or loss is reflected in the results of
operations. Major renewals or betterments are capitalized while
maintenance costs and repairs are expensed in the period incurred.
Intangible Assets and Goodwill
Intangible assets are stated at cost and consist primarily of customer
contracts, non-compete agreements and goodwill. Intangible assets,
except goodwill, are amortized over the following estimated useful
lives:
Customer contracts Ten years
Non-compete agreements Five years
Other Three to ten years
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." In accordance with SFAS No. 142, the Company ceased
amortization of goodwill and tested its goodwill and other intangible
assets for impairment under the income approach. The income approach is
based on the present value of future cash flows expected by the
Company. The Company performs this impairment analysis on an annual
basis, or if circumstances indicate that the carrying value of goodwill
exceeds its fair value.
Prior to implementing SFAS No. 142, the Company reviewed goodwill for
impairment as prescribed under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." No impairment of goodwill existed under SFAS No. 121 as
the undiscounted cash flows expected to be generated were greater than
the carrying value of the related goodwill assets.
7
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Revenue from service and monitoring contracts is recognized as earned
over the related contract period, generally one to five years. Services
are billed in advance on a monthly, quarterly, or annual basis and any
amounts not earned are included as unearned revenue until the service
is provided. Installation revenue applicable to new system contracts is
recognized as installations are completed. The Company defers a portion
of its costs related to the installation of equipment and these costs
are amortized using the straight-line method over ten years.
Derivatives
The Company records all derivative instruments in the consolidated
balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction and if it is, the type of hedge
transaction.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions. Such estimates and
assumptions 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 reported periods. Actual results could differ from estimated
amounts.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash and cash
equivalents, accounts receivable and payable, and derivative
instruments. The carrying value of cash and cash equivalents, accounts
receivable and trade payables approximates fair value due to their
short-term maturities. The carrying value of the Company's line of
credit is considered to approximate fair market value, as the interest
rates of these instruments are based predominantly on variable
reference rates. Derivative instruments are recorded on the balance
sheet at fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk principally comprise accounts receivable.
The Company performs periodic credit evaluations of its customers and
generally does not require collateral. The Company maintains allowances
for potential credit losses and such losses have been within
management's expectations.
8
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (Continued)
Long-Lived Assets
The Company values long-lived assets, including the Company's
intangible assets, at the lower of cost or, if impaired, fair value of
the asset. Management evaluates the realizability of long-lived assets
periodically as events or circumstances indicate a possible inability
to recover the carrying amounts. If such events or changes in
circumstances occur, the Company will recognize an impairment loss if
the undiscounted future cash flows expected to be generated by the
asset (or acquired business) are less than the carrying value of the
related assets. The impairment loss would adjust the assets to their
fair value.
Advertising
The Company expenses advertising costs as incurred. Advertising costs
were $67,215 and $162,802 for the ten-month period ended October 31,
2003 and the year ended December 31, 2002, respectively, and are
included in selling and marketing expenses.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed each
year. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of: (a) temporary differences between the
financial reporting and tax basis of assets and liabilities and (b)
operating loss and tax credit carryforwards. The overall change in
deferred tax assets and liabilities for the period measures the
deferred tax expense for the period. Effects of changes in enacted tax
laws on deferred tax assets and liabilities are reflected as
adjustments to tax expense in the period of enactment. The measurement
of deferred tax assets may be reduced by a valuation allowance if,
based on the weight of available evidence, it is deemed more likely
than not that some or all of the deferred tax assets will not be
realized.
The Company is included in the consolidated federal income tax return
and certain state income tax returns of its stockholder, Lane
Industries, Inc. The amount of income tax liability for which the
Company will be responsible is determined by the Tax Allocation
Agreement between the Company and Lane Industries, Inc. However, the
tax provision in these financial statements has been computed on a
separate return basis.
3. Acquisitions of Businesses
In March 2002, the Company acquired certain assets of Associated
Electronics Co., Inc. ("AECO") in exchange for cash of approximately
$935,000. AECO provided protection services primarily to commercial
customers in Northern California. As a result of the acquisition, the
Company expects to strengthen its position in that market. The assets
acquired, consisting primarily of fire, monitoring and service
contracts, were recorded at their estimated fair value based on
information available to the Company.
9
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
4. Property and Equipment
Property and equipment consists of the following at October 31, 2003
and December 31, 2002:
2003 2002
---- ----
Equipment $ 5,031,287 $ 4,613,132
Vehicles 2,498,299 2,438,365
Furniture and fixtures 1,278,783 1,272,644
Leasehold improvements 984,057 878,840
-------------- --------------
9,792,426 9,202,981
Less: accumulated depreciation and amortization (6,330,852) (5,204,108)
-------------- --------------
$ 3,461,574 $ 3,998,873
============== ==============
Depreciation and amortization expense for the ten-month period ended
October 31, 2003 and the year ended December 31, 2002 was $1,869,266
and $2,106,188, respectively. Included in vehicles are assets under
capital lease with a cost of $2,498,299 and $2,438,365 and related
accumulated depreciation of $1,754,527 and $1,447,349 at October 31,
2003 and December 31, 2002, respectively.
5. Investments in Nonconsolidated Entities
Investments in nonconsolidated entities consisted of a 3.9% interest in
Buzz VC, Ltd. This investment was accounted for under the cost method.
6. Intangible Assets and Goodwill
Intangible assets consist of the following at October 31, 2003:
Accumulated
Cost Amortization Net Book Value
---- ------------ --------------
Customer contracts $ 79,278,328 $ (51,864,999) $ 27,413,329
Non-compete agreements 184,490 (55,347) 129,143
Other 1,557,127 (1,505,010) 52,117
--------------- --------------- ---------------
$ 81,019,945 $ (53,425,356) $ 27,594,589
=============== =============== ===============
10
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
6. Intangible Assets and Goodwill (Continued)
Intangible assets consist of the following at December 31, 2002:
Accumulated
Cost Amortization Net Book Value
---- ------------ --------------
Customer contracts $ 79,508,902 $ (36,899,991) $ 42,608,911
Non-compete agreements 184,490 (24,599) 159,891
Other 1,610,765 (1,469,191) 141,574
--------------- --------------- ---------------
$ 81,304,157 $ (38,393,781) $ 42,910,376
=============== =============== ===============
The Company evaluated the realizability of its customer contract assets
as of October 31, 2003 as events indicated a possible inability to
recover the carrying amounts of these assets. Based on the results of
this analysis, the Company wrote-off customer contracts of $8,354,112
during the period. This charge is included in "Impairment of assets" in
the Statement of Operations and Comprehensive Loss.
Amortization expense for the ten-month period ended October 31, 2003
and the year ended December 31, 2002 was $6,677,685 and $7,980,600,
respectively. Based on the current amount of intangible assets subject
to amortization, the estimated amortization expense for each of the
five succeeding years is as follows:
Year Ending October 31: Amount
----------------------- ------
2004 $ 7,581,383
2005 6,284,314
2006 5,703,257
2007 5,404,058
2008 2,065,818
Effective January 1, 2002, the Company adopted SFAS No. 142. In
accordance with SFAS No. 142, the Company ceased amortization of
goodwill and tested its goodwill and other intangible assets for
impairment under the income approach. This analysis indicated that
goodwill was impaired and the Company recorded a one-time adjustment of
$8,767,073 as the cumulative effect of a change in accounting
principle.
The Company performed its annual goodwill impairment analysis as of
October 31, 2003. As a result of this analysis, it was determined that
the fair value of goodwill exceeded its carrying value and no
impairment charge was necessary.
11
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
6. Intangible Assets and Goodwill (Continued)
The carrying values for goodwill by reporting unit at October 31, 2003
and December 31, 2002 were as follows:
Northern California $ 4,381,479
Southern California 6,346,680
Southwest 2,533,241
---------------
$ 13,261,400
===============
The Company had previously entered into various agreements with
authorized dealers who sell the Company's protection service products.
The Company had the right to purchase qualifying contracts, as defined.
During the year ended December 31, 2002, the Company purchased
contracts for an aggregate total consideration of $3,328,352. No such
contracts were purchased during the ten-month period ended October 31,
2003.
7. Other Assets
Other assets consisted primarily of certain deferred costs related to
installations at December 31, 2002. The Company evaluated the
realizability of these deferred costs as of October 31, 2003 as events
indicated a possible inability to recover the carrying amounts of these
assets. Based on the results of this analysis, the Company wrote-off
deferred installation costs of $6,810,501 during the period. This
charge is included in "Impairment of assets" in the Statement of
Operations and Comprehensive Loss. These deferred costs amount to $0 at
October 31, 2003 and $5,813,623, net of accumulated amortization of
$3,763,520 at December 31, 2002. The deferred costs were amortized over
the estimated service periods, which approximated ten years.
8. Revolving Line of Credit
The Company's $47,500,000 senior credit facility matured on October 31,
2003. Borrowings under the revolving credit note were $34,450,000 and
$36,250,000 as of October 31, 2003 and December 31, 2002, respectively.
The rate of interest on the borrowing is, at the Company's option,
based on the bank's prime rate or certain other short-term rates, and
was approximately 7.5% at October 31, 2003. The Company pays annual
fees of 0.375% on the unused commitment. The revolving credit note was
repaid in connection with the transaction described in Note 14.
The senior credit facility contains, among other things, certain
restrictive financial covenants, including, but not limited to, maximum
leverage ratios and minimum debt service ratios. The senior credit
facility is collateralized by substantially all of the assets of the
Company.
12
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
9. Long-Term Debt
Long-term debt consists of the following at October 31, 2003 and
December 31, 2002:
2003 2002
---- ----
Notes payable to sellers, net of unamortized discount of $0
and $540 at October 31, 2003 and December 31, 2002,
respectively $ 965,773 $ 1,151,269
Capital leases for equipment payable to leasing companies,
principal and interest payable monthly through June 2006 604,563 734,950
-------------- --------------
1,570,336 1,886,219
Less, current maturities (497,683) (576,175)
-------------- --------------
Total long-term debt $ 1,072,653 $ 1,310,044
============== ==============
Notes payable to sellers represents liabilities assumed by the Company
in certain acquisitions of other security companies. The notes had an
effective interest rate of 8% at October 31, 2003.
The aggregate maturities of long-term debt and notes payable as of
October 31, 2003 are as follows:
Year Ending October 31: Amount
----------------------- ------
2004 $ 497,683
2005 379,954
2006 288,282
2007 274,433
2008 129,984
-----------
$ 1,570,336
===========
13
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
10. Income Taxes
The Company had net deferred tax assets of $18,083,153 and $11,741,795,
before valuation allowance, at October 31, 2003 and December 31, 2002,
respectively, representing the estimated future tax effects of tax
deductible temporary differences and carryforwards. The components of
the Company's deferred tax assets and liabilities as of October 31,
2003 and December 31, 2002, are as follows:
2003 2002
---- ----
Current deferred tax assets:
Inventory $ 87,174 87,174
Accrued expenses 378,843 469,669
Reserves 116,210 194,162
Other deferred tax assets 339,024 173,540
--------------- -------------
Current deferred tax asset 921,251 924,545
--------------- -------------
Non-current deferred tax assets (liabilities):
Depreciation (2,375,104) (1,718,236)
Amortization 6,481,841 1,680,732
Net operating loss carryforwards 13,055,165 10,854,754
--------------- -------------
Non-current deferred tax asset, net 17,161,902 10,817,250
--------------- -------------
Net deferred tax asset valuation allowance (18,083,153) (11,741,795)
--------------- -------------
Net deferred tax asset $ - $ -
=============== =============
A full valuation allowance against the net deferred tax asset at the
balance sheet date has been recorded as it is considered more likely
than not, under the provisions of SFAS No. 109 "Accounting for Income
Taxes", that the deferred tax asset will not be realized. The amount of
the deferred tax asset considered realizable could be increased if the
Company returns to profitability and estimates of future taxable income
increase significantly. Net operating loss ("NOL") carryforwards at
October 31, 2003 are estimated to be approximately $32,816,000. They
may be used only to the extent that the Company's net income becomes
positive. The NOL's begin to expire in the year 2020.
14
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
- -------------------------------------------------------------------------------
10. Income Taxes (Continued)
The components of the income tax expense (benefit) for the year ended
October 31, 2003 and December 31, 2002, were as follows:
2003 2002
--------------- --------------
Current:
Federal $ (1,971,163) $ (2,382,146)
State (267,233) (28,571)
-------------- ------------
Net current benefit (2,238,396) (2,410,717)
-------------- ------------
Deferred:
Federal (3,613,125) (292,386)
State (489,837) (124,112)
Change in valuation allowance 6,341,358 2,827,215
-------------- ------------
Net deferred expense 2,238,396 2,410,717
-------------- ------------
Income tax benefit $ - $ -
============== ============
11. Derivative Financial Instruments
The Company conducts limited transactions involving derivative
financial instruments and does not use them for trading purposes. The
Company enters into interest rate swap agreements to protect the
Company from fluctuations in interest rates.
At October 31, 2003, certain interest rate swap agreements were
outstanding with commercial banks (the "Counterparties") as follows:
Notional Effective Maturity
Amounts Interest Rates Dates
------- -------------- --------
Interest rate swaps $5,000,000 4.99% to 5.25% 2004
While these Counterparties may expose the Company to potential credit
losses in the event of nonperformance, no such losses are anticipated.
In the event of nonperformance by a Counterparty, the Company would be
exposed to the accumulated interest, if any, which the Company would
have received from the Counterparty from the date of default to the
date of maturity.
15
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
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11. Derivative Financial Instruments (Continued)
The fair value of the interest rate swaps is the estimated amount the
Company would have to pay or would be paid to terminate the swap
agreements as of October 31, 2003, taking into account the current
interest rate environment. The estimated fair value of the swap
agreements as of October 31, 2003 and December 31, 2002 is a liability
of $126,118 and $536,973, respectively. As of October 31, 2003 and
December 31, 2002, the liability includes a current portion of $126,118
and $265,682, respectively, which is recorded in accrued liabilities,
and a noncurrent portion of $0 and $271,291, respectively, which is
recorded in other long-term liabilities. Included in accrued
liabilities as of October 31, 2003 and December 31, 2002 is $22,613 and
$88,146, respectively, of accrued interest payable related to the swap
agreements.
12. Commitments and Contingencies
Leases
The Company leases its facilities and certain equipment under
noncancelable operating leases expiring at various dates through
October 2007.
The future minimum rental payments for noncancelable operating leases
consist of the following at October 31, 2003:
Year Ending October 31, Amount
----------------------- ------
2004 $ 698,704
2005 332,441
2006 220,663
2007 129,231
2008 11,904
Thereafter 99
------------
$ 1,393,042
============
Total rent expense for all operating leases was $556,888 and $664,515
for the ten-month period ended October 31, 2003 and the year ended
December 31, 2002, respectively.
Legal Matters
The Company is involved in various legal proceedings, which have been
routine and in the normal course of business. In the opinion of
management, after consultation with legal counsel, the resolution of
these matters will not have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows.
16
Lane Security, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 31, 2003 and December 31, 2002
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12. Employee Benefit Plan
The Company sponsors a defined contribution plan (the "Plan") under
which all employees are eligible to participate. The Plan is intended
to meet the qualifications of Internal Revenue Code Section 401(k).
Under the Plan's provisions, employees may contribute the IRS specified
maximum of their compensation on a pre-tax basis. The Company makes
matching contributions up to 6% of an employee's compensation.
Employees vest in Company matching contributions at a rate of 33% per
year beginning after the first year of service. The Company contributed
$78,148 and $106,452 to the Plan during the ten-month period ended
October 31, 2003 and the year ended December 31, 2002, respectively.
13. Related Party Transactions
During the ten-month period ended October 31, 2003 and the year ended
December 31, 2002, the Company paid the sole stockholder, Lane
Industries, Inc., for miscellaneous expenses incurred that were related
to the Company. Total amounts paid during the ten-month period ended
October 31, 2003 and the year ended December 31, 2002 totaled
approximately $413,000 and $296,000, respectively. Amounts due to Lane
Industries, Inc. at October 31, 2003 and December 31, 2002 were
approximately $977,000 and $580,000, respectively, and are included in
accounts payable in the accompanying consolidated balance sheets.
14. Subsequent Event
On December 15, 2003, all of the Company's outstanding common stock was
purchased by Integrated Alarm Services Group, Inc.
17