AlarmForce Industries Inc.
TSX : AF

AlarmForce Industries Inc.

September 13, 2005 17:30 ET

AlarmForce Announces Record Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Sept. 13, 2005) - AlarmForce Industries Inc. (TSX:AF) -

AlarmForce, Canada's largest manufacturer and installer of live two-way voice home alarms systems, is pleased to announce results for the nine months ended July 31, 2005, achieving record levels for revenue, net income and subscriber account base:



July 31, 2005 July 31, 2004 Change
-------------- -------------- ----------------
(9 months ended) (9 months ended) (Over same period)
$ $

Revenue: 12,525,000 10,631,000 + 18%
Cash flow from
operating
activities 5,667,000 5,655,000 +0.2%
Income before
taxes 2,435,000 2,005,000 + 24%
Net income 1,329,000 1,144,000 + 16%
EBITDA(a) 6,060,000 5,076,000 + 20%
Diluted net
income/share 0.11 0.11 0.0%
Subscriber base 54,000 46,000 + 18%

(a) EBITDA (Earnings Before Interest, Income Taxes, Depreciation,
and Amortization) is a key measure in the security industry and
should not be interpreted as GAAP)


Joel Matlin, President and CEO, said that, "Our base of subscriber accounts continued to show robust growth, thus reaching new record levels for revenue and net income. Revenues for the nine months increased to $12,525,000, up by 18% from the corresponding nine months of 2004. EBITDA increased to $6,060,000, up by 20%. Income before taxes increased by 24% while net income increased by 16%. The increase in per-share net income was lower due to share issuances last year, which resulted in a higher denominator representing the weighted average total shares outstanding in 2005. Cash flows from total operating activities marginally increased from a year ago as a result of investments in working capital, including our US expansion. Out of the operating cash flows, $977,000 was applied to debt repayments during the period, and as at the end of the third quarter we continued to operate with zero net debt."

US Expansion Update

Mr. Matlin announced that, "I am very pleased with the progress AlarmForce has made in the United States. From a stand-still start in late February our results to date have proven that our business and operating model works successfully in the North Carolina market. As a result of the positive acceptance and growing account base in Charlotte, we have expanded our installation coverage to also include Greensboro-Winston Salem and Raleigh-Durham. These three areas combined represent a significant portion of the North Carolina population. Notwithstanding that the cost per deal to create a new subscriber account remains higher than in established markets, we are extremely optimistic and expect the cost per deal to continue to decrease, as a direct result of the positive effects of branding. We are also pleased that this expansion has been funded entirely through our existing operating cash flows. The results of our marketing efforts in the United States will be more dramatically felt in the 2006 fiscal year which will reflect a full year of operating results."

Change in accounting policy:

Mr. Matlin also announced that commencing August 1, 2005 the company will change the way it accounts for direct-response marketing expenditures. Previously these costs were deferred and amortized over a four year term (the life of the subscriber contracts). These costs will now be expensed as incurred and previously deferred expenses will be retroactively adjusted in the forth quarter. The policy of deferring costs was originally selected as to facilitate the matching of the marketing expenses with the revenue generated from the four year subscriber contracts. There have been a number of changes in generally accepted accounting principles in both Canada and the US regarding presentation of the matching of revenues and expenses. The company has decided to change its policy to reflect the most conservative of the new alternatives. This policy is consistent with generally accepted accounting policies for organically created intangible assets and is consistent with the changes made by other companies, in other industries, over the last 12 months.

"This change will be adopted as a retroactive change in accounting in accordance with generally accepted accounting principles, and will be applied to all marketing costs including the costs incurred with our US expansion."

"The following summarizes the impact of the new policy on the cumulative results for the three previous quarters of 2005 and comparative figures as they would have been reported using the new accounting method. Revenues, Gross Margin and Cash Flow would have remained unchanged; Income before taxes would have decreased by $ 1,265,000 for the nine month period ended July 31, 2005 and after tax income would have decreased by $ 685,000. As at July 31, 2005 net Deferred Charges would have been reduced by $ 7,043,000 and Future Tax assets would have increased by $2,680,000. For July 31, 2005 Basic Earnings per Share would have also been reduced to $ 0.064 and Fully Diluted Earnings per Share to $ 0.062. This change in accounting policy will be applied retroactively with restatement of prior periods commencing in the fourth quarter. The impact of restating prior periods as at October 31, 2004 will be a net reduction in Deferred Charges of $ 5,778,000, a reduction in shareholders' equity of 3,678,000 and a decrease in the future tax liability by $ 2,100,000. The number of subscribers as well as the Cash position remained unchanged for both periods."

Comparative industry factors:

Mr. Matlin explained that most companies in the home security industry purchase subscriber accounts and capitalize those purchase costs amortizing them over their useful lives which is usually the term of the subscriber contract. AlarmForce is one of the few companies whose growth is internally generated and therefore the accounting treatment is not directly comparable. The value of companies in this industry is normally based on the number of subscribers and multiples of monthly recurring revenues (MRR). In addition there are premiums associated with large account bases, value of the brand, client loyalty, future growth rate and retention. AlarmForce with an annual growth rate of approximately 20% compares favorably with the industry average growth rate of 8%.

"In simplified terms, the change represents a non-cash accounting event, which does not have impact on the fundamentals of our business, such as MRR, account values, and subscriber base as well as cash flows and cash position. Our organic account creation and inherent business value remain the same in all respects. In addition, the company's financial stability and banking relationships are not in any way changed. This is because the new policy is consistent with the bank's method of calculating net assets which excludes intangible assets and deferred charges, and will thus have no impact on financial leverage or compliance with covenants for the company.

"The change will harmonize the accounting treatment of creation costs of different business stages of development that the company expects to be operating in. It reflects our expansion plans for new markets outside Canada and the company's emerging presence in the wider North American public market. The new accounting policy will be simpler to apply to the costs of the early-stage business and brand building in the US.

Mr. Matlin added that, "We expect to continue to achieve strong organic account growth through direct-response marketing programs, which have proven highly cost-effective and a major differentiating feature of our organic model of growth. Our monthly recurring revenues, cash flows and subscriber base are expected to continue to grow strongly in 2005 and subsequent years."

AlarmForce is Canada's largest manufacturer and installer of two-way voice home alarms systems, serving all major markets in Canada and selected markets in the US.

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