<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996
REGISTRATION NO. 333-13505
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MASADA SECURITY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7382 63-1082760
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
950 22ND STREET NORTH, SUITE 800
BIRMINGHAM, ALABAMA 35203
(205) 323-7233
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
TERRY W. JOHNSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MASADA SECURITY HOLDINGS, INC.
950 22ND STREET NORTH, SUITE 800
BIRMINGHAM, ALABAMA 35203
(205) 323-7233
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
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DAVID D. DOWD, III, ESQ. WILLIAM L. HUDSON, ESQ.
BURR & FORMAN BROBECK PHLEGER & HARRISON LLP
420 NORTH 20TH STREET, SUITE 3100 SPEAR STREET TOWER, ONE MARKET
BIRMINGHAM, ALABAMA 35203 SAN FRANCISCO, CA 94105
(205) 251-3000 (415) 442-0900
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE AMOUNT OF REGISTRATION FEE
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Common Stock, $.01 par value...... $35,880,000 $10,872
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 8, 1996
MASADA SECURITY (LOGO)
2,400,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being issued and sold
by Masada Security Holdings, Inc. ("Masada" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$11.00 and $13.00 per share. See "Underwriting" for information relating to the
method of determining the initial public offering price. The Common Stock has
been approved for trading on the Nasdaq National Market under the symbol "MSDA,"
subject to official notice of issuance.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share......................... $ $ $
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Total(2).......................... $ $ $
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(1) Before deducting expenses payable by the Company, estimated at $700,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 360,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
and Proceeds to Company will be $ , $ and $ ,
respectively.
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The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY LEHMAN BROTHERS
The date of this Prospectus is , 1996.
<PAGE> 3
[PHOTOGRAPH OF CENTRAL MONITORING STATION]
Masada provides monitoring services to over 81,000 subscribers principally
from its central station located in Birmingham, Alabama. This central station
has the capability to service approximately 250,000 customers.
[PHOTOGRAPH OF INSTALLER PLACING YARD SIGN]
Through a combination of its Safe Choice marketing program and its
acquisition program, Masada has grown from approximately 19,000 subscribers in
February 1993 to over 81,000 subscribers in September 1996.
[PHOTOGRAPH OF SALES CONSULTANT AND PROSPECTIVE SUBSCRIBERS]
By subsidizing installation costs in return for long-term recurring
revenue, Masada's objective is to provide affordable residential security alarm
services to a greater number of Americans.
[PHOTOGRAPH OF SERVICE TRUCK AND RESIDENCE]
From February 1993 through September 1996, Masada generated over 42,000
subscriber accounts internally through its Safe Choice marketing program, under
which it currently offers an alarm system at a base installation price of $99.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 8
The Company........................................................................... 16
Use of Proceeds....................................................................... 17
Dividend Policy....................................................................... 17
Capitalization........................................................................ 18
Dilution.............................................................................. 19
Selected Consolidated Financial and Operating Data.................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 22
Business.............................................................................. 35
Management............................................................................ 48
Principal Stockholders................................................................ 57
Certain Transactions.................................................................. 59
Description of Capital Stock.......................................................... 62
Shares Eligible for Future Sale....................................................... 64
Underwriting.......................................................................... 65
Legal Matters......................................................................... 66
Experts............................................................................... 66
Additional Information................................................................ 66
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
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The Company intends to furnish to its stockholders annual reports
containing audited financial statements examined by its independent auditors and
quarterly reports containing unaudited condensed financial statements for the
first three quarters of each fiscal year.
Masada Security(R) is a registered tradename of the Company. Safe Choice is
a tradename of the Company.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated or the context
otherwise requires, references to "Masada" or the "Company" are to Masada
Security Holdings, Inc. and its subsidiaries. This Prospectus contains
forward-looking statements which involve risk and uncertainties. The Company's
actual results may differ materially from the results discussed in
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
The Company provides security alarm monitoring services and installs and
services security alarm systems for residential and small business subscribers,
principally in the southern United States. At September 30, 1996, the Company
had over 81,000 subscriber accounts for its alarm monitoring services, a
majority of which were residential subscribers. As a result of the Company's
internally generated "Safe Choice" subscriber accounts and acquisitions of
subscriber account portfolios, the Company has increased its monthly recurring
revenue ("MRR")1 from approximately $0.6 million at February 1, 1993 to
approximately $2.1 million at September 30, 1996, which represents an increase
in annualized MRR from $7.3 million to $25.6 million. Based upon a ranking of
security alarm monitoring companies by annual revenues included in the May 1996
issue of SDM magazine (formerly Security Distributing and Marketing) ("SDM"),
the Company believes that it is one of the largest residential security alarm
monitoring companies in the southern United States. According to a May 1996
survey by SDM, the Company is the second fastest growing security alarm
monitoring company in the United States based upon the Company's historical
three year growth rate in revenues.
The Company's objective is to provide residential security alarm services
to a greater number of Americans by making such services affordable and by
focusing on markets with attractive demographics. The Company's growth strategy
is based upon both internal generation of subscriber accounts marketed under the
tradename "Safe Choice" by the Company's sales consultants, and acquisitions of
subscriber accounts from independent alarm monitoring companies. The Company
believes that it can achieve economies of scale and improve results of
operations by increasing the number and density of subscribers for whom it
provides services, thereby increasing utilization of the Company's central
monitoring station and improving efficiency of its service operations.
From February 1, 1993 through September 30, 1996, Masada has generated
approximately 42,100 subscriber accounts internally through the Safe Choice
marketing program, including over 7,700 new Safe Choice subscriber accounts
during the third quarter of 1996. The Company seeks to create additional
subscriber accounts through the Safe Choice marketing program principally by
subsidizing the initial installation of a residential security alarm monitoring
system in order to capture the MRR generated by the monitoring contract. By
offering the Safe Choice alarm system at a base installation price of $99, the
Company believes it can access a broader demographic market than is presently
being accessed by other existing companies who, according to the January 1996
issue of SDM, sold and installed alarm systems during 1995 for an average price
of $1,200. In addition, the Safe Choice program allows Masada to create
subscriber accounts for an investment which, expressed as a multiple of MRR
generated, is substantially lower than that for which the Company can acquire
subscriber accounts and, in management's belief based upon its knowledge of the
industry, is among the lowest in the industry.
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1 MRR is monthly recurring revenue which the Company is entitled to receive from
contracts in effect at the end of the period. MRR is a term commonly used in
the industry as a measure of the size of a company but not as a measure of
profitability or performance, and does not include any allowance for future
attrition of subscriber accounts or allowance for doubtful accounts. The
Company does not have sufficient information as to the attrition of acquired
subscriber accounts to predict the amount of acquired MRR that will be
realized in future periods or the impact of the attrition of acquired
subscriber accounts on the Company's overall rate of attrition. See "Risk
Factors -- Attrition of Subscriber Accounts."
4
<PAGE> 6
From September 1994 through September 1996, the Company has acquired
approximately 39,000 subscriber accounts in 18 separate transactions. The
Company intends to make acquisitions and open branches in new geographic markets
where the Company does not presently have subscribers, and then to increase the
number of subscriber accounts in such markets through the Safe Choice marketing
program and subsequent acquisitions, both of which have the effect of increasing
subscriber account density in the area, and thereby improving operating
efficiency.
Approximately 90% of the Company's subscribers are located in Florida,
Texas and the Richmond/Washington, D.C./Baltimore metropolitan areas. The
Company's remaining subscribers are located in Georgia, Louisiana, Oklahoma and
Tennessee. According to the Bureau of the Census and the Federal Bureau of
Investigation, the states which the Company serves collectively have higher
projected population growth rates from 1990 through 2010 and had higher crime
rates during 1994 than the nation as a whole. The Company monitors digital
signals arising from burglaries, fires and other monitored events which occur at
the subscribers' premises from the Company's state-of-the-art central monitoring
station located in Birmingham, Alabama, which has the capacity to serve
approximately 250,000 subscriber accounts.
The security alarm industry is highly fragmented and growing. According to
research conducted by J.P. Freeman & Co., a security industry consulting firm
(the "Freeman Research"), there currently are approximately 11,500 security
alarm companies in the United States. A May 1996 survey by SDM reported that in
1995 the 100 largest companies in the industry accounted for only 23% of alarm
industry revenues and the top 10 security alarm monitoring companies served less
than 3% of all United States households. Freeman Research indicates that
residential security alarm monitoring revenues grew in the United States at a
compounded annual rate of 12% between 1988 and 1995. The Company believes that
several factors, including increased concern about crime and favorable
demographic trends, have contributed to the increased demand for residential
security alarm services. Market penetration, however, remains low, with
monitored security alarm systems installed in only 11% of all U.S. households
according to Freeman Research.
THE OFFERING
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Common Stock Offered......................... 2,400,000 shares
Common Stock Outstanding after the
Offering................................... 7,826,826 shares(1)
Use of Proceeds.............................. Redemption of Class A preferred stock and
partial repayment of indebtedness outstanding
under the Company's credit facility. The
Company intends to borrow in the future under
the credit facility to fund the Safe Choice
marketing program, to fund acquisitions of
subscriber accounts, and for general
corporate purposes, including capital
expenditures and working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... MSDA
</TABLE>
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(1) Excludes, as of November 8, 1996, shares reserved for issuance upon exercise
of outstanding options to purchase 391,500 shares of Common Stock and excludes
shares covered by the Underwriters' over-allotment option.
5
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
(In thousands, except number of subscribers)
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<CAPTION>
ELEVEN YEARS ENDED DEC. 31, SIX NINE MONTHS ENDED SEPT. 30,
MONTHS ----------------------------- MONTHS ------------------------------
ENDED HISTORICAL ENDED HISTORICAL
DEC. 31, ----------------- PRO FORMA JUNE 30, ------------------ PRO FORMA
1993(1) 1994 1995 1995(2) 1996 1995 1996 1996(2)
-------- ------- ------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Monitoring..................... $ 6,958 $ 8,756 $12,472 $ 22,326 $ 9,367 $ 8,748 $ 15,374 $ 17,424
Installation................... 2,477 3,083 3,429 5,806 2,493 2,583 3,936 3,936
Service........................ 520 678 911 1,083 677 695 1,153 1,153
Other.......................... -- -- -- 484 -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Total revenues............. 9,955 12,517 16,812 29,699 12,537 12,026 20,463 22,513
Cost of revenues:
Monitoring..................... 1,137 1,374 1,945 3,544 1,421 1,378 2,297 2,575
Installation................... 1,220 1,268 1,339 3,210 1,151 979 1,754 1,754
Service........................ 1,429 1,734 2,235 2,235 1,628 1,574 2,735 2,735
------- ------- ------- ------- ------- ------- -------- --------
Total cost of revenues..... 3,786 4,376 5,519 8,989 4,200 3,931 6,786 7,064
------- ------- ------- ------- ------- ------- -------- --------
Gross profit............... 6,169 8,141 11,293 20,710 8,337 8,095 13,677 15,449
General and administrative
expenses....................... 3,091 5,071 7,550 14,874 4,563 5,470 7,271 8,665
Noncash compensation expense..... -- 92 56 56 99 -- 121 121
Selling and marketing costs...... 1,879 2,923 5,411 5,411 3,780 3,960 6,271 6,271
Depreciation and amortization.... 2,406 3,451 5,258 8,764 4,774 3,573 7,761 8,454
------- ------- ------- ------- ------- ------- -------- --------
Operating loss............. (1,207) (3,396) (6,982) (8,395) (4,879) (4,908) (7,747) (8,062)
Interest expense, net............ 754 593 844 3,622 1,140 632 2,226 2,757
Other nonoperating expense....... -- -- -- (277) -- -- -- (70)
Gain on disposal of assets....... -- -- -- 2 160 -- 225 225
Extraordinary loss from early
retirement of debt............. -- -- -- -- (567) -- (567) (567)
Income tax expense............... -- -- -- (10) -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net loss................... $(1,961) $(3,989) $(7,826) $(12,302) $(6,426) $(5,540) $(10,315) $(11,231)
======= ======= ======= ======= ======= ======= ======== ========
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SEPTEMBER 30, 1996
---------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).................................... $ (434) $ (434) $ (434)
Total assets................................................. 57,239 57,239 57,239
Long-term debt less current portion.......................... 44,359 44,359 27,750
Total stockholders' equity................................... 1,706 1,706 26,960
</TABLE>
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(1) The Company commenced operations on February 1, 1993.
(2) With respect to Statement of Operations Data, Operating Data and Certain
Subscriber Data, gives effect to acquisitions occurring during 1995 and the
first nine months of 1996 as if each had occurred on January 1, 1995, and
with respect to Consolidated Balance Sheet Data, reflects the conversion of
all outstanding shares of Class B convertible preferred stock and Class C
convertible preferred stock into shares of Class B common stock and Class C
common stock, respectively, and the exchange of each outstanding share of
Class A common stock, Class B common stock, and Class C common stock into
three shares of a new, single class of Common Stock, as provided for in the
Company's Plan of Recapitalization, concurrently with the consummation of
this offering. See "Pro Forma Financial Information."
(3) As adjusted to reflect the sale by the Company of 2,400,000 shares of Common
Stock offered hereby and the anticipated application of the estimated net
proceeds therefrom at an assumed offering price of $12.00 per share (less
underwriting discounts and commissions and estimated offering expenses). See
"Use of Proceeds."
6
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<CAPTION>
YEARS ENDED DEC. 31, NINE MONTHS ENDED SEPT. 30,
ELEVEN ------------------------------ SIX -------------------------------
MONTHS MONTHS
ENDED HISTORICAL ENDED HISTORICAL
DEC. 31, ------------------ PRO FORMA JUNE 30, ------------------- PRO FORMA
1993(1) 1994 1995 1995(2) 1996 1995 1996 1996(2)
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OTHER DATA:
MRR at end of period(4)........ $ 660 $ 903 $ 1,298 $ 1,298 $ 2,045 $ 1,108 $ 2,129 $ 2,129
Number of subscribers at end of
period....................... 21,051 30,053 47,060 47,060 77,927 38,699 81,607 81,607
EBITDA(5)...................... $ 1,199 $ 147 $ (1,668) $ 425 $ (6) $ (1,335) $ 135 $ 513
Less Safe Choice revenues.... (1,346 ) (1,937) (2,076) (2,076 ) (1,352) (1,541) (2,122) (2,122 )
Plus Safe Choice selling and
marketing expenses......... 1,879 2,923 5,411 5,411 3,780 3,960 6,271 6,271
------- ------- ------- ------- ------- ------- -------- --------
Adjusted EBITDA(6)......... $ 1,732 $ 1,133 $ 1,667 $ 3,760 $ 2,422 $ 1,084 $ 4,284 $ 4,662
======= ======= ======= ======= ======= ======= ======== ========
Net cash provided by (used in)
operating activities......... $ (329 ) $ 172 $ (3,595) $ 23 $ (3,207) $ (1,159)
Net cash (used in) investing
activities................... $(1,842 ) $(8,663) $(12,729) $(29,348) $ (9,255) $(32,495)
Net cash provided by financing
activities................... $ 1,212 $ 8,610 $ 16,189 $ 29,637 $ 13,807 $ 33,959
</TABLE>
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(4) MRR is monthly recurring revenue that the Company is entitled to receive
under contracts in effect at the end of the period. MRR is a term commonly
used in the security alarm industry as a measure of the size of a company,
but not as a measure of profitability or performance, and does not include
any allowance for future attrition or allowance for doubtful accounts. The
Company does not have sufficient information as to the attrition of acquired
subscriber accounts to predict the amount of acquired MRR that will be
realized in future periods or the impact of the attrition of acquired
accounts on the Company's overall rate of attrition.
(5) EBITDA is derived by adding to net loss the sum of (i) interest expense,
(ii) depreciation and amortization expense, (iii) noncash compensation
expense related to the Company's stock option grants, and (iv) extraordinary
loss from early retirement of debt less (v) gain on disposal of assets.
EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income, and is indicative neither of the Company's operating performance
nor of cash flows available to fund the Company's cash needs. Items excluded
from EBITDA are significant components in understanding and assessing the
Company's financial performance. The Company believes that EBITDA is used by
senior lenders and the investment community to determine the current
borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses. Accordingly, EBITDA is
presented to meet the investment community's expectations for comparative
data. There can be no assurance that EBITDA, as presented by the Company, is
comparable to other similarly titled measures of other security alarm
companies.
(6) Adjusted EBITDA ("Adjusted EBITDA") is derived by adding to EBITDA the Safe
Choice selling and marketing expenses, net of Safe Choice installation
revenues, during the period. Adjusted EBITDA does not represent cash flow
from operations as defined by generally accepted accounting principles,
should not be construed as an alternative to net income, and is indicative
neither of the Company's operating performance nor of cash flows available
to fund the Company's cash needs. As a result of the accounting treatment
applicable to the Company's Safe Choice marketing program, as compared to
the accounting treatment applicable to the acquisition of subscriber
accounts, the Company believes that EBITDA does not fairly reflect that a
significant component of the Company's current period expenses are being
voluntarily "invested" in the internal creation of long-term recurring
revenue Safe Choice subscriber accounts, as though the accounts were being
acquired. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General -- Accounting Policies for Safe Choice
Installations and Subscriber Account Purchases." Accordingly, the Company
presents Adjusted EBITDA as a measure which the Company believes provides a
more appropriate comparison to EBITDA as presented by companies growing
principally through acquisitions. The Company's existing credit facility
contains a financial covenant based upon Adjusted EBITDA. There can be no
assurance that Adjusted EBITDA, as presented by the Company, is comparable
to other similarly titled measures of other security alarm companies.
----------------------
Unless otherwise indicated or the context otherwise requires, all
information contained in this Prospectus assumes (i) the implementation of the
Company's Plan of Recapitalization (the "Recapitalization") concurrently with
the consummation of this offering, which Recapitalization provides for (a) the
automatic redemption of all outstanding shares of Class A preferred stock, (b)
the automatic conversion of all outstanding shares of Class B convertible
preferred stock and Class C convertible preferred stock into shares of Class B
common stock and Class C common stock, respectively, and (c) the automatic
exchange of each outstanding share of Class A common stock, Class B common stock
and Class C common stock into three shares of a new, single class of Common
Stock, and (ii) that the Underwriters' over-allotment option is not exercised.
The closing of this offering will not occur without implementation of the
Recapitalization.
7
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered hereby. This Prospectus
contains forward-looking statements which involve risk and uncertainties. The
Company's actual results may differ materially from the results discussed in
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below and elsewhere in this Prospectus.
DEPENDENCE UPON INTERNALLY GENERATED SUBSCRIBER ACCOUNTS FOR GROWTH
A principal element of the Company's business strategy is to grow by
internally generating subscriber accounts through the Safe Choice marketing
program. From February 1, 1993 to September 30, 1996, the Company added
approximately 42,100 subscriber accounts through the Safe Choice marketing
program, including over 7,700 new Safe Choice accounts during the third quarter
of 1996. The Company's internally generated Safe Choice accounts comprise
approximately 41% of the Company's subscriber accounts, including 42% of the new
accounts gained by the Company during the first nine months of 1996. The Company
believes that continued Safe Choice account generation will be an integral part
of the Company's revenue growth. Masada faces competition for new subscriber
accounts from other alarm monitoring companies, including companies who are
better capitalized than the Company and who offer low price, subsidized
installations of security systems, such as ADT Security Systems, Inc.,
Westinghouse Security Systems, and Brink's Home Security, Inc. See --
"Competition." Competitive pressures may require the Company to reduce its
prices to maintain its Safe Choice growth. Additionally, the Company faces
competition in the hiring of qualified sales consultants from a variety of
businesses. The Company's ability to maintain or increase its Safe Choice growth
in the future will depend in part upon the number and quality of sales
consultants that the Company can hire and retain. There can be no assurance that
the Company will be able to retain a sufficient number of qualified sales
consultants or to sustain its Safe Choice subscriber account growth.
The costs incurred by Masada to generate a new Safe Choice account
typically exceed the initial revenues received from the Safe Choice customer.
The Company subsidizes the customer's purchase of Safe Choice services in order
to secure the MRR generated by the monitoring contract. See "Business -- The
Safe Choice Program." Because the Safe Choice installations involve a subsidy to
the customer, the Company utilizes its credit facility (the "Credit Facility")
to fund the Safe Choice marketing program. If the Company is required to
increase its subsidy due to competitive pressures or higher costs, the Company's
need for additional capital, which will likely be satisfied through borrowed
funds, will increase. If the Company's borrowing capacity under the Credit
Facility is exhausted, the Company's ability to generate Safe Choice accounts
may be impaired. See -- "Need for Additional Capital." Additionally, the ability
of the Company to generate Safe Choice accounts may be limited from time to time
by restrictive covenants in the Credit Facility. See -- "Risks Related to
Leverage."
DEPENDENCE UPON ACQUISITIONS FOR GROWTH; ACQUISITION RISKS
From September 1994 through September 1996, the Company completed 18
acquisitions of subscriber account portfolios of other alarm monitoring
companies. The Company expects that future acquisitions will be an integral part
of the Company's revenue growth. Other alarm service companies have adopted a
strategy similar to the Company's that entails the acquisition of alarm
monitoring accounts. Some of these competitors have greater financial resources
than the Company or may be willing to offer higher prices than the Company is
prepared to offer to acquire subscriber accounts. The effect of such competition
may be to reduce the acquisition opportunities available to the Company, thus
reducing the Company's rate of growth, or to increase the price paid by the
Company for acquired subscriber accounts, which would adversely affect the
Company's return on its investment in such accounts and its results of
operations. There can be no assurance that the Company will be able to find
acceptable acquisition candidates or sustain its recent acquisition rate. See
-- "Competition."
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Because the Company funds its acquisitions with borrowings under the Credit
Facility, the Company's ability to continue its acquisition program may be
impaired if the Company's borrowing capacity under the Credit Facility is
exhausted. See --"Need for Additional Capital."
Acquisitions involve a number of special risks, including the possibility
of problems not discovered prior to the acquisition, account attrition, and the
diversion of management's attention to the assimilation of accounts. Since a
significant portion of the Company's acquired accounts were purchased since
January 1, 1996, the Company has limited experience with a significant portion
of its acquired accounts, and there can be no assurance that the Company will
not encounter difficulties in connection with these acquisitions, including an
actual attrition rate that is higher than that assumed by the Company. See
- -- "Attrition of Subscriber Accounts." For acquisitions that are structured as
the purchase of the stock rather than the assets of other alarm companies, the
Company may inherit unexpected liabilities and may have to dispose of the
unnecessary assets of the acquired companies, which may adversely affect the
Company's results of operations.
NEED FOR ADDITIONAL CAPITAL
During 1994, 1995 and the first nine months of 1996, the Company incurred
costs of approximately $4.4 million, $8.2 million and $10.2 million,
respectively, in generating internal Safe Choice accounts, and invested
approximately $4.0 million, $6.5 million and $24.2 million, respectively, in
acquiring subscriber accounts from alarm monitoring companies. Net cash provided
by (used in) operating activities during 1994, 1995 and the first nine months of
1996 was $.2 million, $(3.6) million and $(1.2) million, respectively. The
Company used borrowings under a prior credit facility and proceeds from sales of
equity securities to fund the Company's Safe Choice marketing program, investing
activities, and operations during these periods. As the Company continues its
strategy to grow through the Safe Choice marketing program and the acquisition
of subscriber accounts, the Company's current borrowing capacity is likely to be
exhausted. Accordingly, the Company will likely be required to obtain additional
debt financing or sell additional equity securities in the future, which may
result in higher leverage or the dilution of then existing holders' investments
in the Common Stock. See -- "Risks Related to Leverage" and -- "Dilution." There
can be no assurance that external funding will be available to the Company on
terms favorable to the Company or at all. Any inability of the Company to obtain
additional capital will likely adversely affect the Company's ability to
continue to generate Safe Choice accounts or to make acquisitions of subscriber
accounts. See -- "Dependence Upon Internally Generated Subscriber Accounts for
Growth" and -- "Dependence Upon Acquisitions for Growth; Acquisition Risks."
QUARTERLY FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company historically has experienced fluctuations in its quarterly
operating results and expects to experience fluctuations of quarterly operating
results in the future. These fluctuations may be caused by many factors,
including, among others, the opening of new branch offices, the volume and
timing of additional internally generated subscriber accounts, the size and
timing of acquisitions of subscriber account portfolios, acquired subscriber
assimilation, attrition experience, competitive pricing pressures, local and
national crime activity, general economic conditions, and seasonality. The Safe
Choice marketing program can be hampered during the winter months as a result of
unfavorable weather conditions, holidays, and reduced hours of daylight. The
Company's expense levels are based, to some extent, on its expectations of
future subscriber and revenue levels, which are dependent on estimates of
internally generated additions of subscriber accounts and of subscriber account
portfolio acquisitions. The Company may be unable, therefore, to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall due to
less than anticipated levels of internally generated accounts or a delay in the
timing of acquisitions. Given the possibility of quarterly fluctuations, the
Company believes that comparisons of the results of its operations for preceding
quarters are not necessarily meaningful and that the results for any one quarter
should not be relied upon as an indication of future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Selected Quarterly Results of Opera-
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tions." In the event that the Company's revenues or operating results for any
quarter are less than the level expected by securities analysts or the market in
general, such shortfall could have an immediate and significant adverse impact
on the market price of the Company's common stock.
GEOGRAPHIC CONCENTRATION AND EXPANSION
At September 30, 1996, almost 90% of the Company's existing subscribers
were located in Florida (53%), Texas (25%) and the Richmond/Washington,
D.C./Baltimore metropolitan area (10%). Accordingly, in these areas the
performance of the Company may be adversely affected by regional or local
economic conditions. See "Business -- Overview."
The Company intends to make acquisitions and open new branch offices in
geographic markets where the Company does not presently have subscribers.
Expansion into new markets requires an investment by the Company in local
branches and personnel necessary to service the subscriber accounts. The
expenses associated with the opening of new branch offices are expensed in the
period in which incurred and thus may substantially impact the Company's
operating results during such period. For the Company to expand successfully
into a new market, the Company must obtain a sufficient number and density of
subscriber accounts in such market to support the additional investment. There
can be no assurance that expansion into new markets will not adversely affect
the Company's future business and results of operations.
ATTRITION OF SUBSCRIBER ACCOUNTS
The Company experiences attrition of subscriber accounts as a result of,
among other factors, relocation of subscribers, adverse financial and economic
conditions, and competition from other alarm service companies. In addition, the
Company may lose acquired accounts in the event it is unable to service them
adequately or to assimilate them into its operations. An increase in such
attrition could have a material adverse effect on the Company's revenues and
results of operations.
When acquiring accounts, the Company usually withholds a portion of the
purchase price as a partial guarantee against subscriber attrition. If the
actual attrition rate for the accounts acquired is greater than the rate assumed
by the Company at the time of the acquisition, and the Company is unable to
recoup its damages from the portion of the purchase price held back from the
seller, such attrition could have a material adverse affect on the Company's
financial condition or results of operations. The Company is not aware of any
reliable historical data relating to account attrition rates prepared by
companies from whom the Company has acquired accounts, and the Company has no
assurance that actual account attrition for acquired accounts will not be
greater than the attrition rate assumed or historically incurred by the Company.
In addition, because some acquired accounts are prepaid on an annual,
semi-annual or quarterly basis, attrition may not become evident for some time
after an acquisition is consummated. See "Business -- The Acquisition Program."
At September 30, 1996, the cost of acquired subscriber accounts, net of
accumulated amortization, was $31.8 million, which constitute 55.5% of the book
value of the Company's total assets. The Company's acquired subscriber accounts
are amortized on a straight-line basis over the estimated life of the related
revenues. The Company estimates the lives of acquired accounts to be
approximately eight years. See Note 1 of Notes to Consolidated Financial
Statements. There could be a material adverse effect on the Company's results of
operations and financial condition if actual account attrition significantly
exceeds assumed attrition and the Company has to make adverse adjustments with
respect to the amortization of acquired subscriber accounts. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General -- Subscriber Attrition."
LIMITED OPERATING HISTORY; HISTORY OF NET LOSSES; ANTICIPATED FUTURE LOSSES
The Company did not commence operations until February 1993 and has grown
from approximately 19,000 subscriber accounts to over 81,000 subscriber accounts
through its Safe Choice marketing program and its acquisition program. See
"Business -- The Safe Choice Program" and
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"Business -- The Acquisition Program." The Company depends on achieving
economies of scale and improving results of operations by increasing the number
and density of subscribers for whom it provides services, thereby increasing
utilization of the Company's central monitoring station and improving efficiency
of its service operations. See "Business -- Business Strategy." Due to the
Company's limited operating history, there can be no assurance that the
Company's business strategy will be successful on a long-term basis.
The Company incurred net losses of $10.3 million for the nine months ended
September 30, 1996, $7.8 million for the year ended December 31, 1995, $4.0
million for the year ended December 31, 1994, and $2.0 million for the eleven
months ended December 31, 1993. These losses reflect, among other factors, the
expenses associated with internally generated subscriber accounts, the charges
incurred by the Company for amortization of purchased subscriber accounts, and
the interest incurred on its indebtedness. Such charges will increase as the
Company continues to generate new subscriber accounts, as the Company continues
to purchase subscriber accounts, if the Company's indebtedness increases, or if
interest rates increase. The Company expects to continue to incur net losses for
the foreseeable future.
"FALSE ALARM" ORDINANCES
According to Freeman Research, approximately 94% of alarm activations that
result in the dispatch of police or fire department personnel are not
emergencies, and thus are "false alarms." Significant concern has arisen in
certain municipalities about this high incidence of false alarms. This concern
could cause a decrease in the likelihood or timeliness of police response to
alarm activations and thereby decrease the propensity of consumers to purchase
or maintain alarm monitoring services.
Recently, a trend has emerged on the part of local governmental authorities
to consider or adopt various measures aimed at reducing the number of false
alarms. Such measures include (i) subjecting alarm monitoring companies to fines
or penalties for transmitting false alarms, (ii) licensing individual alarm
systems and the revocation of such licenses following a specified number of
false alarms, (iii) imposing fines on alarm subscribers for false alarms, (iv)
imposing limitations on the number of times the police will respond to alarms at
a particular location after a specified number of false alarms, and (v)
requiring further verification of an alarm signal before the police will
respond. Enactment of such laws could adversely affect the Company's future
business and results of operations.
LACK OF AUDITED FINANCIAL INFORMATION RELATING TO ACQUISITIONS
Since the Company's primary consideration in making an acquisition is the
amount of MRR associated with the seller's subscriber accounts, the price paid
by the Company is customarily directly tied to such MRR. The price paid varies
based on the number and quality of accounts being purchased from the seller, the
historical activity of such accounts, and other factors. Typically the seller
does not have audited financial statements from which the Company can verify
levels of acquired MRR. Thus, the actual MRR acquired may be less than the
Company anticipated. No audited historical financial information was available
for any of the Company's acquisitions made since September 1994. See
"Business -- The Acquisition Program." Thus, the Company must rely on
management's knowledge of the industry, due diligence procedures, and
representations and warranties of the sellers. The Company expects that future
acquisitions will present the same risks to the Company as its recent
acquisitions.
RISKS RELATED TO LEVERAGE
At September 30, 1996, after giving pro forma effect to the application of
the net proceeds from this offering, the Company's pro forma consolidated
long-term indebtedness would have been approximately $27.8 million. See "Pro
Forma Financial Information." As a result of the Company's strategy to increase
subscriber accounts through the Safe Choice marketing program and acquisitions
of subscriber account portfolios, the Company expects its degree of leverage to
increase significantly,
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at least through 1997. The Company's indebtedness requires that a significant
amount of its cash flow from operations be applied to the payment of interest,
and there can be no assurance that the Company's operations will generate
sufficient cash flow to service this indebtedness. Borrowings under the Credit
Facility are at variable rates of interest, which subjects the Company to
fluctuations in interest rates.
The Credit Facility, which matures on September 30, 1997, includes
covenants that restrict the operational and financial flexibility of the
Company. Failure to comply with certain covenants would, in some instances,
permit the lenders to accelerate the maturity of the obligations thereunder. In
addition, the Company is required to obtain the consent of its lenders under the
Credit Facility and to maintain certain financial ratios in order to undertake
significant acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and Note
5 of Notes to Consolidated Financial Statements.
Because the Credit Facility was not paid in full by September 30, 1996, the
Company is obligated to pay the lenders under the Credit Facility a financing
fee equal to .0275% multiplied by the average commitment amount under the Credit
Facility multiplied by the number of days between September 25, 1996 and the
date on which the Credit Facility is paid in full (the "Financing Fee").
Accordingly, the Financing Fee began to accrue on September 25, 1996 at a daily
rate of $13,750. The proceeds from this offering will not be sufficient to pay
the entire balance due under the Credit Facility. If the Company does not pay
the Credit Facility in full until the Credit Facility matures on September 30,
1997, the Financing Fee will be approximately $5.0 million. Although the Company
has received written commitments from the Credit Facility lenders to amend the
Credit Facility to, among other things, terminate the Financing Fee, increase
the maximum amount available under the Credit Facility from $50 million to $70
million, and extend the maturity date from September 30, 1997 until December 31,
1998, these commitments are subject to the satisfaction of several conditions,
including the receipt by the Company of at least $27.5 million of gross proceeds
in this offering. There can be no assurance that all conditions to the
commitments will be satisfied or that the Credit Facility will be so amended. If
the Financing Fee is not terminated or substantially reduced, the Company will
continue to incur additional interest expense in excess of $.4 million each
month, which will reduce the funds that would otherwise be available for the
operations and growth of the Company, including the Safe Choice marketing
program and possible future acquisitions. In the event the maturity date of the
Credit Facility is not extended, the Company will be required to obtain
additional debt financing or sell additional equity securities during 1997,
which may result in higher leverage or the dilution of then existing holders'
investments in the Common Stock. See "Need for Additional Capital."
RISKS OF LIABILITY
The nature of the services provided by the Company potentially exposes it
to greater risks of liability for employee acts or omissions or system failure
than may be inherent in other businesses. Most of the Company's alarm monitoring
agreements and other agreements pursuant to which it sells its products and
services contain provisions limiting liability to subscribers in an attempt to
reduce this risk. However, in the event of litigation with respect to such
matters, there can be no assurance that these limitations will be enforced, and
the costs of such litigation could have a material adverse effect on the
Company.
The Company carries insurance of various types, including general liability
and errors and omissions insurance. The loss experience of the Company and other
security service companies, however, may affect the availability and cost of
such insurance. Certain of the Company's insurance policies and the laws of some
states may limit or prohibit insurance coverage for punitive or certain other
types of damages, or liability of the Company arising from gross negligence or
wanton behavior.
COMPETITION
The security alarm industry is highly competitive and highly fragmented. In
marketing the Safe Choice system, the Company competes with larger national
companies who are better capitalized and who conduct media advertising, which
the Company does not currently utilize. The Company also competes with larger
national companies, as well as smaller regional and local companies, for the
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acquisition of subscriber accounts. Furthermore, new competitors are continuing
to enter the industry and the Company may encounter additional competition from
such future industry entrants. Certain of the Company's current competitors
have, and new competitors may have, greater resources than the Company. There
can be no assurance that the Company will be able to compete effectively in the
future. See "Business -- Competition."
GEOGRAPHIC LIMITATION ON USE OF PRINCIPAL TRADENAMES
In June 1994, the Company entered into a license agreement (the "License
Agreement") with Centennial Security, Inc., an alarm security company based in
New Jersey ("Centennial Security"), which is owned in part by several of the
Company's stockholders and by the Company. See "Certain
Transactions -- Transactions with Centennial Security." Pursuant to the License
Agreement, the Company granted to Centennial Security an exclusive, ten year
license to use the Masada Security trademark and tradename, the Safe Choice
tradename, and certain other intellectual property in the northern half of the
United States (the states of California (north of Sacramento), Colorado,
Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, portions
of Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska,
Nevada, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oregon,
Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Washington, Wisconsin
and Wyoming) and Canada (the "Centennial Territory"). Although the License
Agreement specifically provides that the Company may operate as a security alarm
company within the Centennial Territory, the License Agreement prohibits the
Company from operating as "Masada Security" and from using the "Safe Choice"
tradename and other intellectual property within the Centennial Territory
without the consent of Centennial Security until the License Agreement
terminates, which is not scheduled to occur until 2004. Correspondingly, the
License Agreement prohibits Centennial Security from operating as "Masada
Security" and using the "Safe Choice" tradename and other intellectual property
outside the Centennial Territory. In the event the Company enters markets
located within the Centennial Territory, the limitations imposed on the Company
by the License Agreement with Centennial Security would likely result in
additional costs resulting from the integration into the Company's operations of
new tradenames for the Company and its Safe Choice product, which could have a
material adverse effect upon the Company's future business and operating
results. See "Certain Transactions -- Transactions with Centennial Security."
BENEFITS TO AFFILIATES
Approximately $8.4 million of the proceeds of this offering will be paid to
six of the Company's stockholders as a result of the redemption of the Company's
Class A preferred stock, including five stockholders who are directors of the
Company or that have some affiliation with directors of the Company:
approximately $3.1 million to Centennial Fund III, L.P., an investment
partnership affiliated with Steven C. Halstedt, a director of the Company;
approximately $2.8 million to Norwest Equity Partners IV, A Minnesota Limited
Partnership, an investment partnership affiliated with George J. Still, Jr., a
director of the Company; approximately $.9 million to Criterion Venture
Partners, Limited, an investment partnership affiliated with Mr. Halstedt;
approximately $50,000 to Bertil D. Nordin, a director of the Company; and
approximately $50,000 to a trust affiliated with O. Gene Gabbard, a director of
the Company. See "The Company," "Use of Proceeds," "Principal Stockholders" and
"Certain Transactions."
Upon implementation of the Recapitalization, all previously outstanding
shares of the Company's preferred stock will be redeemed or converted ultimately
into shares of Common Stock. Accordingly, implementation of the Recapitalization
eliminates certain rights of the holders of such preferred stock, such as
liquidation preferences in favor of the holders of the preferred stock, transfer
restrictions required by the purchasers of the preferred stock that were
applicable to securities of the Company beneficially owned by the two founders
of the Company, Terry W. Johnson and Daryl E. Harms, both of whom are directors
of the Company, and certain rights that could be exercised by the holders of
preferred stock or the Company at the behest of such holders of preferred stock
to purchase securities of the Company beneficially owned by Messrs. Johnson and
Harms upon the occurrence of specified
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events. Thus, the elimination of the Company's preferred stock and the
aforementioned rights of the holders of the preferred stock, as a result of the
Recapitalization, benefits Messrs. Johnson and Harms.
CONTROL BY CERTAIN EXISTING STOCKHOLDERS
Immediately following the sale of the shares of Common Stock offered
hereby, the Company's nine venture capital investors (Centennial Fund III, L.P.,
Centennial Fund IV, L.P., Criterion Venture Partners III, Limited, Norwest
Equity Partners IV, A Minnesota Limited Partnership, Norwest Equity Partners V,
a Minnesota Limited Liability Partnership, South Atlantic Venture Fund II,
Limited Partnership, South Atlantic Venture Fund III, Limited Partnership,
Hancock Venture Partners IV-Direct Fund L.P., and Chase Venture Capital
Associates), will together beneficially own 4,277,709 shares of Common Stock,
which will comprise 54.7% of the outstanding shares of the Common Stock (52.3%
if the Underwriters' over-allotment option is exercised in full). As a result of
their ownership interests, these investors, as a group, may be able to control
the election of all of the Company's directors and to determine all corporate
actions requiring stockholder approval, including significant corporate
transactions. See "Description of Capital Stock" and "Principal Stockholders."
DEPENDENCE UPON SENIOR MANAGEMENT
The success of the Company's business is largely dependent upon the active
participation of its executive officers. The loss of the services for any reason
of one or more of such officers, in particular Terry W. Johnson, the Chairman,
President and Chief Executive Officer of the Company, may have a material
adverse effect on the Company's business. The Company has no employment
agreements with any of its officers. The Company is actively seeking to add to
senior management by hiring a chief operating officer who would assume the title
of President. There can be no assurance that the Company will be able to hire a
qualified executive for this position.
MANAGEMENT OF GROWTH
The Company's business strategy is to grow through the addition of
subscriber accounts. This expansion has placed and will continue to place
substantial demands on the Company's management, operational resources and its
system of financial and internal controls. The Company's future operating
results will depend in part on the Company's ability to continue to implement
and improve its operating and financial controls and to expand, train and manage
its employee base. Additionally, management of growth may limit the time
available to the Company's management to attend to other operational, financial
and strategic issues, which may result in unanticipated adverse developments in
the ongoing operations of the Company.
DEPENDENCE ON THE CENTRAL MONITORING STATION
The Company is dependent on a single alarm monitoring station located in
Birmingham, Alabama to monitor substantially all of its subscriber accounts.
Although the central monitoring station is located in a building which meets or
exceeds all applicable building codes, a catastrophic event such as a bombing,
tornado, hurricane, earthquake, fire, or other disaster could render the central
monitoring station inoperable, which could adversely affect the Company's
business and results of operations.
REGULATION
The Company's operations are subject to a variety of laws, regulations and
licensing requirements of federal, state and local authorities. In certain
jurisdictions, the Company is required to obtain licenses or permits, comply
with standards governing employee selection and training, and meet certain
standards in the conduct of its business. The loss of such licenses, or the
imposition of conditions to the granting or retention of such licenses, could
have a material adverse effect on the Company.
The Company's advertising and sales practices are regulated by both the
Federal Trade Commission (the "FTC") and state consumer protection laws. Such
regulations include restrictions on the
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manner in which the Company promotes the sale of its security alarm systems and
the obligation of the Company to provide new subscribers with certain rescission
rights. While the Company believes that it has complied with these regulations
in all material respects, there can be no assurance that none of these
regulations were violated in connection with the solicitation of the Company's
existing subscriber accounts, particularly with respect to accounts acquired
from third parties, or that no such violations will occur in the future.
DILUTION
The initial public offering price substantially exceeds the net tangible
book value per share of the Common Stock as adjusted for the receipt of the net
proceeds from this offering, resulting in substantial dilution to purchasers of
Common Stock in this offering. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock and the Company's ability
to raise capital in the future. Upon completion of this offering, the 2,400,000
shares of Common Stock offered hereby (2,760,000 shares if the Underwriters'
over-allotment option is exercised in full) will be eligible for sale on the
open market. Upon the expiration of "lock-up" agreements with the Underwriters
180 days after this offering (or earlier if Robertson, Stephens & Company agrees
to release shares from the lock-up agreements), approximately 704,463 shares
will be eligible for sale without restriction and approximately 4,722,363 shares
will be eligible for sale subject to Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act").
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained in the Common Stock. The initial public offering price
of the Common Stock has been determined by negotiations among the Company and
the Underwriters and may have no relationship to the price at which the Common
Stock will trade after completion of this offering. See "Underwriting." The
stock market has from time to time experienced extreme price and volume
fluctuations which have been unrelated to the operating performance of
particular companies. The market price for shares of the Common Stock may be
highly volatile depending upon various factors, including, but not limited to,
the state of the national economy, stock market conditions, alarm industry
reports, and actions by governmental agencies, as well as quarterly variations
in the Company's operating results, changes in financial estimates by securities
analysts or failures by the Company to meet such estimates, litigation involving
the Company, announcements by the Company or its competitors, and general
conditions in the alarm industry. There can be no assurance that the market
price of the Common Stock will not experience significant fluctuations or
decline below the initial public offering price.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Charter and Delaware law could
discourage potential acquisition proposals, delay or prevent a change in control
of the Company, and limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock. These provisions
include a classified board of directors and the issuance, without stockholder
approval, of preferred stock with rights and privileges which could be senior to
the Common Stock. The Company also is subject to Section 203 of the Delaware
General Corporation Laws which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. See
"Description of Capital Stock -- Certain Provisions of the Company's Charter and
Delaware Law."
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THE COMPANY
The Company was incorporated in January 1993 under the laws of the State of
Delaware under the name "Masada Security, Inc." Terry W. Johnson (currently the
CEO and a director of the Company) and Daryl E. Harms (currently a director of
the Company) jointly owned an existing security alarm company which conducted
business under the name "Masada Security" ("Predecessor Masada"). Messrs.
Johnson and Harms, together with an investor group including Centennial Fund
III, L.P. ("Centennial III"), Criterion Venture Partners III, Limited
("Criterion"), Norwest Equity Partners IV, A Minnesota Limited Partnership
("Norwest IV"), and South Atlantic Venture Fund II Limited Partnership ("South
Atlantic II"), formed the Company to serve as the sole general partner of Masada
Security Limited Partnership, a Delaware limited partnership (the
"Partnership"), which on February 1, 1993 acquired the security alarm business
of Predecessor Masada and the security alarm business of Network Security.
Concurrently with these acquisitions, the Company received approximately $7.6
million from the investor group for shares of the Company's Class A preferred
stock and Class B common stock, and the Partnership received $1.5 million from
Messrs. Johnson and Harms and the investor group for subordinated debentures
issued by the Partnership.
In February 1994, the Company changed its name to "Masada Security
Holdings, Inc." and formed a wholly-owned subsidiary known as "Masada Security,
Inc." ("Security"), and the Partnership was merged into Security.
Contemporaneously with this merger, the Company issued shares of its Class B
convertible preferred stock to an investor group that included Messrs. Johnson
and Harms, Centennial III, Centennial Fund IV, L.P. ("Centennial IV"),
Criterion, Norwest IV, South Atlantic II, and Hancock Venture Partners IV-Direct
Fund, L.P. ("Hancock") in exchange for the February 1993 Partnership
subordinated debentures and cash totaling approximately $7.0 million.
In May 1995, the Company received $17.5 million in gross proceeds from the
issuance of its Class C convertible preferred stock to an investor group that
included Messrs. Johnson and Harms, Centennial IV, Criterion, Norwest Equity
Partners V, A Minnesota Limited Liability Partnership ("Norwest V"), South
Atlantic II, South Atlantic Venture Fund III Limited Partnership ("South
Atlantic III"), Hancock, and Chase Venture Capital Associates ("Chase").
In September 1996, the Company's Board of Directors and stockholders
unanimously approved the Recapitalization, which will be implemented
concurrently with the consummation of this offering. The Recapitalization
provides for the automatic redemption of all outstanding shares of Class A
preferred stock, the automatic conversion of all outstanding shares of Class B
convertible preferred stock and Class C convertible preferred stock into shares
of Class B common stock and Class C common stock, respectively, and the
automatic exchange of each outstanding share of Class A common stock, Class B
common stock and Class C common stock into three shares of a new, single class
of Common Stock. The closing of this offering will not occur without
implementation of the Recapitalization.
The executive office of the Company is located at 950 22nd Street North,
Suite 800, Birmingham, Alabama 35203 and the Company's telephone number is (205)
323-7233.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds from the sale of the 2,400,000 shares of Common Stock
offered by the Company, based on an assumed initial public offering price of
$12.00 per share and after deduction of the underwriting discounts and
commissions and estimated offering expenses payable by the Company, are
estimated to be approximately $26.1 million ($30.1 million if the Underwriters'
over-allotment option is exercised in full). The Company intends to use net
proceeds as follows: (i) approximately $8.4 million to redeem all outstanding
shares of the Series A Preferred Stock and pay all accrued dividends on such
shares; and (ii) the remaining net proceeds of $17.7 million to repay a portion
of indebtedness under the Credit Facility and accrued Financing Fee of
approximately $1.1 million. The Company intends in the future to borrow under
the Credit Facility to fund the Safe Choice marketing program, to fund
subscriber account acquisitions from alarm monitoring companies, and for general
corporate purposes, including capital expenditures and working capital.
At September 30, 1996, the Company had approximately $44.4 million of
borrowings outstanding under the $50 million Credit Facility, which amount was
accruing interest at an average annual rate, including applicable margin, of
8.82%. All borrowings under the Credit Facility are due in full on September 30,
1997, at which time the Credit Facility will terminate if not extended. The
interest rates on borrowings under the Credit Facility are, at the option of the
Company, either (a) 2.25% plus the greater of (i) the rate established by
Canadian Imperial Bank of Commerce from time to time at its New York City office
as its "Base Rate" for commercial loans in U.S. dollars or (ii) the Federal
Funds Rate plus 1.00%, or (b) LIBOR plus 3.25%. These interest rates are
exclusive of the Financing Fee. The Company used substantially all of the
currently outstanding borrowings under the Credit Facility to acquire subscriber
accounts from alarm monitoring companies and alarm system dealers and to fund
the Safe Choice marketing program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources," "Business -- The Safe Choice Program," and "Business -- The
Acquisition Program."
The Company has received written commitments from its Credit Facility
lenders to amend the Credit Facility to, among other things, terminate the
Financing Fee, increase the maximum amount available under the Credit Facility
from $50 million to $70 million, and extend the maturity date of the Credit
Facility from September 30, 1997 until December 31, 1998. The lenders'
obligations to amend the Credit Facility are subject to several conditions,
including receipt by the Company of at least $27.5 million of gross proceeds
from this offering and no material adverse changes in the Company's financial
condition, operations, business, assets and prospects. In the event that gross
proceeds from this offering are less than $27.5 million, management believes,
based upon discussions with its lenders, that alternative terms to amend the
Credit Facility can be obtained. There can be no assurance that all conditions
to the commitments will be satisfied or that the Credit Facility will be so
amended. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to pay any cash dividends in the foreseeable future.
The Company intends to retain its earnings, if any, for the future operation and
expansion of its business. Additionally, the Credit Facility restricts the
Company's ability to declare or pay any dividend on, or make any distribution in
respect of, the Company's capital stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
17
<PAGE> 19
CAPITALIZATION
The following table sets forth, as of September 30, 1996, (i) the actual
capitalization of the Company; (ii) pro forma capitalization to reflect (a) the
conversion of all outstanding shares of Class B convertible preferred stock and
Class C convertible preferred stock into shares of Class B common stock and
Class C common stock, respectively, as provided for in the Recapitalization, and
(b) the exchange of each outstanding share of Class A common stock, Class B
common stock and Class C common stock for three shares of a new, single class of
Common Stock, as provided for in the Recapitalization, and (iii) as adjusted to
give effect to the sale of the 2,400,000 shares of Common Stock offered by the
Company hereby and the anticipated application of the estimated net proceeds
therefrom at an assumed offering price of $12.00 per share (less underwriting
discounts and commission and estimated offering expenses), including the payment
of approximately $8.4 million for the redemption of all outstanding shares of
Class A preferred stock and the payment of all accrued dividends on such shares.
See "Use Of Proceeds." The information in the table below is qualified in its
entirety by, and should be read in conjunction with, the consolidated financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt................................... $ 32 $ 32 $ 32
Long-term debt:
Credit Facility................................................... 44,350 44,350 27,750
Other............................................................. 9 9 9
Redeemable preferred stock:
Class A cumulative redeemable preferred stock, $.01 par value,
redemption value of $100 per share, 75,700 shares issued and
outstanding actual and pro forma; none authorized or outstanding
as adjusted..................................................... 7,570 7,570 --
Stockholders' Equity (deficit):
Class B convertible preferred stock, $.01 par value, 358,332
shares authorized and outstanding actual; none authorized or
outstanding pro forma and as adjusted........................... 3 -- --
Class C convertible preferred stock, $.01 par value, 486,111
shares authorized and outstanding actual; none authorized or
outstanding pro forma and as adjusted........................... 5 -- --
Class A common stock, $.01 par value, 333,500 shares authorized
and outstanding actual; none authorized or outstanding pro forma
and as adjusted................................................. 3 -- --
Class B common stock, $.01 par value, 1,078,572 shares authorized
and 570,240 shares outstanding actual; none authorized or
outstanding pro forma and as adjusted........................... 6 -- --
Class C common stock, $.01 par value, 486,111 shares authorized
and none outstanding actual; none authorized or outstanding pro
forma and as adjusted........................................... -- -- --
Common stock, $.01 par value, none authorized or outstanding
actual; 15,000,000 shares authorized and 5,426,826 shares
outstanding pro forma; 7,826,826 shares outstanding as
adjusted(1)..................................................... -- 54 78
Deferred compensation expense..................................... (162) (162) (162)
Paid-in capital................................................... 25,510 25,473 51,533
Accumulated deficit............................................... (23,659) (23,659) (24,489)
-------- ------- -------
Total stockholders' equity.................................... 1,706 1,706 26,960
-------- ------- -------
Total capitalization....................................... $ 53,667 $53,667 $54,751
======== ======= =======
</TABLE>
- ---------------
(1) Excludes, as of November 8, 1996, shares reserved for issuance upon exercise
of outstanding options to purchase 391,500 shares of Common Stock and
excludes shares covered by the Underwriters' over-allotment option.
18
<PAGE> 20
DILUTION
The net tangible book value of the Company as of September 30, 1996 was
approximately $(5.0) million or $(.93) per share of Common Stock, after giving
pro forma effect to the Recapitalization upon the consummation of this offering.
"Net tangible book value" represents the amount of total assets less all
intangible assets other than acquired subscriber agreements, net of accumulated
amortization, less total liabilities and redeemable preferred stock. "Net
tangible book value per share" is such amount divided by the number of shares of
Common Stock outstanding. After giving effect to the sale of the shares of
Common Stock offered hereby at an assumed initial offering price of $12.00 per
share (and deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company), the pro forma net tangible book value
of the Common Stock at September 30, 1996 would have been $26.1 million or $2.69
per share. This represents an immediate increase in net tangible book value of
$3.62 per share to existing stockholders and an immediate dilution of $9.31 to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................................... $12.00
Pro forma net tangible book value before this offering......... $ (.93)
Increase in net tangible book value attributable to new
investors................................................... 3.62
Pro forma net tangible book value after this offering...................... 2.69
-----
Net tangible book value dilution to new investors.......................... $ 9.31
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and to be paid by purchasers of the shares offered hereby (before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ -------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 5,426,826 69.3% $26,200,472 47.6% $ 4.83
New investors.............. 2,400,000 30.7 $28,800,000 52.4 $ 12.00
--------- ----- ----------- -----
Total............. 7,826,826 100.0% $55,000,472 100.0%
========= ===== =========== =====
</TABLE>
The calculations in the tables set forth above assume no exercise of the
Underwriters' over-allotment option or any management stock options.
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands, except number of subscribers)
The following table sets forth certain selected consolidated financial and
other operating data. The selected consolidated financial data in the table are
derived from the consolidated financial statements of the Company and should be
read in conjunction with the Company's consolidated financial statements and
related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus. The
selected consolidated financial data for the eleven months ended December 31,
1993, the years ended December 31, 1994 and December 31, 1995, and the six
months ended June 30, 1996 have been derived from the audited consolidated
financial statements of the Company included elsewhere in this Prospectus. The
selected consolidated financial data presented below for the nine months ended
September 30, 1995 and September 30, 1996 has been derived from the unaudited
consolidated financial statements of the Company. Operating results for the nine
months ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. The Company believes
that the unaudited information has been prepared on the same basis as the
audited financial statements and includes all material adjustments necessary for
a fair presentation of the financial position and operating results for such
period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
ELEVEN YEARS ENDED DECEMBER 31, SIX 30,
MONTHS ----------------------------- MONTHS ------------------------------
ENDED HISTORICAL ENDED HISTORICAL
DEC. 31, ----------------- PRO FORMA JUNE 30, ------------------ PRO FORMA
1993(1) 1994 1995 1995(2) 1996 1995 1996 1996(2)
-------- ------- ------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Monitoring................... $ 6,958 $ 8,756 $12,472 $ 22,326 $ 9,367 $ 8,748 $ 15,374 $ 17,424
Installation................. 2,477 3,083 3,429 5,806 2,493 2,583 3,936 3,936
Service...................... 520 678 911 1,083 677 695 1,153 1,153
Other........................ -- -- -- 484 -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Total revenues........... 9,955 12,517 16,812 29,699 12,537 12,026 20,463 22,513
Cost of revenues:
Monitoring................... 1,137 1,374 1,945 3,544 1,421 1,378 2,297 2,575
Installation................. 1,220 1,268 1,339 3,210 1,151 979 1,754 1,754
Service...................... 1,429 1,734 2,235 2,235 1,628 1,574 2,735 2,735
------- ------- ------- ------- ------- ------- -------- --------
Total cost of revenues... 3,786 4,376 5,519 8,989 4,200 3,931 6,786 7,064
------- ------- ------- ------- ------- ------- -------- --------
Gross profit............. 6,169 8,141 11,293 20,710 8,337 8,095 13,677 15,449
General and administrative
expenses................... 3,091 5,071 7,550 14,874 4,563 5,470 7,271 8,665
Noncash compensation
expense.................... -- 92 56 56 99 -- 121 121
Selling and marketing
costs...................... 1,879 2,923 5,411 5,411 3,780 3,960 6,271 6,271
Depreciation and
amortization............... 2,406 3,451 5,258 8,764 4,774 3,573 7,761 8,454
------- ------- ------- ------- ------- ------- -------- --------
Operating loss........... (1,207 ) (3,396) (6,982) (8,395 ) (4,879 ) (4,908) (7,747) (8,062 )
Interest expense, net........ 754 593 844 3,622 1,140 632 2,226 2,757
Other nonoperating expense... -- -- -- (277 ) -- -- -- (70 )
Gain on disposal of assets... -- -- -- 2 160 -- 225 225
Extraordinary loss from early
retirement of debt......... -- -- -- -- (567 ) -- (567) (567 )
Income tax expense........... -- -- -- (10 ) -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net loss................. $(1,961 ) $(3,989) $(7,826) $(12,302 ) $(6,426 ) $(5,540) $(10,315) $(11,231 )
======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).......................... $ 169 $ (1,775) $ (12) $ 630 $ (434 )
Intangible assets(3)............................... 10,362 13,292 17,719 16,570 38,501
Total assets....................................... 17,742 23,571 31,562 31,378 57,239
Long-term debt less current portion................ 11,100 10,234 10,183 6,516 44,359
Total stockholders' equity......................... 5,599 2,326 11,900 14,130 1,706
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
ELEVEN YEARS ENDED DEC. 31, SIX NINE MONTHS ENDED SEPT. 30,
MONTHS ------------------------------ MONTHS -------------------------------
ENDED HISTORICAL ENDED HISTORICAL
DEC. 31, ------------------ PRO FORMA JUNE 30, ------------------- PRO FORMA
1993(1) 1994 1995 1995(2) 1996 1995 1996 1996(2)
-------- ------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
MRR at end of period(4)........ $ 660 $ 903 $ 1,298 $ 1,298 $ 2,045 $ 1,108 $ 2,129 $ 2,129
Number of subscribers at end of
period....................... 21,051 30,053 47,060 47,060 77,927 38,699 81,607 81,607
EBITDA(5)...................... $ 1,199 $ 147 $ (1,668) $ 425 $ (6) $ (1,335) $ 135 $ 513
Less Safe Choice revenues.... (1,346 ) (1,937) (2,076) (2,076 ) (1,352) (1,541) (2,122) (2,122 )
Plus Safe Choice selling and
marketing expenses......... 1,879 2,923 5,411 5,411 3,780 3,960 6,271 6,271
------- ------- ------- ------- ------- ------- -------- --------
Adjusted EBITDA(6)......... $ 1,732 $ 1,133 $ 1,667 $ 3,760 $ 2,422 $ 1,084 $ 4,284 $ 4,662
======= ======= ======= ======= ======= ======= ======== ========
Net cash provided by (used in)
operating activities......... $ (329 ) $ 172 $ (3,595) $ 23 $ (3,207) $ (1,159)
Net cash (used in) investing
activities................... $(1,842 ) $(8,663) $(12,729) $(29,348) $ (9,255) $(32,495)
Net cash provided by financing
activities................... $ 1,212 $ 8,610 $ 16,189 $ 29,637 $ 13,807 $ 33,959
</TABLE>
- ---------------
(1) The Company commenced operations on February 1, 1993.
(2) Gives effect to acquisitions occurring during 1995 and the first nine months
of 1996 as if each had occurred on January 1, 1995.
(3) Includes acquired subscriber agreements, net of accumulated amortization and
other deferred charges and intangible assets, net of accumulated amortization.
(4) MRR is monthly recurring revenue that the Company is entitled to receive
under contracts in effect at the end of the period. MRR is a term commonly
used in the security alarm industry as a measure of the size of a company,
but not as a measure of profitability or performance, and does not include
any allowance for future attrition or allowance for doubtful accounts. The
Company does not have sufficient information as to the attrition of acquired
subscriber accounts to predict the amount of acquired MRR that will be
realized in future periods or the impact of the attrition of acquired
accounts on the Company's overall rate of attrition.
(5) EBITDA is derived by adding to net loss the sum of (i) interest expense,
(ii) depreciation and amortization expense, (iii) noncash compensation
expense related to the Company's stock option grants, and (iv) extraordinary
loss from early retirement of debt less (v) gain on disposal of assets.
EBITDA does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
net income, and is indicative neither of the Company's operating performance
nor of cash flows available to fund the Company's cash needs. Items excluded
from EBITDA are significant components in understanding and assessing the
Company's financial performance. The Company believes that EBITDA is used by
senior lenders and the investment community to determine the current
borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses. Accordingly, EBITDA is
presented to meet the investment community's expectations for comparative
data. There can be no assurance that EBITDA, as presented by the Company, is
comparable to other similarly titled measures of other security alarm
companies.
(6) Adjusted EBITDA ("Adjusted EBITDA") is derived by adding to EBITDA the Safe
Choice selling and marketing expenses, net of Safe Choice installation
revenues, during the period. Adjusted EBITDA does not represent cash flow
from operations as defined by generally accepted accounting principles,
should not be construed as an alternative to net income, and is indicative
neither of the Company's operating performance nor of cash flows available
to fund the Company's cash needs. As a result of the accounting treatment
applicable to the Company's Safe Choice marketing program, as compared to
the accounting treatment applicable to the acquisition of subscriber
accounts, the Company believes that EBITDA does not fairly reflect that a
significant component of the Company's current period expenses are being
voluntarily "invested" in the internal creation of long-term recurring
revenue Safe Choice subscriber accounts, as though the accounts were being
acquired. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General -- Accounting Policies for Safe Choice
Installations and Subscriber Account Purchases." Accordingly, the Company
presents Adjusted EBITDA as a measure which the Company believes provides a
more appropriate comparison to EBITDA as presented by companies growing
principally through acquisitions. The Company's existing credit facility
contains a financial covenant based upon Adjusted EBITDA. There can be no
assurance that Adjusted EBITDA, as presented by the Company, is comparable
to other similarly titled measures of other security alarm companies.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the historical financial condition and
results of operations of the Company as of and for the nine month periods ended
September 30, 1996 and September 30, 1995, for each of the two fiscal years
ended December 31, 1995 and December 31, 1994 and for the eleven months ended
December 31, 1993. The financial information, discussion and analysis which
follow are based upon and should be read in conjunction with the consolidated
financial statements and the notes thereto, included elsewhere herein. This
Prospectus contains forward-looking statements which involve risk and
uncertainties. The Company's actual results may differ materially from the
results discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below, in "Risk
Factors" and elsewhere in this Prospectus.
GENERAL
The Company provides security alarm monitoring services and installs and
services security alarm systems for residential and small business subscribers,
principally in the southern United States. At September 30, 1996, the Company
had over 81,000 subscriber accounts for its alarm monitoring services, a
majority of which were residential subscribers. From February 1, 1993 to
September 30, 1996, the Company has generated approximately 42,100 subscriber
accounts internally through the Safe Choice marketing program, including over
7,700 new Safe Choice subscriber accounts during the third quarter of 1996. From
September 1994 through September 1996, the Company has added approximately
39,000 subscriber accounts in 18 separate acquisitions of subscriber account
portfolios for an aggregate purchase price of approximately $33.6 million;
24,519 of these accounts were acquired during the first nine months of 1996. As
a result of the Company's Safe Choice marketing program and subscriber account
acquisitions, the Company has increased its MRR from approximately $0.6 million
at February 1, 1993 to approximately $2.1 million at September 30, 1996, which
represents an increase in annualized MRR from $7.3 million to $25.6 million.
The Company internally generates three different types of new subscriber
accounts -- Safe Choice accounts, "traditional" accounts, and Sonitrol(TM)
accounts. The Company offers to install the Safe Choice alarm system for a base
subsidized installation fee of $99 and requires the subscriber to sign an alarm
monitoring contract with an initial term of three to five years with automatic
renewals in the absence of termination by the subscriber or the Company. The
Company retains ownership of the alarm system hardware installed for the new
Safe Choice subscriber. The Company's Safe Choice subscribers also include
"conversions" -- subscribers whose monitoring hardware was installed by persons
other than the Company, such as other alarm monitoring companies that previously
provided monitoring services or builders of new homes who install monitoring
hardware without initiating monitoring service. The Company's costs associated
with generating a new Safe Choice account substantially exceed the installation
fee received from the Safe Choice subscriber. The Company also markets
"traditional" alarm systems, which are characterized by the sale of the alarm
system hardware by the Company to the subscriber at a non-subsidized price. The
average sales price of a traditional alarm system during the first nine months
of 1996 was approximately $2,000. The Company also sells Sonitrol(TM)
sound-based security systems in two counties in southern Florida as a
Sonitrol(TM) franchisee. Sonitrol represented 3.5% of the Company's MRR as of
September 30, 1996, and the average sales price of a single Sonitrol alarm
system during the first nine months of 1996 was approximately $8,000. The forms
of subscriber contracts used by the Company for traditional and Sonitrol(TM)
accounts provide for automatic renewals in the absence of termination by the
subscriber or the Company.
A majority of the Company's revenues are derived from recurring payments
for the monitoring of subscribers' security systems. The remainder of the
Company's revenues include revenues for installing Safe Choice alarm systems,
revenues derived from the sale and installation of traditional and Sonitrol
alarm systems, revenues for installing and/or selling add-ons and upgrades to
alarm systems, and revenues derived from payments for service calls performed on
a time and materials basis. Monitoring and service revenues are recognized as
the service is provided. Selling and marketing costs
22
<PAGE> 24
are related exclusively to the Safe Choice program and are expensed in the
period incurred. Direct installation costs related to Safe Choice security
systems, including materials, labor and installation overhead, are recognized
using the straight-line method over the average term of the contracts. All
direct installation costs related to traditional and Sonitrol alarm system
sales, which include materials, labor and installation overhead, and marketing
costs, are expensed in the period incurred as costs of revenues.
Accounting Policies for Safe Choice Installations and Subscriber Account
Purchases. The difference between the accounting policy for the generation of
subscriber accounts through the Company's Safe Choice program and the accounting
policy for the acquisition of subscriber account portfolios has a significant
impact on the Company's results of operations. All of the Company's costs
related to the marketing of the Safe Choice program are expensed in the period
in which such activities occur. During the first nine months of 1996, the Safe
Choice marketing expenses exceeded the associated installation revenues by an
average of $228 for each new account. Accordingly, new Safe Choice accounts
adversely affect operating results for the period in which the associated
marketing expenses are incurred. In contrast to the accounting policy for the
Safe Choice marketing expenses, all direct external costs associated with
acquisitions of subscriber accounts are capitalized and amortized over eight
years on a straight-line basis. Company personnel and related support costs
incurred solely in connection with subscriber account acquisitions and
transitions are expensed as incurred. As a result of these accounting policies,
the Company's results of operations may vary in any period depending on the
relative contributions of growth in subscriber accounts by internal generation
of Safe Choice accounts and by acquisitions of subscriber account portfolios.
Branch Offices. The expenses associated with the opening of new branch
offices are expensed in the period in which incurred and thus may substantially
impact the Company's operating results during such period. The operating margins
of the Company's branch offices improve as the number and density of subscribers
increase. Accordingly, the operating margins of the Company's oldest and largest
branches generally are superior to those of the newer branch offices. Following
the acquisition by the Company in February 1993 of the businesses of Predecessor
Masada and Network Security and through October 1994, the Company did not add to
its then existing six branch offices. During the second half of 1994, the
Company began implementing a plan to increase the number of branch offices. The
Company opened four new branches during the second half of 1994, including three
"cold start" branches, which are new branches opened prior to the acquisition by
the Company of any subscriber accounts in that market. During 1995, the Company
opened eight new branches, including five cold start branches. In June 1996, the
Company closed its San Bernadino, California branch as a result of the sale of
the Company's California subscriber accounts. The Company has not opened any new
branches in 1996 other than a satellite sales office, in part because of a
decision by the Company to limit new branches to those opened in connection with
acquisitions of subscriber account portfolios. Additionally, the Credit Facility
prohibits the Company from opening any new branches without the consent of the
lenders. The Company, however, anticipates opening additional new branch offices
during 1997 in connection with future acquisitions in new markets.
Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects the Company's revenues. See
"Risk Factors -- Attrition of Subscriber Accounts." Attrition can be measured in
terms of canceled subscriber accounts and in terms of decreased MRR resulting
from canceled subscriber accounts. Gross subscriber attrition is defined by the
Company for a particular period as a quotient, the numerator of which is equal
to the number of subscribers who disconnect during such period and the
denominator of which is the average of the number of subscribers at each month
end during such period. Net MRR attrition is defined by the Company for a
particular period as a quotient, the numerator of which is an amount equal to
gross MRR lost as the result of canceled subscriber accounts during such period,
net of MRR during such period (i) generated by increases in rates to existing
subscribers, (ii) resulting from the reconnection of premises previously
occupied by subscribers of the Company or of prior subscribers of the Company,
(iii) resulting from conversions and (iv) associated with canceled accounts with
respect to
23
<PAGE> 25
which the Company obtained an account guarantee, and the denominator of which is
the average month-end MRR in effect during such period. Although the Company
believes that its formulas of gross subscriber attrition and net MRR attrition
are identical to those used by another publicly traded security alarm company,
there can be no assurance that gross subscriber attrition and net MRR attrition,
as presented by the Company, is comparable to other similarly titled measures of
other alarm monitoring companies. The following table sets forth the Company's
gross subscriber attrition and net MRR attrition for the periods indicated:
<TABLE>
<CAPTION>
ELEVEN
MONTHS TWELVE MONTHS ENDED
ENDED -------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Gross subscriber attrition.... 17.6% 20.3% 16.1% 18.6%
Net MRR attrition............. 14.7% 15.4% 10.2% 6.8%
</TABLE>
The decrease in net MRR attrition from 10.2% for the twelve month period
ended December 31, 1995 to 6.8% for the twelve month period ended September 30,
1996 reflects the substantial increase in account conversions during the first
nine months of 1996. Conversions, which are included by the Company as Safe
Choice accounts, have increased during 1996 as a result of increased emphasis on
marketing to residents of newly constructed homes. If the Company's definition
of net MRR attrition did not include conversions, the Company's net MRR
attrition for the periods shown in the above table would have been 14.8%, 15.7%,
11.1% and 12.1%, respectively. As shown in the following table, conversions have
increased from 471 for 1995 to 4,024 for the first nine months of 1996 and
constituted approximately 9.0% of the Company's new subscriber accounts (without
regard to attrition) during the first nine months of 1996. If conversions, as a
percentage of new subscriber accounts, increase in future periods, the net MRR
attrition will likely continue to decrease. Correspondingly, decreases in
conversions, as a percentage of new subscriber accounts, will likely cause the
net MRR attrition to increase. The Company has had limited experience with
respect to subscriber attrition of conversions. These accounts frequently have a
shorter contractual term than accounts based on Safe Choice systems installed by
the Company. There can be no assurance that the Company will not experience
higher subscriber attrition with respect to conversions.
24
<PAGE> 26
The table below sets forth the change in the Company's subscriber base over
periods 1993-1995 and the first nine months of 1996:
<TABLE>
<CAPTION>
SEPT. 30,
1993 1994 1995 1996
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Number of Subscribers:
Beginning of period................................... 18,906 21,051 30,053 47,060
Additions through Safe Choice:
New installations................................... 4,413 7,922 11,072 14,182
Conversions......................................... 27 71 471 4,024
Additions through traditional sales................... 1,117 1,037 502 733
Reconnections......................................... 140 545 1,126 1,279
Additions through portfolio acquisitions.............. -- 4,453 9,904 24,519
Reductions through portfolio dispositions............. -- -- -- (511)
Gross subscriber attrition............................ (3,552) (5,026) (6,068) (9,679)
------ ------ ------ --------
End of Period.................................. 21,051 30,053 47,060 81,607
====== ====== ====== ========
</TABLE>
Average MRR per Subscriber. The average MRR per subscriber has decreased
from approximately $31.35 at December 31, 1993 to approximately $26.09 at
September 30, 1996 or 16.8%. This decrease is the result of several factors.
First, MRR generated from the monitoring of Sonitrol(TM) security systems, which
generates substantially higher MRR per subscriber, has decreased as a percentage
of the Company's gross MRR. Second, the Company has recently acquired several
security alarm account portfolios with lower MRR per subscriber than that of the
Company's Safe Choice accounts. Third, as part of its strategy to increase
market penetration, the Company has lowered basic monthly monitoring rates in
certain instances, particularly in connection with conversion accounts. There
can be no assurance that the average MRR per subscriber will not decrease in the
future.
Future Net Losses. The Company expects to incur net losses for the
foreseeable future. See "Risk Factors -- Limited Operating History; History of
Net Losses; Anticipated Future Losses." The negative gross margins generated by
the Safe Choice marketing program comprised approximately 40%, 43%, 25% and 27%
of the Company's net losses during the first nine months of 1996, the years
ended December 31, 1995 and 1994, and the eleven months ended December 31, 1993,
respectively. Other factors contributing to the Company's net losses include the
charges incurred by the Company for amortization of purchased subscriber
accounts and interest incurred on its indebtedness. Although the Safe Choice
marketing program adversely impacts current period results, the Company believes
the Safe Choice marketing program will benefit operating results in future years
because of the ongoing monitoring revenues associated with the Safe Choice
accounts.
25
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED SEPT. 30,
------------------------- ------------------
1993 1994 1995 1995 1996
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Revenues:
Monitoring.............................................. 69.9% 70.0% 74.2% 72.7% 75.1%
Installation............................................ 24.9 24.6 20.4 21.5 19.2
Service................................................. 5.2 5.4 5.4 5.8 5.7
----- ----- ----- ----- -----
Total revenues:.................................. 100.0 100.0 100.0 100.0 100.0
Costs of revenues:
Monitoring.............................................. 11.4 11.0 11.6 11.5 11.2
Installation............................................ 12.2 10.1 7.9 8.1 8.6
Service................................................. 14.4 13.9 13.3 13.1 13.4
----- ----- ----- ----- -----
Total costs of revenues.......................... 38.0 35.0 32.8 32.7 33.2
----- ----- ----- ----- -----
Gross profit..................................... 62.0 65.0 67.2 67.3 66.8
----- ----- ----- ----- -----
General and administrative expenses..................... 31.0 40.5 44.9 45.5 35.5
Noncash compensation expense............................ .7 .3 .6
Selling and marketing costs............................. 18.9 23.3 32.2 32.9 30.6
Depreciation and amortization........................... 24.2 27.6 31.3 29.7 38.0
----- ----- ----- ----- -----
Operating (loss)................................. (12.1)% (27.1)% (41.5)% (40.8)% (37.9)%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. Revenues for the first nine months of 1996 increased by $8.4
million, or 70.2% to $20.5 million from $12.0 million for the comparable 1995
period. Monitoring revenue increased by $6.6 million or 75.7%, which was caused
by the addition of approximately 42,900 subscribers during the twelve months
ended September 30, 1996. The increase in subscribers was a result of new Safe
Choice subscribers and the acquisition of portfolios of subscriber accounts. MRR
increased to $2.1 million at September 30, 1996 from $1.1 million at September
30, 1995. Installation revenues, which includes revenues from installations of
Safe Choice systems and from sales of traditional and Sonitrol alarm systems,
increased by 52.4% to $3.9 million during 1996 from $2.6 million during 1995.
The number of new Safe Choice installations and conversions increased by 129.3%
during the nine months ended September 30, 1996 when compared to the nine months
ended September 30, 1995. This increase was caused by the Company operating 18
branch offices during the entire nine month period ended September 30, 1996 in
contrast to the Company opening 8 of its 18 branch offices during the first nine
months of 1995.
Cost of Revenues. Cost of revenues for the first nine months of 1996
increased by $2.9 million, or 72.6% to $6.8 million from $3.9 million for the
comparable period in 1995. Cost of revenues as a percentage of total revenues
increased to 33.2% from 32.7% during the same periods. Monitoring expenses
increased by $.9 million or 66.7%. Monitoring expenses declined as a percentage
of total revenues to 11.2% during the nine months ended September 30, 1996 as
compared to 11.5% for the comparable period in 1995. The decline as a percentage
of total revenues was the result of improved economies of scale at the central
monitoring station generated by the increase in subscribers. Installation
expenses, which include only expenses related to the installation of traditional
and Sonitrol alarm systems, increased $.8 million or 79.2% to $1.8 million for
the nine months ended September 30, 1996 from $1.0 million for the nine months
ended September 30, 1995. As a percent of revenues, installation expenses
increased to 8.6% for the period ended September 30, 1996 as compared to 8.1%
for the comparable period in 1995. A substantial increase in the sale of
traditional alarm systems in one of the Company's markets was the principal
cause of this increase.
Gross Profit. Gross profit for the nine months ended September 30, 1996
was $13.7 million, which represents an increase of $5.6 million, or 69.0%, over
the $8.1 million of gross profit recognized during the comparable 1995 period.
Such increase was primarily caused by an 100.0% increase in the average
26
<PAGE> 28
number of subscribers for the nine months ended September 30, 1996 as compared
to the first nine months of 1995. This increase was partially offset by a
decrease in the average MRR per subscriber during the first nine months of 1996,
which was a result of the acquisition of portfolios of subscriber accounts that
had a lower MRR per subscriber than the Company's historical average and a
decrease in MRR per subscriber from new subscribers generated by the Company's
sales and marketing efforts.
General and Administrative Expenses. General and administrative expenses
rose to $7.3 million for the nine months ended September 30, 1996, which
represents an increase of $1.8 million, or 32.9%,
over general and administrative expenses for the comparable period in 1995. Such
figures as a percentage of total revenues decreased to 35.5% for the nine months
ended September 30, 1996, from 45.5% for the nine months ended September 30,
1995. The reduction in general and administrative expenses as a percentage of
total revenues is primarily the result of improvement in operating efficiencies
of branch offices opened during late 1994 and 1995, the growth in subscriber
accounts from portfolio acquisitions serviced by existing branch offices, and
the fact that the Company did not open any new branch offices during the first
nine months of 1996.
Selling and Marketing Costs. Selling and marketing costs related to the
Company's Safe Choice program were $6.3 million for the nine months ended
September 30, 1996, reflecting an increase of $2.3 million or 58.4% over selling
and marketing costs for the comparable 1995 period. The increase was a result of
a 129.3% increase in the number of subscribers generated by the Safe Choice
program, including account conversions. Selling and marketing costs grew at a
slower rate than the growth in revenues because of the operating efficiencies
created by the Company's increasing volume of Safe Choice installations in
existing markets.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the nine months ended September 30, 1996 increased by $4.2 million,
or 117.2%, to $7.8 million from $3.6 million for the nine months ended September
30, 1995. This increase was the result of the addition of approximately 22,000
Safe Choice subscriber accounts during the twelve months from October 1, 1995 to
September 30, 1996 and the Company's acquisition of approximately 30,000
subscriber accounts during the same twelve month period.
Interest Expense. Interest expense increased by $1.6 million to $2.2
million during the nine months ended September 30, 1996. This increase was
caused by an increase in the debt outstanding under the Company's credit
facility to approximately $44.4 million at September 30, 1996 as compared to
$6.2 million outstanding at September 30, 1995. The Company increased its
borrowings during the first nine months of 1996 to fund Safe Choice account
growth and the acquisition of subscriber account portfolios. The Company used
borrowings totaling $23.5 million during the first nine months of 1996 to
consummate subscriber account acquisitions. The Company anticipates that its
interest expense will increase by more than $400,000 per month in the fourth
quarter of 1996 and during 1997 as long as the Financing Fee continues to
accrue.
1995 COMPARED TO 1994
Revenues. Revenues for 1995 increased by $4.3 million, or 34.3% to $16.8
million from $12.5 million for 1994. Monitoring revenue increased by $3.7
million or 42.4%, which was the result of the addition of approximately 17,000
subscribers during 1995. The increase in subscribers was primarily the result of
new Safe Choice subscribers and acquisitions of subscriber account portfolios.
MRR increased to $1.3 million at December 31, 1995 from $.9 million at December
31, 1994. Installation revenues increased by 11.2% from $3.1 million during 1994
to $3.4 million during 1995. Installation revenue grew at a slower rate than
monitoring revenue primarily as a result of the Company's increased focus on the
acquisition of portfolios of subscriber accounts during 1995. Safe Choice
installations and conversions increased by 44.4% from 1994 to 1995 and additions
from portfolio acquisitions increased by 122.4% from 1994 to 1995.
Cost of revenues. Cost of revenues for 1995 increased by $1.1 million, or
26.1% to $5.5 million from $4.4 million in 1994. Cost of revenues as a
percentage of total revenues declined to 32.8% during
1995 from 35.0% during 1994. Monitoring expenses increased by $.6 million, or
41.6% primarily due to
27
<PAGE> 29
the increased activity at the Company's central monitoring station as a result
of a larger subscriber base. Monitoring expenses as a percentage of monitoring
revenue decreased to 15.6% during 1995 from 15.7% during 1994. Such decrease
reflected improved efficiencies as a result of the relocation of the Company's
central monitoring station in 1995 to Birmingham, Alabama from Ft. Lauderdale,
Florida. These improved efficiencies were offset by a lower MRR per subscriber
in 1995 due primarily to the acquisition of portfolios of subscriber accounts
that had a lower average MRR per subscriber than the Company's average and a
decrease in the MRR per subscriber from new internally generated subscribers.
Service expenses increased by $.5 million or 28.9%, primarily due to a larger
subscriber base. Service expense as a percentage of total revenue decreased from
1994 to 1995 as a result of economies of scale and improved efficiencies due to
a larger subscriber base.
Gross profit. Gross profit for 1995 was $11.3 million, which represents an
increase of $3.2 million, or 38.7%, over the $8.1 million of gross profit
recognized in 1994. Such increase was caused primarily by an increase in
monitoring activity, which paralleled the increase in the Company's subscriber
base from 30,053 at December 31, 1994 to 47,060 at December 31, 1995. Gross
profit as a percentage of total revenues was 67.2% for 1995 as compared to 65.0%
for 1994. This increase was caused primarily by an increase in monitoring
revenues as a percentage of total revenues.
General and administrative expenses. General and administrative expenses
rose to $7.6 million in 1995, which represents an increase of $2.5 million, or
48.9%, over general and administrative expenses in 1994. Such figure as a
percentage of total revenues increased to 44.9% in 1995 from 40.5% in 1994, due
primarily to the opening of eight branch offices during 1995 and four branch
offices during 1994. The increase in expenses was caused by an increase in
corporate and branch overhead expenses incurred to support the additional
offices and a larger subscriber base. The provision for doubtful accounts
increased to $250,000 in 1995 from $85,000 in 1994, reflecting an increase in
the Company's subscriber base.
Selling and marketing costs. Selling and marketing costs related to the
Company's Safe Choice program for 1995 totaled $5.4 million, reflecting an
increase of $2.5 million, or 85.1%, over selling and marketing costs in 1994.
The increase was caused by a 39.8% increase in the number of subscribers
generated by the Safe Choice program, an increase in the number of supervisory
personnel required to manage the additional offices added by the Company during
1995, an increase in training costs to support an increase in the number of
sales consultants, and a modification to the Company's commission rate schedule
for Safe Choice sales consultants in order to attract and retain the Company's
sales force.
Depreciation and amortization expense. Depreciation and amortization
increased by $1.8 million, or 52.4%, to $5.3 million during 1995. The increase
was the result of the addition of approximately 11,500 Safe Choice subscriber
accounts and the Company's purchase of approximately 9,900 subscriber accounts
through portfolio acquisitions during 1995.
Interest expense. Interest expense increased by 42.3% to $.8 million in
1995 from $.6 million in 1994, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth.
1994 COMPARED TO THE ELEVEN MONTHS ENDED DECEMBER 31, 1993
Revenues. Revenues for 1994 increased by $2.6 million, or 25.7%, to $12.5
million from $10.0 million for 1993. Monitoring revenue increased by $1.8
million or 25.8%, due to the addition of approximately 9,000 subscribers during
1994. The increase in subscribers was primarily a result of new subscribers
generated by the Company's sales and marketing efforts. MRR increased to $.9
million at December 31, 1994 from $.7 million at December 31, 1993. Installation
revenues increased by approximately 24.5% to $3.1 million during 1994 from $2.5
million during 1993.
Cost of revenues. Cost of revenues for fiscal 1994 increased by $.6
million, or 15.6% to $4.4 million. Cost of revenues as a percentage of total
revenues declined to 35.0% during 1994 from 38.0% during
28
<PAGE> 30
1993. Monitoring expenses increased by $.2 million, or 20.8%. Monitoring
expenses as a percentage of monitoring revenue decreased to 15.7% during 1994
from 16.3% during 1993. Such decrease reflects improved economies of scale at
the central monitoring station as a result of the increase in subscriber
accounts. Service expenses increased by $.3 million or 21.3%, primarily due to a
larger subscriber base. Service expense as a percentage of total revenue
decreased from 1993 to 1994 as a result of a decrease in the average cost of
service per account.
Gross profit. Gross profit for 1994 was $8.1 million, which represents an
increase of $2.0 million, or 32.0%, over the $6.2 million of gross profit
recognized in 1993. Such increase was caused primarily by an increase in
monitoring activity, which paralleled the increase in the Company's subscriber
base from 21,051 at December 31, 1993 to 30,053 at December 31, 1994. Gross
profit as a percentage of total revenues was 65.0% for 1994 as compared to 62.0%
for 1993. This increase was caused primarily by an increase in monitoring
revenues as a percentage of total revenues.
General and administrative expenses. General and administrative expenses
rose to $5.1 million in 1994, which represents an increase of $2.0 million, or
64.1%, over general and administrative expenses in 1993. Such figure as a
percentage of total revenues increased to 40.5% in 1994 from 31.0% in 1993, due
primarily to the opening of four branch offices during 1994. The increase in
expenses was caused by an increase in corporate and branch overhead expenses
incurred to support the additional offices and a larger subscriber base. During
1994 the Company established a provision for doubtful accounts of $85,000 as a
result of an increase in the Company's subscriber base of 42.8%.
Selling and marketing costs. Selling and marketing costs related to the
Safe Choice program for 1994 totaled $2.9 million, reflecting an increase of
$1.0 million, or 55.6%, over selling and marketing costs in 1993. The increase
was a result of a 79.5% increase in the number of subscribers generated by the
Safe Choice program and an increase in the number of supervisory personnel
required to manage the additional offices added by the Company during 1994.
Depreciation and amortization expense. Depreciation and amortization
increased by $1.0 million, or 43.4%, to $3.5 million for 1994. The increase was
the result of the addition of approximately 8,000 Safe Choice subscriber
accounts during 1994.
Interest expense. Interest expense decreased to $.6 million for 1994 from
$.8 million for 1993 as a result of the Company's use of proceeds from the
issuance of preferred stock to reduce the Company's indebtedness.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited statement of operations and
other data for each quarter of 1995 and the first three quarters of 1996, as
well as such data expressed as a percentage of the Company's total revenues for
the periods provided. The consolidated statement of operations has been derived
from unaudited financial statements and has been prepared on the same basis as
the Company's audited financial statements which appear elsewhere in this
Prospectus. In the opinion of the Company's management, this data includes all
material adjustments necessary for a fair presentation of such data. Results set
forth below are not necessarily comparable to, or indicative of, results of
future periods.
29
<PAGE> 31
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT NUMBER OF SUBSCRIBERS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Monitoring........................ $ 2,720 $ 2,867 $ 3,161 $ 3,724 $ 4,092 $ 5,276 $ 6,006
Installation...................... 780 846 957 846 1,186 1,307 1,443
Service........................... 202 233 260 216 293 383 477
------- ------- ------- ------- ------- ------- -------
Total revenues............... 3,702 3,946 4,378 4,786 5,571 6,966 7,926
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Monitoring........................ 507 435 436 567 651 770 876
Installation...................... 269 353 357 360 523 628 603
Service........................... 479 504 591 661 741 887 1,107
------- ------- ------- ------- ------- ------- -------
Total cost of revenues....... 1,255 1,292 1,384 1,588 1,915 2,285 2,586
------- ------- ------- ------- ------- ------- -------
Gross profit................. 2,447 2,654 2,994 3,198 3,656 4,681 5,340
General and administrative.......... 1,519 1,797 2,154 2,080 2,024 2,539 2,708
Noncash compensation expense........ -- -- -- 56 30 69 22
Selling and marketing costs......... 1,082 1,339 1,539 1,451 1,672 2,108 2,491
Depreciation and amortization....... 1,165 1,165 1,243 1,685 1,559 3,215 2,987
------- ------- ------- ------- ------- ------- -------
Operating loss............... $(1,319) $(1,647) $(1,942) $(2,074) $(1,629) $(3,250) $(2,868)
======= ======= ======= ======= ======= ======= =======
OTHER OPERATING DATA:
EBITDA(1)........................... $ (154) $ (482) $ (699) $ (333) $ (40) $ 34 $ 141
Less Safe Choice revenues......... (474) (484) (583) (535) (622) (730) (770)
Plus Safe Choice selling and
marketing expenses.............. 1,082 1,339 1,539 1,451 1,672 2,108 2,491
------- ------- ------- ------- ------- ------- -------
Adjusted EBITDA(2).............. $ 454 $ 373 $ 257 $ 583 $ 1,010 $ 1,412 $ 1,862
======= ======= ======= ======= ======= ======= =======
CERTAIN SUBSCRIBER DATA:
MRR at end of period(3)............. $ 948 $ 1,051 $ 1,108 $ 1,298 $ 1,842 $ 2,045 $ 2,129
Number of subscribers at end of
period............................ 31,886 36,353 38,699 47,060 69,147 77,927 81,607
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Monitoring........................ 73.5 % 72.7 % 72.2 % 77.8 % 73.4 % 75.7 % 75.8 %
Installation...................... 21.1 21.4 21.9 17.7 21.3 18.8 18.2
Service........................... 5.4 5.9 5.9 4.5 5.3 5.5 6.0
------- ------- ------- ------- ------- ------- -------
Total revenues............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Monitoring........................ 13.7 11.0 9.9 11.9 11.7 11.1 11.0
Installation...................... 7.3 8.9 8.2 7.5 9.4 9.0 7.6
Service........................... 12.9 12.8 13.5 13.8 13.3 12.7 14.0
------- ------- ------- ------- ------- ------- -------
Total cost of revenues....... 33.9 32.7 31.6 33.2 34.4 32.8 32.6
------- ------- ------- ------- ------- ------- -------
Gross profit................. 66.1 67.3 68.4 66.8 65.6 67.2 67.4
General and administrative.......... 41.0 45.6 49.2 43.4 36.3 36.4 34.2
Noncash compensation expense........ -- -- -- 1.2 .5 1.0 .3
Selling and marketing............... 29.2 33.9 35.2 30.3 30.0 30.3 31.4
Depreciation and amortization....... 31.5 29.5 28.4 35.2 28.0 46.2 37.7
------- ------- ------- ------- ------- ------- -------
Operating loss............... (35.6)% (41.7)% (44.4)% (43.3)% (29.2)% (46.7)% (36.2)%
======= ======= ======= ======= ======= ======= =======
OTHER OPERATING DATA:
EBITDA(1)........................... (4.2)% (12.2)% (16.0)% (7.0)% (.7)% .5 % 1.8 %
Less Safe Choice revenues......... (12.8) (12.3) (13.3) (11.2) (11.2) (10.5) (9.7)
Plus Safe Choice selling and
marketing expenses.............. 29.2 33.9 35.2 30.3 30.0 30.3 31.4
------- ------- ------- ------- ------- ------- -------
Adjusted EBITDA(2)........... 12.2 % 9.4 % 5.9 % 12.1 % 18.1 % 20.3% 23.5 %
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) EBITDA is derived by adding to net loss the sum of (i) interest expense,
(ii) depreciation and amortization expense, (iii) noncash compensation expense
related to the Company's stock option grants, and (iv) extraordinary loss from
early retirement of debt less (v) gain on disposal of assets. EBITDA does not
30
<PAGE> 32
represent cash flow from operations as defined by generally accepted
accounting principles, should not be construed as an alternative to net
income, and is indicative neither of the Company's operating performance nor
of cash flows available to fund the Company's cash needs. Items excluded from
EBITDA are significant components in understanding and assessing the Company's
financial performance. The Company believes that EBITDA is used by senior
lenders and the investment community to determine the current borrowing
capacity and to estimate the long-term value of companies with recurring cash
flows from operations and net losses. Accordingly, EBITDA is presented to meet
the investment community's expectations for comparative data. There can be no
assurance that EBITDA, as presented by the Company, is comparable to other
similarly titled measures of other security alarm companies. Information
regarding the Company's cash flows for 1995 and the nine months ended
September 30, 1996 appear elsewhere in this Prospectus. See "Prospectus
Summary," "Selected Consolidated Financial and Operating Data," and "Index to
Consolidated Financial Statements."
(2) Adjusted EBITDA ("Adjusted EBITDA") is derived by adding to EBITDA the Safe
Choice selling and marketing expenses, net of Safe Choice installation
revenues, during the period. Adjusted EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles, should not
be construed as an alternative to net income, and is indicative neither of the
Company's operating performance nor of cash flows available to fund the
Company's cash needs. As a result of the accounting treatment applicable to
the Company's Safe Choice marketing program, as compared to the accounting
treatment applicable to the acquisition of subscriber accounts, the Company
believes that EBITDA does not fairly reflect that a significant component of
the Company's current period expenses are being voluntarily "invested" in the
internal creation of long-term recurring revenue Safe Choice subscriber
accounts, as though the accounts were being acquired. See "-- Accounting
Policies for Safe Choice Installations and Subscriber Account Purchases."
Accordingly, the Company presents Adjusted EBITDA as a measure which the
Company believes provides a more appropriate comparison to EBITDA as presented
by companies growing principally through acquisitions. The Company's existing
credit facility contains a financial covenant based upon Adjusted EBITDA.
There can be no assurance that Adjusted EBITDA, as presented by the Company,
is comparable to other similarly titled measures of other security alarm
companies. Information regarding the Company's cash flows for 1995 and the
nine months ended September 30, 1996 appear elsewhere in this Prospectus. See
"Prospectus Summary," "Selected Consolidated Financial and Operating Data,"
and "Index to Consolidated Financial Statements."
(3) MRR is monthly recurring revenue that the Company is entitled to receive
under contracts in effect at the end of the period. MRR is a term commonly
used in the security alarm industry as a measure of the size of a company, but
not as measure of profitability or performance, and does not include any
allowance for future attrition or allowance for doubtful accounts. The Company
does not have sufficient information as to the attrition of acquired
subscriber accounts to predict the amount of acquired MRR that will be
realized in future periods or the impact of the attrition of acquired accounts
on the Company's overall rate of attrition.
The Company's revenues increased in each quarter in 1995 and the first
three quarters of 1996, primarily as a result of increases in the number of
subscribers to the Company's monitoring services. Such subscriber increases have
resulted from the addition of subscribers through sales and marketing efforts of
the Company's personnel and the acquisition of subscriber account portfolios.
Gross profit as a percentage of sales increased each quarter through 1995 but
decreased slightly in the first quarter of 1996 due to the expenses incurred to
increase monitoring personnel in preparation for the consummation of the March
1996 acquisition of the Intercap subscriber account portfolio and due to an
increase in the sale of traditional alarm systems in one of the Company's
markets. Depreciation and amortization increased in the second and third
quarters of 1996 as a result of the March 1996 Intercap acquisition. See
"Business -- The Acquisition Program."
The Company historically has experienced fluctuations in its quarterly
operating results and expects to experience fluctuations of quarterly operating
results in the future. These fluctuations may be caused by many factors,
including, among others, the opening of new branch offices, the volume and
timing of additional internally generated subscriber accounts, the size and
timing of acquisitions of subscriber account portfolios, new subscriber
assimilation, attrition experience, competitive pricing pressures, local and
national crime activity, general economic conditions, and seasonality. The Safe
Choice marketing program can be hampered during the winter months as a result of
unfavorable weather conditions, holidays, and reduced hours of daylight. The
Company's expense levels are based, to some extent, on its expectations of
future subscriber and revenue levels, which are dependent on estimates of
internally generated additions of subscriber accounts and of subscriber account
portfolio
31
<PAGE> 33
acquisitions. The Company may be unable, therefore, to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall due to less
than anticipated levels of internally generated accounts or a delay in the
timing of acquisitions. Given the possibility of quarterly fluctuations, the
Company believes that comparisons of the results of its operations for preceding
quarters are not necessarily meaningful and that the results for any one quarter
should not be relied upon as an indication of future performance. In the event
that the Company's revenues or operating results for any quarter are less than
the level expected by securities analysts or the market in general, such
shortfall could have an immediate and significant adverse impact on the market
price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
General. Since February 1993, the Company has financed its operations and
growth from a combination of borrowings under the Company's revolving credit
facilities and sales of stock. The Company's principal uses of cash are the
costs associated with marketing and installing Safe Choice systems, acquisitions
of subscriber account portfolios, and interest payments on borrowings under the
Credit Facility described below. A substantial portion of the Company's future
operating cash flow will be used to fund the Safe Choice marketing and
installation costs and to service the Company's debt.
Approximately $16.6 million of the proceeds of this offering will be used
to reduce the amount outstanding under the Credit Facility to approximately
$27.8 million. See "Use of Proceeds." The Company believes that after
application of the proceeds of this offering, the funds available under the
Credit Facility would be adequate to meet the Company's anticipated requirements
for operating expenses (including Safe Choice marketing and installation costs),
interest payments required by the Credit Facility, and capital expenditures
through December 1997. The substantial costs associated with the Safe Choice
marketing program, however, could exhaust the Company's current borrowing
capacity prior to that date, particularly if the Company's growth in Safe Choice
installations continues. The Company will need additional capital to pay the
principal indebtedness of the Credit Facility and certain fees required by the
Credit Facility, all of which is due on September 30, 1997, unless the maturity
of the Credit Facility is extended. Future acquisitions of subscriber account
portfolios will likely require additional financing. Although the Company
believes that it can obtain additional debt financing and/or an extension of the
Credit Facility maturity date beyond September 30, 1997, there can be no
assurance that additional capital or an extension of the Credit Facility
maturity date will be available to the Company on terms favorable to the Company
or at all. See "Risk Factors -- Need for Additional Capital" and " --Risks
Related to Leverage." In the event the maturity of the Credit Facility is not
extended beyond September 30, 1997, the Company will attempt to obtain
replacement debt financing or sell additional equity securities during 1997 in
order to repay the Credit Facility on or before September 30, 1997.
For the nine months ended September 30, 1996, the Company's net cash
provided by (used in) operating activities was $(1.2) million, compared to
($3.2) million for the comparable period in 1995. The improvement in net cash
(used in) operations for the nine months ended September 30, 1996 compared to
the corresponding 1995 period was caused in part by an increase in subscriber
deposits and accrued liabilities resulting from the growth in the Company's
subscriber base and the related increase in accrued liabilities. An increase in
accounts payable during the 1996 period caused by the growth of the Company and
the timing of disbursements for payment of accounts payable also contributed to
this improvement in net cash (used in) operations for the 1996 period. Changes
in operating assets and liabilities between the nine months ended September 30,
1996 and the comparable 1995 period generally were the result of greater current
assets and current liabilities during 1996 due to the growth of the Company in
1996. During 1995, 1994 and the eleven months ended December 31, 1993, the
Company's net cash provided by (used in) operating activities was ($3.6)
million, $.2 million and ($.3) million, respectively.
For the nine months ended September 30, 1996, the Company's net cash (used
in) investing activities was ($32.5) million, compared to ($9.3) million for the
comparable period in 1995, primarily
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<PAGE> 34
as a result of the acquisition of subscriber account portfolios. During 1995,
1994, and the eleven months ended December 31, 1993, the Company's net cash
(used in) investing activities was ($12.7) million, ($8.7) million, and ($1.8)
million, respectively, primarily as a result of the acquisition of subscriber
account portfolios and capitalized Safe Choice installation costs during 1995
and 1994, and primarily as a result of capitalized Safe Choice installation
costs during 1993.
During the nine months ended September 30, 1996, the Company's net cash
provided by financing activities was $34.0 million, compared to $13.8 million
for the comparable period in 1995. During 1995, 1994, and the eleven months
ended December 31, 1993, the Company's net cash provided by financing activities
was $16.2 million, $8.6 million, and $1.2 million respectively. Financing
activities were principally the result of the issuance and retirement of term
debt during the first nine months of 1996, and the issuance of preferred stock
and the issuance and retirement of long-term debt during 1995 and 1994.
Credit Facility. On March 28, 1996, the Company entered into an agreement
with affiliates of Canadian Imperial Bank of Commerce (collectively, "CIBC") and
SunTrust Bank, Central Florida, N.A. (collectively, the "Lenders") that
established the Credit Facility. The maximum amount available under the Credit
Facility is $50.0 million. The Company had approximately $44.4 million
outstanding under the Credit Facility at October 1, 1996. On June 4, 1996,
August 9, 1996 and October 10, 1996, the Company and the Lenders amended the
Credit Facility to relax certain financial covenants and other provisions. The
Credit Facility matures on September 30, 1997, subject to earlier termination.
Availability under the Credit Facility is restricted in two ways: (i) the
ratio of principal indebtedness under the Credit Facility plus the face amount
of all outstanding letters of credit issued under the Credit Facility to MRR;
and (ii) aggregate advances for acquisitions of subscriber account portfolios
cannot exceed a specified amount. The more restrictive of these availability
tests resulted in total remaining availability of approximately $1.8 million at
October 1, 1996.
The interest rates on borrowings under the Credit Facility are, at the
option of the Company, either (a) 2.25% plus the greater of (i) the rate
established by CIBC from time to time at its New York City office as its "Base
Rate" for commercial loans in U.S. dollars or (ii) the Federal Funds Rate plus
1.00% or (b) LIBOR plus 3.25%. The Company has paid to the Lenders facility fees
totaling $1.6 million and is obligated to pay the Lenders a quarterly fee of .5%
per annum on the aggregate daily unused portion of the Credit Facility. Because
the Credit Facility was not paid in full by September 30, 1996, the Company is
obligated to pay the Lenders a financing fee equal to .0275% multiplied by the
average commitment amount under the Credit Facility multiplied by the number of
days between September 25, 1996 and the date on which the Credit Facility is
paid in full (the "Financing Fee"). Accordingly, the Financing Fee began to
accrue on September 25, 1996 at a daily rate of $13,750. The proceeds from this
offering will not be sufficient to pay the entire balance due under the Credit
Facility. If the Company does not pay the Credit Facility in full until the
Credit Facility matures on September 30, 1997, the Financing Fee will be
approximately $5.0 million.
The Company has received written commitments from its Credit Facility
lenders to amend the Credit Facility to, among other things, terminate the
Financing Fee, increase the maximum amount available under the Credit Facility
from $50 million to $70 million, and extend the maturity date of the Credit
Facility from September 30, 1997 until December 31, 1998. The lenders'
obligations to amend the Credit Facility are subject to several conditions,
including receipt by the Company of at least $27.5 million of gross proceeds
from this offering and no material adverse changes in the Company's financial
condition, operations, business, assets and prospects. In the event that gross
proceeds from this offering are less than $27.5 million, management believes,
based upon discussions with its lenders, that alternative terms to amend the
Credit Facility can be obtained. There can be no assurance that all conditions
to the commitments will be satisfied or that the Credit Facility will be so
amended.
The Credit Facility contains customary covenants including, among others,
restrictions on the incurrence of debt, encumbrances on or sale of assets,
mergers and acquisitions, investments, dividends, and transactions with
affiliates. Financial covenants include the maintenance of (i) a minimum ratio
of adjusted net operating income to total debt service, (ii) a maximum ratio of
total debt to annualized adjusted net operating income, (iii) maximum capital
expenditures during the term of the Credit Facility, (iv) maximum Safe Choice
capital expenditures and purchases of subscriber
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<PAGE> 35
accounts from dealers determined monthly, and (v) a maximum ratio of Credit
Facility indebtedness, including Credit Facility letters of credit, to MRR.
The Credit Facility prohibits all transfers of funds, such as loans,
advances, and dividends, to the Company from its subsidiaries, except that
Security may pay up to $100,000 annually to the Company for legal and accounting
fees, directors' fees and expenses, and other administrative costs. The Company
believes that such restrictions have not had and will not have a significant
impact on the Company's ability to meet its cash obligations.
Capital Expenditures. The Company anticipates making capital expenditures
during the three month period ended December 31, 1996 of $.4 million for
computers and other capital items. The Company anticipates that capital
expenditures for equipment and installations related to the Safe Choice program
will be approximately $2.5 for the three month period ended December 31, 1996.
In addition, the Company anticipates making capital expenditures of
approximately $1.0 million for the upgrading of its monitoring and
administrative software during 1997. The Company believes that the installation
of new software will improve efficiencies of both branch and administrative
offices. The Company believes cash flows from operations together with
borrowings under the Credit Facility will be sufficient to fund the Company's
capital expenditures in 1996 and 1997.
Impact of SFAS 121. In March 1995, the Financial Accounting Standards
Board issued SFAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" effective for financial statements for
fiscal years beginning after December 15, 1995. This statement requires that
long-lived assets and certain identifiable intangibles used in operations be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
determines its future undiscounted cash flows using the current MRR, anticipated
future growth, and the most recent historical attrition rate. At September 30,
1996, the estimated undiscounted cash flows exceeded the carrying value of the
Company's long-lived assets, primarily acquired subscriber agreements, deferred
installation costs, property and equipment, and intangible assets.
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<PAGE> 36
BUSINESS
The discussion in this section of the Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that would cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" and "Management's Discussion of Financial Condition and
Results of Operations," as well as those discussed elsewhere in this section and
in this Prospectus.
OVERVIEW
The Company provides security alarm monitoring services and installs and
services security alarm systems for residential and small business subscribers,
principally in the southern United States. At September 30, 1996, the Company
had over 81,000 subscriber accounts for its alarm monitoring services, a
majority of which were residential subscribers. As a result of the Company's
internally generated Safe Choice subscriber accounts and acquisitions of
subscriber account portfolios, the Company has increased its MRR from
approximately $0.6 million at February 1, 1993 to approximately $2.1 million at
September 30, 1996, which represents an increase in annualized MRR from $7.3
million to $25.6 million. Based upon a ranking of security alarm monitoring
companies by annual revenues included in the May 1996 issue of SDM, the Company
believes that it is one of the largest residential security alarm monitoring
companies in the southern United States. According to a May 1996 survey by SDM,
the Company is the second fastest growing security alarm monitoring company in
the United States based upon the Company's historical three year growth rate in
revenues.
The Company's objective is to provide residential security alarm services
to an increasing number of Americans by making such services affordable and by
focusing on markets with attractive demographics. The Company's growth strategy
is based upon both internal generation of subscriber accounts marketed under the
tradename "Safe Choice" by the Company's sales consultants, and acquisitions of
subscriber accounts from independent alarm monitoring companies. The Company
believes that it can achieve economies of scale and improve results of
operations by increasing the number and density of subscribers for whom it
provides services, thereby increasing utilization of the Company's central
monitoring station and improving efficiency of its service operations.
From February 1, 1993 through September 30, 1996, the Company has generated
approximately 42,100 subscriber accounts internally through the Safe Choice
marketing program, including over 7,700 new Safe Choice subscriber accounts
during the third quarter of 1996. The Company seeks to create additional
subscriber accounts through the Safe Choice marketing program principally by
subsidizing the initial installation of a residential security alarm monitoring
system in order to capture the MRR generated by the monitoring contract. By
offering the Safe Choice alarm system at a base installation price of $99, the
Company believes it can access a broader demographic market than is presently
being accessed by most other existing companies who, according to the January
1996 issue of SDM, sold and installed alarm systems during 1995 for an average
price of $1,200. In addition, the Safe Choice program allows the Company to
create subscriber accounts for an investment which, expressed as a multiple of
MRR generated, is substantially lower than that for which the Company can
acquire subscriber accounts and, in management's belief based upon its knowledge
of the industry, is among the lowest in the industry.
From September 1994 through September 1996, the Company has acquired
approximately 39,000 subscriber accounts in 18 separate transactions. The
Company intends to make acquisitions and open branches in new geographic markets
where the Company does not presently have subscribers, and then to increase the
number of subscriber accounts in such markets through the Safe Choice marketing
program and subsequent acquisitions, both of which have the effect of increasing
subscriber account density in the area, and thereby improving operating
efficiency.
Approximately 90% of the Company's subscribers are located in Florida,
Texas and the Richmond/Washington, D.C./Baltimore metropolitan areas. The
Company's remaining subscribers are located in Georgia, Louisiana, Oklahoma and
Tennessee. According to the Bureau of the Census and
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<PAGE> 37
the Federal Bureau of Investigation, the states which the Company serves
collectively have higher projected population growth rates from 1990 through
2010 and had higher crime rates during 1994 than the nation as a whole. The
Company monitors digital signals arising from burglaries, fires and other
monitored events which occur at the subscribers' premises from the Company's
state-of-the-art central monitoring station located in Birmingham, Alabama,
which has the capacity to serve approximately 250,000 subscriber accounts.
MARKET OVERVIEW AND TRENDS
The Company's market consists of owners of single family residences and
small businesses. In response to studies commissioned by the Company, the
Company targets a demographic group consisting of young, highly mobile families
with above-average incomes. According to 1994 U.S. Census Bureau data, there are
approximately 23.6 million single-family residences and, according to a 1994
Report of the President, there were approximately 1.2 million businesses with
100 or fewer employees in the states which the Company services.
The security alarm industry is characterized by the following attributes:
- LOW PENETRATION AND RAPID GROWTH. The residential security alarm market
is characterized by a low level of market penetration and rapid growth. An
industry trend toward subsidizing installation costs to increase
affordability, combined with other factors such as heightened concern
about crime and favorable demographic trends, have resulted in increased
demand for residential security alarm services. Freeman Research indicates
that while residential security alarm monitoring revenues grew at a
compounded annual rate of 12.0% between 1988 and 1995, monitored security
alarm systems are installed in only 11% of all U.S. households.
- HIGH DEGREE OF FRAGMENTATION. The security alarm industry is primarily
comprised of a large number of small providers of alarm systems and
services. According to Freeman Research, there are approximately 11,500
security alarm companies nationally, and approximately 3,250 operate in
the geographic regions which the Company currently services. A May 1996
survey by SDM reported that in 1995, the 100 largest companies in the
industry accounted for only 23% of alarm industry revenues and the top 10
security alarm monitoring companies served less than 3% of all United
States households. Based on its acquisition experience, the Company
believes that many smaller alarm service companies, because of their size,
have higher overhead expenses as a percentage of revenues than the Company
and lack access to capital on terms as attractive as those available to
the Company.
- ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. Prior to the development
of digital communications technology, alarm monitoring required a
dedicated telephone line, which rendered long-distance monitoring
uneconomical. Consequently, in order to achieve a national or regional
presence, alarm monitoring companies were required to maintain a large
number of geographically dispersed monitoring stations. The development of
digital communications technology eliminated the need for dedicated
telephone lines, reducing the cost of monitoring services to the
subscriber and permitting the monitoring of subscriber accounts over a
wide geographic area from a central monitoring station. The elimination of
local monitoring stations has decreased the cost of providing alarm
monitoring services and has substantially increased the economies of scale
for larger alarm service companies. In addition, the concurrent
development of microprocessor-based control panels has substantially
reduced the cost of the equipment available to subscribers in the
residential and small business markets.
The Company believes that several factors contribute to a favorable market
for security alarm services both generally in the United States and specifically
in the southern portion of the country:
- CONCERN ABOUT CRIME. According to the 1994 Uniform Crime Report
published by the Federal Bureau of Investigation (the "UCR"), between 1985
and 1994 the number of violent crimes reported in the United States
increased by more than 40.3% and the total number of reported
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<PAGE> 38
criminal offenses increased by 12.6%. Although the UCR reported that the
number of property crimes decreased on a nationwide basis from 1993 to
1994 by 1.7%, a property crime was committed in the United States in 1994
once every three seconds. The average property crime rate in 1994 for the
states in which the Company operates was approximately 19.0% higher than
the nation as a whole, averaging approximately 5,542 property crimes per
100,000 residents. In Florida, the Company's largest market, the 1994
property crime and overall crime rates were approximately 52.5% and 53.5%,
respectively, above the national averages. The southern states (as
designated by the UCR) accounted for both 42% of murders and 38% of crime
index offenses, more than any other region in the nation.
- DEMOGRAPHIC TRENDS. According to the Bureau of the Census, the states
which the Company serves collectively have higher projected population
growth rates from 1990 to 2010 than the national average. According to the
United States Department of Commerce, 47.1% of U.S. households earn the
Company's target income level. Other recent trends that are favorable to
the residential security alarm business include the increase in women in
the workforce resulting in more children being left at home alone, and the
increase in people working at home, which generates greater demand for
security services to protect home office equipment.
- INSURANCE DISCOUNTS. The increase in demand for security systems may
also be attributable in part to the practice of certain insurance
companies to grant discounts to homeowners who install alarm systems, and
such discounts are typically greater when systems are monitored by a
central station. In addition, insurance companies may require that
businesses install an alarm system as a condition of insurance coverage.
- SECURITY ALARM EFFECTIVENESS. A study entitled "Crime Statistics:
Burglaries and Robberies" in the 1996 Fact Book Issue of Security Sales
magazine reported that non-alarmed homes are burglarized 2.2 times more
often than those with alarms. Furthermore, a study conducted by the
Portland, Oregon Police Bureau in 1993 found that total residential losses
in the Portland area from burglaries in alarmed homes were $104,000
compared to losses of $5.9 million for homes without an alarm.
BUSINESS STRATEGY
The Company's objective is to provide residential security alarm services
to a greater number of Americans by making such services affordable and by
focusing on markets with attractive demographic characteristics. The Company
believes that it can achieve economies of scale and improve results of
operations by increasing the number of subscribers for whom it provides
services, which will increase utilization of the Company's central monitoring
station and improve efficiency of its service operations. The Company therefore
seeks to increase the number of subscriber accounts through both internally and
externally generated growth and retain its focus on the residential security
alarm monitoring market. The Company seeks to target those areas with attractive
demographic profiles and with high levels of concern about crime. The Company's
principal focus to date has been on metropolitan areas in the southern United
States.
The Company intends to achieve this objective through the implementation of
the following strategies:
- INCREASING PENETRATION THROUGH LOWER PRICE POINTS. Freeman Research
indicates that the percentage of total households in the United States
which own an electronic security system is only 11%. The Company believes
that, with crime remaining an important concern of Americans, the Company
can increase the number of households which subscribe to a monitored
security alarm system in any given region by offering initial installation
of such a system at an attractive price. The Company believes that by
offering its Safe Choice residential system at a base installation price
of $99, the Company can access a broader demographic market than is
presently being accessed by most other existing companies who, according
to the January 1996 issue of SDM, sold and installed alarm systems during
1995 for an average price of $1,200.
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<PAGE> 39
- CREATING INTERNAL GROWTH THROUGH THE SAFE CHOICE MARKETING PROGRAM. The
Company believes that its Safe Choice marketing program, through which it
seeks to create additional subscriber accounts by subsidizing the initial
installation of a residential security alarm monitoring system as a means
of capturing subscriber MRR, represents an effective internal growth
strategy. The Safe Choice program allows the Company to create subscriber
accounts for an investment which, expressed as a multiple of the MRR
generated, is substantially lower than that for which the Company can
acquire subscriber accounts and, in the Company's belief, is among the
lowest in the industry. From February 1, 1993 to September 30, 1996, the
Company has generated approximately 42,100 Safe Choice accounts, including
over 7,700 new Safe Choice accounts during the third quarter of 1996.
- ACQUIRING SUBSCRIBER ACCOUNT PORTFOLIOS. The Company intends to increase
the number of subscriber accounts through a program of selective
acquisitions both as a means to open branch offices in new geographic
markets and to increase subscriber account density in existing markets.
The Company seeks to acquire subscriber portfolios comprised primarily of
residential subscribers in geographic areas with attractive demographic
characteristics. From September 1994 through September 1996, the Company
has acquired over 39,000 subscriber accounts, representing $1.0 million in
MRR, in 18 separate transactions. The Company believes that the highly
fragmented nature of the security alarm industry and the benefits to be
achieved from economies of scale will continue to provide it with
acquisition opportunities in the future.
- INCREASING ACCOUNT DENSITY IN EXISTING MARKETS. The Company believes
that increasing account density in the regions it currently
serves -- principally Florida, Texas and the Richmond/Washington
D.C./Baltimore metropolitan areas -- will enhance the efficiency of its
service routes and of its branch office marketing organization. The
Company's objective is to increase the number of Safe Choice installations
in each branch once it has established an initial presence in a
metropolitan area. By servicing and marketing to a higher number of
accounts and potential accounts per employee, the Company seeks to improve
the incremental operating margins associated with new subscriber accounts.
In this way, the Company believes that it can reduce general and
administrative expense as a percentage of sales and increase operating
margins at any given branch office.
- OFFERING ENHANCED SERVICES TO SUBSCRIBERS. The Company seeks to increase
sales of enhanced services to new and existing subscribers, which will
have the effect of increasing the Company's average MRR per subscriber.
The Company currently offers supervised monitoring (primarily to small
businesses) and cellular back-up services. During 1997, the Company
intends to offer enhanced services such as extended warranty service on
the equipment installed in a subscriber's home and paging services for
subscribers.
THE SAFE CHOICE PROGRAM
The Company believes that its Safe Choice marketing program represents an
effective internal growth strategy. The Company subsidizes system installations
in order to secure the MRR associated with providing ongoing alarm monitoring
services. The Company believes that by offering its Safe Choice residential
system at a base installation price of $99, the Company can access a broader
demographic market than is presently being accessed by most other existing
companies who, according to the January 1996 issue of SDM, sold and installed
alarm systems during 1995 for an average price of $1,200. The Company has,
through its Safe Choice program, internally created subscriber accounts during
the first nine months of 1996 for an investment that represents a multiple of
MRR which is approximately 61% of the average multiple at which the Company
acquired subscriber accounts during the same period. From February 1, 1993
through September 30, 1996, the Company has generated approximately 42,100
subscriber accounts internally through the Safe Choice program, including over
7,700 new subscriber accounts during the third quarter of 1996.
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<PAGE> 40
Safe Choice Product
The Company currently offers its basic Safe Choice alarm system for base
installation fees of $99 (residential) and $250 (small business). Each
residential or small business customer is required to enter into a written
contract for the Company's monitoring services, generally at a subscription
price of $25 per month and for a term of three to five years. When the Company
generates a subscriber account through a conversion, the Company may alter
certain terms of the basic Safe Choice system, including reduced monthly
monitoring charges and installation fee. The basic Safe Choice alarm system
includes protection for three openings to the premises, if residential, or two
openings, if small business, an interior motion detector, a centralized
processing unit ("CPU") with the ability to communicate signals to the Company's
central monitoring station, a battery back-up, a siren, window decals and a lawn
sign. The Company retains ownership of the installed equipment. As a result, the
Company provides a lifetime limited warranty on system parts and a one year
limited warranty on labor. For additional installation fees, the account
subscriber can protect additional openings, add additional sirens and motion
detectors, or elect to add additional protective features to the system, such as
"panic buttons" and fire protection by means of smoke and heat detectors. As a
result of such customer additions to the Company's basic Safe Choice package,
the Company's average fee to install a Safe Choice system was approximately $150
per account subscriber during the first nine months of 1996.
The primary security alarm system installed by the Company is a
custom-configured, hard-wire alarm system manufactured by C & K Systems, Inc., a
leading manufacturer of such systems in the United States. The Company has
purchased alarm systems from other manufacturers in the past and believes that
it could readily do so in the future if necessary. The Company also installs
alarm systems with hybrid CPUs, which allow for both wireless and hard-wired
installation of protective devices. Wireless devices use radio signals from
transmitters incorporated into the protective devices to communicate activation
signals from such devices to the subscriber's CPU. Hard-wire devices, on the
other hand, use actual wires to connect each of the protective devices to the
subscriber's CPU. While wireless devices can generally be installed more quickly
than those that require wires, thus reducing labor costs, the Company's
experience is that hard-wire systems are currently more economical to install
than wireless systems due to the higher equipment costs of wireless systems. The
Company nevertheless retains the flexibility to install wireless devices.
Marketing
In response to studies commissioned by the Company, the Company targets a
demographic group consisting of young families with above-average income. The
Company primarily markets the Safe Choice system through a direct marketing
campaign conducted by approximately 330 sales consultants in the Company's 18
branch offices. The sales consultant typically visits personally with the
subscriber at the subscriber's residence and presents a mounted display of the
hard-wired equipment and a description of its features. Sales consultants are
compensated solely by commissions and other sales-based bonuses.
Although the Company trains each sales consultant, the Company focuses on
hiring individuals with strong entrepreneurial skills who are capable of
developing their own sales techniques. The Company pays higher commissions than
most other alarm companies, periodically recognizes superior performance of
sales consultants, and gives the sales consultant the freedom to conduct his or
her own marketing. Each sales consultant reports to the applicable Sales Leader
and/or Branch Manager of the branch, who monitors and approves the activities of
the sales consultant. Sale consultants are encouraged to ask for customer
referrals as the Company has found that the use of referrals results in a better
success rate than cold calls or other mass marketing techniques. Sales
consultants also generate additional new leads by distributing flyers in target
neighborhoods, making personal cold calls to homes in target neighborhoods, and
attending trade shows. The Company provides the sales consul-
39
<PAGE> 41
tants with support services, training and any sales materials which they may
need, such as business cards, demonstration units, brochures, flyers and other
selling materials. The Company's sales force also generates new Safe Choice
accounts through conversions. The Company pays sales commissions for conversions
on the same basis as Safe Choice installations.
Although the Company does not generally conduct mass marketing through the
media, the Company's branches occasionally do use a combination of targeted
direct mail and outbound telemarketing to generate prospective subscriber leads.
If a sales consultant sells a new account from a Company generated lead, the
sales consultant receives a lower commission than if the lead was self-
generated.
The Company believes that as it increases the density of its subscriber
base in a geographic region, the placement of highly visible yard signs in front
of each subscriber's home or business will enhance awareness of the Company in
such region and thus lead to more "call-in" and referral business.
Enhanced Services
Part of the Company's internal growth strategy is to increase sales of
enhanced services to new and existing subscribers in an effort to raise the
Company's average MRR per subscriber above the basic $25 per month. The Company
currently offers supervised monitoring (primarily to small businesses) and
cellular back-up services. Supervised monitoring allows the alarm system to send
various types of signals to the central monitoring station containing
information on the use of the system, such as what users armed or disarmed the
system and at what time of the day. Cellular back-up services allow the alarm
system to send signals through a cellular telephone system in the event that
regular telephone service is interrupted. Currently, these enhanced services
account for an immaterial amount of the Company's MRR.
During 1997, the Company intends to offer the following additional enhanced
services: (i) extended warranty service to cover the normal cost of repair and
maintenance of the alarm system during normal business hours after the
expiration of the initial warranty; (ii) paging services, in which the Company
would serve as a reseller of paging services in conjunction with offering the
enhanced service of paging a subscriber in the event of an alarm activation; and
(iii) medic alert package, in which a person experiencing medical difficulty
could signal the monitoring station for assistance in contacting an ambulance.
THE ACQUISITION PROGRAM
The Company intends to continue to increase the number of its subscriber
accounts through a program of selective acquisitions of subscriber accounts from
alarm monitoring companies. The Company seeks acquisitions as a means of
entering new markets and of increasing subscriber account density in existing
markets. From September 1994 through September 1996, the Company acquired
approximately 39,000 subscriber accounts representing almost $1.0 million in MRR
through 18 separate transactions. The Company believes that it is an effective
competitor in the acquisition market because of the substantial experience of
its management in acquiring MRR companies, as a result of both the acquisitions
made by the Company and acquisitions made by members of the Company's management
in the cable television and cellular telephone businesses. See "Management."
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<PAGE> 42
The six largest acquisitions of alarm service companies since September 1,
1994 are summarized in the following table:
<TABLE>
<CAPTION>
KENMAR THE 593 Alarms By
ELECTRONICS, CORPORATION INTERCAP(3) HRD, Inc.
INC. D/B/A ALARM D/B/A KRISTYNIK Funds d/b/a
HOUSTON DATA CLASSIC SECURITY Joint Secure
ALARM GROUP, INC. ALARM SYSTEM, INC. Venture America
------------ ----------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Date of Acquisition............ 11/94 9/95 11/95 1/96 3/96 6/96
MRR acquired(1)................ $88,930 $65,834 $40,611 $84,957 $390,182 $128,091
Aggregate number of monitoring
contracts acquired........... 2,972 2,889 2,224 3,617 15,444 5,291
MRR per subscriber............. $29.92 $22.79 $18.43 $23.49 $25.26 $24.21
Approximate percentage(2) of:
Residential accounts......... 71% 50% 95% 75% 75% 75%
Commercial accounts.......... 29% 50% 5% 25% 25% 25%
</TABLE>
- ---------------
(1) The amount of MRR acquired is typically the sum of monthly revenues
generated historically by those subscriber accounts acquired by the Company
that satisfy, as of the closing of the sale, the delinquency standard
negotiated between the Company and the seller of the accounts, such as not
more than 60 days past due. MRR is a measure of subscriber base size and not a
measure of profitability or performance. The Company does not have sufficient
information to predict the amount of MRR that will be realized in future
periods. See "Risk Factors -- Attrition of Subscriber Accounts."
(2) These percentages were calculated as of the date of acquisition.
(3) On March 28, 1996, the Company acquired 15,444 alarm monitoring contracts
representing approximately $.4 million of MRR from the Chapter 11 trustee (the
"Trustee") for the bankruptcy estates of InterCap Funds Joint Venture,
Security Data Group of California, Inc. and IMIF IV-C Service Corp.
(collectively, "InterCap"). The MRR associated with these contracts
represented, on an annualized basis, approximately 30% of the 1995 revenues of
InterCap. Based on estimates provided by InterCap, approximately 75% of the
contracts acquired were for residential accounts and the remaining 25% were
for commercial accounts. The contracts acquired from InterCap are located in
Florida (49.9%), Texas (34.9%), Georgia (9.7%), Maryland (5.2%) and Louisiana
(.3%), and are all serviced by branch locations of the Company that were in
operation prior to the acquisition. InterCap filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Colorado in October 1994. The bankruptcy
cases were converted to Chapter 7 in September 1996.
Based on the Company's due diligence investigation of InterCap, the Company's
management believes that InterCap did not actively seek new monitoring
contracts subsequent to the commencement of the bankruptcy cases in October
1994, that prior to the bankruptcy filing, InterCap primarily added new
contracts through the acquisition of subscriber account portfolios from other
alarm monitoring companies, and that InterCap did not have formal policies for
writing off uncollectible accounts or for collection methods. The contracts
acquired had original terms that ranged from two to five years with automatic
renewal provisions. The terms of the InterCap contracts for residential
accounts and commercial accounts were not materially different from each other
nor were the principal terms of the InterCap contracts materially different
from that of the contracts of the Company. The Company estimates that as of
September 13, 1995, approximately 35% of InterCap's accounts receivable were
at least 120 days old. Based on the information provided to the Company by
InterCap, the Company estimates the gross MRR attrition experienced by
InterCap to have been approximately 13.2%, 9.9% and 18.8% for the twelve
months ended December 31, 1993, 1994 and 1995, respectively. InterCap only
provided the Company with information regarding attrition on InterCap's
aggregate subscriber base. InterCap's attrition information did not
distinguish between types of subscribers. The Company estimates that InterCap
incurred expenses related to servicing and maintaining accounts of
approximately $1.0 million and $.9 million for the years ended December 31,
1994 and 1995, respectively. The statistical and other information regarding
InterCap contained in this paragraph was provided to the Company by InterCap
and has not been substantiated by the Company other than through its customary
due diligence procedures with respect to proposed acquisitions. The Company
does not believe that the historical performance of the contracts acquired
from InterCap is indicative of future performance of such contracts.
Because the Company's primary consideration in making an acquisition is the
amount of MRR that will be derived from new subscribers acquired, the price paid
by the Company is customarily directly tied to such MRR. To protect the Company
against the loss of acquired accounts and to encourage the
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<PAGE> 43
seller of such accounts to facilitate the transfer of subscribers, management
typically requires the seller to provide guarantees against account
cancellations for up to 12 months following the acquisition by placing in an
escrow account a negotiated percentage of the purchase price.
No audited historical financial information was provided to the Company
prior to the closing of any acquisitions consummated by the Company to date, and
the Company is not aware of any reliable historical data relating to collections
as a percentage of billings or account attrition rates prepared by the former
management of the sellers. See "Risk Factors -- Lack of Audited Financial
Information Relating to Acquisitions." In evaluating the quality of the accounts
acquired, the Company relied primarily on management's knowledge of the
industry, its due diligence procedures, its experience integrating accounts into
the Company's operations, its assumptions as to attrition rates for the acquired
accounts, and the representations and warranties of the sellers. If the actual
financial condition or operations of a seller were inaccurately represented to
the Company in connection with an acquisition or the actual attrition rate for
the accounts acquired is greater than the rate assumed by the Company at the
time of the acquisition, and the Company is unable to recoup its damages from
the portion of the purchase price held back from the seller, such acquisition
could have a material adverse effect on the Company's financial condition or
results of operations. See "Risk Factors -- Attrition of Subscriber Accounts."
On October 1, 1996, the Company purchased approximately 1,100 subscriber
accounts located in the Baltimore, Maryland area representing approximately
$23,000 of MRR. The Company continues on an ongoing basis to evaluate potential
acquisitions of subscriber account portfolios. The Company is currently engaged
in discussions with independent alarm service companies regarding possible
acquisitions. As of the date of this Prospectus, the Company has not entered
into any agreements for new acquisitions, nor does the Company consider any
acquisitions to be probable.
The Acquisition Management System
The Company employs a comprehensive acquisition management system to
identify, evaluate, and assimilate acquisitions of new subscriber accounts. Each
facet of the acquisition management system is administered by an acquisition
team which is comprised of Messrs. Johnson, Kark, Tomick and Armstrong, each of
whom has experience in acquiring companies whose value is based upon MRR. The
Company believes that this system helps to ensure the success of its acquisition
program. The acquisition management system includes the following components:
- IDENTIFICATION AND NEGOTIATION. The Company actively seeks to identify
prospective companies and dealers with targeted direct mail, trade
magazine advertising, trade show participation, membership in key alarm
organizations, and contacts through various prominent vendors and other
industry participants. Management's extensive experience in identifying
and negotiating previous acquisitions and the Company's use of standard
form agreements helps to facilitate the successful negotiation and
execution of acquisitions in a timely manner.
- DUE DILIGENCE. The Company conducts an extensive pre-closing review and
analysis of all facets of the seller's business. The process includes, but
is not limited to: (i) review of all subscriber contracts and an analysis
of the rights and obligations under such contracts, (ii) telephone surveys
of a representative sample of subscribers, (iii) review of customer
billing records and accounts receivable aging reports, and (iv) review of
the seller's telephone traffic to determine if it is reasonable for the
number and type of subscribers.
- ASSIMILATION. The Company develops a specific assimilation program, in
conjunction with the seller, for each acquisition. Assimilation efforts
typically include a letter approved by the Company from the seller to its
subscribers explaining the sale and transition, followed by either a
personal visit by a Company representative or one or more mailings from
the Company to provide the Company's subscriber with service brochures,
field service and monitoring phone number stickers, yard signs and window
decals. Thereafter, the Company often conducts a telephone survey of
acquired subscribers to solicit certain information and answer the
subscriber's questions or concerns. As a follow-up to the survey, as
necessary, a Company
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technician will service subscribers' alarm systems to verify that they are
in proper working condition. As a result of the acquisition of subscriber
accounts from other alarm monitoring companies, a number of the security
alarm systems monitored by the Company were installed by other companies.
TRADITIONAL SALES AND SONITROL(TM)
If requested by the subscriber, the Company will sell "traditional" alarm
monitoring services, which are characterized by substantially higher initial
costs to the subscriber. Traditional subscribers purchase the alarm system
hardware from the Company and are not required by the Company to enter into
multi-year monitoring contracts.
The Company also sells, installs and services Sonitrol(TM) sound-based
security systems in Dade County (Miami) and Broward County (Ft. Lauderdale),
Florida as a Sonitrol franchisee. The Sonitrol system is a sound-based
monitoring system designed primarily for commercial customers. As of September
30, 1996, Sonitrol represented 3.5% of the Company's MRR. The Company operates a
separate monitoring station located in Miami, Florida solely for the purpose of
monitoring its Sonitrol accounts.
THE DEALER PROGRAM
Many small alarm system dealers specialize in selling and installing alarm
systems for residential or small business subscribers in a limited geographic
area. Often, such dealers do not find it profitable to provide central
monitoring station or field services to their subscribers because they do not
have sufficient subscribers to support the fixed operating expenses associated
with such services, or access to capital on attractive terms. The Company has
entered into one oral and one written agreement with such dealers that provide
for the purchase by the Company of the dealers' subscriber accounts on an
ongoing basis. The dealers install an alarm system, arrange for subscribers to
enter into alarm monitoring agreements on a form of agreement approved by the
Company, and, if accepted by the Company, install the Company's yard signs and
window decals. The Company will only accept subscriber contracts which contain
limits on the Company's liability and are with subscribers who have a certain
minimum credit. The contracts are submitted to the Company for periodic review.
The Company currently purchases approximately 50 subscriber accounts per month
through its dealer program.
ALARM MONITORING SERVICES
The Company monitors most of its subscriber accounts at its central
monitoring station in Birmingham, Alabama, which incorporates the use of
advanced communications and computer systems that route incoming alarm signals
and telephone calls to operators. Each operator sits before a computer monitor
that provides immediate information concerning the nature of the alarm signal,
the subscriber whose alarm has been activated and the premises on which such
alarm is located. All telephone conversations are automatically recorded.
The Company's central monitoring station currently has the capacity to
monitor approximately 250,000 subscribers, with low incremental costs for
expansion. The equipment at the central monitoring station includes
sophisticated phone switching equipment, digital receivers that process the
incoming signals, two file servers with built-in redundancy, four compute
servers which share the workload of the file servers, a network of "smart"
computer terminals, a 32 channel voice-activated recording system,
uninterruptable power supply generated by two separate AC power feeds from two
separate power grids, and dual backup generators supplied by different fuel
sources.
The Company's central monitoring station is listed by Underwriters
Laboratories Inc. ("UL") as a protective signaling services station. UL
specifications for central monitoring stations include building integrity,
back-up systems, staffing and standard operating procedures. In many
jurisdictions, applica-
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ble law requires that security alarms for certain buildings be monitored by
UL-listed facilities. In addition, such listing is required by certain insurance
companies as a condition to insurance coverage.
Depending upon the type of service for which the subscriber has contracted,
central monitoring station personnel respond to alarms by relaying information
to the local fire or police departments, notifying the subscriber, or taking
other appropriate action. Non-emergency administrative signals include power
failures, low battery signals, deactivation and reactivation of the alarm
monitoring system, and test signals, and are processed automatically by central
monitoring station computers. The Company's central monitoring station operates
24 hours per day, seven days a week, including all holidays. The Company's
central monitoring station personnel are trained to tell subscribers how to turn
off their systems in the event of a false alarm, thus reducing the instances in
which field service personnel must be dispatched.
In certain of its acquisitions of subscriber account portfolios, the
Company has not begun monitoring the acquired accounts following consummation of
the acquisition due to the particular circumstances of the seller. Typically the
monitoring company that was monitoring such subscriber accounts prior to the
acquisition continues to monitor such subscriber accounts in accordance with a
pre-existing contractual arrangement. Following the completion of such
arrangements, the Company commences monitoring at the Birmingham central
monitoring station.
INSTALLATION AND FIELD SERVICES
The Company generally maintains installation and field service personnel in
each of its branch offices. Smaller branches subcontract services and
installation to third party entities until it becomes economically viable to
hire an internal staff. These employees are trained by the Company to install
and maintain the various types of subscriber security systems marketed and
serviced by the Company and also those typically marketed by other dealers and
found in the households of acquired subscriber accounts. The primary alarm
system that the Company installs is manufactured by C&K Systems, Inc. The
Company has purchased alarm systems from other manufacturers in the past and
believes that it can readily do so in the future if necessary. The Company
believes that the majority of installed alarm systems monitored in the United
States were manufactured by a limited number of manufacturers. Accordingly, the
Company believes that it can readily train service personnel to service these
systems. The Company warrants labor for one year after installation.
Installations of new alarm systems are performed promptly after the
completion of the sale of the account. After completing an installation, the
technician instructs the subscriber on the use of the system and furnishes a
written manual and, in many instances, an instruction video. Additional follow-
up instruction is provided by sales consultants in the branch offices on an as
needed basis.
The increasing density of the Company's subscriber base as a result of the
Company's continuing strategy to "infill" its existing branch service areas with
new subscribers permits more efficient scheduling and routing of field service
technicians and results in economies of scale at the branch level. The increased
efficiency in scheduling and routing also allows the Company to provide faster
field service response and support, which leads to a higher level of subscriber
satisfaction.
CUSTOMER RETENTION
The Company believes that customer satisfaction is an important factor in
the retention of subscriber accounts. The Company has implemented a number of
measures intended to maximize customer satisfaction, including an annual survey
of all subscribers, and periodic awards to the branches that maintain superior
customer satisfaction. During 1995, the Company implemented a total quality
management ("TQM") program to improve customer satisfaction. Through the TQM
program, the Company on an ongoing basis analyzes and documents all processes
critical to customer satisfaction, including sales, installations, monitoring,
billing and customer service. The Company then implements improvements and
repeats the analysis process. To further enhance customer satisfaction, and
therefore customer retention, each branch is on-line with the Company's central
computer in
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Birmingham so that employees of any branch can immediately access subscriber
account information and respond promptly to questions or complaints.
In the normal course of its business, the Company experiences customer
cancellations of monitoring and related services as a result of subscriber
relocation, the cancellation of acquired accounts in the process of assimilation
into the Company's operations, unfavorable economic conditions, and other
reasons. This attrition is offset to a certain extent by revenues from the sale
of additional services to existing subscribers, the reconnection of premises
previously occupied by subscribers, the conversion of accounts previously
monitored by other alarm companies, and guarantees provided by the sellers of
such accounts. The Company experienced 10.2% net MRR attrition in the fiscal
year ended December 31, 1995 and 6.8% net MRR attrition for the twelve month
period ended September 30, 1996. See "Risk Factors -- Attrition of Subscriber
Accounts" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General -- Subscriber Attrition."
RISK MANAGEMENT
The nature of the services provided by the Company potentially exposes it
to greater risks of liability for employee acts or omissions or system failure
than may be inherent in other businesses. Most of the Company's alarm monitoring
agreements and other agreements pursuant to which it sells its products and
services contain provisions limiting the Company's liability to subscribers in
an attempt to reduce this risk.
The Company carries insurance of various types, including general liability
and errors and omissions insurance. The loss experience of the Company and other
security service companies may affect the availability and cost of such
insurance. Certain of the Company's insurance policies and the laws of some
states may limit or prohibit insurance coverage for punitive or certain other
types of damages, or liability of the Company arising from gross negligence or
wanton behavior. See "Risk Factors -- Risks of Liability."
COMPETITION
The security alarm industry is highly competitive and highly fragmented.
The Company competes with numerous other companies for new subscriber accounts
with regard to both the internal generation of new subscriber accounts and the
acquisition of subscriber accounts. The Company's primary competitors for new
Safe Choice subscriber accounts include ADT Security Systems, Inc., Brink's Home
Security, Inc. (a subsidiary of The Pittston Service Group), Westinghouse
Security Systems (a subsidiary of Westinghouse Electric Corporation) and
Multimedia Security Services, Inc. (a subsidiary of Gannett, Inc.), each of whom
offers low price, subsidized installations of alarm systems, is better
capitalized than the Company, and advertises through media, a practice not
currently utilized by the Company. Competition for new accounts is based
primarily on installation price, monthly monitoring fee, services offered, and
reputation for quality of service. The Company's primary competitors for
acquisitions include Republic Industries, Inc., Vector Security, Inc. and
Rollins Protective Services, Inc. Utility companies and cable television
companies also have recently entered the alarm monitoring business and will
likely compete with the Company for new accounts and for acquisitions. See "Risk
Factors -- Competition."
The Telecommunications Act of 1996 prohibits the regional Bell operating
companies from engaging in the providing of alarm monitoring services until
February 2001, except to the extent any Bell operating company was engaged in
such business as of November 30, 1995. Ameritech, one of the Bell operating
companies, entered the alarm monitoring business prior to November 1995 through
a series of acquisitions and continues to seek acquisitions of subscriber
account portfolios.
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CENTENNIAL SECURITY LICENSE AGREEMENT
In June 1994, the Company entered into the License Agreement with
Centennial Security, which is owned in part by the several of the Company's
stockholders and by the Company. See "Certain Transactions -- Transactions with
Centennial Security." Pursuant to the License Agreement, the Company granted to
Centennial Security an exclusive, ten year license to use the Masada Security
trademark and tradename, the Safe Choice tradename, and certain other
intellectual property in the northern half of the United States (the states of
California (north of Sacramento), Colorado, Connecticut, Delaware, Idaho,
Illinois, Indiana, Iowa, Kansas, Maine, portions of Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New
Jersey, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South
Dakota, Utah, Vermont, Washington, Wisconsin and Wyoming) and Canada (the
"Centennial Territory"). Although the License Agreement specifically provides
that the Company may operate as a security alarm company within the Centennial
Territory, the License Agreement prohibits the Company from operating as "Masada
Security" and from using the "Safe Choice" tradename and other intellectual
property within the Centennial Territory without the consent of Centennial
Security until the License Agreement terminates, which is not scheduled to occur
until 2004. Correspondingly, the License Agreement prohibits Centennial Security
from operating as "Masada Security" and using the "Safe Choice" tradename and
other intellectual property outside the Centennial Territory. The Company and
Centennial Security currently do not operate in any common markets and are not
competitors of each other. In the event the Company enters markets located
within the Centennial Territory, the limitations imposed on the Company by the
License Agreement with Centennial Security could have a material adverse effect
upon the Company's future business and operating results. The consideration
received by the Company for granting this license to Centennial Security
consisted exclusively of shares of Centennial Security's capital stock. The
License Agreement does not provide for the payment of any revenues or other
consideration by either party in the future. See "Certain Transactions --
Transactions with Centennial Security."
REGULATORY MATTERS
Recently, a trend has emerged on the part of local governmental authorities
to consider or adopt various measures aimed at reducing the number of false
alarms. Such measures include (i) subjecting alarm monitoring companies to fines
or penalties for transmitting false alarms, (ii) licensing individual alarm
systems and the revocation of such licenses following a specified number of
false alarms, (iii) imposing fines on alarm subscribers for false alarms, (iv)
imposing limitations on the number of times the police will respond to alarms at
a particular location after a specified number of false alarms, and (v)
requiring further verification of an alarm signal before the police will
respond. See "Risk Factors -- 'False Alarm' Ordinances."
The Company's operations are subject to a variety of other laws,
regulations and licensing requirements of federal, state and local authorities.
In certain jurisdictions, the Company is required to obtain licenses or permits,
to comply with standards governing employee selection and training, and to meet
certain standards in the conduct of its business. Many jurisdictions also
require certain of the Company's employees to obtain licenses or permits.
The alarm industry is also subject to requirements imposed by various
insurance, approval, listing and standards organizations. Depending upon the
type of subscriber served, the type of security service provided and the
requirements of the applicable local governmental jurisdiction, adherence to the
requirements and standards of such organizations is mandatory in some instances
and voluntary in others.
The Company's advertising and sales practices are regulated by both the FTC
and state consumer protection laws. Such laws and regulations include
restrictions on the manner in which the Company promotes the sale of its
security alarm systems and the obligation of the Company to provide purchasers
of its alarm systems with certain rescission rights.
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The Company's alarm monitoring business utilizes telephone lines and radio
frequencies to transmit alarm signals. The cost of telephone lines and the type
of equipment which may be used in telephone line transmission are currently
regulated by both federal and state governments. The operation and utilization
of radio frequencies are regulated by the Federal Communications Commission and
state public utilities commissions. See "Risk Factors -- Regulations."
TRADEMARKS
The Company operates under the federally registered tradename "Masada
Security." The Company has also applied for federal registration of the
tradename "The Safe Choice -- Masada Security" under which it markets the Safe
Choice system.
LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its
business. The Company does not believe that any of such pending or threatened
litigation will have a material adverse effect on the financial condition or
results of operations of the Company.
CONTINGENCIES
The Company received notice in October 1996 that the Internal Revenue
Service ("IRS") will audit the 1994 income tax return of Alarms by HRD, Inc.
("HRD"), which became a wholly-owned subsidiary of the Company on June 4, 1996.
The Company purchased all of the HRD capital stock on that date in order to
acquire HRD's subscriber account portfolio. See "-- The Acquisition Program."
The purchase agreement (the "HRD Agreement") between the Company and the former
HRD stockholders (the "Prior HRD Stockholders") provides that the Prior HRD
Stockholders are obligated to indemnify the Company for any and all tax
liabilities of HRD arising prior to the June 1996 closing, without limitation.
Approximately $1,000,000 of the HRD purchase price was deposited in escrow (the
"Escrow Deposit") to protect the Company against attrition of acquired accounts
and any undisclosed liabilities of HRD. Additionally, the Company retained
$100,000 of the HRD purchase price (the "Holdback") in accordance with the HRD
Agreement for possible undisclosed liabilities that arise prior to the June 1996
closing but are first discovered during the four months following the closing.
Although the prior HRD Stockholders have demanded that the Company relinquish
the Holdback notwithstanding the IRS audit, the Company intends to retain the
Holdback and prevent disbursement of any portion of the Escrow Deposit to the
Prior HRD Stockholders until the IRS audit is completed and the resulting income
tax liability (if any) is established. Because the IRS has not challenged any
particular reporting position in the 1994 HRD return, the Company is presently
unable to determine whether the Company will incur any liability as a result of
this audit.
EMPLOYEES
At October 1, 1996, the Company employed 873 individuals, including 819 on
a full-time basis and 54 on a part-time basis. Currently, none of the Company's
employees are represented by a labor union or covered by a collective bargaining
agreement. The Company believes its relations with its employees are good.
PROPERTY
The Company's executive office, administrative office and central
monitoring station are located at 950 22nd Street North, Suite 800, Birmingham,
Alabama 35203. The executive offices constitute 14,623 square feet and are
currently subject to a lease which will expire in August of 2004. The Company
also leases office space for sales and service representatives in Tampa,
Deerfield Beach, Miami, Orlando, Homestead, West Palm Beach and Jacksonville,
Florida; Atlanta, Georgia; Beltsville and Randalstown, Maryland; Alexandria and
Richmond, Virginia; Clear Lake City, Addison, Houston, San Antonio and Austin,
Texas; Oklahoma City, Oklahoma; and Harahan, Louisiana. The Company believes
that its existing office space will be adequate to meet its needs of the
immediate future.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and current position(s) of each director and executive
officer of the Company are as set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- --------------------------------------
<S> <C> <C>
Terry W. Johnson........................ 54 Chairman of the Board, President and
Chief Executive Officer
John M. Kark............................ 43 Vice President -- Operations and
Director
David P. Tomick......................... 44 Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
Charles F. Armstrong.................... 35 Vice President -- Acquisitions
(Security)
Cathy M. Antee.......................... 37 Controller (Security) and Secretary
Robert E. Fincher....................... 41 Vice President -- Marketing (Security)
O. Gene Gabbard......................... 56 Director
I. Robert Greene........................ 36 Director
Steven C. Halstedt...................... 50 Director
Daryl E. Harms.......................... 45 Director
William A. Johnston..................... 45 Director
Bertil D. Nordin........................ 62 Director
George J. Still, Jr..................... 38 Director
</TABLE>
The Company is actively seeking to add to senior management by hiring a
chief operating officer who would assume the title of President.
Terry W. Johnson has been Chairman of the Board, President and Chief
Executive Officer of the Company since its formation in January 1993. Mr.
Johnson co-founded Predecessor Masada with Daryl E. Harms in 1988 and served as
its principal executive officer until Predecessor Masada sold the Masada
Security business in February 1993.
John M. Kark has been a director of the Company and responsible for the
branch office operations of Security since February 1993. He has served as a
Vice President of the Company and Security since May 1995 and December 1994,
respectively. He has held his present titles of Vice President -- Operations of
the Company and of Security since September 1996. Prior to February 1993, Mr.
Kark served as the President of Network Security City Branches, Inc., an alarm
security company based in Dallas, Texas which was acquired by the Partnership.
David P. Tomick has been Vice President, Chief Financial Officer, Treasurer
and Assistant Secretary of the Company and Security since May 1995 and December
1994, respectively. Mr. Tomick served in other similar capacities with the
Company from April 1994 to May 1995. Prior to April 1994, Mr. Tomick was Vice
President -- Finance of Falcon Cable TV which was engaged in the business of
operating cable television systems.
Charles F. Armstrong has been Vice President -- Acquisitions of Security
since December 1994. Mr. Armstrong served in a similar capacity with the Company
from May 1994 to December 1994. From 1991 until 1994, Mr. Armstrong was the
principal of Armstrong Capital Corporation, which served as a business
development consultant to cable television and telephone companies as well as
raising capital for emerging business ventures. Prior to 1991, Mr. Armstrong
served as Vice President -- Investment Banking/Business Broker for Johnson
Crowley & Associates, Inc., which concentrated on brokering companies in the
cable television industry.
Cathy M. Antee has been Secretary and Controller of Security since January
1995 and Secretary of the Company since May 1995. Ms. Antee was employed by
Parisian, Inc. as Treasury Director and
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Director of Investor Relations from April to December 1994 and as a Senior
Financial Analyst from March 1990 to April 1994. She is a certified public
accountant.
Robert E. Fincher has been Vice President -- Marketing of Security since
December 1994. Mr. Fincher has served in a similar capacity since November 1993.
From early 1992 to November 1993, Mr. Fincher worked as Vice President/Marketing
Director of BioImaging Diagnostic Center, Inc. Prior to 1992, Mr. Fincher worked
for Southern Cellular as a Regional Vice President from 1991 to 1992 and as a
General Manager from 1990 to 1991.
O. Gene Gabbard has been a director of the Company since its formation in
January 1993. Mr. Gabbard has served as an independent consultant and
entrepreneur since January 1993. From August 1990 until January 1993, Mr.
Gabbard served as an Executive Vice President and the Chief Financial Officer of
MCI Telecommunications Corporation. Mr. Gabbard is also a director of Adtran,
Inc., Data Technology Corporation, Intercel, Inc., and MindSpring Enterprises,
Inc.
I. Robert Greene has been a director of the Company since September 1995.
Mr. Greene has been a Principal with Chase Capital Partners since August 1994.
He was employed by Prudential Equity Investors as an Associate from 1988 until
1992 and as a Director from 1992 until 1994.
Daryl E. Harms has been a director of the Company since its formation in
January 1993. Mr. Harms co-founded Predecessor Masada with Mr. Johnson in 1988
and served as the Secretary of the Company from January 1993 until May 1995 and
as the Secretary of Security from February 1994 through December 1994. Mr. Harms
co-founded with Mr. Johnson in 1994 Masada Resource Group, L.L.C., which is
engaged in the business of developing facilities for the conversion of municipal
waste and sewage sludge into ethanol and other by-products. Mr. Harms is the
principal executive of Masada Resource Group, L.L.C. and owns, with Mr. Johnson,
the corporation that serves as the sole manager of Masada Resource Group, L.L.C.
Steven C. Halstedt has been a director of the Company since its formation
in January 1993. Mr. Halstedt co-founded The Centennial Funds beginning in 1981,
a group of four venture capital funds based in Denver, Colorado that specialize
in electronic communications investments. Two of these funds, Centennial Fund
III, L.P. and Centennial Fund IV, L.P., are stockholders of the Company. See
"Principal Stockholders." Mr. Halstedt serves as an individual general partner
of the general partner of each of The Centennial Funds. He has served since 1986
as Chairman of the Board of Centennial Holdings, Inc., the management company
for The Centennial Funds.
William A. Johnston has been a director of the Company since February 1994.
Mr. Johnston has been employed by Hancock Venture Partners, Inc. in various
capacities since 1983 and has served as a Senior Vice President since 1987.
Bertil D. Nordin has been a director of the Company since February 1994.
Mr. Nordin served as Chairman of Digital Communications Associates, Inc. since
prior to 1990 until his retirement in December 1994. Mr. Nordin is a director of
TechForce Corporation.
George J. Still, Jr. has been a director of the Company since its formation
in January 1993. Mr. Still has been a Principal with Norwest Venture Capital
Management since October 1989 and was a general partner of the Centennial Funds
from July 1984 until October 1989. He is a director of PeopleSoft, Inc.
Pursuant to the terms of the Certificate of Incorporation, as amended (the
"Charter"), of the Company, the Board of Directors is divided into three
classes. One class will hold office initially for a term expiring at the annual
meeting of stockholders to be held in 1997, a second class will hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 1998, and a third class will hold office initially for a term expiring at the
annual meeting of stockholders to be held in 1999. Each director will hold
office for the term to which he is elected and until his successor is duly
elected and qualified. Messrs. Halstedt, Kark and Johnston will have terms
expiring in 1997, Messrs. Still, Gabbard and Greene will have terms expiring in
1998, and Messrs. Johnson, Harms and Nordin will have terms expiring in 1999. At
each annual meeting of the stockholders of the Company, the successor
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<PAGE> 51
to the class of directors whose terms expire at such meeting will be elected to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. See "Description of Capital
Stock -- Certain Provisions of the Company's Charter and Delaware
Law -- Classified Board of Directors." The Board of Directors elects officers
annually and such officers serve at the discretion of the Board of Directors.
The Company is actively seeking to hire a President/chief operating officer. See
"Risk Factors -- Dependence Upon Senior Management."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, currently comprised of
Messrs. Johnson, Nordin and Johnston, and an Audit Committee, currently
comprised of Messrs. Nordin & Still. The Compensation Committee makes
recommendations concerning salaries and bonuses for executive officers of the
Company and administers the Company's stock plans. The Audit Committee reviews
the results and scope of the audits and other services provided by the Company's
independent auditors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Johnson, who serves as a member of the Compensation Committee,
currently serves, and during the Company's last fiscal year served, as the
Chairman of the Board, President and Chief Executive Officer of the Company.
DIRECTOR COMPENSATION
Two of the Company's directors, Mr. Gabbard and Mr. Nordin, receive $1,000
for each Board of Directors or committee meeting attended. All directors are
reimbursed for out-of-pocket expenses incurred to attend Board of Directors or
committee meetings.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table summarizes for 1995 the
compensation of the Company's Chief Executive Officer during 1995 and the other
most highly compensated executive officers of the Company (the "Named Executive
Officers") whose total compensation exceeded $100,000 during 1995:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION SALARY
---------------------------------------------------------------- -------------------
<S> <C>
Terry W. Johnson................................................ $ 160,000
Chief Executive Officer
John M. Kark.................................................... $ 139,858
Vice President
David P. Tomick................................................. $ 134,808
Chief Financial Officer
</TABLE>
Year-End Option Values. The following table sets forth information
regarding the number and value of options held at December 31, 1995 by each of
the Named Executive Officers. No options were exercised during 1995 by such
executives.
50
<PAGE> 52
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING DOLLAR VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
- --------------------------------------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Terry W. Johnson............................. -- -- -- --
John M. Kark................................. 0 60,000 $ 0 $166,200
David P. Tomick.............................. 0 45,000 0 124,650
</TABLE>
- ---------------
(1) The value of the options is based upon the exercise price and the estimated
fair market value of the underlying shares at December 31, 1995 ($2.77 per
share).
Stock Plans. The Company has adopted three stock award plans. The Board of
Directors of the Company adopted the Stock Option/Purchase Plan of Masada
Security Holdings, Inc. in 1994 ("1994 Stock Plan"), the Masada Security
Holdings, Inc. 1996 Stock Option Plan in April 1996 ("1996 Stock Plan"), and the
Masada Security Holdings, Inc. 1997 Stock Option Plan in September 1996 (the
"1997 Stock Plan"). The purposes of these plans are to provide long-term
incentives and awards to directors, officers and key employees of the Company,
to assist the Company in attracting and retaining such individuals on a basis
competitive with industry practices, to align their interests with those of the
Company's stockholders, and to provide additional compensation for them.
1994 Stock Plan
Under the 1994 Stock Plan, 300,000 shares of the Company's Common Stock are
available for issuance, subject to such adjustments as may be necessary to
reflect changes in the capitalization of the Company (i.e., a stock split) or
such other significant transactions requiring adjustment of the number of shares
reserved for the 1994 Stock Plan. As of September 30, 1996, awards covering
241,500 of the 300,000 shares of Common Stock available for issuance under the
1994 Stock Plan had been granted.
The 1994 Stock Plan is administered by the Compensation Committee of the
Board of Directors of the Company (the "Compensation Committee"). The
Compensation Committee has full authority, in its discretion, to administer and
interpret the 1994 Stock Plan and to adopt or appeal such rules and regulations
consistent with the terms of the 1994 Stock Plan as the Compensation Committee
deems necessary or advisable in order to carry out the administration of the
1994 Stock Plan. The Compensation Committee shall have the authority to select,
for participation in the 1994 Stock Plan, those officers, directors or other key
employees of the Company whom the Compensation Committee deems to be important
to the long-term growth and success of the Company. The Compensation Committee
shall also have authority to determine the number of shares that will be subject
to a stock award and the conditions subject to which stock awards will become
payable. The participant, however, has the right to elect the form in which he
or she wishes to accept the stock award. The participant may choose to accept a
grant of a stock award as either an incentive stock option ("ISO") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), or a non-qualified stock option ("NQSO"), which is a stock option that
fails to meet one or more of the requirements of an ISO (hereinafter, an ISO and
a NQSO are collectively referred to as "Stock Options"), or a stock purchase
award which shall be deemed a purchase and sale of the Common Stock of the
Company and shall not be a Stock Option ("Stock Purchase") (hereinafter and
heretofore, an ISO, NQSO and a Stock Purchase are collectively referred to as
"Stock Awards"). Only one form of Stock Award may be selected upon any single
grant.
Upon the grant of a Stock Award, the Compensation Committee provides the
participant written notice ("Participation Notice") which sets forth the name of
the participant, the number of shares of Common Stock to be granted to such
participant pursuant to the Stock Award, depending upon the form of Stock Award
selected by the participant, and the price per share of Common Stock to be
granted to such participant, depending upon the form of Stock Award selected by
the participant. Upon receipt of such Participation Notice, the participant has
thirty (30) days to notify the Company ("Participation Acceptance") of the
elected form of the Stock Award. The participant may only select
51
<PAGE> 53
one form of Stock Award in response to any single Participation Acceptance. If
the participant fails to properly elect a form of Stock Award, the Compensation
Committee may, in its sole discretion, select the form of Stock Award which will
be utilized in the grant of the shares of Common Stock to the participant. In
the event the participant fails to deliver a Participation Acceptance within the
thirty (30) days after delivery of the Participation Notice, the Stock Award
identified in the Participation Notice shall be automatically canceled and
rescinded without any further or additional actions on the part of the
Compensation Committee; provided, however, the Compensation Committee may elect
to allow a participant to receive such Stock Award at any future time during the
term of the 1994 Stock Plan.
The Compensation Committee shall not grant an ISO to any person who, at the
time of granting, is not an employee of the Company or a subsidiary.
Furthermore, the Compensation Committee shall not grant an ISO pursuant to which
the aggregate fair market value ("FMV") of the Company's Common Stock on the
date of grant with respect to which such ISO is exercisable for the first time
during any calendar year is in excess of $100,000 or such other limitations as
may be provided by the Code. All Stock Options shall expire ten (10) years after
the effective date of the grant of such Stock Option unless earlier terminated,
canceled or forfeited. A Stock Option is effectively granted upon the execution
of an agreement between the participant and the Company evidencing the grant of
such Stock Option ("Stock Option Agreement"). The exercise price of an ISO shall
not be less than one hundred percent (100%) of the FMV as of the date of the
Participation Notice. The exercise price for a NQSO shall be such price as
determined by the sole discretion of the Compensation Committee. The exercise
price must be paid in cash upon exercise.
Each Stock Option pursuant to the 1994 Stock Plan shall become vested based
upon the participant's years of employment (or service as a director of the
Company) beginning on or after February 1, 1993 with the Company or a subsidiary
("Vesting Period"). Upon two years of employment/director service, each Stock
Option becomes 40% vested. On the anniversary date of each year thereafter, an
additional 20 percent of any Stock Option becomes vested until it is 100 percent
vested upon the completion of the participant's fifth year of
employment/director service.
A participant who is a director of the Company, but not an employee of the
Company or any subsidiary (a "Director Participant") may exercise during the
Vesting Period that portion of his or her Stock Options which are vested. Except
as indicated below, any participant that is not Director Participant (an
"Employee Participant") may not exercise any portion of his or her Stock
Options, whether or not vested, until the conclusion of the Vesting Period. If
an Employee Participant, prior to completion of the Vesting Period, resigns from
his or her employment or is terminated for "cause" (as defined in the 1994 Stock
Plan), then the Employee Participant's Stock Option is automatically canceled
and forfeited in its entirety. If the Employee Participant's employment is
terminated during the Vesting Period for any other reason, including death or
disability, the Employee Participant (or his or her representative) within three
months, may exercise only the vested portion of the Employee Participant's Stock
Options. The non-vested portion is automatically canceled and forfeited.
The effective date of a Stock Purchase shall be the date that the Company
and the participant entered into an agreement evidencing the sale of such shares
of Common Stock identified in the Participation Notice ("Stock Purchase
Agreement"). The price per share of Common Stock purchased pursuant to a Stock
Purchase shall be the price determined by the Compensation Committee in its sole
discretion. The Stock Purchase price shall be paid by the participant to the
Company in a single payment on the fifth anniversary of the date of execution of
the Stock Purchase Agreement. The obligation of payment of the Stock Purchase
shall be evidenced by the execution and delivery by the participant of an 8%
promissory note ("Promissory Note"). Payment of the Promissory Note shall be
secured by a pledge of the Common Stock comprising the Stock Purchase.
The Stock Purchase shall become incrementally non-forfeitable and not
subject to repurchase by the Company over a five year period based upon the
participant's years of employment with the Company or a subsidiary (or service
as a director of the Company) beginning on or after February 1,
52
<PAGE> 54
1993. Upon completion of two years of employment (or service as a director of
the Company) the Stock Purchase shall become 40 percent non-forfeitable. On the
anniversary date of each year thereafter, another 20 percent of the Stock
Purchase shall become non-forfeitable until upon completion of the fifth year of
employment/director service, the Stock Purchase becomes 100 percent
non-forfeitable ("Forfeiture Period"). If any Director Participant ceases to
serve as a director of the Company during the Forfeiture Period for any reason
whatsoever, then the percentage of the Stock Purchase which remains forfeitable
may, at the option of the Compensation Committee, be forfeited to and
repurchased by the Company in exchange for the cancellation of the pro rata
obligation under the Promissory Note. As regards the non-forfeitable portion,
the Director Participant must pay the pro rata portion of the Promissory Note,
including interest accrued thereon. The Compensation Committee may in its
discretion, elect not to exercise its right to force the forfeiture and
repurchase of the forfeitable portion of the Stock Purchase.
If any Employee Participant, prior to the completion of the Forfeiture
Period, either resigns from his or her employment or is terminated for "cause"
(as defined in the 1994 Stock Plan), then the Stock Purchase shall, at the
option of the Compensation Committee, be forfeited to and be repurchased by the
Company in exchange for the cancellation of the pro rata portion of the
Promissory Note as discussed above. If the Employee Participant's employment is
terminated during the Forfeiture Period for any other reason, including death
and disability, then the Compensation Committee, at its option, may cause the
Stock Purchase to be forfeited and repurchased by the Company in the following
manner. A percentage of the Stock Purchase which remains forfeitable as of such
date shall be forfeited to and repurchased by the Company in exchange for the
cancellation by the Company of the obligation of payment of the pro rata portion
of the Promissory Note associated with such forfeitable amounts. The
non-forfeitable portion of the Stock Purchase shall be forfeited to and
repurchased by the Company in exchange for (i) the cancellation by the Company
of the obligation of payment remaining under the Promissory Note ("Cancellation
Amount") and (ii) payment by the Company to the participant of the difference
between the Cancellation Amount and the fair market value of the percentage of
the Common Stock comprising the Stock Purchase which has become non-forfeitable.
If within one (1) year after such payment, the Company sells securities
comprising at least 20% of the Common Stock (assuming full dilution and complete
conversion of all convertible securities) or participates in certain
reorganization events, and the valuation of the Common Stock in such
transaction(s) is greater than that paid to the participant for his Stock
Purchase, then the Company is obligated to pay to the participant the excess of
the fair market value as determined with reference to such transaction and the
fair market value previously paid to the participant. The Compensation Committee
may, at its discretion, elect not to exercise its right of forfeiture.
Notwithstanding the foregoing, in the event that any participant shall fail
to pay the Promissory Note upon maturity, then the Company may exercise any and
all remedies available in law or equity to obtain full payment in accordance
with the Promissory Note.
In the event that the Company is acquired by a third party ("Acquiror"),
whether by means of a merger or consolidation in which the Company does not
survive, the sale of all or substantially all of the assets of the Company or
Security, or the sale of at least 80% of the shares of capital stock of the
Company ("Reorganization Event"), then the Compensation Committee may, in its
absolute discretion, accelerate the dates upon which the Stock Options are
vested and exercisable and upon which the Stock Purchases become non-forfeitable
to the date immediately preceding the date of the Reorganization Event.
Nonetheless, the Company must (i) in the event that the Acquiror shall assume
the 1994 Stock Plan, accelerate 50% of the non-vested Stock Options and/or
forfeitable Stock Purchases of any Employee Participant who has been offered and
has accepted comparable employment with the Acquiror or an affiliate of the
Acquiror, and (ii) accelerate 100% of the non-vested Stock Options and/or
forfeitable Stock Purchases of any Employee Participant who has not been offered
comparable employment by the Acquiror or any affiliate of the Acquiror.
Upon issuance of Common Stock or upon the exercise of a Stock Option or on
account of a Stock Purchase, the ownership of such Common Stock shall be subject
to the restrictions upon transferability
53
<PAGE> 55
imposed by the federal and state securities laws and may not be transferred or
resold unless the participant shall furnish to the Company an opinion of counsel
acceptable to the Company, at such participant's expense, that such transfer or
sale does not violate any federal or applicable state securities laws.
Furthermore, in the event that the participant desires to transfer, incumber,
pledge, assign, sell or otherwise dispose of all or any portion of any Common
Stock required pursuant to any Stock Option or Stock Purchase, he or she may
transfer such Common Stock only after first giving the Company an option to
purchase all of such shares at the same price, terms and conditions as offered
to the participant.
The Compensation Committee may terminate or amend the 1994 Stock Plan at
any time; provided, however, that the termination or modification of the 1994
Stock Plan does not adversely affect the rights of any participant with regard
to a Stock Award that has previously been granted pursuant to the 1994 Stock
Plan.
1996 Stock Plan
Under the 1996 Stock Plan, 150,000 shares of Common Stock are available for
issuance, subject to such adjustments which may be necessary to reflect changes
in the number or kind of shares of Common Stock or other securities of the
Company. The 1996 Stock Plan provides for the granting to directors, officers,
or key employees of the Company an ISO or a NQSO. As of September 30, 1996,
Stock Options covering 144,000 shares of Common Stock available for issuance
under the 1996 Stock Plan had been granted.
The 1996 Stock Plan is administered by the Compensation Committee, which
has the discretion to, among other matters, determine the persons to whom
options will be granted; the number of shares purchasable upon exercise of each
Stock Option; whether Stock Options will be an ISO or a NQSO; the exercise price
of the shares issuable pursuant to the Stock Options (which price may not be
less than the greater of 100 percent of the fair market value of the Common
Stock or $10.67 per share if an ISO or no less than $10.67 per share if an
NQSO); and the period of time during which each Stock Option may be exercised
(not to exceed 10 years for an ISO). The purchase price of the shares issued
pursuant to each Stock Option must be paid in cash or, if permitted by the
Compensation Committee, by surrender of shares of Common Stock held by the
participant or combination of cash and shares, or by the delivery to the Company
of such other consideration consisting of money or property actually received by
the Company or as may be deemed in the sole opinion of the Compensation
Committee to have a value equal to the aggregate exercise price.
The aggregate fair market value of the shares of Common Stock for which an
ISO may first be exercisable by a participant during any one calendar year may
not exceed $100,000. No ISO may be granted after the tenth anniversary of
adoption of the 1996 Stock Plan, and no ISO may be granted to any employee who
owns stock possessing more than 10 percent of the total combined voting power of
all classes of stock of the Company, unless the exercise price is no less than
the greater of 110 percent of the fair market value of the Common Stock or
$10.67 per share and such ISO, by its terms, would not be exercisable after five
years from the date on which the ISO is granted.
The Compensation Committee has the power to specify, with respect to Stock
Options granted to a particular participant, the effect upon such participant's
right to exercise a Stock Option in the event that the participant shall cease
to be employed by, or otherwise associated or affiliated with the Company,
either directly, as an employee or member of the Board of Directors of the
Company, or indirectly, as an employee of a subsidiary, under various
circumstances. In no event, however, can an ISO be exercised more than three
months after termination of employment for any reason other than disability, or
more than one year after termination by reason of disability.
No ISO or NQSO shall be transferrable by a participant other than by will
or the laws of descent and distribution or pursuant to a Qualified Domestic
Relations Order. In addition, no Common Stock received or purchased pursuant to
the exercise of an ISO cannot be transferred by the participant except pursuant
to the participant's will or the laws of descent and distribution until such
date which is
54
<PAGE> 56
the later of two years after the grant of such ISO or one year after the
issuance to the participant of the shares pursuant to the exercise of such ISO.
The Board of Directors may terminate or amend the 1996 Stock Plan;
provided, however, that the Board of Directors of the Company may not amend the
1996 Stock Plan without approval of the stockholders of the Company for the
following: (i) to increase the total number of shares of stock issuable pursuant
to an ISO or materially increase the number of shares of Common Stock pursuant
to the 1996 Stock Plan; (ii) to change the class of employees eligible to
receive an ISO or to materially change the class of persons who may participate
in the 1996 Stock Plan; or (iii) otherwise materially increase the benefits
accruing to participants. However, in no event may a termination or amendment of
the 1996 Stock Plan affect the rights of a participant under an existing Stock
Option Agreement without the consent of such a participant or his or her legal
representative.
1997 Stock Plan
The 1997 Stock Plan provides for the granting to officers or other key
employees of the Company an ISO or a NQSO (with or without reload rights).
Directors who are not employees of the Company are not eligible to receive
options under the 1997 Stock Plan. Under the 1997 Stock Plan, an aggregate of
500,000 shares of Common Stock ("Maximum Aggregate Shares") become available
over a five year period beginning in 1997, subject to such adjustments which may
be necessary to reflect changes in the number or kind of shares of Common Stock
or other securities of the Company. On January 1, 1997, twenty percent of the
Maximum Aggregate Shares, or 100,000 shares, will become eligible for issuance.
An additional 100,000 shares become eligible for issuance each of the next four
years thereafter, until all of the Maximum Aggregate Shares are available for
Stock Option grants on January 1, 2001.
The 1997 Stock Plan is administered by the Compensation Committee, which
has the discretion to, among other matters, determine the persons to whom Stock
Options will be granted; the number of shares purchasable upon exercise of each
Stock Option; whether the Stock Option will be an ISO or a NQSO; whether the
Stock Option will have related rights; the exercise price of the shares issuable
pursuant to the Stock Option (which price may not be less than 100 percent of
the fair market value of the Common Stock if an ISO or not less than 85 percent
of fair market value if an NQSO); and the period of time during which each Stock
Option may be exercised (not to exceed 10 years for an ISO). The purchase price
of the shares issued pursuant to each Stock Option must be paid in cash or, if
permitted by the Compensation Committee, by surrender of shares of Common Stock
held by the participant or combination of cash and shares, or by the delivery to
the Company of such other consideration consisting of money or property actually
received by the Company or as may be deemed in the sole opinion of the
Compensation Committee to have a value equal to the aggregate exercise price.
The aggregate fair market value of the shares of Common Stock for which an
ISO may first be exercisable by a participant during any one calendar year may
not exceed $100,000. No ISO may be granted after the tenth anniversary of
adoption of the 1997 Stock Plan, and no ISO may be granted to any employee who
owns stock possessing more than 10 percent of the total combined voting power of
all classes of stock of the Company, unless the exercise price is no less than
110 percent of the fair market value of the Common Stock and such ISO, by its
terms, would not be exercisable after five years from the date on which the ISO
is granted.
The Compensation Committee may in its discretion grant reload option rights
in conjunction with any Stock Option. Reload option rights entitle the
participant, upon exercise of any Stock Option through the delivery of
previously owned shares, to be automatically granted, on the date of such
exercise, a new Stock Option (the "Reload Option") (a) for a number of shares of
the Company's Common Stock not exceeding the number of shares of the Company's
Common Stock delivered in payment of the option price of the original Stock
Option; (b) having an option price not less than the fair market value of the
Company's Common Stock on the date of grant of the Reload Option; (c) having an
expiration date not later than the expiration date of the original Stock Option;
and
55
<PAGE> 57
(d) otherwise having the same terms and conditions as the Stock Option whose
exercise has triggered such payment, except that no Reload Option may be
exercised prior to the end of one year from the date of grant of the Reload
Option and unless the participant retains beneficial ownership of the shares of
the Company's Common Stock issued pursuant to the exercise of the original Stock
Option for a period of one year. In granting Reload Option rights, the
Compensation Committee may provide for successive grants of Reload Options upon
the exercise of Reload Options.
Because the number of shares covered by a Reload Option is limited to the
number of previously owned shares delivered in payment of the option price of
the original Stock Option, Reload Option rights will not increase the net number
of shares which may be acquired under a Stock Option. Because the option price
of the Reload Option may not be less than fair market value on the date that the
underlying Stock Option is exercised, Reload Option rights also will not
increase the total net value (excess of fair market value over the option price)
realizable under the original Stock Option. However, since a participant who
exercises a Stock Option before the end of its term will not forfeit the
potential for future market price appreciation, Reload Option rights will
encourage earlier stock option exercises, thereby promoting the identification
with stockholder interest resulting from ownership of the Company's Common Stock
by participants.
The Compensation Committee has the power to specify, with respect to Stock
Options granted to a particular participant, the effect upon such participant's
right to exercise a Stock Option in the event that the participant shall cease
to be employed by the Company under various circumstances. In no event, however,
can an ISO be exercised more than three months after termination of employment
for any reason other than disability, or more than one year after termination by
reason of disability.
No ISO or NQSO shall be transferrable by a participant other than by will
or the laws of descent and distribution or pursuant to a Qualified Domestic
Relations Order. In addition, no Common Stock received or purchased pursuant to
the exercise of an ISO cannot be transferred by the participant except pursuant
to the participant's will or the laws of descent and distribution until such
date which is the later of two years after the grant of such ISO or one year
after the issuance to the participant of the shares pursuant to the exercise of
such ISO.
The Board of Directors may terminate or amend the 1997 Stock Plan;
provided, however, that the Board of Directors of the Company may not amend the
1997 Stock Plan without approval of the stockholders of the Company for the
following: (i) to increase the total number of shares of stock issuable pursuant
to an ISO or materially increase the number of shares of Common Stock pursuant
to the 1997 Stock Plan; (ii) to change the class of employees eligible to
receive an ISO or to materially change the class of persons who may participate
in the 1997 Stock Plan; or (iii) otherwise materially increase the benefits
accruing to participants. However, in no event may a termination or amendment of
the 1997 Stock Plan affect the rights of a participant under an existing Stock
Award Agreement without the consent of such a participant or his or her legal
representative.
401(K) PLAN
Effective January 1, 1996, any employee (including the Named Executive
Officers) of Security who has completed 1,000 hours of service at the end of his
or her first twelve months of employment or any calendar year ending thereafter,
may contribute to the Masada Security 401(k) Plan ("401(k) Plan"). Security
contributes to each employee's 401(k) account an amount equal to 50% of the
first 6% of each employee's compensation that is contributed by such employee to
the 401(k) Plan.
56
<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of Common Stock (a) immediately prior to this offering and assuming
the exercise of options and warrants exercisable within 60 days of the date
hereof and the conversion of all shares of Class B and Class C Convertible
Preferred Stock into shares of Common Stock, and (b) as adjusted to reflect the
sale of the shares of Common Stock pursuant to this offering by (i) each person
known to the Company to own beneficially more than 5% of the outstanding shares
of Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
PERCENT OWNED(1)
--------------------------------
NAME AND ADDRESS NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING
- ---------------------------------------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Norwest Venture Capital(2) 1,096,929 20.2% 14.0%
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301-1426
Centennial Fund III, L.P.(3) 731,931 13.5% 9.3%
1428 15th Street
Denver, CO 80202
Centennial Fund IV, L.P.(3) 635,205 11.7% 8.1%
1428 15th Street
Denver, CO 80202
South Atlantic Venture Funds(4) 609,951 11.2% 7.8%
614 West Bay Street, Suite 200
Tampa, FL 33606-2704
Hancock Venture Partners, Inc.(5) 531,246 9.8% 6.8%
One Financial Center, 44th Floor
Boston, MA 02111
Chase Capital Partners(6) 468,750 8.6% 6.0%
380 Madison Avenue, 12th Floor
New York, NY 10017
Terry W. Johnson(7) 1,054,617 19.4% 13.4%
Daryl E. Harms(7) 1,054,617 19.4% 13.4%
Steven C. Halstedt(3) 1,570,833 28.9% 20.0%
George J. Still, Jr.(2) 1,096,929 20.2% 14.0%
William A. Johnston(5) 531,246 9.8% 6.8%
I. Robert Greene(6) 468,750 8.6% 6.0%
O. Gene Gabbard(8) 26,007 * *
Bertil D. Nordin(9) 23,007 * *
John M. Kark 0 -- --
David P. Tomick 0 -- --
All directors and executive officers as a group
(13 individuals) (2, 3, 5, 6, 7, 8, 9) 4,825,626 88.7% 61.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting power and sole investment power with respect to all the
shares beneficially owned, subject to community property laws, where
applicable.
(2) Consists of 814,362 and 282,567 shares held of record by Norwest IV and
Norwest V, respectively, which are part of an affiliated group of investment
partnerships. Itasca Partners is the sole general partner of Norwest IV and
Itasca Partners V, LLC is the sole general partner of Norwest V. Mr. Still, a
director of the Company, is a non-managing general partner of Itasca Partners
and is one of three managing general partners of Itasca Partners V, LLC. Mr.
Still disclaims beneficial ownership of such shares except to the extent of
his indirect pecuniary interest in such shares. Each of Norwest IV and Norwest
V disclaims beneficial ownership of the shares held of record by the other.
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<PAGE> 59
(3) Shares shown as beneficially owned by Steven C. Halstedt consist of 731,931,
635,205, and 203,697 shares held of record by Centennial III, Centennial IV,
and Criterion. Centennial Holdings III, L.P. ("Holdings III") is the sole
general partner of Centennial III, Centennial Holdings IV, L.P. ("Holdings
IV") is the sole general partner of Centennial IV, and CVP III General Partner
is the sole general partner of Criterion. Mr. Halstedt, a director of the
Company, is one of three general partners of Holdings III, is one of seven
general partners of Holdings IV, and is the Chairman of the Board and owner of
30.5% of the capital stock of Centennial Holdings, Inc., the parent company of
Criterion Investments, Inc., one of four general partners of CVP III General
Partner. Mr. Halstedt disclaims beneficial ownership of all shares held of
record by Centennial III, Centennial IV, and Criterion. Centennial III and
Holdings III disclaim beneficial ownership of the shares held of record by
Centennial IV and Criterion, Centennial IV and Holdings IV disclaim beneficial
ownership of the shares held of record by Centennial III and Criterion, and
Criterion and CVP III General Partner disclaim beneficial ownership of the
shares held of record by Centennial III and Centennial IV.
(4) Consists of 531,426 and 78,525 shares held of record by South Atlantic II
and South Atlantic III, respectively, which are part of an affiliated group of
investment partnerships. Each of South Atlantic II and South Atlantic III
disclaims beneficial ownership of the shares held of record by the other.
(5) Consists of 531,246 shares held of record by Hancock. Hancock Venture
Partners, Inc., is one of three managing general partners of Back Bay Partners
XII, L.P., the sole general partner of Hancock. Mr. Johnston, a director of
the Company and a Senior Vice President of Hancock Venture Partners, Inc.,
disclaims beneficial ownership of such shares.
(6) Consists of 468,750 shares held of record by Chase. Chase Capital Partners
is the sole general partner of Chase. Mr. Greene, a director of the Company
and a Principal of Chase Capital Partners, disclaims beneficial ownership of
such shares except to the extent of his indirect pecuniary interest in such
shares.
(7) Includes 1,000,380 shares owned by MSAM, Inc., a corporation owned and
controlled by Messrs. Johnson and Harms.
(8) Includes 17,007 shares owned by the O. Gene Gabbard Revocable Trust of which
Mr. Gabbard is a trustee, and 9,000 shares issuable pursuant to certain NQSOs
granted pursuant to the 1994 Stock Option Plan and which are currently
exercisable or will be exercisable within 60 days of November 8, 1996.
(9) Includes 6,000 shares issuable pursuant to certain NQSOs granted pursuant to
the 1994 Stock Option Plan and which are currently exercisable or will be
exercisable within 60 days of November 8, 1996.
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CERTAIN TRANSACTIONS
All information set forth below, other than the information under
"-- Recapitalization," does not assume implementation of the Recapitalization.
FEBRUARY 1993 CAPITALIZATION AND ACQUISITION OF PREDECESSOR MASADA
Prior to January 1993, Predecessor Masada was an operating security alarm
company that did business under the name "Masada Security." The owners of
Predecessor Masada, Mr. Johnson and Mr. Harms, each a director of the Company,
along with an investor group led by Centennial III and Criterion, formed the
Company to serve as the sole general partner of the Partnership and formed the
Partnership to acquire the security alarm business of Predecessor Masada and the
security alarm business of Network Security, Inc., which acquisitions were
consummated on February 1, 1993. Predecessor Masada received $6,950,000 from the
Partnership for the sale of the Predecessor Masada security alarm business, of
which $6,320,000 was applied by Predecessor Masada to satisfy its bank
financing. To obtain a portion of the funds needed for these acquisitions, the
Company and the Partnership engaged in the following securities transactions,
also on February 1, 1993: (i) the Company sold 75,200 shares of Class A
preferred stock for $100 cash per share as follows: 500 shares to Mr. Gabbard, a
director of the Company, and 27,800, 25,000, 13,900 and 8,000 shares to
Centennial III, Norwest IV, South Atlantic II, and Criterion, respectively; (ii)
the Company sold 60,000 shares of Class B common stock for $1 per share as
follows: 22,182 shares to Centennial III; 19,944 shares to Norwest IV; 11,094
shares to South Atlantic II; 6,384 shares to Criterion; and 396 shares to
Gabbard; (iii) the Company sold 20 shares of Class A common stock to each of
Messrs. Johnson and Harms for $1 per share; (iv) the Partnership issued
subordinated debentures in the aggregate principal amount of $1,500,000 (the
"Partnership Debentures") in exchange for cash in like amount as follows:
$350,479 from Centennial III; $315,179 from Norwest IV; $175,240 from South
Atlantic II; $100,857 from Criterion; $279,123 from Mr. Johnson; and $279,122
from Mr. Harms. Additionally, MSAM, Inc., a corporation owned by Messrs. Johnson
and Harms ("MSAM"), made a capital contribution of $40,000 to the Partnership in
February 1993 in exchange for a limited partnership interest in the partnership.
As a result of these transactions, designees of Centennial III (Mr. Halstedt)
and Norwest IV (Mr. Still) became directors of the Company.
FEBRUARY 1994 RECAPITALIZATION AND MERGER
On February 11, 1994, the Partnership was merged into the Company's newly
formed subsidiary, Security. Contemporaneously with this merger (the "Merger"),
the Company issued an additional 506,501 shares of Class B common stock to the
five holders thereof (Centennial III, Norwest IV, South Atlantic II, Criterion
and Mr. Gabbard) pursuant to a 9.44167 to 1 stock split of the Class B common
stock. As a result of the Merger, the following occurred: (i) the Partnership
ceased to exist; (ii) the Company sold 358,332 shares of Class B convertible
preferred stock for cash and/or the redemption of the Partnership Debentures
equal to $24 per share as follows: 11,630, 11,630, 1,399 and 1,399 shares to Mr.
Johnson, Mr. Harms, Mr. Nordin and an affiliate of Mr. Gabbard, respectively,
each a director of the Company; 25,020, 87,745, 83,149, 46,221, 6,285 and 83,333
shares to Centennial III, Centennial IV, Norwest IV, South Atlantic II,
Criterion, and Hancock, respectively; and 521 shares to Carol deB. Whitaker
("Ms. Whitaker"); and (iii) MSAM received 333,460 shares of the Company's Class
A common stock in exchange for MSAM's limited partnership interest in the
Partnership. The Company also sold to Mr. Nordin, contemporaneously with the
Merger, 500 shares of Class A preferred stock for $50,000 cash and 3,739 shares
of Class B common stock for $396. As a result of these transactions, a designee
of Hancock (Mr. Johnston) became a director of the Company.
MAY 1995 EQUITY FINANCING
In May 1995, the Company sold 486,111 shares of Class C convertible
preferred stock for $36 cash per share as follows: 5,715, 5,715, 472 and 472
shares to Mr. Johnson, Mr. Harms, Mr. Nordin and an affiliate of Mr. Gabbard,
each a director of the Company; 8,464, 110,214, 1,190, 83,724, 23,267, 23,267,
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83,333 and 138,889 shares to Centennial III, Centennial IV, Criterion, Norwest
V, South Atlantic II, South Atlantic III, Hancock, and Chase, respectively; and
1,389 shares to Ms. Whitaker. As a result of these transactions, a designee of
Chase (Mr. Greene) became a director of the Company.
TRANSACTIONS WITH CENTENNIAL SECURITY
In June 1994, Security entered into three agreements with Centennial
Security, a security alarm company organized in part by one of the Company's
stockholders, Centennial IV: the License Agreement, a monitoring agreement (the
"Monitoring Agreement") and a purchase agreement (the "Purchase Agreement").
Security granted to Centennial Security in the License Agreement an exclusive
license to use the Masada Security trademark and tradename and certain
intellectual property in the northern half of the United States (the states of
California (north of Sacramento), Colorado, Connecticut, Delaware, Idaho,
Illinois, Indiana, Iowa, Kansas, Maine, portions of Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New
Jersey, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South
Dakota, Utah, Vermont, Washington, Wisconsin and Wyoming) and Canada. The
License Agreement has a ten year initial term. Unless one party gives notice of
termination to the other party, the License Agreement will automatically be
extended for successive three year renewal terms. In exchange for the grant of
this license, Centennial Security issued to Security 4,750 shares of the Class B
common stock of Centennial Security pursuant to the Purchase Agreement.
Pursuant to the Monitoring Agreement, Security agreed to provide monitoring
and certain administrative services to Centennial Security in exchange for fees
for a period of at least 18 months to begin when Centennial Security commenced
operations. In accordance with the Monitoring Agreement, Security monitored
certain security alarm accounts of Centennial Security beginning in August 1995
and provided administrative services to Centennial Security during 1995. In
April 1996, Security and Centennial Security agreed to terminate the Monitoring
Agreement effective upon the assumption of the monitoring function by an
independent monitoring company, which occurred during June 1996. In connection
with such termination, Centennial Security agreed to pay a $112,000 termination
payment to Security in the form of an unsecured promissory note payable in
twelve monthly installments beginning in September 1996. Centennial Security
paid fees of $40,127 and $16,152 to Security pursuant to the Monitoring
Agreement during 1995 and 1996 (through June), respectively.
The Purchase Agreement, as amended in June 1995, provides that if
Centennial Security determines to seek a sale of Centennial Security, it must
give written notice to Security of such determination prior to negotiating with
any other person for a possible sale, and it must negotiate exclusively with
Security thereafter for a stated period that could last up to six months. If
Centennial Security and Security negotiate for a stated period without reaching
an agreement for the acquisition of Centennial Security, Centennial Security can
sell to a third party, but only at a price higher than the average of Security's
last offer to Centennial Security and Centennial Security's last counteroffer to
Security. These restrictions on Centennial Security's ability to sell its
business expire upon the closing of any public offering by Centennial Security
of its capital stock.
During July 1995, Centennial Security sold 438,049 shares of its Series B
convertible preferred stock to Centennial IV, Chase, Hancock, Centennial
Holdings, Inc. ("Centennial Holdings"), and Security in a private offering.
Security purchased 27,867 of these shares, which are convertible into shares of
Centennial Security's common stock, in exchange for a cash payment of $766,343.
In connection with this transaction, Security's 4,750 shares of Class B common
stock of Centennial Security were converted into 67,199 shares of Centennial
common stock. Additionally, Security and the other purchasers obtained certain
registration rights with respect to the common stock of Centennial Security.
Masada (through Security) presently owns 12.3% of the capital stock of
Centennial Security. Centennial IV and Centennial Holdings, which provides
administrative services to Centennial III and
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Centennial IV and is the parent company of one of four general partners of the
general partner of Criterion, presently own 29.7% and 2.3% of the capital stock
of Centennial Security, respectively. Upon completion of this offering,
Centennial IV, Centennial III and Criterion will collectively own approximately
20.0% of the Common Stock of the Company. Hancock and Chase, which own 14.1% and
21.1%, respectively, of the capital stock of Centennial Security, will own
approximately 6.8% and 6.0%, respectively, of the Company's Common Stock upon
completion of this offering. Mr. Johnson and Mr. Johnston have served as
directors of Centennial Security since June 1994 and July 1995, respectively. As
compensation for his service as a director, Centennial Security has granted to
Mr. Johnson options to purchase 2,500 shares of Centennial Security common
stock.
TRANSACTIONS WITH MASADA RESOURCE GROUP, L.L.C.
The Company and Masada Resource Group, L.L.C. ("Resource") both lease
office space for their respective principal executive offices on the same floor
of the same building located at 950 22nd Street North, Birmingham, Alabama
35203. See "Business -- Property." Pursuant to an oral agreement reached during
1996 between the Company and Resource, the Company subleases to Resource
approximately 1,700 square feet of improved office space in this building for
annual rent of approximately $25,000, and Resource subleases to the Company
approximately 1,200 square feet of unimproved office space in this building for
annual rent of approximately $12,000. The Company and Resource otherwise operate
independently of each other. Messrs. Johnson and Harms collectively own
approximately 85% of the equity interests of Resource.
RECAPITALIZATION
During September 1996, the Board of Directors and stockholders of the
Company unanimously approved the Recapitalization, which will be implemented
concurrently with the closing of this offering. The Recapitalization provides
for (i) the automatic redemption of all 75,700 outstanding shares of the
Company's Class A preferred stock, (ii) the automatic conversion of all 358,332
outstanding shares of the Company's Class B convertible preferred stock into
358,332 shares of the Company's Class B common stock, (iii) the automatic
conversion of all 486,111 outstanding shares of the Company's Class C
convertible preferred stock into 546,870 shares of the Company's Class C common
stock, (iv) upon the filing of an amendment to the Company's Charter, the
automatic exchange of each share of the Company's Class A common stock, Class B
common stock and Class C common stock outstanding following the conversion of
Class B and C convertible preferred stock (collectively, 1,808,942 shares) for
three shares of a new, single class of Common Stock, and (v) the cancellation of
all shares of Class A, Class B and Class C common stock, Class A preferred
stock, and Class B and C convertible preferred stock. The closing of this
offering will not occur without implementation of the Recapitalization.
Prior to adoption of the Recapitalization, each share of Class C
convertible preferred stock was convertible into one share of Class C common
stock pursuant to the Company's Charter. Several of the Company's venture
capital stockholders would not agree to convert voluntarily their shares of
Class C convertible preferred stock on this basis. Following a series of
negotiations, all stockholders agreed that the Recapitalization should provide
that each share of Class C convertible preferred stock would convert into 1.125
shares of Class C common stock.
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DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this offering, the authorized capital stock of the
Company will consist of 15,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock; and in accordance with the Recapitalization, all outstanding
shares of the Company's Class A preferred stock will have been redeemed and
canceled, and all outstanding shares of the Company's Class B convertible
preferred stock and Class C convertible preferred stock (collectively, the
"Convertible Preferred Stock") will have been converted, indirectly, into Common
Stock and canceled. See "Use of Proceeds" and "Certain
Transactions -- Recapitalization."
COMMON STOCK
Immediately prior to the completion of this offering, there will be
5,426,826 shares of Common Stock outstanding held of record by fifteen
stockholders (assuming implementation of the Recapitalization). Upon
consummation of this offering, 7,826,826 shares of Common Stock will be issued
and outstanding (assuming the Underwriter's over-allotment is not exercised).
The Common Stock has been approved for trading on the Nasdaq National Market
under the symbol "MSDA," subject to official notice of issuance.
The holders of Common Stock are entitled to cast one vote for each share
held of record on all matters presented to stockholders. The holders of Common
Stock do not possess cumulative voting rights, and directors are elected by
plurality. The holders of Common Stock are entitled to such dividends as may be
declared by the Board of Directors and funds will be available therefore,
subject to the right of the holders of any preferred stock which may be issued.
Upon liquidation, dissolution or winding up of the Company, the assets legally
available for distribution to stockholders are to be distributed equally among
the holders of Common Stock at that time outstanding, subject to prior
distribution rights for creditors and the preferential rights of any shares of
preferred stock then outstanding. The holders of Common Stock have no preemptive
rights or conversion rights.
PREFERRED STOCK
Following the completion of this offering, no shares of Preferred Stock
will be outstanding. The Company will use approximately $8.4 million of the net
proceeds of this offering to pay all accrued Class A preferred stock dividends
and to redeem and cancel all shares of the Class A preferred stock in accordance
with the Recapitalization. All shares of Convertible Preferred Stock will have
been converted, indirectly, into shares of Common Stock and thereafter canceled,
all in accordance with the Recapitalization. See "Use of Proceeds" and "Certain
Transactions -- Recapitalization."
The Company is authorized to issue Preferred Stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that would adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of such issuance, the
Preferred Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. The
Company has no present intention to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND DELAWARE LAW
Classified Board of Directors. The Company's Charter provides for the
Board of Directors to be divided into three classes of directors, as nearly
equal in number as is reasonably possible, serving staggered terms so that
directors' initial terms will expire either at the 1997, 1998 or 1999 annual
meeting of the stockholders. Starting with the 1997 annual meeting of the
stockholders, one class of directors will be elected each year for a three-year
term. See "Management -- Directors and Executive Officers."
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior
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experience as directors of the Company. The Company believes that this, in turn,
will permit the Board of Directors to more effectively represent the interests
of stockholders.
Delaware Anti-Takeover Statute. The Company is subject to Section 203 of
the Delaware General Corporation Laws which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(a) by persons who are directors and also officers and (b) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or after such date, the business
combination is approved by the Board of Directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. An "interested stockholder" is defined as any person
that is (a) the owner of 15% or more of the outstanding voting stock of the
corporation or (b) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
REGISTRATION RIGHTS
The holders of all shares of capital stock of the Company currently
outstanding (collectively, the "Existing Stockholders") and the Company are
parties to the Third Amended and Restated Securities Purchase Agreement, which
will be in effect following the consummation of this offering (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, subject to the provisions of
the lock-up agreements executed by each of the Existing Stockholders (see
"Underwriting"), the Existing Stockholders have the following rights: (a) those
Existing Stockholders who own at least 50% of the 2,785,716 shares of Common
Stock to be issued pursuant to the Recapitalization in exchange for 928,572
shares of Class B common stock (the "Common B Shares") can request that the
Company effect the registration under the Securities Act on one occasion of
Common B Shares held by them, subject to certain restrictions; (b) in the event
the Company becomes eligible to use a registration statement on Form S-3,
Existing Stockholders can make additional requests that the Company effect the
registration under the Securities Act of Common B Shares held by them, subject
to certain restrictions; (c) those Existing Stockholders who own at least 30% of
the 1,640,610 shares of Common Stock to be issued pursuant to the
Recapitalization in exchange for 546,870 shares of Class C common stock (the
"Common C Shares") can request that the Company effect the registration under
the Securities Act on two occasions of Common C Shares held by them, subject to
certain restrictions; (d) in the event the Company becomes eligible to use a
registration statement on Form S-3, Existing Stockholders can make additional
requests that the Company effect the registration under the Securities Act of
Common C Shares held by them, subject to certain restrictions; and (e) in the
event the Company proposes to register shares of Common Stock under the
Securities Act, other than pursuant to a registration statement on Form S-4 or
Form S-8 or in connection with an exchange offering of securities solely to
existing holders of the Company's securities, the Company is required to notify
all Existing Stockholders and, subject to certain limitations, any Existing
Stockholder may request the registration of any Common B Shares, Common C Shares
or the other 1,000,500 shares of Common Stock issued to them pursuant to the
Recapitalization. These registration rights of the Existing Stockholders expire
no later than December 31, 1998.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is SunTrust Bank,
Atlanta.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 7,826,826
shares of Common Stock outstanding (8,186,826 if the Underwriters'
over-allotment option is exercised in full), assuming that no options are
exercised. The 2,400,000 shares sold in this offering will be freely tradeable
without restrictions or further registration under the Securities Act, other
than shares purchased by affiliates of the Company, as that term is defined
under applicable law ("Affiliates").
All of the persons who were stockholders of the Company prior to this
offering have agreed that they will not, for a period commencing on the date of
the lock-up agreement through a period of 180 days after the effective date of
the registration statement without the prior written consent of Robertson,
Stephens & Company, subject to certain limited exceptions, offer to sell,
contract to sell, or otherwise dispose of, pledge or grant any rights with
respect to any shares of Common Stock, or any securities convertible into or
exchangeable for shares of Common Stock presently owned or thereafter acquired
(the "Lock-up Agreements").
After the expiration of the Lock-up Agreements, 704,463 shares of Common
Stock will be freely tradeable without restriction or registration under the
Securities Act. All of the remaining 4,722,363 shares of Common Stock
outstanding prior to this offering were issued and sold by the Company in
private transactions in reliance upon the exemption set forth in Section 4(2) of
the Securities Act and are restricted securities under Rule 144 under the
Securities Act, or were issued by the Company upon conversion of other shares of
capital stock that were issued and sold in such transactions (the "Restricted
Shares"). Restricted Shares may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, including pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, including Affiliates, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the number of shares of Common Stock then outstanding (approximately 78,268
immediately after this offering) or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the making of a filing
with the SEC with respect to such sale. Such sales are also subject to certain
manner of sale and notice requirements and to the availability of current public
information about the Company. A person who is not an Affiliate at any time
during the three months preceding a sale and who has beneficially owned
Restricted Shares for at least three years is entitled to sell such Restricted
Shares under Rule 144 without regard to the availability of public information,
volume limitations, manner of sale provisions or notice requirements (the "Sale
Conditions"). However, after the three-year holding period Restricted Shares
held by Affiliates must continue to be sold in the manner prescribed by Rule 144
and are subject to the Sale Conditions.
As of the date of this Prospectus 450,000 shares of Common Stock were
reserved for issuance pursuant to the 1994 Stock Plan and the 1996 Stock Plan.
Prior to this offering there has been no public market for the Common
Stock. The Company cannot predict the effect, if any, that sales of shares of
Common Stock, or the availability of such shares for sale, will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market could adversely affect prevailing
market prices.
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UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company and Lehman Brothers Inc. (the "Representatives"),
have severally agreed with the Company, subject to the terms and conditions of
the Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------------- ----------------
<S> <C>
Robertson, Stephens & Company LLC..................................................
Lehman Brothers Inc................................................................
---------
Total..................................................................... 2,400,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 360,000
additional shares of Common Stock at the same price per share as the Company
receives for the 2,400,000 shares that the Underwriters have agreed to purchase.
To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number of shares of Common Stock to
be purchased by it shown in the above table represents as a percentage of the
2,400,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 2,400,000
shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Pursuant to the terms of the Lock-up Agreements, the holders of 5,426,826
shares of the Company's Common Stock will not, from the date of the Lock-up
Agreements through 180 days after the effective date of the registration
statement, subject to certain limited exceptions, offer to sell, contract to
sell or otherwise dispose of, pledge or grant any rights with respect to any
shares of Common Stock, any options or warrants to purchase Common Stock or any
securities convertible into or exchangeable for Common Stock owned directly by
such holders or with respect to which they have the power of disposition without
the prior written consent of Robertson, Stephens & Company. The Company has also
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock, any options or warrants to purchase Common Stock or any
securities convertible into or exchangeable for Common Stock (other than in
accordance with the 1994 Stock Option Plan, the 1996 Stock Option Plan or the
1997 Stock Option Plan) through 180 days after the effective date of the
registration statement without the prior written consent of Robertson, Stephens
& Company. Robertson, Stephens & Company may in its sole discretion and at any
time without notice release all or a portion of the securities subject to the
Lock-up Agreements.
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The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock has been determined through negotiations among the Company and the
Representatives. Among the factors to be considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other publicly traded companies which the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development, the current state of the industry and the economy as a whole and
other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock will be passed upon for the Company by
Burr & Forman, Birmingham, Alabama, counsel for the Company. Certain legal
matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison
LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Masada Security Holdings, Inc. at
December 31, 1993, 1994 and 1995 and June 30, 1996, and for the eleven months
ended December 31, 1993, the years ended December 31, 1994 and 1995, and the six
months ended June 30, 1996, appearing in this Prospectus and the registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
In November 1995, the Company's Board of Directors, upon the recommendation
of its Audit Committee, retained Ernst & Young LLP as its independent public
auditors to audit the Company's financial statements for 1995 and concurrently
dismissed the Company's former auditors, Coopers & Lybrand LLP. Ernst & Young
LLP was subsequently engaged in June 1996 to audit the Company's financial
statements for 1994, the eleven months ended December 31, 1993, and the six
months ended June 30, 1996. The reports of Coopers & Lybrand LLP, which are not
a part of this Prospectus, on the Company's financial statements for 1994 and
the eleven months ended December 31, 1993, before restatement, did not contain
any adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope, or accounting principles. During 1995 (through
November), 1994 and the eleven months ended December 31, 1993, there were no
disagreements between the Company and Coopers & Lybrand LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Coopers & Lybrand LLP, would have caused it to make reference to the subject
matter of the disagreement in connection with its report.
The Company has filed a registration statement on Form S-1 (together with
any amendments thereto, the "Registration Statement") with the Securities and
Exchange Commission under the Securities Act with respect to the Common Stock.
This Prospectus, which constitutes a part of the Registration Statement, omits
certain information contained in the Registration Statement and reference is
made to the Registration Statement and the exhibits and schedules thereto for
further information with respect to the Company and the Common Stock offered
hereby. This Prospectus contains summaries of the material terms and provisions
of certain documents and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.
66
<PAGE> 68
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information to be filed by the Company with
the Commission may be inspected, without charge, at public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W. Washington,
D.C., 20549, and at the following regional offices of the Commission: New York
Regional Office, 7 World Trade Center, Suite 1300, New York, NY 10048; Los
Angeles Regional Office, 5670 Wilshire Blvd., 11th Floor, Los Angeles, CA
90036-3648; and Chicago Regional Office, Suite 1400, Citicorp Center, 500 W.
Madison Street, Chicago, IL 60661-2511. Copies of such materials may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street N.W,
Washington, D.C. 20549, and its public reference facilities in New York, New
York; Los Angeles, California; and Chicago, Illinois, at prescribed rates. The
Commission also maintains a Web Site at http://www.sec.gov which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
67
<PAGE> 69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MASADA SECURITY HOLDINGS, INC. AND SUBSIDIARIES:
Report of Independent Accounts.................................................................. F-2
Consolidated Balance Sheets as of December 31, 1993, 1994 and 1995, as of June 30, 1996, and as
of September 30, 1996 (unaudited)............................................................. F-3
Consolidated Statements of Operations for the eleven months ended December 31, 1993, the years
ended December 31, 1994 and 1995, the six months ended June 30, 1996, and the nine months
ended September 30, 1995 and 1996 (unaudited)................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the eleven months ended December
31, 1993, the years ended December 31, 1994 and 1995, the six months ended June 30, 1996 and
the three months ended September 30, 1996 (unaudited)......................................... F-5
Consolidated Statements of Cash Flows for the eleven months ended December 31, 1993, the years
ended December 31, 1994 and 1995, the six months ended June 30, 1996, and the nine months
ended September 30, 1995 and 1996 (unaudited)................................................. F-6
Notes to Consolidated Financial Statements...................................................... F-7
PRO FORMA FINANCIAL INFORMATION:
Explanatory Note................................................................................ F-19
Pro Forma Combined Condensed Statements of Operations (unaudited) for the year ended December
31, 1995 and the nine months ended September 30, 1996......................................... F-20
Notes to Pro Forma Combined Condensed Statements of Operations (unaudited) for the year ended
December 31, 1995 and the nine months ended September 30, 1996................................ F-22
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Masada Security Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Masada
Security Holdings, Inc. as of December 31, 1993, 1994, 1995 and June 30, 1996,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the eleven months ended December 31, 1993, the years
ended December 31, 1994 and 1995, and the six months ended June 30, 1996. 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 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. 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 consolidated financial position of Masada Security
Holdings, Inc. at December 31, 1993, 1994, 1995 and June 30, 1996, and the
consolidated results of operations and cash flows for the eleven months ended
December 31, 1993, the years ended December 31, 1994 and 1995, and the six
months ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
August 2, 1996, except for
Note 15 as to which the
date is September 27, 1996
F-2
<PAGE> 71
MASADA SECURITY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1993 1994 1995 1996 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 221,501 $ 341,197 $ 205,364 $ 516,479 $ 511,102
Accounts receivable, less allowance for
doubtful accounts of $0, $85,000,
$250,000, $398,836 and $398,836......... 476,148 668,479 773,061 1,362,881 1,693,025
Other receivables......................... -- 7,765 16,650 90,283 72,227
Prepaid expenses.......................... 89,138 137,630 229,054 51,807 6,685
Inventory................................. 425,052 511,971 672,800 799,897 886,753
----------- ----------- ----------- ----------- -----------
Total current assets................ 1,211,839 1,667,042 1,896,929 2,821,347 3,169,792
Property and equipment, net................. 4,484,485 4,283,711 3,535,574 3,187,272 3,071,101
Acquired subscriber agreements, net of
accumulated amortization of $547,479,
$1,245,123, $2,477,496, $4,164,481 and
$5,346,915................................ 4,252,521 6,453,492 10,868,286 32,702,110 31,756,974
Other deferred charges and intangible
assets, net............................... 6,109,289 6,838,289 6,850,964 7,244,165 6,744,244
Deferred installation costs, net of
accumulated amortization of $153,804,
$805,592, $2,310,005, $3,486,800 and
$4,237,789................................ 1,547,636 4,288,783 7,604,256 9,905,408 11,690,856
Other assets................................ 136,227 40,000 806,373 806,373 806,373
----------- ----------- ----------- ----------- -----------
Total assets........................ $17,741,997 $23,571,317 $31,562,382 $56,666,675 $57,239,340
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................ $ 130,089 $ 489,914 $ 492,244 $ 240,436 $ 339,941
Accounts payable.......................... 33,981 881,300 538,817 583,118 774,253
Current portion of notes payable.......... 10,310 1,192,073 84,800 62,668 32,395
Accrued liabilities....................... 729,935 713,002 560,458 1,291,402 1,552,907
Subscriber deposits....................... 138,589 165,321 232,752 1,240,008 904,598
----------- ----------- ----------- ----------- -----------
Total current liabilities........... 1,042,904 3,441,610 1,909,071 3,417,632 3,604,094
Notes payable, less current portion......... 11,100,000 10,233,877 10,183,227 40,105,974 44,359,407
----------- ----------- ----------- ----------- -----------
Total liabilities................... 12,142,904 13,675,487 12,092,298 43,523,606 47,963,501
Redeemable preferred stock:
Class A cumulative redeemable preferred
stock, $.01 par value, redemption value
of $100 per share; 75,700 shares
authorized, issued and outstanding...... -- 7,570,000 7,570,000 7,570,000 7,570,000
Stockholders' equity:
Class B convertible preferred stock, $.01
par value (involuntary liquidation
preference of $24 per share, see Note
8); 358,332 shares authorized, issued
and
outstanding............................. -- 3,583 3,583 3,583 3,583
Class C convertible preferred stock, $.01
par value (involuntary liquidation
preference of $36 per share, see Note
8); 486,111 shares authorized, issued
and
outstanding............................. -- -- 4,861 4,861 4,861
Class A common stock, $.01 par value;
333,500 shares authorized, issued and
outstanding............................. -- 3,335 3,335 3,335 3,335
Class B common stock, $.01 par value;
1,078,572 shares authorized, 570,240
shares issued and outstanding........... -- 5,702 5,702 5,702 5,702
Deferred compensation expense............. -- (189,540) (133,170) (183,877) (186,482)
Paid-in capital........................... -- 8,170,599 25,510,064 25,510,064 25,510,064
Accumulated deficit....................... -- (5,667,849) (13,494,291) (19,770,599) (23,635,224)
Partners' capital......................... 5,599,093 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total stockholders' equity.......... 5,599,093 2,325,830 11,900,084 5,573,069 1,705,839
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity............................ $17,741,997 $23,571,317 $31,562,382 $56,666,675 $57,239,340
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 72
MASADA SECURITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN NINE MONTHS ENDED
MONTHS ENDED YEARS ENDED DECEMBER 31, SIX MONTHS SEPTEMBER 30,
DECEMBER 31, ------------------------- ENDED JUNE --------------------------
1993 1994 1995 30, 1996 1995 1996
------------ ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Monitoring revenue........... $ 6,958,463 $ 8,756,096 $12,472,090 $ 9,367,488 $ 8,748,411 $ 15,373,979
Installation revenue......... 2,476,716 3,082,844 3,428,873 2,493,036 2,583,188 3,936,346
Service revenue.............. 520,056 678,275 910,841 676,509 695,054 1,152,628
----------- ----------- ----------- ----------- ----------- ------------
Total revenues...... 9,955,235 12,517,215 16,811,804 12,537,033 12,026,653 20,462,953
Monitoring expense........... 1,137,077 1,374,181 1,945,270 1,420,776 1,378,062 2,297,509
Installation costs and
expenses................... 1,219,502 1,267,563 1,338,518 1,151,080 979,529 1,753,818
Service expenses............. 1,429,017 1,734,055 2,235,275 1,628,354 1,574,348 2,734,708
----------- ----------- ----------- ----------- ----------- ------------
Total cost of
revenues.......... 3,785,596 4,375,799 5,519,063 4,200,210 3,931,939 6,786,035
----------- ----------- ----------- ----------- ----------- ------------
Gross profit................. 6,169,639 8,141,416 11,292,741 8,336,823 8,094,714 13,676,918
Operating expenses:
Selling and marketing...... 1,879,200 2,922,851 5,410,579 3,780,178 3,960,196 6,271,040
General and
administrative........... 3,091,056 5,162,930 7,605,510 4,661,956 5,469,890 7,391,792
Depreciation............... 895,524 1,069,489 1,196,770 623,535 890,897 954,138
Amortization............... 1,510,605 2,381,168 4,061,993 4,150,569 2,682,191 6,806,977
----------- ----------- ----------- ----------- ----------- ------------
Total operating
expenses.......... 7,376,385 11,536,438 18,274,852 13,216,238 13,003,174 21,423,947
----------- ----------- ----------- ----------- ----------- ------------
Loss from operations......... (1,206,746 ) (3,395,022) (6,982,111) (4,879,415) (4,908,460) (7,747,029)
Other (expenses) income:
Interest................... (754,161 ) (593,770) (844,331) (1,140,189) (631,610) (2,226,421)
Gain on disposal of
subscriber agreements.... -- -- -- 160,167 -- 225,188
----------- ----------- ----------- ----------- ----------- ------------
Net loss before income taxes
and extraordinary item..... (1,960,907 ) (3,988,792) (7,826,442) (5,859,437) (5,540,070) (9,748,262)
Income taxes................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------
Loss before extraordinary
item....................... (1,960,907 ) (3,988,792) (7,826,442) (5,859,437) (5,540,070) (9,748,262)
Extraordinary loss from early
retirement of debt (net of
income taxes of $0)........ -- -- -- (566,911) -- (566,911)
----------- ----------- ----------- ----------- ----------- ------------
Net loss..................... $(1,960,907 ) $(3,988,792) $(7,826,442) $(6,426,348) $(5,540,070) $(10,315,173)
=========== =========== =========== =========== =========== ============
Supplemental pro forma loss
per share (see Notes 1 and
10):
Net loss..................... $(7,826,442) $(6,426,348) $(5,540,070) $(10,315,173)
=========== =========== =========== ============
Supplemental pro forma loss
per share.................. $ (1.38) $ (1.13) $ (.98) $ (1.82)
=========== =========== =========== ============
Shares used in computing
supplemental pro forma loss
per share.................. 5,667,858 5,667,858 5,667,858 5,667,858
=========== =========== =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 73
MASADA SECURITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1993, THE YEARS ENDED
DECEMBER 31, 1994 AND 1995, THE SIX MONTHS ENDED JUNE 30, 1996,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS CLASS CLASS DEFERRED
CLASS B CLASS C A B C COMPENSATION PAID-IN ACCUMULATED
PREFERRED PREFERRED COMMON COMMON COMMON EXPENSE CAPITAL DEFICIT
--------- --------- ------ ------ ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1993..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss...................... -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ --------- ----------- ------------
Balance December 31, 1993..... -- -- -- -- -- -- -- --
Recapitalization upon merger
into a corporation, net of
transaction costs........... -- -- 3,335 5,702 -- -- (19,037) (1,960,907)
Conversion of subordinated
note payable to 62,500
shares of Class B
convertible preferred
stock....................... 625 -- -- -- -- -- 1,499,375 --
Issuance of 295,832 shares of
Class B convertible
preferred stock, net of
issuance costs.............. 2,958 -- -- -- -- -- 6,690,261 --
Issuance of compensatory stock
options..................... -- -- -- -- -- (281,850) -- 281,850
Amortization of deferred
compensation expense........ -- -- -- -- -- 92,310 -- --
Net loss...................... -- -- -- -- -- -- (3,988,792)
------ ------ ------ ------ ------ --------- ----------- ------------
Balance December 31, 1994..... 3,583 -- 3,335 5,702 -- (189,540) 8,170,599 (5,667,849)
Issuance of 486,111 shares of
Class C convertible
preferred stock, net of
issuance costs.............. -- 4,861 -- -- -- -- 17,339,465 --
Amortization of deferred
compensation expense........ -- -- -- -- -- 56,370 -- --
Net loss...................... -- -- -- -- -- -- -- (7,826,442)
------ ------ ------ ------ ------ --------- ----------- ------------
Balance December 31, 1995..... 3,583 4,861 3,335 5,702 -- (133,170) 25,510,064 (13,494,291)
Issuance of compensatory stock
options..................... -- -- -- -- -- (150,040) -- 150,040
Amortization of deferred
compensation expense........ -- -- -- -- -- 99,333 -- --
Net loss...................... -- -- -- -- -- -- -- (6,426,348)
------ ------ ------ ------ ------ --------- ----------- ------------
Balance June 30, 1996......... 3,583 4,861 3,335 5,702 -- (183,877) 25,510,064 (19,770,599)
------ ------ ------ ------ ------ --------- ----------- ------------
Issuance of compensatory stock
options (unaudited)......... -- -- -- -- -- (24,200) -- 24,200
Amortization of deferred
compensation expense
(unaudited)................. -- -- -- -- -- 21,595 -- --
Net loss (unaudited).......... -- -- -- -- -- -- -- (3,888,825)
------ ------ ------ ------ ------ --------- ----------- ------------
Balance September 30, 1996
(unaudited)................. $ 3,583 $ 4,861 $3,335 $5,702 $ -- $ 186,482 $25,510,064 $(23,635,224)
====== ====== ====== ====== ====== ========= =========== ============
<CAPTION>
PARTNERS' STOCKHOLDERS'
CAPITAL EQUITY TOTAL
----------- -------------
<S> <C> <C>
Balance, February 1, 1993..... $ 7,560,000 $ 7,560,000
Net loss...................... (1,960,907) (1,960,907)
----------- ------------
Balance December 31, 1993..... 5,599,093 5,599,093
Recapitalization upon merger
into a corporation, net of
transaction costs........... (5,599,093) (7,570,000)
Conversion of subordinated
note payable to 62,500
shares of Class B
convertible preferred
stock....................... -- 1,500,000
Issuance of 295,832 shares of
Class B convertible
preferred stock, net of
issuance costs.............. -- 6,693,219
Issuance of compensatory stock
options..................... -- --
Amortization of deferred
compensation expense........ -- 92,310
Net loss...................... -- (3,988,792)
----------- ------------
Balance December 31, 1994..... -- 2,325,830
Issuance of 486,111 shares of
Class C convertible
preferred stock, net of
issuance costs.............. -- 17,344,326
Amortization of deferred
compensation expense........ -- 56,370
Net loss...................... -- (7,826,442)
----------- ------------
Balance December 31, 1995..... -- 11,900,084
Issuance of compensatory stock
options..................... -- --
Amortization of deferred
compensation expense........ -- 99,333
Net loss...................... -- (6,426,348)
----------- ------------
Balance June 30, 1996......... -- 5,573,069
----------- ------------
Issuance of compensatory stock
options (unaudited)......... -- --
Amortization of deferred
compensation expense
(unaudited)................. -- 21,595
Net loss (unaudited).......... -- (3,888,825)
----------- ------------
Balance September 30, 1996
(unaudited)................. $ -- $ 1,705,839
=========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 74
MASADA SECURITY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN SIX MONTHS NINE MONTHS ENDED SEPTEMBER
MONTHS ENDED YEARS ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, -------------------------- 30, ---------------------------
1993 1994 1995 1996 1995 1996
------------ ----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net loss.............................. $(1,960,907 ) $(3,988,792) $ (7,826,442) $ (6,426,348) $ (5,540,070) $(10,315,173)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 2,406,129 3,450,657 5,258,763 4,774,104 3,573,088 7,761,115
Amortization of deferred
compensation expense.............. -- 92,310 56,370 99,333 -- 120,928
Losses on accounts receivable....... 176,025 389,176 774,544 613,193 432,657 880,114
(Gain) loss on sale of assets....... -- -- 15,919 (160,167) -- (225,188)
Loss from retirement of debt, net of
tax............................... 2,540 -- -- 566,911 -- 566,910
Changes in operating assets and
liabilities:
Accounts and other receivables...... (227,382 ) (589,272) (888,011) (1,276,646) (1,008,415) (1,855,655)
Prepaid expenses.................... (57,449 ) (48,492) (91,424) 177,247 (122,253) 222,369
Inventory........................... (138,883 ) (86,919) (160,829) (127,097) (81,220) (213,953)
Other assets........................ (40,000 ) 96,227 -- --
Accounts payable.................... 33,981 847,319 (342,483) 44,301 (758,490) 235,436
Accrued liabilities................. (348,650 ) (16,933) (246,793) 730,944 63,421 992,449
Subscriber deposits................. (174,810 ) 26,732 (144,813) 1,007,256 234,617 671,846
----------- ----------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities........ (329,406 ) 172,013 (3,595,199) 23,031 (3,206,665) (1,158,802)
Investing activities:
Purchase of property and equipment.... (394,218 ) (868,715) (433,538) (281,516) (368,020) (501,302)
Proceeds from the sale of property and
equipment and acquired subscriber
agreements.......................... 16,859 -- 6,900 624,607 -- 625,309
Purchase of subscriber agreements..... -- (3,951,031) (6,525,535) (23,923,389) (5,259,530) (24,181,437)
Purchase of other deferred charges and
intangible assets................... 184,588 (450,093) (190,926) (2,290,178) (84,800) (2,422,818)
Increase in deferred installation
costs............................... (1,701,441 ) (3,392,935) (4,819,885) (3,477,947) (2,776,386) (6,014,384)
Investment in Centennial Security..... -- -- (766,373) -- (766,373) --
Other................................. 51,930 -- -- -- -- --
----------- ----------- ------------ ------------ ------------ ------------
Net cash used in investing
activities.................. (1,842,282 ) (8,662,774) (12,729,357) (29,348,423) (9,255,109) (32,494,632)
Financing activities:
Bank overdraft........................ 130,089 359,825 2,330 (251,808) 1,287,991 (152,303)
Additions to long-term debt........... 1,100,000 11,167,280 13,966,000 45,932,542 10,216,000 50,185,975
Repayment of debt..................... (17,991 ) (9,609,867) (15,123,933) (16,044,227) (15,041,000) (16,074,500)
Proceeds from Class C convertible
preferred stock, net of issuance
cost................................ -- -- 17,344,326 -- 17,344,326 --
Proceeds from Class B convertible
preferred stock, net of issuance
cost................................ -- 6,693,219 -- -- -- --
----------- ----------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities.................. 1,212,098 8,610,457 16,188,723 29,636,507 13,807,318 33,959,172
----------- ----------- ------------ ------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents... (959,590 ) 119,696 (135,833) 311,115 1,345,543 305,738
Cash and cash equivalents, beginning
of period........................... 1,181,091 221,501 341,197 205,364 341,197 205,364
----------- ----------- ------------ ------------ ------------ ------------
Cash and cash equivalents, end of
period.............................. $ 221,501 $ 341,197 $ 205,364 $ 516,479 $ 1,686,740 $ 511,102
=========== =========== ============ ============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest............................ $ 754,161 $ 671,491 $ 912,109 $ 847,093 $ 682,194 $ 1,931,032
=========== =========== ============ ============ ============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
On February 11, 1994, the Company converted $1,500,000 of subordinated
notes payable to 62,500 shares of Class B convertible preferred stock in
connection with the Company's reorganization and merger.
On October 17, 1994, the Company entered into a note
payable -- subordinated promissory note in an amount of $258,227 in exchange
for the rights to certain subscriber agreements.
See accompanying notes.
F-6
<PAGE> 75
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Masada Security Limited Partnership was formed on February 1, 1993, through
the purchase of the business and assets of MSAM, L.P., MSAM, Inc. and Network
Security City Branches, Inc. as described in Note 2. Masada Security Holdings,
Inc. was a 1% capital and profits interest general partner and a 61.94% profits
and a 98.48% capital interests in Masada Security Limited Partnership. On
February 11, 1994, in connection with a reorganization and merger transaction,
Masada Security Limited Partnership was merged into a newly formed corporation,
which is a wholly owned subsidiary of Masada Security Holdings, Inc.
The consolidated financial statements present the operations of Masada
Security Limited Partnership through February 11, 1994 and Masada Security
Holdings, Inc. in all subsequent periods (collectively referred to as the
"Company"). The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries.
The Company's business is to acquire, construct, develop, operate and own
residential and commercial security alarm systems. The Company operates security
monitoring service systems in Georgia, Florida, Texas, Virginia, Maryland,
Louisiana, Oklahoma and the District of Columbia. All material intercompany
accounts and transactions have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid debt securities with an original
maturity period of three months or less at the time of purchase to be cash
equivalents.
INVENTORY
Inventory consists primarily of parts and supplies and is stated at the
lower of cost or market, with cost determined using the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Costs of maintenance and repairs
are charged to expense when incurred and costs of betterments are capitalized.
Depreciation is provided on a straight-line basis using the following lives:
<TABLE>
<S> <C>
Security monitoring equipment........................................... 5 years
Office equipment........................................................ 7 years
Computer equipment...................................................... 5 years
Leasehold improvements.................................................. lease term
Vehicles................................................................ 5 years
</TABLE>
F-7
<PAGE> 76
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER DEFERRED CHARGES AND INTANGIBLE ASSETS
Other deferred charges and intangible assets are recorded at cost.
Amortization is provided on a straight-line basis, using the following lives:
<TABLE>
<S> <C>
Acquired subscriber agreements........................................ 8 years
Noncompete agreements................................................. 3 to 7 years
Nonsolicitation agreement............................................. 5 years
Franchise agreements.................................................. 15 years
Loan acquisition costs................................................ term of loan
Organizational costs.................................................. 5 years
Goodwill.............................................................. 15 years
</TABLE>
DEFERRED INSTALLATION COSTS
Deferred installation costs consist of materials, labor and overhead
associated with the installation of residential security alarm systems (Safe
Choice). Amortization is provided on a straight-line basis over the estimated
average period subscribers are expected to generate monitoring revenues which
approximates five years.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This statement
requires impairment losses to be recognized for long-lived assets used in
operations when events and circumstances indicates that the assets might be
impaired and the undiscounted cash flows are not sufficient to recover the
assets' carrying amount. The adoption of this statement did not have a material
impact on the Company's consolidated financial statements.
REVENUES
Monitoring revenues, pursuant to contracts with terms of one to five years,
are recognized monthly as services are provided. Amounts paid in advance are
deferred and recognized in the month service occurs.
Installation revenues are recognized in the period of installation of the
alarm system to the extent of direct selling costs. Any excess installation
revenue is deferred and amortized over the life of the monitoring contract.
Service revenue is recognized in the period that the services are provided.
INCOME TAXES
Effective February 11, 1994, concurrent with the Company's merger into a
new corporation, as described above, the Company adopted the provisions of
Financial Accounting Standards Board Statement No. 109 "Accounting for Income
Taxes." This statement requires the establishment of deferred tax liabilities
and assets for all temporary differences caused when the tax bases of assets and
liabilities differ from those reported in the accompanying consolidated
financial statements. The adoption of this statement did not have a material
impact on these consolidated financial statements. Prior to February 11, 1994,
there were no deferred tax liabilities or assets recorded as the net loss of the
Company was reported in the tax returns of the partners of Masada Security
Limited Partnership.
F-8
<PAGE> 77
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued To Employees," and intends to continue to do so. The alternative fair
value accounting provided for under Financial Accounting Standards Board
Statement No. 123, "Accounting and Disclosure for Stock-Based Compensation,"
requires the use of option valuation models. The effect of applying Statement
No. 123's fair value method to the Company's stock option awards results in net
loss and loss per share that are not materially different from amounts reported.
LOSS PER SHARE
Supplemental pro forma loss per share in the statements of operations is
computed based on the weighted average number of common and common equivalent
shares outstanding during the periods after giving effect to the plan of
recapitalization (as discussed more fully in Note 15), and upon the exercise of
stock options using the treasury stock method. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin (SAB) No. 83, the number of common
equivalent shares which became issuable during the periods pursuant to the grant
of stock options (using the treasury stock method), have been considered in the
calculation of common and common equivalent shares as if they were outstanding
for all periods presented. The supplemental pro forma weighted average number of
common shares assumes that the Class C convertible preferred stock was issued
and the plan of recapitalization (Note 15) was effective retroactive to January
1, 1995.
CONCENTRATION OF CREDIT RISK
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate caps and nonderivative financial assets.
The Company grants credit to customers for relatively short periods of time
before disconnecting monitoring service to these customers.
DERIVATIVES
Premiums paid for purchased interest rate cap agreements are amortized to
interest expense over the terms of the cap agreements. Amounts receivable from
cap agreements are accrued as a reduction of interest expense.
USE OF ESTIMATES
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
2. ACQUISITIONS
In connection with the formation of the Company, on February 1, 1993, the
Company acquired the business and assets of MSAM, L.P. and MSAM, Inc.
(collectively MSAM), and Network Security City Branches, Inc. (Network) for an
aggregate purchase price of approximately $15,900,000. The
F-9
<PAGE> 78
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase price was allocated primarily to property and equipment, subscriber
agreements, a franchise agreement and a nonsolicitation agreement based on their
fair value at that date. The excess of the purchase price over the fair value of
the assets acquired (goodwill) of approximately $1,900,000 is being amortized on
a straight-line basis over 15 years. MSAM and Network operated security
monitoring systems in Florida and Georgia.
During 1994, the Company acquired certain subscriber agreements and other
assets and certain liabilities from Strategic Security Systems, Inc. on March
15, Williams Security, Inc. on September 22, Electronic Technical Associates,
Inc. on October 14, KenMar Electronics, Inc. on November 1 and Select Security,
Inc. on December 14, for an aggregate purchase price of approximately
$3,900,000. The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, substantially all of the purchase price has been
allocated to acquired subscriber agreements and non-compete agreements based on
the estimated fair value at the date of acquisition.
During 1995, the Company acquired certain subscriber agreements and other
assets and assumed certain liabilities from Global Security, Inc. on May 5,
Alert Centre Inc. on June 15, GRB Security Systems, Inc. on June 29, Deltron,
Inc. on June 30, Network Multi-Family Security Corporation on July 26, TelStar
Cellular Corporation on September 11, Alarm Data Group, Inc. on September 30,
Lafayette Security and Electronics Systems, Inc. on October 10 and The 593
Corporation (Classic Alarm) on November 2, for an aggregate purchase price of
approximately $6,300,000. The acquisitions have been accounted for by the
purchase method of accounting and, accordingly, substantially all of the
purchase price has been allocated to acquired subscriber agreements and
non-compete agreements based on the estimated fair value at the date of
acquisition.
During 1996, the Company acquired certain subscriber agreements and other
assets and assumed certain liabilities from Kristynik Security Systems, Inc. on
January 8, InterCap Funds Joint Venture on March 28, Alarms by HRD Inc. on June
4 and Home Protection Services, Inc. on June 14, for an aggregate purchase price
of approximately $23,400,000. The acquisitions have been accounted for by the
purchase method of accounting and, accordingly, substantially all of the
purchase price has been allocated to acquired subscriber agreements and
non-compete agreements based on the estimated fair value at the date of
acquisition.
The following unaudited pro forma information presents the consolidated
results of operations of the Company as though the aforementioned 1995 and 1996
acquisitions had occurred as of January 1, 1995. This pro forma summary does not
necessarily reflect what the actual results of operation would have been had the
acquisitions occurred at January 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues................................................... $ 29,699 $ 22,513
Net loss................................................... (12,302) (11,231)
Net loss per share......................................... (7.65) (6.17)
</TABLE>
F-10
<PAGE> 79
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Security monitoring equipment... $4,302,635 $ 4,708,642 $ 4,807,777 $ 4,884,182
Office
equipment..................... 197,601 294,069 464,271 541,354
Computer equipment.............. 115,378 194,471 326,663 374,939
Leasehold improvements.......... 433,790 481,372 513,246 544,728
Vehicles........................ 330,605 570,170 585,400 601,670
---------- ----------- ----------- -----------
5,380,009 6,248,724 6,697,357 6,946,873
Less accumulated depreciation... (895,524) (1,965,013 ) (3,161,783 ) (3,759,601)
---------- ----------- ----------- -----------
$4,484,485 $ 4,283,711 $ 3,535,574 $ 3,187,272
========== =========== =========== ===========
</TABLE>
4. OTHER DEFERRED CHARGES AND INTANGIBLE ASSETS
Other deferred charges and intangible assets, net consist of the following
at:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995 1996
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Noncompete agreements........... $ 308,334 $ 1,625,960 $ 2,778,408 $ 2,752,266
Nonsolicitation agreement....... 1,900,000 1,900,000 1,900,000 1,900,000
Franchise agreements............ 2,100,000 2,100,000 2,100,000 2,100,000
Loan acquisition costs.......... 588,327 983,784 1,169,961 2,485,015
Organization
costs......................... 73,643 121,296 121,296 121,296
Goodwill........................ 1,948,306 1,948,306 1,948,306 1,948,306
----------- ----------- ----------- -----------
6,918,610 8,679,346 10,017,971 11,306,883
Less accumulated amortization... (809,321) (1,841,057 ) (3,167,007 ) (4,062,718)
----------- ----------- ----------- -----------
$6,109,289 $ 6,838,289 $ 6,850,964 $ 7,244,165
=========== =========== =========== ===========
</TABLE>
F-11
<PAGE> 80
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
Notes payable consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
----------------------- ----------------------- ----------------------- -----------------------
YEAR END YEAR END PERIOD END PERIOD END
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Credit agreement -- payable
in full on September 30,
1997....................... $ -- -- $ -- -- $ -- -- $40,096,567 10.5%-8.75%
Revolving credit and term
loan agreement -- payable
in quarterly installments
of various amounts
beginning March 31, 1995
and continuing through
December 31, 2000.......... 9,600,000 10% 11,000,000 10.5% 9,925,000 9.5% -- --
Note payable -- subordinated
promissory note with
interest payments due
monthly and principle due
on November 1, 1999........ -- -- 258,227 7% 258,227 7% -- --
Note payable -- subordinated
debt....................... 1,500,000 -- -- -- -- -- -- --
Note payable................. 10,310 Various 167,723 Various 84,800 Various 72,075 Various
----------- ----------- ----------- -----------
$11,110,310 $11,425,950 $10,268,027 $40,168,642
=========== =========== =========== ===========
</TABLE>
On February 11, 1993, the Company entered into a $10,000,000 Revolving
Credit and Term Loan agreement (the Agreement) with State Street Bank and Trust
Company (State Street) and Citizens Savings Bank (Citizens). Borrowings under
the Agreement were permitted on a revolving basis, subject to compliance with
certain restrictive covenants and the lenders' approval, until February 1, 1994,
at which time the then outstanding loan balance was to convert to a term note
payable in 72 monthly installments, at varying amounts, beginning February 28,
1994. Interest was based upon prime (8.0% at December 31, 1993) plus a variable
margin not to exceed 2%. The Company paid, on a monthly basis, an annual
commitment fee of .5% of the unused portion of the commitment. Amounts borrowed
under the Agreement were collateralized by a senior security interest in
substantially all assets of the Company.
On February 11, 1994, the Company entered into an amended revolving credit
and term loan agreement (the Amended Agreement) with State Street and Citizens
in which the Company increased its maximum borrowing capacity to $17,500,000.
Borrowings under the Amended Agreement were permitted on a revolving basis.
Interest was based upon prime rate plus a variable margin not to exceed 2%. The
Company paid, on a monthly basis, an annual commitment fee of .5% of the unused
portion of the commitment. Amounts borrowed under this Amended Agreement were
collateralized by a senior security interest in substantially all assets of the
Company.
On August 9, 1994, the Amended Agreement was revised to give the Company
the option of basing its interest rate on either the London Interbank Offering
Rate (LIBOR) and/or prime rate plus an applicable margin (margin is a function
of the ratio of senior debt to earnings before interest, taxes, depreciation and
amortization) or a fixed rate. The revision to the Amended Agreement also
changed the payment of an annual commitment fee from a monthly to a quarterly
basis and lowered the amount of annualized net operating income (as defined in
the revised Amended Agreement) required to be maintained for each quarterly
period beginning March 31, 1994 and continuing through December 31, 1995.
F-12
<PAGE> 81
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The subordinated debt represented notes payable to certain stockholders. On
February 11, 1994, in conjunction with the reorganization and merger described
in Note 1, the subordinated debt was converted to 62,500 shares of Class B
preferred stock.
On August 24, 1995, the Amended Agreement was revised to give the Company
borrowings on a revolving basis, subject to compliance with certain restrictive
covenants. At December 31, 1995, the total outstanding advances of $9,925,000
carried an effective interest rate of 9.5% based on prime (8.5% at December 31,
1995).
On March 28, 1996, the Company entered into a Credit Agreement (the Credit
Agreement) with Canadian Imperial Bank of Commerce (CIBC) and SunTrust Bank
(SunTrust) in which the Company increased its maximum borrowing capacity to
$50,000,000. Borrowings under the Credit Agreement are permitted on a revolving
basis, subject to restrictive covenants related primarily to specific ratios,
capital expenditures and the continuing operation of the Company. These
covenants remain in effect until September 30, 1997 (the expiration date). The
outstanding balance of the revolving loans shall be due and payable in full on
the expiration date. The Company has the option of basing its interest rate on
either the LIBOR rate plus 3.25% ($33,000,000 outstanding at 8.75% on June 30,
1996), or the prime rate plus 2.25% ($7,096,567 outstanding at 10.75% on June
30, 1996). A portion of the proceeds from the Credit Agreement was used to
retire the existing debt under the Amended Agreement as revised on August 24,
1995, which resulted in an extraordinary loss of $566,911 representing the
unamortized portion of deferred financing costs. The Company pays, on a
quarterly basis, an annual commitment fee of .5% of the unused portion of the
commitment. In addition to the interest rate and the annual commitment fee, the
Company is required to pay a financing fee equal to .0275% per day of the
commitment amount under the Credit Agreement from September 25, 1996 through the
earlier of the expiration date or the date at which the Credit Agreement is paid
in full. Amounts borrowed under the Credit Agreement are collateralized by a
senior security interest in substantially all assets of the Company.
The fair value of the Company's notes payable approximates their carrying
values because their rates fluctuate with the prime rate.
6. INCOME TAXES
The deferred tax benefits of approximately $2,000,000, $2,800,000 and
$2,400,000 generated during the 1994, 1995 and 1996 periods, respectively, have
been offset by a valuation allowance.
Differences between the tax bases of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax items are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses....................... $ 1,497,000 $ 2,970,000 $ 3,566,000
Acquired subscriber agreements............. 329,000 1,410,000 2,624,000
Property and equipment..................... 67,000 203,000 697,000
Accounts receivable........................ 29,000 91,000 147,000
Other...................................... 66,000 98,000 149,000
----------- ----------- -----------
Gross deferred tax assets.................... 1,988,000 4,772,000 7,183,000
Valuation allowance.......................... (1,988,000 ) (4,772,000 ) (7,183,000)
----------- ----------- -----------
Net deferred tax assets...................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Company has net operating loss carry-forwards, subject to certain
limitations, for regular federal income tax purposes of approximately
$3,992,000, $7,900,000 and $9,500,000 at December 31, 1994, December 31, 1995
and June 30, 1996, respectively, which begin expiring in 2009 and continue to
F-13
<PAGE> 82
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expire through 2011. Utilization of the net operating losses may be subject to a
substantial annual limitation due to the ownership change provisions of Internal
Revenue Code Section 382. The valuation allowance has been established until it
is more likely than not that the deferred tax assets will be realized.
7. REDEEMABLE PREFERRED STOCK
The Class A redeemable preferred stock of $7,570,000 is reflected in the
accompanying financial statements on February 11, 1994, effective with the
merger of Masada Security Limited Partnership into a corporation as described in
Note 1. The Class A redeemable preferred stock may be redeemed by the Company at
any time based on a redemption price of $100 per share. The Class A redeemable
preferred stock is subject to mandatory redemption on December 31, 1998 and
1999, or upon the occurrence of an event of noncompliance, as defined in the
Company's Certificate of Incorporation, if demand for redemption is made by the
holders of sixty percent of the Class A redeemable preferred stock, and subject
to various bank restrictions.
The holders of the Company's Class A preferred stock are entitled to
receive cumulative cash dividends out of assets of the Company, that are
available by law for the payment of dividends, when, as and if declared by the
Board of Directors. Dividends accrue at 6% from February 1, 1995 through
February 1, 1998 and at 12% thereafter. No dividends have been approved or
declared as of June 30, 1996.
The holders of 60% of the Class A redeemable preferred stock must approve
the declaration of any dividend to the common stockholders. Any dividends so
approved must be simultaneous and equal to all classes of common stock.
8. STOCKHOLDERS' EQUITY
CLASS B CONVERTIBLE PREFERRED STOCK
Shares of Class B convertible preferred stock are convertible at any time
at the option of the holders into Class B common stock at the rate of one share
of Class B common stock for each share of Class B convertible preferred stock,
subject to adjustments to prevent the holders of Class B convertible preferred
stock from being diluted by any stock dividends, stock splits or sales below $24
per share of Class B common stock or securities convertible into common stock.
The holders of the Class B convertible preferred stock are entitled to
receive dividends declared on Class B common stock as if the Class B convertible
preferred stock had been converted into Class B common stock.
CLASS C CONVERTIBLE PREFERRED STOCK
Shares of Class C convertible preferred stock are convertible at any time
at the option of the holders into shares of Class C common stock at the rate of
one share of Class C common stock for each share of Class C convertible
preferred stock, subject to adjustments to prevent the holders of Class C
convertible preferred stock from being diluted by any stock dividends, stock
splits or sales below $36 per share of Class C common stock.
The holders of the Class C convertible preferred stock are entitled to
receive dividends declared on the Class C common stock as if the Class C
convertible preferred stock had been converted into Class C common stock.
F-14
<PAGE> 83
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VOTING RIGHTS
Generally, voting rights are vested in the Company's common stock provided
that the holders of the Class B and Class C convertible preferred stock are
deemed to have converted into Class B and Class C common stock at the time of
any vote. For the election of directors, the holders of Class B and Class C
convertible preferred stock have voting rights. The holders of the Class B and
Class C convertible preferred stock also have voting rights related to the
authorization, issuance or redemption of the Company's capital stock and
acquisitions or mergers of the Company.
RIGHTS ON LIQUIDATION
In the event of liquidation or dissolution of the Company, the assets
remaining after the payment of all liabilities will be distributed to the
stockholders in the following order of priority:
(a) first, to the holders of the Class C convertible preferred stock,
an amount equal to $36 per share, plus any accrued and unpaid dividends;
(b) second, to the holders of the Class B convertible preferred stock,
an amount equal to $24 per share, plus any accrued and unpaid dividends;
(c) third, to the holders of the Class A redeemable preferred stock,
an amount equal to $100 per share, plus any accumulated and unpaid
dividends;
(d) fourth, to the holders of the Class A and Class B common stock,
the aggregate sum of $16,480,000, to be allocated based on the number of
shares held (the holders of convertible preferred do not participate in
this distribution), and
(e) fifth, the remainder, if any, to the holders of the Class A, Class
B and Class C common stock in proportion to the number of shares held,
provided that the Class B and Class C convertible preferred stock shall be
deemed to have been converted into Class B and Class C common stock for
purposes of this distribution.
9. STOCK OPTION PLAN
Under the 1994 Stock Option/Purchase Plan (94 Plan) the Company has 100,000
shares of Class B common stock reserved for issue to key employees and/or
nonemployee directors through stock options. Options granted under the 94 Plan
become exercisable after five years of continued service from the initial date
of service.
Under the 1996 Stock Option Plan (96 Plan) the Company has 50,000 shares of
Class B common stock reserved for issuance to employees and nonemployee
directors through stock options. The period for exercise of each option under
the 96 Plan is determined by the Compensation Committee of the Board of
Directors and shall not be exercisable after ten years from the date of grant.
During 1994 and 1996, 62,500 and 18,000 options, respectively, were granted
at an exercise price of $.01. Because the exercise price of the options was less
than the fair value of the Company's common stock at the date of grant,
compensation expense of $281,850 and $150,040, respectively, will be recognized
over the vesting period of the options. Compensation expense of $92,310, $56,370
and $99,333 was recognized in 1994, 1995 and 1996, respectively, related to
these options.
At June 30, 1996, 15,000 of the 80,500 outstanding options were exercisable
and 69,500 options remained available for grant. Through June 30, 1996, no
options have been exercised.
F-15
<PAGE> 84
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LOSS PER SHARE
Primary loss per share is based on the weighted average number of common
shares and equivalents outstanding during each period excluding the effect of
stock options outstanding, which, if considered, would reduce loss per share.
The following table presents historical primary loss per share for each
period. The Company did not have any securities which were not considered common
stock equivalents and, therefore, primary loss per share is the same as fully
diluted loss per share.
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss................................................ $(3,988,792) $(7,826,442) $(6,426,348)
Preferred dividends (Note 7)............................ -- (416,350) (227,100)
---------- ---------- ----------
Net loss, adjusted for preferred dividends.............. $(3,988,792) $(8,242,792) $(6,653,448)
========== ========== ==========
Loss per common and equivalent share, adjusted for
preferred dividends
Primary:
Loss from continuing operations before extraordinary
item............................................... $ (3.16) $ (5.33) $ (3.48)
Extraordinary loss from early retirement of debt...... -- -- (.33)
---------- ---------- ----------
Loss per share.......................................... $ (3.16) $ (5.33) $ (3.81)
========== ========== ==========
Shares used in computing loss per share................. 1,262,072 1,545,637 1,748,183
========== ========== ==========
</TABLE>
11. CENTENNIAL SECURITY, INC.
The Company has a strategic alliance with Centennial Security, Inc.
(Centennial), a business similar to that of the Company with a target market of
the northern United States.
The Company has an investment in the Series B preferred and common stock of
Centennial, which amounted to $766,373 at June 30, 1996 and represented
approximately 12% of Centennial's total equity. This investment is included in
other assets in the accompanying consolidated balance sheet and is classified as
available for sale pursuant to Financial Accounting Standards Board statement
No. 115. The Company accounts for this investment on the cost method as there is
no quoted market value for these securities and management believes the fair
value of this investment approximates its carrying value. As a part of the
arrangement with Centennial, the Company will be partially shielded from
dilution as Centennial's equity rises to certain benchmarks and will have a
right of first refusal for participation in certain subsequent stock issuances.
In consideration for the Company's equity interest in Centennial, in June
1994 the Company and Centennial entered into a trademark and intellectual
property agreement which grants Centennial the right to use the trade name
Masada and certain intellectual property throughout the northern United States
and Canada. This agreement also provides Centennial with a variety of services
and support of the Safe Choice program.
The Company and Centennial also entered into an agreement under which the
Company will provide monitoring and billing and collection services to
Centennial for two years from the commencement of Centennial's operations. The
total services provided to Centennial amounted to $16,152 in 1995 and $40,127
for the six months ended June 30, 1996. No services had been provided under this
agreement at December 1994.
F-16
<PAGE> 85
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks on specifically identified outstanding debt
obligations.
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on floating rate long-term debt. At December 31,
1993, December 31, 1994, December 31, 1995, and June 30, 1996, the Company was a
party to two interest rate cap agreements, each with an original term of four
years. At June 30, 1996, the two interest rate cap agreements had remaining
terms of 8 and 20 months. The agreements entitle the Company to receive from
counterparties on a quarterly basis the amounts, if any, by which the Company's
interest payments on $5,000,000 and $3,750,000 of its floating rate notes
payable due on December 31, 2000 exceed 8%.
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain land and buildings under operating leases in the
normal course of business. The total minimum lease commitment at June 30, 1996,
under noncancelable operating leases, is as follows:
<TABLE>
<S> <C>
1996..................................................................... $ 379,905
1997..................................................................... 728,723
1998..................................................................... 547,136
1999..................................................................... 385,805
2000..................................................................... 315,824
Thereafter............................................................... 960,526
----------
$3,317,919
==========
</TABLE>
Total rental expense amounted to approximately $220,000, $389,600, $638,000
and $409,747 in 1993, 1994, 1995 and 1996, respectively.
The Company is party to claims and matters of litigation incidental to the
normal course of its business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
14. BENEFIT PLAN
On January 1, 1996 the Company established a 401(k) profit sharing plan and
trust available to all eligible employees who have completed one year of service
and are twenty-one years of age. The 401(k) plan provides for discretionary
contributions by the Company as determined by resolutions of the board of
directors. The Company contribution to the 401(k) plan in 1996 totaled $57,085.
15. SUBSEQUENT EVENTS
On August 14, 1996, the compensation committee of the board of directors
approved the grant of 50,000 options under the 96 Plan at an exercise price of
$32, which exceeded the estimated fair market value of the Company's Class B
common stock on that date. Accordingly, no compensation expense will be
recognized in connection with these options.
On September 27, 1996, the board of directors and stockholders of the
Company approved a plan of recapitalization contingent upon the closing of the
proposed initial public offering. The plan of recapitalization provides for the
automatic redemption of all outstanding shares of Class A preferred
F-17
<PAGE> 86
MASADA SECURITY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock from the proceeds of the proposed offering, the automatic conversion of
all outstanding shares of Class B convertible preferred stock and Class C
convertible preferred stock into shares of Class B common stock and Class C
common stock, respectively, and the automatic exchange of each outstanding share
of Class A common stock, Class B common stock (including outstanding options and
related exercise prices pursuant to the 94 Plan and the 96 Plan), and Class C
common stock into three shares of a new, single class of Common Stock.
The number of options included above and elsewhere in these financial
statements and notes, except those options provided for pursuant to the 97 Plan,
do not reflect the three for one share exchange contemplated in connection with
the plan of recapitalization described above.
On September 27, 1996, the board of directors and stockholders of the
Company approved the 1997 Stock Option Plan (97 Plan) which allows the Company
to grant to officers and other key employees up to 500,000 shares of the new,
single class of common stock over five years beginning on January 1, 1997. The
adoption of the 97 Plan is contingent upon the completion of the plan of
recapitalization.
F-18
<PAGE> 87
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1996
The unaudited pro forma statements of operations for the year ended
December 31, 1995 and the nine months ended September 30, 1996 reflect the
combination of historical income statements for those acquisitions that occurred
between January 1, 1995 and September 30, 1996, prior to their respective dates
of acquisition as if they had occurred on January 1, 1995 and adjustments as
described below. All acquisitions as of June 30, 1996 are included in the
audited June 30, 1996 consolidated financial statements and have been accounted
for using the purchase method of accounting.
In the opinion of the Company's management, all adjustments necessary to
present fairly such pro forma financial statements have been made. These
unaudited pro forma financial statements are not necessarily indicative of the
actual results of operations had all acquisitions occurred as of January 1, 1995
nor do they purport to indicate the results of future operations of the Company.
These unaudited pro forma financial statements should be read in connection with
the accompanying notes and the historical financial statements and notes thereto
of the Company included elsewhere in this Prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
F-19
<PAGE> 88
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)(A)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
MASADA COMBINED
SECURITY ACQUIRED PRO FORMA
HOLDINGS, INC. PORTFOLIOS ADJUSTMENTS PRO FORMA
-------------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Monitoring revenue............................ $ 12,472 $ 9,854 $ $ 22,326
Installation revenue.......................... 3,429 2,377 5,806
Service revenue............................... 911 172 1,083
Other......................................... 484 484
--------- ------ ------ ------
Total revenue....................... 16,812 12,887 29,699
Monitoring expenses........................... 1,945 1,599 3,544
Installation costs and expenses............... 1,339 1,871 3,210
Service expenses.............................. 2,235 2,235
--------- ------ ------ ------
Total cost of revenues.............. 5,519 3,470 8,989
--------- ------ ------ ------
Gross profit........................ 11,293 9,417 20,710
Operating expenses:
Selling and marketing costs................. 5,411 5,411
General and administrative.................. 7,606 7,324 14,930
Depreciation................................ 1,197 101 1,298
Amortization................................ 4,061 1,968 1,437(b) 7,466
--------- ------ ------ ------
Total operating expenses............ 18,275 9,393 1,437 29,105
--------- ------ ------ ------
Loss from operations................ (6,982) 24 (1,437) (8,395)
Other (expenses) income:
Interest.................................... (844) (916 ) (1,862)(c) (3,622)
Other....................................... (277 ) (277)
Gain on disposal............................ 2 2
--------- ------ ------ ------
Net loss before income taxes.................. (7,826) (1,167 ) (3,299) (12,292)
Income taxes.................................. (10 ) (10)
--------- ------ ------ ------
Net loss...................................... $ (7,826) $(1,177 ) $(3,299) $ (12,302)
========= ====== ====== ======
Net loss per share(d)......................... $ (4.87) $ (7.65)
========= ======
Shares used in computing net loss per
share(d).................................... 1,608,000 1,608,000
========= ======
</TABLE>
See accompanying notes to pro forma combined condensed statements of operations
(unaudited).
F-20
<PAGE> 89
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------------------------
MASADA COMBINED
SECURITY ACQUIRED PRO FORMA
HOLDINGS, INC. PORTFOLIOS ADJUSTMENTS PRO FORMA
-------------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Monitoring revenue............................ $ 15,374 $2,050 $ $ 17,424
Installation revenue.......................... 3,936 3,936
Service revenue............................... 1,153 1,153
--------- ------ ------ ------
Total revenue....................... 20,463 2,050 22,513
Monitoring expenses........................... 2,297 278 2,575
Installation costs and expenses............... 1,754 1,754
Service expenses.............................. 2,735 2,735
--------- ------ ------ ------
Total cost of revenue............... 6,786 278 7,064
--------- ------ ------ ------
Gross profit........................ 13,677 1,772 15,449
Operating expenses:
Selling and marketing costs................. 6,271 6,271
General and administrative.................. 7,392 1,392 8,784
Depreciation................................ 954 2 956
Amortization................................ 6,807 427 266(b) 7,500
--------- ------ ------ ------
Total operating expenses...................... 21,424 1,821 266 23,511
--------- ------ ------ ------
Loss from operations................ (7,747) (49) (266) (8,062)
Other (expenses) income:
Interest.................................... (2,226) (176) (355)(c) (2,757)
Other....................................... (70) (70)
Gain on disposal............................ 225 225
--------- ------ ------ ------
Net loss before income taxes and extraordinary
item........................................ (9,748) (295) (621) (10,664)
Income taxes.................................. -- --
--------- ------ ------ ------
Loss before extraordinary item................ (9,748) (295) (621) (10,664)
Extraordinary loss from early retirement of
debt (net of income taxes of $0)............ (567) (567)
--------- ------ ------ ------
Net loss...................................... $ (10,315) $ (295) $ (621) $ (11,231)
========= ====== ====== ======
Net loss per share(d)......................... $ (5.67) $ (6.17)
========= ======
Shares used in computing net loss per
share(d).................................... 1,819,537 1,819,537
========= ======
</TABLE>
See accompanying notes to pro forma condensed consolidated statements of
operations (unaudited).
F-21
<PAGE> 90
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
SEPTEMBER 30, 1996
(a) See "Pro Forma Financial Information."
(b) Adjustments to amortization of acquired subscriber agreements and
non-compete agreements consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED, NINE MONTHS
DECEMBER 31, ENDED
1995 SEPTEMBER 30, 1996
------------ -------------------
<S> <C> <C>
To record the amortization of acquired subscriber
agreements and non-compete agreements on a straight-
line basis over 3 to 8 years based upon the lives of
the respective agreements............................ $ 3,405 $ 747
To eliminate historical amortization expense of the
Combined Acquired Portfolios......................... (1,968) (481)
------- -------
$ 1,437 $ 266
======= =======
(c) Adjustments to interest expense, net, consist of the following:
<CAPTION>
YEAR ENDED, NINE MONTHS
DECEMBER 31, ENDED
1995 SEPTEMBER 30, 1996
------- -------
<S> <C> <C>
To eliminate historical interest expense, net of the
Combined Acquired Portfolios......................... $ 916 $ 176
To record interest expense for an increase borrowing
under the Company's Credit Facility totaling $29.2
million at an effective rate per annum of 9.53% and
8.73%, respectively, in connection with the
acquisition of the Combined Acquired Portfolios...... (2,778) (531)
------- -------
$ (1,862) $ (355)
======= =======
</TABLE>
(d) Shares do not reflect the exchange provided for in the plan of
recapitalization.
F-22
<PAGE> 91
LOGO MASADA SECURITY HOLDINGS, INC.
Number of Subscriber Accounts Monthly Recurring Revenue ("MRR")*
<TABLE>
<S> <C>
[Bar Chart representing the [Bar Chart representing MRR of
number of subscribers of Masada Masada as of the end of each of
as of the end of each of the the seven quarters ending with
seven quarters ending with September 30, 1996]
September 30, 1996]
</TABLE>
Masada Branch Locations
[Map Identifying Location of Each of Masada's Branch Offices]
- ---------------
* MRR is monthly recurring revenue which the Company is entitled to receive from
contracts in effect at the end of the period. MRR is a term commonly used in
the industry as a measure of the size of a company but not as a measure of
profitability or performance, and does not include any allowance for future
attrition of subscriber accounts or allowance for doubtful accounts. The
Company does not have sufficient information as to the attrition of acquired
subscriber accounts to predict the amount of acquired MRR that will be realized
in future periods or the impact of the attrition of acquired subscriber
accounts on the Company's overall rate of attrition.
<PAGE> 92
MASADA SECURITY (LOGO)
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses (other than underwriting commissions) of the sale of the
shares of Common Stock are as follows:
<TABLE>
<S> <C>
Registration Fee.......................................................... $ 10,872
NASD Filing Fee........................................................... 4,088
Nasdaq NMS Application Fee................................................ 37,500
Blue Sky Fees and Expenses................................................ 5,000
Printing and Engraving.................................................... 100,000
Transfer Agent's Fees and Expenses........................................ 10,000
Legal Fees and Expenses................................................... 350,000
Accounting Fees and Expenses.............................................. 150,000
Miscellaneous Disbursements............................................... 32,540
--------
TOTAL........................................................... $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company contains a provision which,
subject to certain exceptions described below, eliminates the liability of a
director to the Company or its stockholders for monetary damages for any breach
of duty as a director. This provision does not eliminate the liability of the
director (i) for violations of his duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law (the "Delaware Corporation Law") relating
to unlawful dividends and distributions, or (iv) for any transaction from which
the director derived an improper personal benefit.
The Certificate of Incorporation of the Company requires the Company to
indemnify any person who was, is, or is threatened to be made a named defendant
or respondent in any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, by reason
of service by such person as a director of the Company or any other corporation,
including any subsidiary, for which he or she as such at the request of the
Company. Directors are entitled to be indemnified against judgments, penalties,
fines, settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding, except that no payments may be made with respect
to liability which is not eliminated pursuant to the provision of the Company's
Certificate of Incorporation described in the preceding paragraph. Directors are
also entitled to have the Company advance any such expenses prior to final
disposition of the proceeding, upon delivery of a written affirmation by the
director of his good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to repay the amounts
advanced if it is ultimately determined that the standard of conduct has not
been met.
In addition to the Certificate of Incorporation of the Company, Section
145(c) of the Delaware Corporation Law requires the Company to indemnify any
director who has been successful on the merits or otherwise in defending any
proceeding described above. The Delaware Corporation Law also provides that a
court may order indemnification of a director if it determines that the director
is fairly and reasonably entitled to such indemnification. The ByLaws of the
Company specifically adopts Section 145(c).
The Board of Directors of the Company also has the authority to extend to
officers, employees and agents the same indemnification rights held by
directors, subject to all of the accompanying conditions
II-1
<PAGE> 94
and obligations. The Board of Directors has extended indemnification rights to
all of its executive officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three (3) years, the Company has consummated two
unregistered sales of its capital stock. On February 11, 1994, contemporaneously
with the merger of the Partnership into Security, the Company (i) issued 333,460
shares of the Company's Class A common stock to MSAM, a corporation owned by
Messrs. Johnson and Harms, in consideration of MSAM's limited partnership
interest in the Partnership valued by the Company at an amount equal to MSAM's
original cash contribution to the Partnership in February of 1993, $40,040; (ii)
sold 358,332 shares of Class B convertible preferred stock for cash and/or the
redemption of certain debentures issued by the Partnership equal to $24 per
share, or an aggregate offering price of approximately $8.6 million, as follows:
11,630, 11,630, 1,399, and 1,399 shares to Mr. Johnson, Mr. Harms, Mr. Nordin
and an affiliate of Mr. Gabbard, respectively, each a director of the Company;
25,020, 87,745, 6,285, 83,333, 83,149 and 46,221 shares to Centennial III,
Centennial IV, Criterion, Hancock, Norwest IV and South Atlantic II,
respectively; and 521 shares to Ms. Whitaker; and (iii) sold Mr. Nordin 500
shares of Class A preferred stock for $50,000 and 3,739 shares of Class B common
stock for $396. On May 31, 1995, the Company sold 486,111 shares of Class C
convertible preferred stock for $36 cash per share, or an aggregate offering
price of approximately $17.5 million, as follows: 5,715, 5,715, 472 and 472
shares to Mr. Johnson, Mr. Harms, Mr. Nordin and an affiliate of Mr. Gabbard,
respectively, each a director of the Company; 8,464, 110,214, 138,889, 1,190,
83,333, 83,724, 23,267 and 23,267 shares to Centennial III, Centennial IV,
Chase, Criterion, Hancock, Norwest V, South Atlantic II and South Atlantic III,
respectively; and 1,389 shares to Ms. Whitaker. See "Certain Transactions" in
Part I.
For each issuance, the Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 based upon the following
facts: (i) there was no more than 15 purchasers in either issuance consisting
primarily of the same institutional investors; (ii) none of the purchasers was
solicited by means of any public advertising; (iii) each of the sales were
memorialized by negotiated stock purchase agreements; (iv) during such
negotiations, each purchaser was given access to the Company's books and records
and had the opportunity to meet and ask questions of the executive officers of
the Company; and (v) the Company believed and still believes that each purchaser
was a suitable investor.
On September 27, 1996, the Board of Directors and stockholders of the
Company unanimously adopted the Company's Plan of Recapitalization, which will
be implemented concurrently with the Offering and which provides, among other
things, for the automatic exchange of each share of Class A common stock, Class
B common stock and Class C common stock outstanding on the effective date for
three (3) shares of a new, single class of common stock. See "Certain
Transactions -- Recapitalization" in Part I for a more detailed description of
the transaction. The Company is relying upon the exemption from registration
provided in Section 3(a)(9) of the Securities Act of 1933 based upon the fact
that all shares of the new class of common stock will only be issued to existing
stockholders of the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as exhibits to this Registration
Statement as required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
<C> <S> <C>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Masada Security Holdings, Inc. Third Restated Certificate of Incorporation dated
June 28, 1996.(1)
3.2 -- Certificate of Amendment to the Certificate of Incorporation of Masada Security
Holdings, Inc. dated September 30, 1996.(1)
</TABLE>
II-2
<PAGE> 95
<TABLE>
<CAPTION>
<S> <C>
3.3 -- Masada Security Holdings, Inc. Fourth Restated Certificate of Incorporation
(proposed).(1)
3.4 -- Masada Security Holdings, Inc. ByLaws.(1)
3.5 -- Masada Security Holdings, Inc. Plan of Recapitalization dated September 27,
1996.(1)
4.1 -- Provisions in the Masada Security Holdings, Inc. Fourth Restated Certificate of
Incorporation and ByLaws defining the rights of holders of its Common Stock.(1)
4.2 -- Second Amended and Restated Securities Purchase Agreement dated May 31, 1995
among Masada Security Holdings, Inc. and Certain Purchasers.(1)
4.3 -- Third Amended and Restated Securities Purchase Agreement dated September 30, 1996
among Masada Security Holdings, Inc. and Certain Purchasers.(1)
4.4 -- Specimen Stock Certificate.(1)
5.1 -- Opinion of Burr & Forman as to the legality of the securities being registered.*
9.1 -- MSAM, Inc. 1994 Voting Trust Agreement.(1)
10.1 -- Restated and Amended Masada Security Holdings, Inc. 1996 Stock Option Plan.(1)
10.2 -- Stock Option/Purchase Plan of Masada Security Holdings, Inc., including First
Amendment and Second Amendment.(1)
10.3 -- Sonitrol Dealer Franchise Agreement between Sonitrol Southeast, Inc. and Masada
Security Limited Partnership dated December 23, 1988 for Dade County, Florida.(1)
10.3(a) -- Sonitrol Dealer Franchise Agreement between Sonitrol Southeast, Inc. and Masada
Security Limited Partnership dated February 26, 1993 for Broward County,
Florida.(1)
10.3(b) -- Agreement and Approval of the Assumption of the two Sonitrol Dealer Franchise
Agreements by Masada Security, Inc. effective February 11, 1994.(1)
10.4 -- Lease Agreement by and between Birmingham-Jefferson Civic Center Authority and
Masada Security, Inc. dated June 7, 1994, including amendments (4).(1)
10.5 -- Asset Purchase Agreement by and between Masada Security, Inc. and Kenmar
Electronics, Inc. d/b/a Houston Alarm dated October 27, 1994.(1)
10.5(a) -- Escrow Agreement by and among Masada Security, Inc., Kenmar Electronics, Inc.
d/b/a Houston Alarm and Texas Commerce Bank, National Association, dated November
1, 1994.(1)
10.5(b) -- Non-Competition Agreement by and between Masada Security, Inc. and Kenmar
Electronics, Inc. d/b/a Houston Alarm dated November 1, 1994.(1)
10.5(c) -- Non-Competition Agreement by and between Masada Security, Inc. and Forrest W.
Jenkins dated November 1, 1994.(1)
10.5(d) -- Non-Competition Agreement by and between Masada Security, Inc. and Robert E.
Jenkins dated November 1, 1994.(1)
10.5(e) -- Non-Competition Agreement by and between Masada Security, Inc. and Russell S.
Vail dated November 1, 1994.(1)
10.6 -- Asset Purchase Agreement by and between Masada Security, Inc. and Global
Security, Inc. dated April 14, 1995.(1)
10.6(a) -- Escrow Agreement by and between Masada Security, Inc. and Global Security, Inc.
dated May 5, 1995.(1)
10.6(b) -- Non-Solicitation Agreement by and between Masada Security, Inc. and Global
Security, Inc. dated May 5, 1995.(1)
10.6(c) -- Non-Solicitation Agreement by and between Masada Security, Inc. and Casey
Slawinski dated May 5, 1995.(1)
</TABLE>
II-3
<PAGE> 96
<TABLE>
<CAPTION>
<S> <C>
10.6(d) -- Non-Solicitation Agreement by and between Masada Security, Inc. and Tim C.
Mitchell dated May 5, 1995.(1)
10.6(e) -- Monitoring Agreement by and between Masada Security, Inc. and Global Security,
Inc. dated April 14, 1995.(1)
10.7 -- Asset Purchase Agreement by and between Masada Security, Inc. and Alert Centre,
Inc. dated June 15, 1995.(1)
10.7(a) -- Non-Solicitation Agreement by and between Masada Security, Inc. and Alert Centre,
Inc. dated June 15, 1995.(1)
10.7(b) -- Escrow Agreement by and between Masada Security, Inc. and Buchannan Ingersol
Professional Corporation dated June 15, 1995.(1)
10.7(c) -- Subcontractor Agreement by and between Masada Security, Inc. and Alert Centre,
Inc. dated June 15, 1995.(1)
10.7(d) -- Third Party Monitoring Agreement by and between Masada Security, Inc. and Alert
Centre, Inc. dated June 15, 1995.(1)
10.7(e) -- Third Party Monitoring Agreement by and between Masada Security, Inc. and Alert
Centre, Inc. dated June 15, 1995.(1)
10.8 -- Asset Purchase Agreement by and between Masada Security, Inc. and GRB Security
Systems dated June 29, 1995.(1)
10.8(a) -- Escrow Agreement by and among Masada Security, Inc., GRB Security Systems and
SouthTrust Bank of Alabama, N.A. dated June 29, 1995.(1)
10.8(b) -- Non-Solicitation Agreement by and between Masada Security, Inc. and GRB Security
Systems dated June 29, 1995.(1)
10.9 -- Asset Purchase Agreement by and between Masada Security, Inc. and Deltron, Inc.
d/b/a San Antonio Alarm dated June 30, 1995.(1)
10.9(a) -- Escrow Agreement by and among Masada Security, Inc., Deltron, Inc. d/b/a San
Antonio Alarm and SouthTrust Bank of Alabama, N.A. dated June 30, 1995.(1)
10.9(b) -- Non-Solicitation Agreement by and between Masada Security, Inc. and Deltron, Inc.
d/b/a San Antonio Alarm dated June 30, 1995.(1)
10.9(c) -- Non-Solicitation Agreement by and between Masada Security, Inc. and Stephen W.
Biediger dated June 30, 1995.(1)
10.10 -- Asset Purchase Agreement by and between Masada Security, Inc. and Network Multi-
Family Security Corporation dated July 26, 1995.(1)
10.10(a) -- Escrow Agreement by and between Masada Security, Inc. and Network Multi-Family
Security Corporation dated July 26, 1995.(1)
10.10(b) -- Non-Solicitation Agreement by and between Masada Security, Inc. and Network
Multi-Family Security Corporation dated July 26, 1995.(1)
10.11 -- Asset Purchase Agreement by and between Masada Security, Inc. and Tel*Star
Cellular Corporation dated September 1, 1995.(1)
10.11(a) -- Escrow Agreement by and among Masada Security, Inc., Tel*Star Cellular
Corporation and SouthTrust Bank of Alabama, N.A. dated September 11, 1995.(1)
10.11(b) -- Noncompetition, Nonsolicitation and Nondisclosure Agreement by and among Masada
Security, Inc., Tel*Star Cellular Corporation, Guy W. Steele, John P. Thompson,
Kent McClure, David Sessions and Ron Serber dated September 11, 1995.(1)
10.12 -- Asset Purchase Agreement by and between Masada Security, Inc. and Alarm Data
Group, Inc. dated September 22, 1995.(1)
10.12(a) -- Escrow Agreement by and among Masada Security, Inc., Alarm Data Group, Inc. and
SouthTrust Bank of Alabama, N.A. dated September 29, 1995.(1)
</TABLE>
II-4
<PAGE> 97
<TABLE>
<CAPTION>
<S> <C>
10.12(b) -- Noncompetition, Nonsolicitation and Nondisclosure Agreement by and between Masada
Security, Inc., Alarm Data Group, Inc. and Dennis V. Riley dated September 22,
1995.(1)
10.12(c) -- Monitoring Agreement by and between Masada Security, Inc. and Alarm Data Group,
Inc. dated September 29, 1995.(1)
10.13 -- Asset Purchase Agreement by and between Masada Security, Inc. And LaFayette
Security And Electronics Systems, Inc. dated September 11, 1995.(1)
10.13(a) -- Escrow Agreement by and between Masada Security, Inc., LaFayette Security And
Electronics Systems, Inc. and SouthTrust Bank of Alabama, N.A. dated October 10,
1995.(1)
10.13(b) -- Noncompetition, Nonsolicitation and Nondisclosure Agreement by and among Masada
Security, Inc., LaFayette Security And Electronics Systems, Inc. and Cliff C.
Northon dated October 10, 1995.(1)
10.13(c) -- Consulting Agreement by and between Masada Security, Inc. and Cliff C. Northon
dated October 10, 1995.(1)
10.13(d) -- Monitoring Agreement by and between Masada Security, Inc. and LaFayette Security
And Electronics Systems, Inc. dated October 10, 1995.(1)
10.14 -- Asset Purchase Agreement by and between Masada Security, Inc. and The 593
Corporation d/b/a Classic Alarms dated November 2, 1995.(1)
10.14(a) -- Tax Indemnity Escrow Agreement by and between Masada Security, Inc. and The 593
Corporation d/b/a Classic Alarms dated November 2, 1995.(1)
10.14(b) -- Attrition Escrow Agreement by and among Masada Security, Inc., The 593
Corporation d/b/a Classic Alarm and SouthTrust Bank of Alabama, N.A. dated
November 2, 1995.(1)
10.14(c) -- Non-Solicitation Agreement by and among Masada Security, Inc., The 593
Corporation d/b/a Classic Alarm, Anthony T. Mandina, Edgar Corey and Alvin C.
Beaudean dated November 2, 1995.(1)
10.15 -- Stock Purchase Agreement by and between Masada Security, Inc., Paul Kristynik and
Mary Kristynik dated January 8, 1996.(1)
10.15(a) -- Escrow Agreement by and among Masada Security, Inc., Paul Kristynik and Mary
Kristynik, and SouthTrust Bank of Alabama, N.A. dated January 9, 1996.(1)
10.15(b) -- Noncompetition, Nonsolicitation and Nondisclosure Agreement by and between Masada
Security, Inc., Paul Kristynik and Mary Kristynik dated January 8, 1996.(1)
10.15(c) -- Consulting Agreement by and between Masada Security, Inc. and Paul Kristynik
dated January 8, 1996.(1)
10.16 -- Asset Purchase and Sale Agreement by and between Masada Security, Inc. and Harvey
Sender, as trustee for the bankruptcy estates of InterCap Funds Joint Venture,
Security Data Group of California, Inc., and IMIF IV-C Service Corp. dated March
27, 1996.(1)
10.16(a) -- Escrow Agreement by and among Masada Security, Inc., Harvey Sender, as trustee
for the bankruptcy estates of InterCap Funds Joint Venture, Security Data Group
of California, Inc., and IMIV IV-C Service Corp., and SouthTrust Bank of Alabama,
N.A. dated March 28, 1996.(1)
10.16(b) -- Noncompetition, Nonsolicitation and Nondisclosure Agreement by and among Masada
Security, Inc. and Harvey Sender, as trustee for the bankruptcy estates of
InterCap Funds Joint Venture, Security Data Group of California, Inc., and IMIV
IV-C Service Corp. dated March 28, 1996.(1)
10.16(c) -- Acquired Accounts Monitoring Agreement between Masada Security, Inc., Harvey
Sender, as Trustee for the bankruptcy estates of InterCap Joint Venture, Security
Data Group of California, Inc., and IMIF IV-C Service Corp. dated March 28,
1996.(1)
</TABLE>
II-5
<PAGE> 98
<TABLE>
<S> <C>
10.16(d) -- Rejected Accounts Monitoring Agreement between Masada Security, Inc., Harvey
Sender, as Trustee for the bankruptcy estates of InterCap Joint Venture, Security
Data Group of California, Inc., and IMIF IV-C Service Corp. dated March 28,
1996.(1)
10.17 -- Credit Agreement by and among Masada Security, Inc., CIBC Inc., SunTrust Bank,
Central Florida, N.A. and Canadian Imperial Bank of Commerce, New York Agency
dated March 28, 1996.(2)
10.17(a) -- Security and Pledge Agreement by and between Masada Security, Inc., and Canadian
Imperial Bank of Commerce, New York Agency dated March 28, 1996.(1)
10.17(b) -- Pledge Agreement by and among Masada Security Holdings, Inc. and Canadian
Imperial Bank of Commerce, New York Agency dated March 28, 1996.(1)
10.17(c) -- Amendment to Credit Agreement and Certain Other Documents by and among Masada
Security, Inc., CIBC Inc., SunTrust Bank, Central Florida, N.A. and Canadian
Imperial Bank of Commerce, New York Agency dated June 4, 1996.(1)
10.17(d) -- Second Amendment to Credit Agreement by and among Masada Security, Inc., CIBC
Inc., SunTrust Bank, Central Florida, N.A. and Canadian Imperial Bank of
Commerce, New York Agency dated August 9, 1996.(1)
10.17(e) -- Third Amendment to Credit Agreement by and among Masada Security, Inc., CIBC
Inc., SunTrust Bank, Central Florida, N.A., State Street Bank and Trust Company,
and Canadian Imperial Bank of Commerce, New York Agency dated October 10,
1996.(1)
10.18 -- Stock Purchase Agreement by and among Masada Security, Inc. and Russell B. Jones,
Robert S. Moses, David R. Donnelly and Ronald G. Walters dated May 31, 1996.(1)
10.18(a) -- Amendment to Stock Purchase Agreement by and among Masada Security, Inc. and
Russell B. Jones, Robert S. Moses, David R. Donnelly and Ronald G. Walters dated
June 4, 1996.(1)
10.18(b) -- Escrow Agreement by and among Masada Security, Inc. and SunTrust Bank, Central
Florida, National Association, dated June 3, 1996.(1)
10.19 -- Agreement between Masada Security, Inc. and Centennial Security, Inc. dated as of
June 10, 1994.(1)
10.20 -- Purchase Agreement among Centennial Security, Inc., Masada Security, Inc. and
Certain Stockholders of Centennial Security, Inc. dated as of June 10, 1994.(1)
10.21 -- Trademark and Intellectual Property Agreement between Masada Security, Inc. and
Centennial Security, Inc. dated as of June 10, 1994.(1)
10.22 -- Amendment Agreement between Masada Security, Inc. and Centennial Security, Inc.
dated as of June 23, 1995.(1)
10.23 -- Series B Preferred Stock Purchase Agreement by and among Centennial Security,
Inc. and Centennial Fund IV, L.P., Chemical Venture Capital Associates, Hancock
Venture Partners IV-Direct Fund L.P., Larimer & Co. and Masada Security, Inc.
dated July 11, 1995.(1)
10.24 -- Registration Agreement by and among Centennial Security, Inc. and Centennial Fund
IV, L.P., Chemical Venture Capital Associates, Hancock Venture Partners IV-Direct
Fund L.P., Larimer & Co., Masada Security, Inc. and Robert J. Shiver dated July
11, 1995.(1)
10.25 -- Stockholders Agreement by and among and Centennial Fund IV, L.P., Chemical
Venture Capital Associates, Hancock Venture Partners IV-Direct Fund L.P., Larimer
& Co., Masada Security, Inc., Robert J. Shiver, Catherine Merigold and Steven
Schovee dated July 11, 1995.(1)
10.26 -- Masada Security Holdings, Inc. 1997 Stock Option Plan.(1)
16.1 -- Letter from Coopers & Lybrand LLP.
</TABLE>
II-6
<PAGE> 99
<TABLE>
<C> <S> <C>
21.1 -- Subsidiaries of Masada Security Holdings, Inc.(1)
23.1 -- Consent of Ernst & Young LLP, independent auditors to Masada Security Holdings,
Inc.
23.2 -- Consent of Burr & Forman (contained in the opinion included at Exhibit 5.1)*
24.1 -- Power of Attorney of certain officers and directors of the Company (contained on
the signature page of the Registration Statement as originally filed on October
4, 1996)
27.1 -- Financial Data Schedule (for SEC use only)(1)
</TABLE>
- ---------------
* To be filed by amendment.
(1) Previously filed with the Registration Statement filed on October 4, 1996.
(2) Previously filed with Amendment No. 1 to the Registration Statement filed on
October 31, 1996.
(b) No Financial Statement Schedules of Item 11(e) of Regulation S-X are
required to be included in this Registration Statement.
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant as described in Item 14 or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
3. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on November 6, 1996.
MASADA SECURITY HOLDINGS, INC.
By: /s/ TERRY W. JOHNSON
------------------------------------
Terry W. Johnson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------- ------------------
<C> <S> <C>
/s/ TERRY W. JOHNSON Chairman of the Board, November 6, 1996
- --------------------------------------------- President and Chief
Terry W. Johnson Executive Officer
(principal executive
officer)
/s/ DAVID P. TOMICK Vice President, Chief November 6, 1996
- --------------------------------------------- Financial Officer and
David P. Tomick Treasurer (principal
financial officer)
/s/ CATHY M. ANTEE Secretary (principal November 6, 1996
- --------------------------------------------- accounting officer)
Cathy M. Antee
/s/ DAVID P. TOMICK* Director November 6, 1996
- ---------------------------------------------
O. Gene Gabbard
/s/ DAVID P. TOMICK* Director November 6, 1996
- ---------------------------------------------
I. Robert Greene
/s/ DAVID P. TOMICK* Director November 6, 1996
- ---------------------------------------------
Steven C. Halstedt
/s/ DARYL E. HARMS Director November 6, 1996
- ---------------------------------------------
Daryl E. Harms
/s/ DAVID P. TOMICK* Director November 6, 1996
- ---------------------------------------------
William A. Johnston
/s/ DAVID P. TOMICK* Director November 6, 1996
- ---------------------------------------------
John M. Kark
/s/ DAVID P. TOMICK* Director November 6, 1996
- ---------------------------------------------
Bertil D. Nordin
/s/ DAVID P. TOMICK* Director November 6, 1996
- ---------------------------------------------
George J. Still, Jr.
</TABLE>
* Attorney-in-fact
II-8
<PAGE> 1
EXHIBIT 16.1
COOPERS & LYBRAND COOPERS & LYBRAND L.L.P.
a professional services firm
November 7, 1996
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Masada Security Holdings, Inc. as part of
its Form S-1 registration statement, which we understand was initially filed
with the Commission on October 4, 1996, and is being amended on November 7,
1996, pursuant to Item 304 of Regulation S-K. We agree with the statements
concerning our Firm in such Form S-1 registration statement.
Very truly yours,
COOPERS & LYBRAND L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of the firm under the caption "Experts" and to
the use of our report dated August 2, 1996 (except for Note 15 as to which the
date is September 27, 1996), in the Registration Statement (Amendment No. 2 to
Form S-1 No. 333-13505) and related Prospectus of Masada Security Holdings, Inc.
for the registration of 2,760,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
--------------------------------------
Birmingham, Alabama
November 7, 1996
