UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended March 31, 1998 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 1-8138
Alarmguard Holdings, Inc.
Incorporated In Delaware IRS Identification No: 33-0318116
Principal Executive Offices: Telephone (203) 795-9000
125 Frontage Road
Orange, Connecticut 06477
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
The number of shares of Alarmguard Holdings, Inc.'s common stock, $.0001 par
value, outstanding as of April 30, 1998 was 5,593,948.
Items 1 and 2 of the Company's Quarterly Report on Form 10-Q for the Quarter
ended March 31, 1998 are amended to reflect an imputed non-cash dividend on the
convertible preferred stock as discussed in Note 10. The non-cash dividend is
reflected in the accompanying condensed consolidated balance sheet at March 31,
1998 as a charge against accumulated deficit with a corresponding increase in
additional paid in capital. The non-cash dividend is also included in the
dividend requirement on preferred stock in the condensed consolidated statement
of operations for the three months ended March 31, 1998.
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
March 31 December 31
1998 1997
---------- ------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $13,311 $698
Restricted cash 2,608 1,931
Accounts receivable, net 8,442 5,558
Inventories 3,817 3,065
Other current assets 474 343
-------- --------
Total current assets 28,652 11,595
Property and equipment, net 3,252 2,133
Customer installation costs, net 9,169 8,868
Customer contracts and intangibles, net 79,757 43,027
Other investments 2,097 2,245
Other assets 1,692 1,982
-------- --------
Total assets $124,619 $69,850
======== ========
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ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Balance Sheets (continued)
(In thousands)
March 31 December 31
1998 1997
---------- --------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current liabilities:
Accounts payable $2,105 $2,659
Accrued expenses 7,994 5,675
Current portion of notes payable 505 2,462
Deferred revenue 9,456 6,231
Other current liabilities 5,306 4,061
--------- -------
Total current liabilities 25,366 21,088
Notes payable, less current portion 696 549
Credit facility 63,500 46,700
Subordinated debt 3,756 4,389
Other liabilities 325 321
Cumulative Convertible Preferred Stock,
Redeemable at $1,000 par value:
Series A, 5% dividends, 35,700 shares issued
and outstanding at March 31, 1998 33,835 -
Series B, 5,000 shares issued and outstanding
at March 31, 1998 4,738 -
Stockholders' deficiency:
Common Stock, $.0001 par value, 25,000,000
shares authorized, 5,593,396 shares
issued and outstanding at March 31, 1998
and December 31, 1997 1 1
Additional paid in capital 44,043 35,286
Accumulated deficit (51,641) (38,484)
---------- ------------
Total stockholders' deficiency (7,597) (3,197)
---------- ------------
Total liabilities and stockholders' deficiency $124,619 $69,850
========== ============
See accompanying notes to condensed consolidated financial statements.
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ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
For The Three Months
Ended March 31
----------------------------
1998 1997
-------- ---------
Revenue $10,913 $6,597
Cost of revenue 5,008 2,673
----------- --------
Gross profit 5,905 3,924
Selling, general and administrative expense 4,440 3,203
Acquisition integration expense 328 -
Amortization and depreciation expense 3,524 2,371
----------- --------
Total operating expense 8,292 5,574
----------- --------
Operating loss (2,387) (1,650)
Other income (expense):
Interest expense, net (1,435) (844)
Other, net 35 -
----------- --------
Net loss (3,787) (2,494)
Dividend requirement on preferred stock,
including imputed non-cash dividend of
$9,024 in 1998 (See Note 10) (9,370) (171)
----------- --------
Loss applicable to common shares $(13,157) $(2,665)
=========== =========
Basic and diluted loss per common share $(2.35) $(0.87)
=========== =========
Weighted average number of basic and diluted
common shares 5,593 2,877
See accompanying notes to condensed consolidated financial statements.
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ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
For The Three Months
Ended March 31,
--------------------------
1998 1997
--------------------------
Operating activities:
Net loss $(3,787) $(2,494)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization and depreciation 3,524 2,371
Accretion on preferred stock 73 -
Customer installation costs incurred (1,205) (1,154)
Changes in operating assets and
liabilities, net of effects of
acquisitions 424 632
---------- -----------
Net cash used in operating activities (971) (645)
Investing activities:
Acquisition of businesses, net of cash
acquired (36,992) -
Increase in restricted cash (677) -
Purchases of property and equipment (540) (50)
---------- ------------
Net cash used in investing activities (38,209) (50)
Financing activities:
Net proceeds from issuance of preferred stock 37,800 -
Proceeds from term loan 17,600 800
Proceeds from bridge loan - 500
Payments of term loan (800) -
Financing fees paid (346) -
Payments of other notes payable (2,341) (513)
Payments of capital leases (120) -
---------- ------------
Net cash provided by financing activities 51,793 787
Increase in cash and cash equivalents 12,613 92
Cash and cash equivalents at beginning of period 698 230
---------- ------------
Cash and cash equivalents at end of period $13,311 $322
========== ============
Cash paid for interest $1,222 $855
========== ============
See accompanying notes to condensed consolidated financial statements.
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ALARMGUARD HOLDINGS, INC.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Alarmguard Holdings, Inc. ("Alarmguard" or the "Company") is the
successor-in-interest to Security Systems Holdings, Inc. ("SSH") and Triton
Group Ltd. ("Triton"), following the merger ("Merger") of SSH and Triton on
April 15, 1997. Alarmguard, through its wholly-owned subsidiaries, sells and
installs burglar and fire alarm systems and provides monitoring and security
system repair and maintenance services to homeowners and businesses, principally
in the Northeast and Mid-Atlantic regions of the United States.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. The condensed
consolidated balance sheet as of December 31, 1997 has been derived from the
audited consolidated balance sheet as of that date. The unaudited interim
financial information of Alarmguard should be read in conjunction with the
audited consolidated financial statements of Alarmguard as of and for the year
ended December 31, 1997.
2. Acquisitions
On February 2, 1998, Alarmguard purchased all of the issued and
outstanding shares of capital stock of Detect, Inc. ("Pelletier"), a company
located in Danbury, Connecticut, with approximately 7,200 subscribers and
Monthly Recurring Revenue ("MRR") of approximately $0.2 million, for a total
purchase price of approximately $10.4 million. The total purchase price
consisted of $9.5 million paid at closing, the assumption of $0.5 million of
notes payable and $0.4 million representing an amount due to the sellers of
Pelletier based on certain post closing adjustments. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was preliminarily allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. In connection with this acquisition, the Company received current
assets of $0.6 million, property and equipment of $0.2 million, customer
contracts of $10.8 million and other intangibles of $0.4 million and assumed
current liabilities of $1.6 million.
During the first quarter of 1998, Alarmguard also acquired certain
operating assets of Security System Inc. ("Sentry"), of Malden, Massachusetts
and Protech Security, Inc. of New York for an aggregate of $24.5 million in cash
and $3.1 million representing an amount due to the sellers based on certain post
closing adjustments. The acquisitions added approximately $0.6 million of MRR
and approximately 20,000 customers. The acquisitions were accounted for under
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the purchase method of accounting and, accordingly, the purchase price has been
preliminarily allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the respective dates of acquisition. In
connection with the acquisitions, Alarmguard received current assets of $1.2
million, customer contracts of $27.4 million, other intangibles of $0.4 million
and property and equipment of $0.6 million and assumed current liabilities of
$2.0 million.
Accrued expenses at March 31, 1998 include $2.2 million of estimated
costs expected to be incurred as a result of the 1997 and 1998 acquisitions. The
results of operations of the acquired companies have been included in the
consolidated statements of operations from the respective dates of acquisitions.
The following unaudited pro forma information shows the results of the
Company's operations as though the acquisitions consummated during the first
three months of 1998 had been made as of January 1, 1998 and January 1, l997,
and the acquisitions consummated during the fiscal year of 1997 had been made as
of January 1, 1997 (in thousands, except per share data):
For The Three Months Ended
March 31,
--------------------------
1998 1997
----------- ------------
Pro forma revenue $12,798 $11,979
=========== ============
Pro forma net loss $(5,865) $(6,814)
Pro forma basic and diluted per share: $(1.05) $(1.22)
=========== ============
Shares used in computations 5,593 5,593
=========== ============
The pro forma results are not necessarily indicative of the actual
results of operations that would have been obtained had the acquisitions taken
place at the beginning of the respective periods or the results that may occur
in the future and do not give effect to cost savings which are expected to occur
as a result of the consolidation of the acquired companies.
3. Inventories
Inventories consist principally of alarm components and supplies which
are carried at the lower of cost or market value.
4. Customer Installation Costs
During each of the three months ended March 31, 1998 and 1997,
Alarmguard incurred approximately $1.2 million of customer installation costs
primarily attributable to the operations of its dealer and direct marketing
programs. Alarmguard added approximately 2,100 and 2,000 customers,
respectively, through its dealer and direct marketing programs during these
periods.
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5. Customer Contracts and Intangibles
Customer contracts and intangibles (at cost) consist of the following
(in thousands):
March 31, 1998 December 31, 1997
----------------- ------------------
Acquired customer contracts $88,063 $49,807
Covenants not to compete 13,713 12,944
Goodwill 2,493 2,493
----------------- ------------------
104,269 65,244
Less accumulated amortization (24,512) (22,217)
----------------- ------------------
$79,757 $43,027
================= ==================
6. Other Investments
Other investments are comprised of certain assets held by Triton at the
time of the Merger in April 1997, which are in the process of being liquidated
(in thousands).
March 31, December 31,
1998 1997
------------ ----------------
Ridgewood Hotels, Inc. Series A
Preferred Stock $2,009 $2,009
Other 88 236
------------ ----------------
$2,097 $2,245
============ ================
Alarmguard owns 450,000 shares of Series A Preferred Stock of Ridgewood
Hotels, Inc. ("Ridgewood") with a face value of $3.6 million. Alarmguard
currently receives a 10% quarterly dividend of $90,000 on this investment and
the preferred stock is redeemable at any time by Ridgewood at its face value
plus accrued dividends. The preferred stock is convertible by Alarmguard at any
time into 1,350,000 Ridgewood common shares, which would represent approximately
47% of the Ridgewood common shares then outstanding, or 40% fully diluted.
Alarmguard accounts for the Ridgewood investment using the cost method of
accounting.
7. Long Term Debt
On February 3, 1998, in connection with the offering of Convertible
Preferred Stock (see Note 10), Alarmguard, Inc. (the "Borrower"), a wholly owned
subsidiary of the Company, increased the availability under the Third Amended
and Restated Term Loan and Acquisition Credit Agreement (the "Credit Facility")
from $60 million to $90 million. The Credit Facility provides for interest only
advances until January 31, 2000 and amortization thereafter. Borrowings under
the Credit Facility are secured by substantially all of the properties and
assets of the Borrower including accounts receivable, inventory, leasehold
interests, customer contracts and the capital stock of all of the subsidiaries
of the Company. Interest on the Credit Facility accrues and is payable at the
option of the Borrower at either prime plus 1 1/2% or LIBOR plus 2.75%
(approximately 8.7% at March 31, 1998), however the Company has fixed the
interest rate on $40.0 million of its outstanding borrowings at 8.84% for three
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years through an interest rate swap agreement. At March 31, 1998, outstanding
borrowings under the Credit Facility were $63.5 million.
8. Stock Options
On March 10, 1998, the Board of Directors issued 365,000 additional
stock options to the senior management of Alarmguard which vest over a four-year
period from the date of grant. The exercise price for all options granted was
$10.00 per share, the quoted market value of the common stock on the date of
grant.
9. Commitments and Contingencies
The Company experiences routine litigation in the normal course of its
business. Management does not believe that any pending or threatened litigation
will have a material adverse effect on the financial condition or results of
operations of the Company.
10. Sale of Cumulative Convertible Preferred Stock
On February 3, 1998, the Company completed an offering of 40,000 shares
of Cumulative Convertible Preferred Stock (35,000 shares of Series A Preferred
and 5,000 shares of Series B Preferred) are redeemable at $1,000 per share, five
years from the date of issuance, yielding gross proceeds totaling $40 million.
The Company issued 700 additional shares of the Series A Preferred Stock in
exchange for $0.7 million of the Company's subordinated debt. Net proceeds of
the offering, after the payment of investment banking fees and legal expenses,
amounted to approximately $37.8 million. The costs incurred for completing the
February 1998 offering are being amortized to the dividend requirement on
Preferred Stock over the five-year life of the security with the unamortized
balance reflected as a reduction of the Preferred Stock's carrying value.
The Series A Preferred Stock pays quarterly cash dividends at 5% per
annum. Under the terms of the securities, holders of the Series A and Series B
Preferred Stock have the right to convert their shares at any time, into
4,972,434 shares of the Company's common stock at the conversion price of $8.25
per share and $7.75 per share, respectively, subject to certain anti-dilution
provisions. The holders of the newly issued preferred stock have the right to
elect two additional members to the Company's Board of Directors. The net
proceeds from the offering and the increased credit facility discussed in Note 7
are intended to finance acquisitions and expand the Company's Dealer and Direct
Marketing Programs. In connection with the sale of the Preferred Stock, the
Company imputed a one-time non-cash dividend of approximately $9.0 million
($1.61 per common share) as a result of the conversion prices of the two series
of Preferred Stock being less than the quoted market price of the Company's
Common Stock at the date of issuance, as required by EITF D-60: Accounting for
the Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature. Such amount was recognized upon issuance of
the Preferred Stock as a charge against accumulated deficit, with a
corresponding increase in additional paid in capital. The imputed non-cash
dividend is also included in the dividend requirement on Preferred Stock in the
condensed consolidated statement of operations for the three months ended March
31, 1998.
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11. Earnings per Share
The 1997 calculation of basic and diluted loss per common share
excludes the dividend requirement on preferred stock as a result of the
conversion of the Preferred Stock and related accrued dividends into Alarmguard
Common Stock at the time of the Merger.
All dilutive securities (stock options, warrants and convertible
preferred stock) have been excluded from the diluted loss per common share
calculation as such instruments are antidilutive.
12. Recent FASB Pronouncements
In 1998, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company will adopt SFAS No. 131
effective for year end financial reporting in 1998 and expects no material
impact upon adoption.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain matters in this section constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results of Alarmguard Holdings, Inc.
(the "Company" or "Alarmguard") to be materially different from historical
results or from any results expressed or implied by such forward looking
statements. These factors are discussed under the caption "Risk Factors" in a
Registration Statement on Form S-4 (File No. 333-23307) filed with the
Securities and Exchange Commission on March 14, 1997.
General Overview
For an overview of the Company's accounting policies, see the Company's
audited consolidated financial statements as of and for the year ended December
31, 1997.
Alarmguard sells and installs burglar and fire alarm systems and
provides security monitoring services and security system repair and maintenance
services to homeowners and businesses, principally in the Northeast and
Mid-Atlantic regions of the United States. Alarmguard provides its security
alarm systems and services primarily under its trademark "Alarmguard". As of
March 31, 1998, Alarmguard had approximately $2.9 million of Monthly Recurring
Revenue ("MRR") and approximately 92,000 subscribers.
On April 15, 1997, SSH completed a merger with Triton pursuant to an
Agreement and Plan of Merger dated December 23, 1996, as amended March 6, 1997.
The combined company was renamed Alarmguard Holdings, Inc., the common shares of
which are listed for trading on the American Stock Exchange under the symbol
"AGD".
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Alarmguard's objective is to provide residential and commercial
security services to an increasing number of subscribers. Alarmguard's growth
strategy is to enhance its position in the security alarm monitoring industry in
the Northeastern and Mid-Atlantic United States by increasing the number and
density of subscribers for whom it provides services. Alarmguard is pursuing
this strategy through a balanced growth plan involving: (1) incorporating
acquisitions of portfolios of subscriber accounts in existing and contiguous
markets; (2) internal growth through direct marketing to obtain new subscribers
(the "Direct Marketing Program"); (3) acquiring credit-approved monitoring
contracts from Alarmguard authorized dealers (the "Dealer Program"); (4) growth
of Alarmguard's core business through referrals and traditional local marketing;
and (5) acquisition of new multi-locational commercial subscribers from its
National Accounts Program. Alarmguard believes that increasing the number and
density of its subscribers will help it to achieve economies of scale and
enhance results of operations.
During the three months ended March 31, 1998, Alarmguard acquired three
companies in the security alarm installation and monitoring business for an
aggregate of $37.5 million in cash, notes payable and amounts due to sellers
based on certain post closing adjustments. The acquisitions added approximately
$0.8 million of MRR and approximately 27,000 subscribers.
Key Operating Measures
The Company employs three internal measurements to assess the
performance of its operations: Adjusted EBITDA, MRR and Gross MRR Attrition.
Adjusted EBITDA. Adjusted EBITDA is derived by adding Dealer and Direct
Marketing Program and acquisition integration expenses incurred, net of Dealer
and Direct Marketing Program revenues earned, to EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization). This calculation provides a
basis for comparison of Alarmguard's results to those of other security alarm
companies that grow through the acquisition of subscriber accounts rather than
those that grow both internally and through acquisitions. An amount similar to
Adjusted EBITDA is used by lenders in extending credit to Alarmguard. Adjusted
EBITDA does not represent cash flows from operations as defined by generally
accepted accounting principals and should not be construed as an alternative to
net income. Adjusted EBITDA was $1.9 million for the three months ended March
31, 1998 compared to $1.3 million for the three months ended March 31, 1997, a
51% increase.
For The Three Months Ended
March 31,
---------------------------
1998 1997
----------- -----------
(in thousands)
EBITDA $1,137 $721
Less Dealer and Direct Marketing Program revenue (348) (353)
Plus Dealer and Direct Marketing Program expense 784 889
Plus acquisition integration expense 328 -
----------- -----------
Adjusted EBITDA $1,901 $1,257
=========== ===========
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Monthly Recurring Revenue. MRR represents revenue that a company in the
security alarm industry is entitled to receive under contracts (monitoring,
leasing, and maintenance) in effect at the end of such period. MRR is a term
commonly used in the security alarm industry as a measure of the size of a
company. It does not measure profitability or performance, and does not include
any allowance for future subscriber attrition or uncollectible accounts
receivable.
Gross MRR Attrition. Gross MRR attrition has an adverse effect on the
Company's financial position and results of operations, since it affects the
Company's recurring revenues. Gross MRR attrition, generally expressed on an
annualized basis, can be measured in terms of decreased MRR resulting from
canceled subscriber accounts. Gross MRR attrition is defined by the Company for
a particular period as a quotient, the numerator of which is equal to gross MRR
lost as the result of canceled subscriber accounts during such period and the
denominator of which is the average month end MRR during such 12 month period.
The following table sets forth the Company's MRR additions, cancellations, and
gross MRR attrition for the periods indicated (in thousands):
Three Months Twelve Months
MRR Ended March 31, 1998 Ended December 31,
1998 1997
-------------------- -------------------
Beginning of period $2,087 $1,392
Dealer and Direct Marketing
Program additions
55 193
Acquisition additions 777 586
Other additions (1) 47 134
Canceled MRR (2) (72) (218)
-------------------- -------------------
End of period $2,894 $2,087
==================== ===================
Gross MRR attrition (3) 11.9% 11.8%
==================== ===================
(1) MRR primarily generated through traditional non-investment sales programs.
(2) Includes canceled MRR of subscribers who have moved from homes or
businesses in which an existing alarm system has already been
installed.
(3) Calculated on a trailing twelve-month basis.
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
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Revenue. Revenues for the three months ended March 31, 1998 were $10.9
million, an increase of $4.3 million, or 65.4%, over the comparable period in
1997. This increase was primarily the result of a 63.2% increase of recurring
revenue to $6.8 million from $4.2 million and a 68.8% increase in installation
revenue to $3.4 million from $2.0 million. A significant portion of the revenue
growth was related to acquisition activity in 1997 and 1998.
Gross Profit. Gross profit increased to $5.9 million, or 54.1% of total
revenue, for the first quarter of 1998 compared to $3.9 million, or 59.5% of
total revenue, in the first quarter of 1997. The decrease in gross profit as a
percentage of total revenue was primarily the result of several larger
commercial installations in the traditional business which had lower gross
profit margins than the Company's traditional business as well as lower per-unit
revenue for installations through the Direct Marketing Program.
Selling, General and Administrative. Selling, general and
administrative expense for the first quarter of 1998 increased approximately
$1.2 million, or 38.6%, over the comparable period in 1997. The increase was
primarily the result of the acquisitions as well as increased staffing
requirements at the corporate level required to facilitate the Company's growth
plan and additional expenses of operating as a public company, costs which were
not incurred during the first quarter of 1997. As a percent of total revenue,
selling, general and administrative expense for the first quarter of 1998
decreased to 40.7% from 48.6% in the comparable 1997 period, reflecting
economies of scale resulting from incremental revenue growth.
Acquisition Integration Expenses. During the first three months of
1998, the Company incurred $328,000 of costs associated with the integration of
acquired subscriber accounts into the Company's system. These costs were not
material in the first quarter of 1997. Management expects to continue to incur
such costs in the future, principally relating to the acquisition and
integration of subscriber account portfolios acquired in the first quarter of
1998 and future acquisitions.
Amortization and Depreciation. Amortization and depreciation for the
first quarter of 1998 increased by approximately $1.2 million, or 48.6%,
compared to the same period in 1997. This increase was primarily the result of
the acquisition activity in 1997 and 1998.
Operating Loss. The operating loss for the first quarter of 1998
increased to approximately $2.4 million from $1.7 million in the comparable 1997
period. As a percent of total revenue, the operating loss decreased to 21.9% for
the first quarter of 1998 compared to 25.0% for the same period in 1997. This
improvement reflects the increased profitability derived from incremental
revenues.
Interest Expense. Interest expense, net of interest income, for the
three months ended March 31, 1998 was $1.4 million, compared to $0.8 million in
the comparable period in 1997. This increase is primarily the result of an
increased outstanding balance under the Company's credit facility in the first
quarter of 1998 compared to the first quarter of 1997, reflecting the Company's
growth through acquisitions combined with subscriber additions through the
Dealer and Direct Marketing Programs.
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Dividend Requirement on Preferred Stock. The dividend requirement on
preferred stock during the first quarter of 1998 reflects the 5% per annum
dividend on the Cumulative Convertible Preferred Stock issued in February 1998,
amortization of the costs incurred for completing the offering of Cumulative
Convertible Preferred Stock issued in February 1998, and an imputed one-time
non-cash dividend of approximately $9.0 million as a result of the conversion
prices of the two series of Preferred Stock being less than the quoted market
price of the Company's Common Stock at the date of issuance. In the comparable
period in the prior year, this amount reflects the dividends accrued on the
Redeemable Preferred Stock of the predecessor company that were converted to
Common Stock of the Company in connection with the Triton Merger in April 1997.
The costs incurred for completing the February 1998 offering are being amortized
to the dividend requirement on Preferred Stock over the five-year life of the
security with the unamortized balance reflected as a reduction of the Preferred
Stock's carrying value.
Liquidity and Capital Resources
Capital Resources. The Company has financed its operations and growth
since May 1992 with a combination of borrowings under credit facilities,
issuance of subordinated debentures, sale of common and preferred stock, the
1997 Merger with Triton, and internally generated cash flows. The Company's
principal uses of cash have been for the acquisition of subscriber accounts,
costs associated with the Dealer and Direct Marketing Programs and interest
payments on borrowings under the Credit Facility. A substantial portion of the
Company's future operating cash flow will be used to fund the Dealer and Direct
Marketing Programs and to service borrowings under the Credit Facility and other
company debt. There can be no assurance that the Company will continue to have
the ability to meet its borrowing requirements to fund its acquisition
strategies and Dealer and Direct Marketing Programs.
In February 1998, the Company completed an offering of 40,000 shares of
Cumulative Convertible Preferred Stock (35,000 shares of Series A and 5,000
shares of Series B) at $1,000 per share yielding gross proceeds totaling $40
million. Concurrently, the Company issued 700 additional shares of the Series A
Preferred Stock in exchange for $0.7 million of the company's subordinated debt.
The Series A Preferred Stock pays quarterly dividends at 5% per annum. Under the
terms of the securities, holders of the Series A and Series B Preferred Stock
have the right to convert their shares at any time, into shares of the Company's
Common Stock at the conversion price of $8.25 per share and $7.75 per share,
respectively, subject to certain anti-dilution provisions. Concurrent with the
offering, the Company increased its credit facility from $60 million to $90
million. The proceeds from the offering and borrowings from the expanded Credit
Facility are being used to finance acquisitions and expand the company's Dealer
and Direct Marketing Programs.
As of March 31, 1998, the Company had $13.3 million in cash. This
represents the net proceeds from the Preferred Stock offering that were not used
to fund first quarter acquisitions and operations. Additionally, the Company had
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$63.5 million outstanding under its Credit Facility with approximately $1.6
million of availability at the end of the quarter. The Company's ability to
borrow under the Credit Facility is limited by certain representations and
financial covenants.
The Credit Facility is a non-amortizing loan which converts to a
five-year amortizing term loan on April 30, 2000. Borrowings under the Credit
Facility are secured by substantially all of the properties and assets of the
Borrower including accounts receivable, inventory, leasehold interests, customer
contracts and the capital stock of all of the subsidiaries of the Company.
Alarmguard has subordinated debentures of $3.9 million bearing interest
at 15%, which are due in April 1999. In connection with the subordinated debt,
Alarmguard issued warrants to purchase 215,939 shares of Alarmguard Common Stock
at an exercise price of $11.11 per share, the value of which was accounted for
as a discount to the subordinated debt and is being amortized over the two year
life of the underlying debt instrument. The Company also has a total of $3.8
million due to sellers of previous acquisitions, a portion of which is secured
by various notes. A portion of the amounts due to sellers requires the Company
to make periodic principal and interest payments.
The Company intends to continue to use its existing cash balances, cash
flows from operations, the liquidation of its other investments and borrowings
under the credit facility to finance the addition of subscriber accounts,
primarily through acquisitions and the Dealer and Direct Marketing Programs.
Additionally, the Company, depending on future needs and the cost and
availability of various financing alternatives, may from time to time seek
additional debt or equity financing in the public or private markets in order to
continue to support the growth of subscriber accounts. There can be no assurance
that the Company will be able to obtain such capital on acceptable terms or at
all.
If cash flows from operations, combined with borrowings under the
credit facility and other borrowings are insufficient to fund the Company's
growth strategies, management would curtail the Dealer and Direct Marketing
Programs and implement a cost reduction strategy to the extent necessary to
satisfy its obligations.
Liquidity. During the first three months of 1998 and 1997, the
Company's net cash used in operating activities was approximately $1.0 million
and $0.6 million, respectively. The increase was primarily the result of the
increased interest costs and acquisition integration expenses, partially offset
by improved operating margins due to incremental revenue growth and resulting
economies of scale.
For the first quarter of 1998 and 1997, the Company's net cash used in
investing activities was approximately $38.2 million and $50,000, respectively.
This significant increase reflects the acquisitions in the first quarter of
1998.
Net cash provided by financing activities was approximately $51.8
million in the first quarter of 1998 as compared to $0.8 million in the year ago
15
<PAGE>
period. The increase reflects the cash generated from the Preferred Stock
offering and increased borrowings under the credit facility discussed above.
The Company incurred net losses of approximately $3.8 million and $2.5
million for the first quarter of 1998 and 1997, respectively. The Company
expects to incur losses for the foreseeable future, the result of its continuing
growth strategy.
Recent FASB Pronouncements. In 1998, the FASB issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." The
Company will adopt SFAS No. 131 effective for year end financial reporting in
1998 and expects no material impact upon adoption.
The Company continues to review "Year 2000" issues. Based on its review
to date, it does not anticipate incurring any significant costs associated with
this issue.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this quarterly report on Form
l0-Q:
Exhibits
Number Exhibit
27 Financial data schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated April 1, 1998, in
which the Company reported under Item 2. Acquisition or Disposition of Assets,
the acquisition of certain assets of Security Systems, Inc. (dba "Sentry")
completed on March 17, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALARMGUARD HOLDINGS, INC.
DATE: November 13, 1998 By: /s/David Heidecorn
------------------------------ ----------------------
David Heidecorn
Principal Financial
Officer
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