SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest Commission File Number 1-8138
event reported): March 17, 1998
ALARMGUARD HOLDINGS, INC.
Incorporated in Delaware IRS Employee Identification Number:
33-0318116
Principal Executive Office: Telephone: (203) 795-9000
125 Frontage Road
Orange, CT 06477
<PAGE>
This Current Report on Form 8-K/A is filed by Alarmguard Holdings, Inc.
("Alarmguard" or the "Company"), a Delaware corporation, as an amendment to that
certain Current Report on Form 8-K filed by Alarmguard on April 1, 1998 and
amended on Form 8-K/A filed by Alarmguard on May 29, 1998. Item 7 (b) of such
Report is amended to reflect an imputed one time non-cash dividend on the
convertible preferred stock as discussed in Note A. The non-cash dividend is
reflected in the accompanying pro forma condensed combined balance sheet as a
charge against accumulated deficit with a corresponding increase to additional
paid in capital.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The following audited financial statements of Sentry
Protective Systems, a division of Security Systems Inc.
("Sentry"), as of and for the year ended December 31, 1997 are
provided herein:
(1) Report of Independent Auditors
(2) Balance Sheet as of December 31, 1997
(3) Statement of Operations and Divisional Net Asset
Deficiency for the year ended December 31, 1997
(4) Statement of Cash Flows for the year ended December
31, 1997
(5) Notes to Financial Statements
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed combined financial
information sets forth, for the respective periods and as of the dates
indicated, the results of operations and the financial position of Alarmguard
after giving effect to the acquisition of certain assets of Sentry on March 17,
1998 as if the transaction was consummated as of the respective dates indicated
below. The pro forma information also gives effect to the sale by the Company of
40,700 shares of Cumulative Convertible Preferred Stock at $1,000 per share (the
"Preferred Stock Offering") in February 1998 (generating net cash proceeds of
approximately $37.8 million), and an imputed one-time non-cash dividend of
approximately $9.0 million as a result of the conversion price 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. A portion of the cash proceeds from the
Preferred Stock Offering was used to complete the Sentry acquisition. The
unaudited pro forma financial information should be read in conjunction with
Alarmguard's audited historical consolidated financial statements and notes
thereto as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997.
The unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that actually would have occurred if the Sentry
acquisition and Preferred Stock Offering had been consummated as of these dates
indicated, nor is it necessarily indicative of future operating results or
financial position.
The unaudited pro forma condensed combined balance sheet as of December
31, 1997 reflects the Sentry acquisition and Preferred Stock Offering as if such
transactions had occurred on December 31, 1997. The unaudited pro forma
condensed combined statement of operations for the year ended December 31, 1997
reflects the Sentry acquisition and Preferred Stock Offering as if the
transactions had occurred on January 1, 1997.
2
<PAGE>
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, hereunto duly authorized.
ALARMGUARD HOLDINGS, INC.
Dated: November 13, 1998 By: /s/ David Heidecorn
---------------------------------
David Heidecorn
Chief Financial Officer and
Executive Vice President
3
<PAGE>
Item 7 (a) Financial Statements of Business Acquired
Audited Financial Statements of Sentry Protective Systems, a division of
Security Systems Inc. ("Sentry") as of and for the year ended December 31,
1997.
4
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Security Systems, Inc.
We have audited the accompanying balance sheet of Sentry Protective Systems (a
division of Security Systems, Inc.) as of December 31, 1997, and the related
statements of operations and divisional net asset deficiency and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sentry Protective Systems at
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1997 the Company changed
its method of accounting for lease revenue and related direct costs.
/s/ Ernst & Young LLP
Stamford, Connecticut
May 15, 1998
5
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Balance Sheet
December 31, 1997
(IN THOUSANDS)
ASSETS
Current assets:
Cash $ 208
Accounts receivable, less allowance for doubtful
accounts of $1,155 1,485
Inventories 359
Prepaid expenses and other current assets 347
--------
Total current assets 2,399
Property and equipment, net 634
Customer installation costs, net of accumulated
amortization of $353 156
Customer contracts, net of accumulated amortization
of $1,260 1,918
Other assets 29
--------
Total assets $ 5,136
========
LIABILITIES AND DIVISIONAL NET ASSET DEFICIENCY
Current liabilities:
Accounts payable $ 771
Accrued expenses 433
Customer deposits 357
Deferred revenue 1,562
Revolving loan facility 10,100
Note payable to stockholders, including accrued
interest of $12 462
Other current liabilities 368
--------
Total current liabilities 14,053
Other liabilities 167
Commitments and contingencies (NOTE 9)
Divisional net asset deficiency (9,084)
--------
Total liabilities and divisional net asset
deficiency $ 5,136
========
SEE ACCOMPANYING NOTES.
6
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Statement of Operations and Divisional Net Asset Deficiency
Year ended December 31, 1997
(IN THOUSANDS)
Recurring revenue $ 6,832
Installation revenue 1,857
Service revenue 1,038
-------
Total revenue 9,727
Monitoring expense (807)
Installation expense (4,245)
Service expense (1,204)
-------
Total cost of revenue (6,256)
-------
Gross profit 3,471
Selling, general and administrative expense (7,071)
Amortization and depreciation expense (1,014)
-------
Total operating expenses (8,085)
-------
Operating loss (4,614)
Other income (expense):
Interest expense (1,038)
Interest income 25
Gain on sale of customer contracts 1,289
Other, net 15
-------
Loss before extraordinary item (4,323)
Extraordinary loss on refinancing of debt (102)
-------
Net loss (4,425)
Divisional net asset deficiency, beginning of year (5,511)
Divisional borrowings 852
-------
Divisional net asset deficiency, end of year $(9,084)
=======
SEE ACCOMPANYING NOTES.
7
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Statement of Cash Flows
Year ended December 31, 1997
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss $(4,425)
Adjustments to reconcile net loss to net cash used
in operating activities:
Gain on sale of customer contracts (1,289)
Amortization and depreciation 1,014
Provision for bad debts 864
Loss on refinancing of debt 102
Customer installation costs incurred (58)
Changes in operating assets and liabilities:
Increase in accounts receivable (1,170)
Increase in inventories (104)
Increase in prepaid expenses and other
current assets (192)
Increase in accounts payable 285
Increase in accrued expenses 54
Increase in other liabilities 178
Increase in customer deposits 201
Increase in deferred revenue 231
-------
Net cash used in operating activities (4,309)
INVESTING ACTIVITIES:
Purchases of property and equipment (108)
Acquisition of customer contracts (970)
Proceeds from sale of customer contracts 1,289
-------
Net cash provided by investing activities 211
FINANCING ACTIVITIES:
Payments of long-term debt (1,105)
Proceeds from issuance of long-term debt 3,955
Divisional borrowings 852
Proceeds from officer/stockholder loans 450
Payments on note receivable from stockholder 200
-------
Net cash provided by financing activities 4,352
-------
Net increase in cash 254
Cash overdraft, beginning of year (46)
-------
Cash, end of year $ 208
=======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 950
=======
SEE ACCOMPANYING NOTES.
8
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Notes to Financial Statements
December 31, 1997
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Sentry Protective Systems (the "Company" or the "Alarm Division"), a division of
Security Systems, Inc. conducts operations from its main office in Malden,
Massachusetts. The Company also has other offices in Massachusetts and Maine.
The Company sells and installs alarm systems and provides alarm monitoring and
maintenance services to commercial and residential customers located throughout
Massachusetts, Rhode Island, Connecticut, Maine and New Hampshire. Management
believes the Company operates in one industry segment.
BASIS OF PRESENTATION
Security Systems, Inc. is comprised of two divisions, the Alarm Division and the
Guard division ("Guard Division"). The accompanying financial statements reflect
the accounts of the Alarm Division including expense allocations between the
Alarm Division and the Guard Division based upon methods which management
believes to be a reasonable and equitable allocation of such items (see Note 7).
The Company is not a separate legal entity and accordingly, the balance sheet
and statement of operations and divisional net asset deficiency reflect a net
asset deficiency which includes amounts owed to the Guard Division, contributed
capital and accumulated deficit.
Due to allocations associated with certain operating expenses, as discussed in
Note 7, the accompanying financial statements may not be indicative of the costs
that would have been incurred had the Company been operated as a separate legal
entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CHANGE IN ACCOUNTING METHOD
In 1997, the Company recognized recurring lease payments and deferred direct
costs incurred in conjunction with the related leases (with amortization over
the estimated useful life), in accordance with the operating lease provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("SFAS No. 13"). Also, in accordance with Statement of Financial Accounting
Standards No. 51, "Financial Reporting by Cable Television Companies" ("SFAS No.
51"), revenue from lease installations were recognized to the extent that direct
selling costs were charged to expense with any excess revenue deferred and
amortized over the term of the lease. In all prior years, the Company recognized
lease payments and related expenses in accordance with the sales type lease
provisions of SFAS No. 13.
9
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company changed its method of accounting for leases and related costs
because it believes the operating lease provisions of SFAS No. 13 and SFAS No.
51 more accurately display the economic benefits and risks related to its
leasing program than the sales type lease provisions of SFAS No. 13. Also, the
Company changed its method in conjunction with the anticipated acquisition of
substantially all of its assets by Alarmguard Holdings Inc. (see Note 11) in
order to conform to the accounting principles utilized by Alarmguard Holdings
Inc.
In accordance with the provisions of APB No. 20, Accounting Changes ("APB No.
20"), the Company has elected to utilize the special exemption provision which
allows an entity that is issuing its financial statements to the public for the
first time in conjunction with a business combination to retroactively restate
its financial statements as if the newly adopted accounting principle was
utilized from inception. Management believes the use of the newly adopted
accounting principles, applied retroactively, better portrays the results that
can be expected in future periods. As such, the divisional net asset deficiency
at January 1, 1997 has been retroactively restated, by a decrease of $311,000,
to reflect accounting for the Company's leasing program under the operating
lease provisions of SFAS No. 13 and in accordance with SFAS No. 51.
REVENUE RECOGNITION
Revenue from the sale of alarm systems is recognized upon completion of the
installation. Payments received prior to completion of an installation are
recorded in the accompanying balance sheet as customer deposits.
Revenue from installations relating to new subscriber accounts generated under
the Company's leasing program is recognized at the time the installation is
completed to the extent that related direct selling costs are charged to
expense. Any excess installation revenue is deferred and amortized to income
over the initial term of the related noncancelable monitoring/equipment lease
contract (5 years), adjusted to reflect estimated subscriber attrition.
Revenue from alarm monitoring and service agreements is recognized as the
services are rendered. Advance billings are accounted for as deferred revenue.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from customers in
Massachusetts, Rhode Island, Connecticut, Maine and New Hampshire. Credit is
extended based on an evaluation of the customer's financial condition;
collateral is not required. The Company maintains an allowance for doubtful
accounts at a level which management believes is sufficient to cover potential
losses.
INVENTORIES
Inventories consist principally of alarm components and supplies and are stated
at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is being depreciated over the
estimated useful lives of the assets. Depreciation is computed using both
straight-line and accelerated methods. Costs of maintenance and repairs are
charged to expense when incurred and costs of improvements are capitalized.
10
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CUSTOMER INSTALLATION COSTS
Customer installation costs consist of materials and direct labor incurred in
connection with installing and activating new subscriber accounts under the
Company's leasing programs. Amortization is provided on a straight-line basis
over the term of the initial monitoring/equipment lease contract (5 years),
adjusted to reflect estimated subscriber attrition. When an installation is
identified for disconnection, the remaining net book value of the installation
costs are fully written-off and charged to amortization expense.
CUSTOMER CONTRACTS
Customer contracts consist of purchased alarm customer lists which are being
amortized on the straight-line method over their estimated useful lives of four
years. Amortization expense related to customer contracts amounted to $705,000
in 1997.
ADVERTISING
Advertising and promotion costs are charged to operations when incurred. The
Company charged $171,000 to expense for advertising and promotion during the
year ended December 31, 1997.
INCOME TAXES
The Company, as a division of Security Systems, Inc., calculates its income
taxes as if it were a separate entity giving effect to Security Systems, Inc.'s
status as an S corporation in accordance with the Internal Revenue Code.
Accordingly, no provision has been made for federal income taxes since the
stockholders are responsible for reporting their share of the Company's taxable
income or loss on their individual income tax returns. For state income tax
purposes, S corporations with revenues in excess of $9 million are taxed at a
4.5% rate in Massachusetts.
Income taxes are determined under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred taxes
result from temporary differences in the recognition of revenues and expenses
for tax and financial reporting purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued expenses are carried at
cost, which approximates fair value, due to the short-term nature of these
instruments. At December 31, 1997, the fair value of the Company's long-term
debt approximates its carrying value as such debt generally bears interest at
floating rates or its rate does not differ significantly from the rate the
Company would have to pay for similar debt on the balance sheet date.
11
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 130 is effective for the first quarter of 1998, while
SFAS No. 131 is effective for year end financial reporting in 1998 and on an
interim basis thereafter. Also, in 1998, the FASB issued FASB No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits". FASB
No. 132 is effective for year end reporting in fiscal 1998. All of these
pronouncements require additional disclosure and the Company expects no material
impact upon adoption.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consists of the following (in
thousands):
Furniture, fixtures and equipment (useful lives
ranging from five to ten years) $ 722
Vehicles (useful lives ranging from one to five
years) 346
Leasehold improvements (useful lives ranging from
nine to ten years) 299
------
1,367
Less accumulated depreciation 733
------
$ 634
======
Depreciation expense was $289 for the year ended December 31, 1997.
4. NOTES AND LEASES PAYABLE
Notes payable included in other current liabilities and other liabilities at
December 31, 1997 consists of the following (in thousands):
Various leases, each collateralized by a vehicle,
with interest rates varying from 5.96% to 11.32%
and final payment dates ranging from March 1999
to July 2000 $ 78
Various equipment leases, with interest rates
varying from 11.25% to 18.38% and final payment
dates ranging from May 1998 to January 2000 38
Note payable for alarm accounts acquired, interest
at 8% per annum and due in September 2000 138
Other notes payable 3
----
Total notes and leases payable 257
Less current portion 119
----
Long term portion $138
====
12
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Notes to Financial Statements (continued)
5. REVOLVING LOAN FACILITY
On August 22, 1996, the Company entered into a revolving line of credit which
permitted borrowings of up to $1,000,000 for working capital purposes (the
"Revolving Loan") and a line of credit which permitted borrowings of up to
$9,000,000 to fund acquisitions (the "Acquisition Loan"). The Revolving Loan and
the Acquisition Loan are collectively referred to as the "Loans".
On September 16, 1997, the loans were amended and restated whereby the loans
were consolidated into a Revolving Loan Facility (the "Facility") permitting
borrowings of up to $11,000,000, which was required to be reduced to $10,000,000
by February 28, 1998. The Facility matures on June 30, 1998 at which date all
outstanding principal, accrued interest and unpaid fees are due and payable.
Interest is payable at the bank's prime rate plus 2% or 10.5% at December 31,
1997 (previously based on the bank's prime plus 1.5%). The Facility is secured
by substantially all of the assets of the Company. In addition, the Company was
required to maintain key person life insurance policies, for the benefit of the
bank, on two of its stockholders in the amount of $2,000,000 and $300,000,
respectively.
In connection with the refinancing, the Company wrote-off unamortized deferred
financing fees of $102,000, which is reflected as an extraordinary loss in the
Company's statement of operations. As of December 31, 1997, $10,100,000 was
outstanding under the Facility. For the year ended December 31, 1997, the
Company incurred $990,000 in interest expense related to the Loans and the
Facility.
On March 18, 1998, the Company paid all amounts due on the Facility with
proceeds from the sale of substantially all of the Company's assets (see Note
12).
6. NOTE PAYABLE TO STOCKHOLDERS
During the period from August to October 1997, the Company issued various
promissory notes (the "Notes") to stockholders of the Company aggregating
$450,000. The Notes accrue interest monthly at 10% per annum, are payable on
demand and are subordinated to the Company's Revolving Loan Facility (see Note
5).
7. RELATED PARTY TRANSACTIONS
In August 1997, the Company collected an outstanding loan receivable and all
accrued interest thereon from a stockholder of the Company aggregating
approximately $200,000.
The Company leases office space in Malden, Massachusetts and Portland, Maine
from a stockholder of the Company. Rent expense charged to operations in 1997
for these locations amounted to $106,000. The Malden, Massachusetts lease
requires monthly payments of $6,996 and expires on December 31, 2003. The
Portland, Maine lease requires monthly payments of $1,800 and expires on October
1, 2002.
Divisional borrowings, included in the divisional net asset deficiency at
December 31, 1997 consist of non-interest bearing advances from the Guard
Division and are payable on demand. During the year ended December 31, 1997, the
Company incurred $106,000 of operating expenses (generally, risk management,
professional fees and utilities) allocated by Security Systems, Inc. among the
Company and the Guard Division.
13
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Notes to Financial Statements (continued)
8. INCOME TAXES
Differences between the tax basis of assets and liabilities and their financial
reporting amounts that give rise to significant portions of deferred state
income taxes are as follows as of December 31, 1997:
Deferred tax assets (liabilities):
Net operating losses $ 372,000
Allowance for doubtful accounts 50,000
Other assets 18,000
Other liabilities (26,000)
---------
Valuation allowances (414,000)
---------
Net deferred taxes $ --
=========
The Company has net operating loss carryforwards for state income tax purposes
of approximately $8.6 million at December 31, 1997, which expire from 1998 to
2002. The valuation allowance has been established until it is more likely than
not that the deferred tax assets will be realized.
9. COMMITMENTS AND CONTINGENCIES
Various claims generally incidental to the conduct of its normal business are
pending or threatened against the Company from time to time. While ultimate
liability, if any, is presently not determinable, in the opinion of management,
these matters will have no material adverse effect on the Company's financial
position, results of operations or cash flows.
10. RETIREMENT PLAN
Security Systems, Inc.'s profit sharing plan was amended and restated, effective
January 1, 1995, to incorporate a 401(k) savings option. Effective this same
date, the name of the plan was changed to the Security Systems, Inc. 401(k)
Profit Sharing Plan. The plan covers all employees. Participants may elect to
make contributions to the plan pursuant to a salary reduction agreement and
subject to statutory limits. At the discretion of the Board of Directors,
Security Systems, Inc. may make a matching contribution of electing
participants' contributions, but not to exceed 6% of the participant's
compensation. There were no matching contributions to the plan for the year
ended December 31, 1997. In addition, the plan allows for Security Systems,
Inc., at the discretion of the Board of Directors, to make further contributions
to the plan based on the participant's salary. No additional contributions were
made to the plan for the year ended December 31, 1997.
14
<PAGE>
Sentry Protective Systems
(A division of Security Systems, Inc.)
Notes to Financial Statements (continued)
11. SALE OF CUSTOMER CONTRACTS
In October 1997, the Company entered into an asset sale agreement with an
unrelated third party setting forth terms for the sale of certain of the
Company's alarm monitoring accounts and the related accounts receivable. The
sales price was approximately $1,300,000, subject to adjustments for working
capital. Proceeds from the sale were $1,289,000, all of which was recorded as a
gain in the Company's statement of operations as the alarm monitoring accounts
sold were recorded at zero book value at the time of the sale. In conjunction
with the sale, approximately $200,000 of proceeds were placed in escrow subject
to the satisfaction and settlement of certain provisions of the sale agreement.
This amount has been included in other current assets at December 31, 1997 and
was received by the Company in 1998.
12. SUBSEQUENT EVENTS
On March 17, 1998, Alarmguard Holdings, Inc. ("Alarmguard") purchased
substantially all of the assets of the Company for approximately $26.5 million
in cash, including $2.6 million held in escrow subject to the finalization of
certain post-closing adjustments. A portion of the proceeds from the sale were
used to pay all of the amounts due under the Company's Revolving Loan Facility
(see Note 5).
Prior to December 31, 1997, the Company received a $250,000 deposit from
Alarmguard. This amount is included in other current liabilities at December 31,
1997.
13. YEAR 2000 ISSUES (UNAUDITED)
The Company has developed a plan to modify its information technology to be
ready for the year 2000. The Company does not expect this project to have a
significant effect on operations. The Company's Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
15
<PAGE>
Item 7 (b) Pro Forma Financial Information
Alarmguard Holdings, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
PROFORMA ALARMGUARD,
WITH PREFERRED
PREFERRED PREFERRED STOCK
STOCK STOCK PRO FORMA OFFERING,
ALARMGUARD OFFERING OFFERING SENTRY ADJUSTMENTS AND SENTRY
---------- -------- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 698 $ 37,800 (A) $ 38,498 $ 208 ($14,587) (B) $ 24,119
Restricted cash 1,931 1,931 0 2,608 (B) 4,539
Accounts receivable, net 5,558 5,558 1,485 (537) (B) 6,506
Inventories 3,065 3,065 359 (64) (B) 3,360
Prepaid expenses 343 343 347 (347) (B) 343
--------- -------- --------- -------- ---------- ---------
Total current assets 11,595 37,800 49,395 2,399 (12,927) 38,867
Property and equipment, net 2,133 2,133 634 (35) (B) 2,732
Customer installation costs,
net 8,868 8,868 156 (156) (B) 8,868
Customer contracts and
intangibles, net 43,027 43,027 1,918 24,946 (B) 69,891
Other investments 2,245 2,245 0 0 2,245
Other assets 1,982 1,982 29 (29) (B) 1,982
--------- -------- --------- -------- ---------- ---------
Total assets $ 69,850 $ 37,800 $ 107,650 $ 5,136 $ 11,799 $ 124,585
========= ======== ========= ======== ========== =========
Liabilities and stockholders'
deficiency
Current liabilities:
Accounts payable $ 2,659 $ 2,659 $ 771 ($771) (B) $ 2,659
Accrued expenses 5,675 5,675 433 297 (B) 6,405
Current portion of notes
payable 2,462 2,462 357 (254) (B) 2,565
Revolving credit facility 0 0 10,100 (10,100) (B) 0
Deferred revenue 6,231 6,231 1,562 (542) (B) 7,251
Other current liabilities 4,061 4,061 830 2,252 (B) 7,143
--------- -------- --------- -------- ---------- ---------
Total current liabilities 21,088 0 21,088 14,053 (9,118) 26,023
Notes payable, less current
portion 549 549 0 0 549
Credit facility 46,700 46,700 0 12,000 (B) 58,700
Subordinated debt 4,389 (675) (A) 3,714 0 0 (B) 3,714
Other liabilities 321 321 167 (167) (B) 321
Redeemable preferred stock 38,500 (A) 38,500 0 0 (B) 38,500
Stockholders' deficiency
Common stock 1 1 0 0 (B) 1
Additional paid-in capital 35,286 9,024 (A) 44,310 (9,084) 9,084 (B) 44,310
Accumulated Deficit (38,484) (9,049) (A) (47,533) 0 0 (B) (47,533)
--------- -------- --------- -------- ---------- ---------
Total stockholders' deficit (3,197) (25) (3,222) (9,084) 9,084 (3,222)
--------- -------- --------- -------- ---------- ---------
Total liabilities and
stockholders' deficiency $ 69,850 $ 37,800 $ 107,650 $ 5,136 $ 11,799 $ 124,585
========= ======== ========= ======== ========== =========
</TABLE>
16
<PAGE>
Alarmguard Holdings, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ALARMGUARD
ALARMGUARD SENTRY ADJUSTMENTS AND SENTRY
---------- ------ ----------- ----------
<S> <C> <C> <C> <C>
Recurring revenue $ 21,540 $ 6,832 $ 28,372
Installation revenue 10,470 1,857 12,327
Service revenue 2,250 1,038 3,288
-------- -------- --------- --------
Total revenue 34,260 9,727 0 43,987
Monitoring expense 2,692 807 3,499
Installation expense 7,543 4,245 11,788
Service expense 4,176 1,204 5,380
-------- -------- --------- --------
Total cost of revenue 14,411 6,256 0 20,667
-------- -------- --------- --------
Gross profit 19,849 3,471 0 23,320
Selling, general and administrative 15,909 7,071 22,980
expense
Acquisition integration expense 349 0 349
Amortization and depreciation expense 11,386 1,014 3,846 (C) 16,246
-------- -------- --------- --------
Total operating expenses 27,644 8,085 3,846 39,575
-------- -------- --------- --------
Operating loss (7,795) (4,614) (3,846) (16,255)
Other income (expense)
Interest expense, net (4,683) (1,013) (90) (D) (5,786)
Other, net 142 1,304 1,446
-------- -------- --------- --------
Loss from continuing operations ($12,336) ($ 4,323) ($ 3,936) ($20,595)
======== ======== ========= ========
Basic and diluted loss from continuing
operations per common share ($ 2.61) ($ 4.36)
Number of basic and diluted common shares
used in calculating loss from continuing
operations per common share 4,726 4,726
</TABLE>
17
<PAGE>
Alarmguard Holdings, Inc.
Notes to Unaudited Pro Forma Financial Information
(A) Represents the net cash proceeds from the 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) in February 1998 at $1,000 per
share. Alarmguard issued 700 additional shares of Series A Preferred Stock
in exchange for $0.7 million of subordinated debt and wrote off the
unamortized discount associated with certain warrants issued concurrently
with the subordinated debt of approximately $25,000. The Series A Preferred
Stock pays quarterly cash dividends at 5% per annum. The costs incurred
($2.2 million) in the offering are reflected as a reduction of the
Preferred Stock's carrying value. In addition, the Company recorded, as a
charge against accumulated deficit with a corresponding increase in
additional paid in capital, a 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.
(B) Alarmguard purchased certain of the operating assets of Sentry for $23.8
million in cash, of which $12.0 million was financed with borrowings under
the Company's expanded Credit Facility. The Company also has committed to
pay the sellers up to an additional $3.0 million which represents an amount
to be determined based on certain post closing adjustments, $2.6 million of
which has been secured by a letter of credit and is reflected as restricted
cash. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price has been preliminarily
allocated to the assets acquired, principally customer contracts of $26.5
million and a covenant not to compete of $0.3 million, and liabilities
assumed based on their estimated fair values at the date of the
acquisition. In accordance with the terms of the agreement, $10.1 million
of the cash paid was used to repay the current debt of Sentry concurrent
with the closing.
(C) To record amortization expense of acquired customer contracts (seven year
life) and covenants not to compete (five year life) resulting from the
acquisition of Sentry (see Note (B)).
(D) To record interest expense on the borrowings incurred to finance the
acquisition of Sentry, net of interest expense recorded by Sentry on its
debt that was repaid in connection with the acquisition (see Note (B)).
Interest is calculated using Alarmguard's estimated borrowing rate of 9%
per annum.
18
