UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended June 30, 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, CT 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 August 10, 1998 was 5,593,948.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
June 30 December 31
1998 1997
----------------- ---------------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $8,844 $698
Restricted cash 2,608 1,931
Accounts receivable, net 6,839 5,558
Inventories 4,273 3,065
Other current assets 351 343
----------------- ---------------------
Total current assets 22,915 11,595
Property and equipment, net 3,578 2,133
Customer installation costs, net 10,115 8,868
Customer contracts and intangibles, net 79,406 43,027
Other investments 2,097 2,245
Other assets 1,730 1,982
----------------- ---------------------
Total assets $119,841 $69,850
================= =====================
<PAGE>
ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Balance Sheets (continued)
(In thousands)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
--------------------- ---------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current liabilities:
Accounts payable $2,457 $2,659
Accrued expenses 7,173 5,675
Current portion of notes payable 505 2,462
Deferred revenue 8,901 6,231
Other current liabilities 5,496 4,061
--------------------- ---------------------
Total current liabilities 24,532 21,088
Notes payable, less current portion 380 549
Credit facility 64,700 46,700
Subordinated debt 3,900 4,389
Other liabilities 231 321
Cumulative Convertible Preferred Stock,
$1,000 par value:
Series A, 5% dividends, 35,700 shares issued and outstanding
at June 30, 1998 33,931 -
Series B, 5,000 shares issued and outstanding at June 30,
1998 4,752 -
Stockholders' deficiency:
Common Stock, $.0001 par value, 25,000,000 shares
authorized, 5,593,948 and 5,593,396 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively 1 1
Additional paid in capital 35,021 35,286
Accumulated deficit (47,607) (38,484)
--------------------- ---------------------
Total stockholders' deficiency (12,585) (3,197)
--------------------- ---------------------
Total liabilities and stockholders' deficiency 119,841 $69,850
===================== =====================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
----------------------------------- -----------------------------------
1998 1997 1998 1997
---------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenue $13,125 $8,387 $24,038 $14,984
Cost of revenue 5,764 3,568 10,772 6,241
---------------- ---------------- ------------------ ---------------
Gross profit 7,361 4,819 13,266 8,743
Sales and marketing expense 1,511 1,179 2,779 2,195
General and administrative expense 3,824 2,817 6,996 5,004
Acquisition integration expense 379 - 707 -
Amortization and depreciation expense 4,533 3,093 8,057 5,464
---------------- ---------------- ------------------ ---------------
Total operating expense 10,247 7,089 18,539 12,663
---------------- ---------------- ------------------ ---------------
Operating loss (2,886) (2,270) (5,273) (3,920)
Other income (expense):
Interest expense, net (1,665) (1,151) (3,100) (1,995)
Other, net 116 (12) 151 (12)
---------------- ---------------- ------------------ ---------------
Net loss before extraordinary item (4,435) (3,433) (8,222) (5,927)
Extraordinary loss from early extinguishment of
debt - (813) - (813)
---------------- ---------------- ------------------ ---------------
Net loss (4,435) (4,246) (8,222) (6,740)
Dividend requirement on preferred stock (555) (29) (901) (200)
---------------- ---------------- ------------------ ---------------
Loss applicable to common shares $(4,990) $(4,275) $(9,123) $(6,940)
================ ================ ================== ===============
Basic and diluted loss per common share:
Net loss before extraordinary item $(0.79) $(0.71) $(1.47) $(1.55)
Extraordinary loss - (0.17) - (0.21)
---------------- ---------------- ------------------ ---------------
Net loss (0.79) (0.88) (1.47) (1.76)
Loss from dividend requirement (0.10) (0.01) (0.16) (0.05)
---------------- ---------------- ------------------ ---------------
Net loss per common share $(0.89) $(0.89) $(1.63) $(1.81)
================ ================ ================== ===============
Weighted average number of basic and diluted
common shares 5,594 4,802 5,594 3,840
================ ================ ================== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ALARMGUARD HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
Operating activities:
Net loss $(8,222) $(6,740)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 8,057 5,464
Amortization of sub debt warrants 211
Customer installation costs incurred (2,965) (2,209)
Changes in operating assets and liabilities, net of
effects of acquisitions 724 863
----------------- ------------------
Net cash used in operating activities (2,195) (2,622)
Investing activities:
Acquisition of businesses, net of cash acquired (39,647) (4,645)
Increase in restricted cash (677) (1,931)
Purchases of property and equipment (1,105) (149)
----------------- ------------------
Net cash used in investing activities (41,429) (6,725)
Financing activities:
Net proceeds from issuance of preferred stock 37,800 -
Proceeds from term loan 18,800 44,200
Proceeds from issuance of subordinated debt - 4,300
Payments of term loan (800) (31,836)
Payments of subordinated debt - (4,951)
Payment of cash dividend on preferred stock (718) -
Financing fees paid (439) (1,040)
Payments of other notes payable and capital leases (2,873) (1,139)
----------------- ------------------
Net cash provided by financing activities 51,770 9,534
Increase in cash and cash equivalents 8,146 187
Cash and cash equivalents at beginning of period 698 230
----------------- ------------------
Cash and cash equivalents at end of period $8,844 $417
================= ==================
Cash paid for interest $3,049 $1,952
================= ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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 and six
month periods ended June 30, 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 included in the Company's Form 10-K for the year then
ended.
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 six months of 1998, Alarmguard also acquired certain
operating assets of Security Systems, Inc. ("Sentry"), of Malden, Massachusetts
and four additional companies in the security alarm installation and monitoring
business for an aggregate of $25.8 million in cash and $3.3 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 22,000
customers. The acquisitions were accounted for under 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 $1.3 million, customer
contracts of $28.8 million, other intangibles of $0.5 million, and property and
equipment of $0.6 million and assumed current liabilities of $2.1 million.
The following unaudited pro forma information shows the results of the
Company's operations as though the acquisitions consummated during the first six
months of 1998 had been made as of January 1, l998 and January 1, 1997, and the
acquisitions consummated during the fiscal year of 1997 had been made as of
January 1, 1997 (in thousands, except per share data):
<PAGE>
<TABLE>
<CAPTION>
For The Six Months Ended June 30,
---------------------------------------
1998 1997
------------------ ----------------
<S> <C> <C>
Pro forma revenue $26,168 $24,739
================== ================
Pro forma loss before extraordinary item $(10,448) $(14,747)
================== ================
Pro forma net loss $(10,448) $(15,560)
================== ================
Pro forma basic and diluted net loss per share before
extraordinary item $(1.87) $(2.64)
================== ================
Pro forma basic and diluted net loss per share $(1.87) $(2.78)
================== ================
Shares used in computations 5,594 5,594
================== ================
</TABLE>
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 the six months ended June 30, 1998 and 1997, Alarmguard incurred
approximately $3.0 million and $2.2 million, respectively, of customer
installation costs primarily attributable to the operations of its dealer and
direct marketing programs. Alarmguard added approximately 5,500 and 3,200
customers, respectively, through its dealer and direct marketing programs during
these periods.
<PAGE>
5. Customer Contracts and Intangibles
Customer contracts and intangibles (at cost) consist of the following (in
thousands):
June 30, 1998 December 31, 1997
-------------------- -------------------------
Acquired customer contracts $91,071 $49,807
Covenants not to compete 13,754 12,944
Goodwill 2,493 2,493
-------------------- -------------------------
107,318 65,244
Less accumulated amortization (27,912) (22,217)
-------------------- -------------------------
$79,406 $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).
June 30, 1998 December 31, 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 8.66% at June 30, 1998). The Company has fixed the interest rate
on $40.0 million of its outstanding borrowings at 8.84% for three years through
an interest rate swap agreement. At June 30, 1998, outstanding borrowings under
the Credit Facility were $64.7 million.
<PAGE>
On July 31, 1998, the Company repaid $3.9 million of subordinated debt
through a new $3.9 million term loan which was provided by certain banks under
the Credit Facility. The new term loan has no impact on availability under the
Credit Facility. The term loan accrues interest at 30 day LIBOR plus 4.10%
(which represented approximately 9.75% on July 31, 1998) and is due and payable
on January 31, 2005. The subordinated debt was issued in April 1997, bore
interest at 15% and was due in April 1999.
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. On July 1, 1998, the Company issued 70,000 stock options to the Directors
of the Company pursuant to the Directors Stock Option Plan. These options vest
over a three-year period and have an exercise price of $9.625 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) which 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 elected 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.
<PAGE>
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.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
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
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 June 30, 1998,
Alarmguard had approximately $3.0 million of Monthly Recurring Revenue ("MRR")
and approximately 95,000 subscribers.
<PAGE>
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) addition of new commercial subscribers through 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 six months ended June 30, 1998, Alarmguard acquired six
companies in the security alarm installation and monitoring business for an
aggregate of $39.0 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 29,000 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 costs 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 only through the acquisition of subscriber accounts. 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 principles and should not be construed
as an alternative to net income. Adjusted EBITDA for the three months ended June
30, 1998 increased to $2.5 million from $1.4 million for the comparable 1997
period, a 74.8% increase. For the six months ended June 30, 1998, Adjusted
EBITDA was $4.4 million compared to $2.7 million in the prior year.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
-------------------- -------------------
1998 1997 1998 1997
-------------------- -------------------
(in thousands)
<S> <C> <C> <C> <C>
EBITDA $1,647 $823 $2,784 $1,544
Less Dealer and Direct Marketing
Program revenue (431) (316) (779) (669)
Plus Dealer and Direct Marketing
Program expense 917 930 1,701 1,819
Plus acquisition integration expense 379 - 707 -
--------------------- -------------------
Adjusted EBITDA $2,512 $1,437 $4,413 $2,694
===================== ===================
</TABLE>
<PAGE>
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):
Six Months Twelve Month
MRR Ended June 30, Ended December 31,
1998 1997
---------------- ------------------
---------------- ------------------
Beginning of period $2,087 $1,392
Dealer and Direct Marketing Program
additions 153 193
Acquisition additions 817 586
Other additions (1) 110 134
Canceled MRR (2) (162) (218)
------------------- -----------------
End of period $3,005 $2,087
=================== =================
Gross MRR attrition (3) 11.7% 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 June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenue. Revenues for the three months ended June 30, 1998 were $13.1
million, an increase of $4.7 million, or 56.5%, over the comparable period in
1997. This increase was primarily the result of a 66.1% increase of recurring
revenue to $8.6 million from $5.2 million and a 39.8% increase in installation
revenue to $3.7 million from $2.6 million. A significant portion of the revenue
growth was related to acquisition activity in 1997 and 1998.
<PAGE>
Gross Profit. Gross profit increased to $7.4 million, or 56.1% of total
revenue, for the quarter ended June 30, 1998 compared to $4.8 million, or 57.5%
of total revenue, in the comparable 1997 period. The decrease in gross profit as
a percentage of total revenue was primarily the result of lower margin
installations in the current quarter.
Sales and Marketing. Sales and marketing expense for the three months ended
June 30, 1998 increased approximately $0.3 million or 28.2% over the comparable
period in 1997. As a percent of total revenue, sales and marketing expense for
the three months ended June 30, 1998 decreased to 11.5% from 14.1% in the
comparable 1997 period, reflecting economies of scale resulting from incremental
revenue growth.
General and Administrative. General and administrative expense for the
quarter ended June 30, 1998 increased approximately $1.0 million, or 35.7%, 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. As a percent of total revenue,
general and administrative expense for the three months ended June 30, 1998
decreased to 29.1% from 33.6% in the comparable 1997 period, again reflecting
economies of scale resulting from incremental revenue growth.
Acquisition Integration Expenses. During the three months ended June 30,
1998, the Company incurred $0.4 million of costs associated with the integration
of acquired subscriber accounts into the Company's system. These costs were not
material in the comparable period 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 six months of
1998 and future acquisitions.
Amortization and Depreciation. Amortization and depreciation for the
quarter ended June 30, 1998 increased by approximately $1.4 million, or 46.6%,
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 three months ended June 30, 1998
increased to $2.9 million from $2.3 million in the comparable 1997 period. As a
percent of total revenue, the operating loss for the quarter decreased to 22.0%
in 1998 compared to 27.1% for the same period in 1997, reflecting economies of
scale as discussed above.
Interest Expense. Interest expense, net of interest income, for the quarter
ended June 30, 1998 was $1.7 million, compared to $1.2 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 1998 compared to the
comparable period of 1997, reflecting the Company's growth through acquisitions
combined with subscriber additions through the Dealer and Direct Marketing
Programs.
<PAGE>
Dividend Requirement on Preferred Stock. The dividend requirement on
preferred stock during the quarter ended June 30, 1998 reflects the 5% per annum
cash dividend on the Cumulative Convertible Preferred Stock issued in February
1998. The costs incurred for completing the February 1998 offering,
approximately $2.2 million, 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. 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.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenue. Revenues for the six months ended June 30, 1998 were $24.0
million, an increase of $9.1 million, or 60.4%, over the comparable period in
1997. This increase was primarily the result of a 64.9% increase of recurring
revenue to $15.4 million from $9.4 million and a 52.5% increase in installation
revenue to $7.1 million from $4.7 million. A significant portion of the revenue
growth was related to acquisition activity in 1997 and 1998.
Gross Profit. Gross profit increased to $13.3 million, or 55.2% of total
revenue, for the six months ended June 30, 1998 compared to $8.7 million, or
58.3% of total revenue, in the comparable 1997 period. The decrease in gross
profit as a percentage of total revenue was primarily the result of lower margin
installations in the current period.
Sales and Marketing. Sales and marketing expense for the six months ended
June 30, 1998 was $2.8 million compared to $2.2 million for the comparable 1997
period. As a percent of total revenue, sales and marketing expense for the
six-month period decreased to 11.6% from 14.6% in the prior year, reflecting
economies of scale from increased revenues.
General and Administrative. General and administrative expense for the six
months ended June 30, 1998 increased approximately $2.0 million, or 39.8%, over
the comparable period in 1997. As a percent of total revenue, general and
administrative expense for the six-month period decreased to 29.1% from 33.4% in
the comparable 1997 period, reflecting economies of scale resulting from
incremental revenue growth.
Acquisition Integration Expenses. During the six months ended June 30,
1998, the Company incurred $0.7 million of costs associated with the integration
of acquired subscriber accounts into the Company's system. These costs were not
material in 1997.
Amortization and Depreciation. Amortization and depreciation for the six
months ended June 30, 1998 increased by approximately $2.6 million, or 47.5%,
compared to the same period in 1997. The increase was primarily the result of
the acquisition activity in 1997 and 1998.
Operating Loss. The operating loss for the six months ended June 30, 1998
increased to $5.3 million from $3.9 million in the comparable 1997 period. As a
percent of total revenue, the operating loss for the quarter decreased to 21.9%
in the current year compared to 26.2% for the same period in 1997. This
improvement again reflects the increased profitability derived from incremental
revenues.
<PAGE>
Interest Expense. Interest expense, net of interest income, for the six
months ended June 30, 1998 was $3.1 million, compared to $2.0 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 1998 compared to
1997, reflecting the Company's growth through acquisitions combined with
subscriber additions through the Dealer and Direct Marketing Programs.
Dividend Requirement on Preferred Stock. The dividend requirement on
preferred stock during the six months ended June 30, 1998 reflects the 5% per
annum cash dividend on the Cumulative Convertible Preferred Stock issued in
February 1998. 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. 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.
<PAGE>
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 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 acquisition of subscriber accounts,
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 and
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 June 30, 1998, the Company had $8.8 million in unrestricted cash.
Additionally, the Company had $64.7 million outstanding under its Credit
Facility with approximately $2.5 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.
<PAGE>
The Credit Facility is a non-amortizing loan which converts to a 5
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.
At June 30, 1998, Alarmguard had subordinated debentures of $3.9 million
bearing interest at 15%, which were to be due in April 1999. On July 31, 1998,
the Company repaid this amount through a new $3.9 million term loan which was
provided by certain banks under the Credit Facility. In connection with the
issuance of the subordinated debt in 1997, 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 was being amortized over the two year life of the
underlying debt instrument prior to the repayment of the subordinated debt on
July 31, 1998. 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 cash balances, 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 six months of 1998 and 1997, the Company's net
cash used in operating activities was approximately $2.2 million and $2.6
million, respectively. Improved operating margins due to incremental revenue
growth and resulting economies of scale more than offset increased interest
costs and acquisition integration expenses.
For the first six months of 1998 and 1997, the Company's net cash used in
investing activities was approximately $41.4 million and $6.7 million,
respectively. This significant increase reflects the acquisitions completed
primarily in the first quarter of 1998.
Net cash provided by financing activities was approximately $51.8 million
in the six months ended June 30, 1998 as compared to $9.5 million in the
comparable year ago period. The increase reflects the cash generated from the
Preferred Stock offering and increased borrowings under the credit facility
discussed above. The Company incurred losses applicable to common shares of
approximately $9.1 million and $6.9 million for the six months ended June 30,
1998 and 1997, respectively. The Company expects to incur losses for the
foreseeable future, the result of its continuing growth strategy.
<PAGE>
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.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
On June 25, 1998, all publicly traded warrants of the Registrant expired
pursuant to the term of the warrant. Such warrants were formerly traded on the
American Stock exchange under the symbol AGD.WT. On that date the Company
cancelled all of the outstanding warrants.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Registrant's annual shareholder meeting was held on June 30, 1998.
(b) Management's nominees for directors as listed in the proxy statement
were both elected at the annual meeting and there was no solicitation
in opposition thereto. The results are as follows:
David Heidecorn For: 4,832,520
Withhold: 154,079
Thomas W. Janes For: 4,832,535
Withhold: 154,064
(c) The stockholders of the Company approved Management's proposal to
ratify the sale of 35,700 shares of Series A Preferred Stock at $1,000
per share and 5,000 shares of Series B Preferred Stock at $1,000 per
share. The results are as follows:
For: 3,883,586
Against: 202,209
Abstain: 2,248
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/A dated May 29, 1998
with respect to its acquisition of certain assets of Security Systems,
Inc.(dba "Sentry") which included audited financial statements of
Sentry and pro forma financial information.
<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 thereunto duly authorized.
ALARMGUARD HOLDINGS, INC.
DATE: August 11, 1998 By: /s/David Heidecorn
David Heidecorn
Principal Financial Officer
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