<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended
September 30, 1997
Commission file No. 0-20870
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Security Associates International, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 87-0467198
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2101 South Arlington Heights Road, Suite 100, Arlington Heights, Illinois
60005-4142
(Address of principal executive office, including zip code)
(847) 956-8650
(Registrant's telephone number, including area code)
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 [ ] NO [X]
As of November 11, 1997 the Registrant had outstanding 5,100,730 shares of its
$.001 par value Common Stock.
<PAGE> 2
Security Associates International, Inc.
Quarter Ended September 30, 1997
INDEX
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 Financial Statements.
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 2
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 4
Notes to Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7
Part II - OTHER INFORMATION
Item 6 Exhibits and Reports on
Form 8-K......................................... 9
SIGNATURES ................................................. 10
</TABLE>
1
<PAGE> 3
Financial Information
Item 1. Financial Statements
PART 1. FINANCIAL INFORMATION
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1997 DECEMBER 31, 1996
<S> <C> <C>
CURRENT ASSETS:
Cash $ 527,233 $ 632,355
Accounts receivable, net 1,991,486 1,332,990
Notes receivable - 25,180
Other current assets 217,143 236,872
----------------------------------
Total current assets 2,735,862 2,227,397
----------------------------------
FIXED ASSETS, net $ 609,348 417,899
Contract rights to monitor security
systems, net of 11,813,555 6,606,126
Goodwill 7,040,056 6,666,373
Other assets, net 620,234 614,928
----------------------------------
Total other assets 19,473,845 13,887,427
----------------------------------
----------------------------------
TOTAL ASSETS $ 22,819,055 $ 16,532,723
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 436,061 $ 615,775
Note payable for acquisition - 3,721,131
Current maturities of long-term
notes payable 787,558 413,227
Current maturities of notes payable -
related parties - 136,000
Accrued expenses 1,476,743 439,660
Unearned revenue 2,086,506 1,409,796
Other - 9,322
----------------------------------
Total current liabilities 4,786,868 6,744,911
----------------------------------
NOTES PAYABLE, net of current maturities 14,067,037 8,019,348
Subordinated Debt 4,950,000 500,000
----------------------------------
Total liabilities 23,803,905 15,264,259
----------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $10.00 par
value; 35,478 shares and 40,473 shares
outstanding on December 31, 1996 and
September 30, 1997, respectively
(liquidation value of $8,869,500
at December 31, 1996 and $10,118,250
at September 30, 1997); 404,730 354,780
12% redeemable preferred stock, $10.00
par value; 344,165 shares
outstanding on December 31, 1996
and September 30, 1997 3,441,650 3,441,650
Common stock, $.001 par value;
50,000,000 shares authorized; 3,699,375
and 4,198,875 shares outstanding on
December 31, 1996 and September
30, 1997, respectively 4,199 3,699
Additional paid-in capital 4,349,189 3,958,080
Retained deficit (9,184,618) (6,489,745)
----------------------------------
Total stockholders' equity
(deficit) $ (984,850) $ 1,268,464
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 22,819,055 $16,532,723
=================================
</TABLE>
The accompanying notes are an integral part of these balance sheets
2
<PAGE> 4
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
<S> <C> <C> <C> <C>
REVENUES:
Monitoring fees $ 2,646,427 $ 622,655 $ 7,323,247 $ 2,208,590
Membership fees and other 14,670 27,470 93,767 95,512
---------------------------------------------------------------------------------
Total revenues 2,661,097 650,125 7,417,014 2,304,102
---------------------------------------------------------------------------------
EXPENSES:
General, selling and administrative 2,008,856 571,286 5,701,088 1,723,483
Amortization and depreciation 707,017 246,161 1,708,216 696,119
Loss from disposition of
contract rights 438,629 36,378 1,078,977 121,353
---------------------------------------------------------------------------------
Total expenses 3,154,502 853,825 8,488,281 2,540,955
---------------------------------------------------------------------------------
Loss from operations (493,405) (203,700) (1,071,267) (236,853)
Interest expense net 494,295 322,793 1,313,857 792,720
---------------------------------------------------------------------------------
Loss before income in equity of
joint venture (987,700) (526,493) (2,385,124) (1,029,573)
INCOME IN EQUITY OF JOINT VENTURE - 74,024 - 257,447
---------------------------------------------------------------------------------
Loss before taxes (987,700) (452,469) (2,385,124) (772,126)
PROVISION FOR INCOME TAXES - - - -
---------------------------------------------------------------------------------
Net loss (987,700) (452,469) (2,385,124) (772,126)
DIVIDENDS ACCRUED ON PREFERRED
STOCK 103,250 - 309,749 -
---------------------------------------------------------------------------------
Net loss available to common
stockholders $ (1,090,950) (452,469) $ (2,694,873) $ (772,126)
=================================================================================
NET LOSS PER SHARE ($0.27) ($0.12) ($0.67) ($0.21)
=================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,034,292 3,669,137 4,034,292 3,669,137
=================================================================================
</TABLE>
The accompanying notes are an intergal part of these statements
3
<PAGE> 5
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,385,124) (772,127)
Adjustments to reconcile net loss
to net cash used for
operating activities-
Income in equity of joint venture - (257,447)
Amortization and depreciation 1,708,216 696,119
Loss from disposition of
contract rights 1,078,977 121,353
Changes in assets and liabilities-
Accounts Receivables, net (676,496) (908,391)
Other current assets 19,729 (20,480)
Other long - term assets (94,704) -
Accounts payable (179,714) 30,972
Accrued expenses 1,037,083 (126,126)
Unearned revenue 350,403 902,590
Other current liabilities (9,322) (25,179)
--------------------------------
Net cash provided by (used for)
operating activities 849,048 (358,716)
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract rights to
monitor security systems, net (6,084,417) (773,324)
Purchase of fixed assets (284,904) (40,860)
Cash paid for acquisitions, net (896,590) (1,769,469)
--------------------------------
Net cash used for investing
activities (7,265,911) (2,583,653)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
capital stock 441,559 1,714,261
Dividends declared on
preferred stock (309,749) -
Proceeds from notes receivable
from stockholders 25,180 -
Payment of notes payable to
related parties (136,000) (98,742)
Proceeds from notes payable to
related parties 4,450,000 -
Payment of notes payable (4,675,485) (504,582)
Proceeds from notes payable 6,516,236 2,607,601
--------------------------------
Net cash provided by financing
activities 6,311,741 3,718,538
--------------------------------
INCREASE (DECREASE) IN CASH (105,122) 776,169
CASH, beginning of the period 632,355 53,818
--------------------------------
CASH, end of period $ 527,233 $ 829,987
================================
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 6
SECURITY ASSOCIATES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1. BASIS OF PRESENTATION:
The accompanying financial statements have been prepared by the Company,
without audit, in accordance with generally accepted accounting principles for
interim financial information and in conjunction with the rules and regulations
of the Securities and Exchange Commission. Accordingly they do not include all
of the information and footnotes required by generally accepted accounting
principles for financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring matters) considered necessary
for a fair presentation have been included.
The results of operations for the three month and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the full year. These financial statements should be read in
conjunction with the Company's financial statements and related notes in the
Company's S-1 registration statement filed with the Securities and Exchange
Commission, which was declared effective on October 20, 1997.
NOTE 2. STATEMENTS OF CASH FLOWS
The supplemental schedule of noncash activities for the nine months ended
September 30, 1997 and 1996 includes the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Supplemental schedule of cash flow information-
Cash paid during the period for interest $ 882,430 $ 792,720
Supplemental schedule of noncash activities-
Assumption of liabilities in acquisition - 1,355,168
Purchase of contract rights with notes 860,138 75,850
Purchase of contract rights with deferred revenue 326,307 -
</TABLE>
NOTE 3. SUBSEQUENT EVENTS
On October 24, 1997 the Company entered into a letter of intent to purchase
Telecommunications Associates Group, Inc. (ERC) a Cleveland based third party
monitoring central station which also operates a central station in Austin,
Texas. The acquisition is expected to be completed in the fourth quarter of
1997 and will be accounted for under the purchase method.
Stock options representing 876,155 shares (742,155 shares owned by management)
were exercised from October 21, 1997 to date for $563,829.
5
<PAGE> 7
NOTE 4. ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which establishes standards for
computing and presenting earnings per share for publicly held common stock or
potential common stock, and Statement No. 129, Disclosure of Information about
Capital Structure which continues the existing requirements to disclose the
pertinent rights and privileges of all securities other than ordinary common
stock but expands the number of companies subject to portions of its
requirements. Statement No. 128 supercedes the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings Per Share
and simplifies the standards for computing earnings per share. In addition,
Statement No. 128 replaces the presentation of primary earnings per share with
a presentation of basic earnings per share, requires dual presentation of basic
and diluted earnings per share for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic
earnings per share computation. The statements are effective for financial
statements for periods ending after December 15, 1997. Management believes
that the adoption of these statements will not have a material effect on the
quarters presented.
In the second quarter of 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income, which establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The objective of the Statement is
to report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners (comprehensive income). Comprehensive income is the total of net
income and all other nonowner changes in equity. The statement is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. Management believes that the adoption of the statement will
not have a material effect on the quarters presented.
During the third quarter of 1997, The Financial Accounting Standards Board
issued Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information, which expands the criteria for disclosing segment
information. The statement is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Management believes
that the adoption of the statement will not have a material effect on the
quarters presented.
6
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the three months ended September 30, 1997, revenues of the Company were
$2,661,097 compared to $650,125 for the same period of the prior year. This
represents an increase of $2,010,972 or 309.32%. The increase is a result of
the consolidation of central station monitoring operations in the third quarter
of 1996, the acquisition of AMJ central station in December, 1996, the
acquisition of Northern Central central station in February, 1997 and an
increase of over 6,000 owned Accounts in the Company's owned Account portfolio.
General, selling and administrative expenses for the three months ended
September 30, 1997 increased by $1,437,570 or 251.64% over the same period in
the prior year. The increase was primarily caused by increases in salary and
related expenses attributable to the expansion of central station operations
and the Company hiring additional personnel to manage the Company's rapid
growth.
The increase of $460,856 in amortization and depreciation expenses is related
to the increase in the contract rights purchased and the increased amortization
of goodwill due to the acquisitions in the third and fourth quarters of 1996
and the first quarter of 1997.
The increase in the loss from the disposition of contract rights from $36,378
to $438,629 is attributable to the increase in the Account portfolio during
the period and an increase in the attrition rate to 8.5% primarily due to two
account portfolios in which the Company experienced attrition rates exceeding
40%. Accordingly, the remaining net book value on these account purchases was
reduced to 18 months and a write off of $145,969 was taken against these two
portfolios at June 30,1997.
Interest expense increased from $322,793 to $494,295 between periods as the
Company increased its debt level by $6,154,751 to finance the three central
station acquisitions and the purchase of Accounts.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the nine months ended September 30, 1997, revenues of the Company were
$7,417,014 compared to $2,304,102 for the same period of the prior year. This
represents an increase of $5,112,912 or 221.90%. The increase is a result of
the consolidation of central station monitoring operations in the third quarter
of 1996, the acquisition of AMJ central station in December, 1996, the
acquisition of Northern Central central station in February, 1997 and an
increase of over 6,000 owned Accounts in the Company's owned Account portfolio.
General, selling and administrative expenses for the nine months ended
September 30, 1997 increased by $3,977,605 or 230.79% over the same period in
the prior year. The increase was primarily caused by increases in salary and
related expenses attributable to the expansion of central station operations
and the Company hiring additional management to control the Company's rapid
growth.
The increase of $1,012,097 in amortization and depreciation expenses is related
to the increase in the contract rights purchased and the increased amortization
of goodwill due to the acquisitions in the third and fourth quarters of 1996
and the first quarter of 1997.
The increase in the loss from the disposition of contract rights from $121,353
to $1,078,977 is attributable to the increase in the Account portfolio during
the period and an increase in the attrition rate to 8.5% from approximately 6%.
This is primarily due to two account portfolios in which the Company
experienced
7
<PAGE> 9
attrition rates exceeding 40%. Accordingly, the remaining net book value
on these account purchases was reduced to 18 months and a write off of $145,969
was taken against these two portfolios at June 30,1997.
Interest expense increased from $792,720 to $1,313,857 between periods as the
Company increased its debt level by $6,154,751 to finance the three central
station acquisitions and the purchase of Accounts.
LIQUIDITY AND CAPITAL RESOURCES
Since 1994, the Company has financed its operations and growth from a
combination of borrowings under the Company's credit facilities and sales of
stock. The Company's principal uses of cash are the acquisition of subscriber
Account portfolios and acquisition of central monitoring stations. The Company
has entered into a letter of intent to purchase Telecommunications Associates
Group, Inc. (ERC) a Cleveland based third party monitoring central station
which also operates a central station in Texas. The acquisition is expected to
be completed in the fourth quarter of 1997 and will be financed primarily
through the capital raised as stock options and warrants are exercised.
Approximately $4.8 million in capital will be raised through the options and
warrants. The remainder of the purchase price will be financed under the
Company's current credit facility. The Company's credit facility will be
increased to $30 million from $15 million to provide the Company with
additional financing in order to continue to acquire Account portfolios.
INFLATION
Management does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
8
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1997.
Item 6.
Exhibit 27
Financial Data Schedule
September 30, 1997
9
<PAGE> 11
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.
Security Associates International, Inc.
Date: November 11, 1997 By:/s/ James S. Brannen
President and
Chief Executive Officer
Date: November 11, 1997 By:/s/ Daniel S. Zittnan
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECURITY
ASSOCIATES INTERNATIONAL, INC.'S BALANCE SHEET AT SEPTEMBER 30, 1997 AND
STATEMENTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 527,233
<SECURITIES> 0
<RECEIVABLES> 2,345,515
<ALLOWANCES> 354,029
<INVENTORY> 0
<CURRENT-ASSETS> 2,735,862
<PP&E> 1,041,147
<DEPRECIATION> 431,709
<TOTAL-ASSETS> 22,819,055
<CURRENT-LIABILITIES> 4,786,868
<BONDS> 0
0
3,846,380
<COMMON> 4,199
<OTHER-SE> 4,349,189
<TOTAL-LIABILITY-AND-EQUITY> 22,819,055
<SALES> 7,417,014
<TOTAL-REVENUES> 7,417,014
<CGS> 0
<TOTAL-COSTS> 8,488,281
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 172,040
<INTEREST-EXPENSE> 1,313,857
<INCOME-PRETAX> (2,385,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,385,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,385,124)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> 0
</TABLE>
