<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997
REGISTRATION STATEMENT NO. 333-31775
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
AMENDMENT NO. 3 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________
SECURITY ASSOCIATES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 7382 87-0467198
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
2101 SOUTH ARLINGTON HEIGHTS ROAD, ARLINGTON HEIGHTS, ILLINOIS 60005-4142
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(847)956-8650
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
JAMES S. BRANNEN
PRESIDENT
SECURITY ASSOCIATES INTERNATIONAL, INC.
2101 SOUTH ARLINGTON HEIGHTS ROAD, ARLINGTON HEIGHTS, ILLINOIS 60005-4142
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(847)956-8650
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(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
________________
Copies to:
JEROLD N. SIEGAN
SACHNOFF & WEAVER, LTD.
30 S. WACKER DRIVE, 29TH FLOOR
CHICAGO, ILLINOIS 60606-7484
TELEPHONE NO. (312) 207-1000
________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
From time to time after this Registration Statement becomes effective.
_________________
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
=============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par value 2,778,088 shares(2) $6.00 $16,668,528.00 $5,051.07
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Warrants 2,000,000 warrants $0 $0 $0
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(1) Estimated solely for purposes of computing the registration fee pursuant
to Rule 457 under the Securities Act of 1933 on the basis of the expected
offering price of the Common Stock.
(2) 778,088 of which shares are also registered for resale, with the consent
of the Registrant, by (i) certain stockholders of the Company; (ii)
persons who are holders of currently exercisable options; and (ii) persons
who receive shares covered by this Registration Statement in connection
with acquisitions and who may wish to sell such shares under circumstances
requiring or making desirable use of the Prospectus contained herein.
Also includes 2,000,000 shares which may be issued pursuant to the
exercise of the Warrants.
_________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED OCTOBER 16, 1997
PROSPECTUS
2,778,088 SHARES AND
2,000,000 WARRANTS
SECURITY ASSOCIATES INTERNATIONAL, INC.
COMMON STOCK
AND
WARRANTS
This Prospectus relates to 2,000,000 shares of common stock, $.001 par
value per share ("Common Stock") and warrants to purchase up to 2,000,000 of
said shares of Common Stock (the "Warrants"), which may be offered and issued
by Security Associates International, Inc. (the "Company"): (i) in connection
with offerings to Dealers to induce them to enter into long term contractual
relationships with the Company (the "Dealer Program") which will be commenced
promptly, will be made on a continuous basis and may continue for a period in
excess of 30 days from the date of initial effectiveness under Rule
415(a)(1)(ix) of Regulation C promulgated under the Securities Act of 1933, as
amended (the "Securities Act"); (ii) in connection with acquisitions of other
businesses, real or personal properties, or securities in business combination
transactions in accordance with Rule 415(a)(1)(viii) of Regulation C; and (iii)
or otherwise under Rule 415 of Regulation C promulgated under the Securities
Act. The Common Stock offered in the Dealer Program under Rule 415(a)(1)(ix)
will be issued by the Company at an assigned value of $6.00 per share, although
no cash outlay or capital investment will be made by the Dealers for such
shares. This Prospectus also covers 778,088 shares of Common Stock which may
be offered for sale by certain selling stockholders ("Selling Stockholders")
under Rule 415(a)(1)(i) and 415(a)(1)(iii). See "Securities Covered by this
Prospectus."
The Common Stock is traded on the OTC Bulletin Board under the symbol
LRMD. On October 13, 1997, the last reported sale price of the Common Stock
was $4.50. See "Price Range of Common Stock."
_________________________
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ________, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE> 3
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR
AN OFFER TO ANY PERSON IN A JURISDICTION WHERE IT IS UNLAWFUL TO MAKE SUCH
OFFER. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME SHALL NOT, UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
TABLE OF CONTENTS
PROSPECTUS SUMMARY...................................................... 3
RISK FACTORS............................................................ 5
PRICE RANGE OF COMMON STOCK............................................. 11
DIVIDEND POLICY......................................................... 11
SELECTED FINANCIAL DATA................................................. 12
PRO FORMA STATEMENT OF INCOME........................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 14
BUSINESS................................................................ 21
MANAGEMENT.............................................................. 35
CERTAIN TRANSACTIONS.................................................... 39
PRINCIPAL AND SELLING STOCKHOLDERS...................................... 40
DESCRIPTION OF CAPITAL STOCK............................................ 43
LEGAL MATTERS........................................................... 47
EXPERTS................................................................. 47
ADDITIONAL INFORMATION.................................................. 47
INDEX TO FINANCIAL STATEMENTS........................................... F-1
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in or implied
by these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in "Risk
Factors."
<PAGE> 4
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Financial Statements and related Notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated, all references to "Security
Associates" or the "Company" include the Company and its subsidiaries.
THE COMPANY
Security Associates International, Inc. ("Security Associates" or the
"Company") provides two types of security alarm monitoring services for
residences and businesses: (i) retail monitoring, which provides alarm
monitoring services to "Accounts" (contracts to provide monitoring services)
owned by the Company ("Retail Monitoring"), and (ii) wholesale monitoring,
which provides alarm monitoring services to Accounts owned by third parties
("Wholesale Monitoring"), largely independent alarm system sales and
installation organizations ("Dealers"). The Company's ability to capture both
Retail Monitoring and Wholesale Monitoring business is enhanced and supported
by a network of approximately 2,000 Dealers to which the Company provides
industry-related education including technology, finance, management and
marketing training ("Dealer Network"). The Company presently owns and operates
three central monitoring stations located in Des Plaines, Illinois, Grand
Rapids, Michigan and Pompano Beach, Florida.
Security Associates' revenues generally consist of recurring payments
under written contracts to provide Retail Monitoring and Wholesale Monitoring.
For the year ended December 31, 1996, the Company derived approximately 35% of
its monitoring revenues from Retail Monitoring and approximately 65% of its
revenues from Wholesale Monitoring. Total revenues increased from $699,154 for
the fiscal year ended December 31, 1993 to $3,782,091 for the fiscal year ended
December 31, 1996. Operating income improved from a loss of $944,311 for the
fiscal year ended December 31, 1993 to a loss of $591,467 for the fiscal year
ended December 31, 1996. The Company's loss per share of Common Stock for the
fiscal year ended December 31, 1996, was $0.47 per share.
The Company's Retail Monitoring services are provided to Accounts that
generally were purchased from portfolios of subscriber Accounts owned by the
Dealers that originally sold and installed the security alarm systems. As of
June 30, 1997, Security Associates owned a total of 20,650 Accounts. From
January 1, 1993 through December 31, 1996 the Company acquired 14,320 Accounts.
During the six months ended June 30, 1997, the Company acquired 7,473
Accounts. As a result the recurring monthly revenue ("RMR") that the Company
is entitled to receive from owned Accounts has increased from $28,388 ($340,656
annualized) as of December 31, 1992 to $443,860 ($5,326,320 annualized) as of
June 30, 1997.
As of June 30, 1997, the Company monitors a total of 121,983 Accounts from
its three central monitoring stations: 119,003 of said Accounts (which are
owned by 865 Dealers) are monitored on a Wholesale Monitoring basis and 2,980
of said Accounts are owned by the Company and are monitored on a Retail
Monitoring basis. From January 1, 1993 through December 31, 1996 the number of
monitored Accounts increased from 12,301 to 109,569. During the six months
ended June 30, 1997, the Company provided monitoring services to 12,414
additional Accounts. The Company's RMR from Wholesale Monitoring has
increased from $59,253 ($711,036 annualized) as of December 31, 1992 to
$557,394 ($6,688,728 annualized) as of June 30, 1997. The Company estimates
that its central monitoring stations are capable of monitoring 140,000 Accounts
without requiring substantial additional capital outlays. The Company's
current plan envisions increasing the total capacity of the Company's central
stations to 300,000 Accounts by the end of 1997, although there can be no
assurance that this goal can be achieved.
The Company maintains its principal executive offices at 2101 South
Arlington Heights Road, Arlington Heights, Illinois 60005. The Company's
telephone number is (847) 956-8650.
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3
<PAGE> 5
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
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PRO FORMA
1992 1993 1994 1995 1996 1996 (1) 1996 1997
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $526 $699 $1,397 $2,733 $3,782 $7,610 $1,654 $4,756
Operating income (loss)....... (893) (944) (345) (389) (591) (161) (33) (578)
Net (loss) available to common
stockholders................ $(1,015) $(846) $(457) $(947) $(1,718) $(1,970) $(320) $(1,604)
Net loss per share............ $(.37) $(.25) $(.13) $(.26) $(.47) $(.54) $(.09) $(.40)
Shares used in computing
net income per share....... 2,746,513 3,407,502 3,662,187 3,665,642 3,669,343 3,669,343 3,669,137 4,034,292
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
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BALANCE SHEET DATA:
<S> <C>
Cash and cash equivalents....................................................................................... $469
Working capital................................................................................................. (1,755)
Total assets.................................................................................................... 22,236
Total debt...................................................................................................... 18,750
Total stockholders' equity...................................................................................... 106
</TABLE>
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(1) Proforma data for the year ended December 31, 1996 give effect to the
acquisitions of Security Associates Command Center II, L.L.C. ("SACC") and
AMJ Central Station Corporation ("AMJ") as if each had occurred on January
1, 1996.
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4
<PAGE> 6
RISK FACTORS
In addition to the other information set forth in this Prospectus,
prospective investors should consider carefully the following factors.
Risks Related to High Leverage. The Company is highly leveraged. At
August 31, 1997, the Company's consolidated indebtedness was approximately
$19.8 million, and the Company had unused borrowing capacity of approximately
$1.8 million under the Company's $15 million senior loan facility and $50,000
under a $5 million subordinated loan facility (the "Loan Agreements"). Future
acquisitions of Account portfolios and central monitoring stations will require
additional borrowings under the Loan Agreements, thereby further increasing the
Company's leverage. See "--Risks Related to Acquisitions."
The Company's ability to continue to service its indebtedness will be
subject to various business, financial and other factors, many of which are
beyond the Company's control. In addition, the Loan Agreements include
covenants that restrict the operational and financial flexibility of the
Company. Failure to comply with certain covenants would, in some instances,
permit the lenders under the Loan Agreements to accelerate the maturity of the
Company's obligations thereunder, and in other instances could result in
cross-defaults permitting the acceleration of all such debt.
The Company's high degree of leverage may have important consequences to
holders of the Common Stock, including the following: (i) a substantial portion
of the Company's cash flow from operations is, and will continue to be,
dedicated to the payment of the principal of and interest on its existing
indebtedness, thereby reducing the funds available to the Company for its
operations and future growth or other business opportunities; (ii) the
Company's ability to obtain additional financing in the future for working
capital, acquisitions of portfolios of Accounts and of central monitoring
stations, capital expenditures, general corporate purposes or other purposes
may be impaired; (iii) the Loan Agreements contain, and are expected to
continue to contain, certain restrictive covenants, including certain covenants
that require the Company to obtain the consent of its lenders and to maintain
certain financial ratios in order to undertake significant acquisitions of
portfolios of subscriber Accounts or of central monitoring stations; (iv) one
of the Company's borrowings under the Loan Agreements is at a floating rate of
interest, causing the Company to be vulnerable to increases in interest rates;
(v) the Company will be more vulnerable to a downturn in the Company's business
or the economy generally; and (vi) the Company's ability to compete against
other less leveraged companies may be adversely affected.
Risks Related to Acquisitions. A principal element of the Company's
business strategy is to acquire Accounts on a portfolio basis and to acquire
additional central monitoring stations. See "Business--Financing Program
Strategy--Expand the Account Acquisition Program." The Company faces
competition for the acquisition of portfolios of Accounts and central
monitoring stations, and may be required to offer higher prices for such
acquisitions than it has in the past. See "--Competition." In addition, due
to the continuing consolidation of the security alarm industry and the
acquisition by the Company and other companies of a number of large portfolios
of Accounts and of central monitoring stations, there may in the future be
fewer large portfolios of Accounts and fewer central monitoring stations
available for acquisition. There can be no assurance that the Company will be
able to find acceptable acquisition candidates or, if such candidates are
identified, that acquisitions can be consummated on terms acceptable to the
Company.
Acquisitions of portfolios of subscriber Accounts and of central
monitoring stations involve a number of special risks, including the
possibility of unanticipated problems not discovered prior to the acquisition,
Account attrition (i.e., cancellation) and the diversion of management's
attention from other business activities in order to focus on the assimilation
of such acquisitions. For acquisitions of central monitoring stations that are
structured as the purchase of the stock of other companies, the Company may
assume unexpected liabilities and may need to dispose of the unnecessary assets
of the acquired companies.
Because the Company's primary consideration in acquiring a portfolio of
subscriber Accounts is the amount of cash flow that can be derived from the RMR
associated with the purchased Accounts, the price
5
<PAGE> 7
paid by the Company is customarily directly tied to RMR. The price paid varies
based on the number and quality of the Accounts being purchased from the seller
and the historical financial information with respect to the acquired Accounts.
In making acquisitions the Company has relied on management's knowledge of the
industry, due diligence procedures and representations and warranties of the
sellers. There can be no assurance that in all instances the representations
and warranties made by the sellers were true and complete or, if the
representations and warranties are inaccurate, that the Company will be able to
recover from the seller damages in an amount sufficient to fully compensate the
Company for any resulting losses. The Company expects that future acquisitions
will present the same risks to the Company as its prior acquisitions.
History of Losses. The Company incurred losses of $1.6 million for the
six months ended June 30, 1997, $1.7 million for fiscal 1996, $947,000 for
fiscal 1995 and $457,000 for fiscal 1994. These losses reflect, among other
factors, the substantial charges incurred by the Company for amortization of
purchased subscriber Accounts and interest incurred on the Company's
indebtedness. Such charges will increase as the Company continues to purchase
subscriber Accounts, as the Company's indebtedness increases, or if interest
rates increase. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company's operating earnings have been insufficient to cover its fixed charges
since the Company was formed, and there can be no assurance that the Company
will attain profitable operations.
Need for Additional Capital. In fiscal 1995 and 1996 and during the six
months ended June 30, 1997, the Company invested a total of approximately $16.8
million in acquisitions of portfolios of Accounts and central monitoring
stations. The Company used borrowings under the Loan Agreements to fund the
Company's investing activities during those fiscal years. The Company intends
to continue to pursue growth through the acquisitions of subscriber Accounts
and central monitoring stations. The Company will be required to seek
additional funding under the Loan Agreements and from the possible sale of
additional securities in the future, which may lead to higher leverage or the
dilution of then existing holders' investment in the Common Stock. See "Risks
Related to High Leverage." Any inability of the Company to obtain funding
through external financing is likely to adversely affect its ability to
increase its acquisition activities. There can be no assurance that external
funding will be available to the Company on attractive terms or at all.
Dependence on Dealers. A principal element of the Company's business
strategy is to grow by increasing the number of Accounts monitored in its
Retail Monitoring and Wholesale Monitoring programs. The Company is dependent
on entering into and maintaining relationships with Dealers who will either
sell their Accounts directly to the Company or will enter into contracts to
provide monitoring services for the Accounts retained by the Dealers. The
Company faces competition from other alarm monitoring companies, including
companies who are better capitalized than the Company and who may offer higher
prices and more favorable terms to Dealers for Accounts they purchase or lower
prices for the monitoring services they provide. There can be no assurance
that the Company will be able to continue to attract Dealers in order to expand
its programs. The Company expects that future acquisitions of central
monitoring stations will also be an integral part of the Company's revenue
growth. Other alarm service companies have adopted a strategy similar to the
Company's that entails the acquisition of central monitoring stations. Some of
these competitors have greater financial resources than the Company or may be
willing to offer higher prices than the Company is prepared to offer to acquire
such stations. The effect of such competition may be to reduce the acquisition
opportunities available to the Company, thus reducing the Company's rate of
growth, or to increase the price paid by the Company for such acquisitions
which will reduce the Company's return on its investments. There can be no
assurance that the Company will be able to find acceptable acquisition
candidates. See "-- Competition."
Attrition of Subscriber Accounts. The Company experiences attrition of
subscriber Accounts as a result of several factors including relocation of
subscribers, adverse financial and economic conditions and competition from
other alarm service companies. In addition, the Company may lose certain
Accounts, particularly acquired Accounts, if the Company does not service those
Accounts adequately or does not
6
<PAGE> 8
successfully assimilate new Accounts into the Company's operations. A
significant increase in attrition could have a material adverse effect on the
Company's revenues and earnings.
When acquiring Accounts, the Company usually withholds a portion of the
purchase price as a partial reserve against excess subscriber attrition. If
the actual attrition rate for the Accounts acquired is greater than the rate
assumed by the Company at the time of the acquisition, and the Company is
unable to recoup its damages from the portion of the purchase price held back
from the seller, such attrition could have a material adverse effect on the
Company's financial condition or results of operations. The Company is not
aware of any reliable historical data relating to Account attrition rates
prepared by the Dealers from whom the Company has acquired Accounts, and the
Company has no assurance that the actual attrition for acquired Accounts will
not be greater than the attrition rate assumed or historically incurred by the
Company. In addition, because some acquired Accounts are prepaid on an annual,
semi-annual or quarterly basis, attrition may not become evident for some time
after an acquisition is consummated. During 1997, the Company experienced
significantly higher attrition than it has historically experienced primarily
as a result of losses attributable to two acquisitions of Accounts out of the
approximately 200 acquisitions made over the past six years.
Possible Adverse Effect of "False Alarm" Ordinances. Significant concern
has arisen in certain municipalities about the high incidence of false alarms.
This concern could cause a decrease in the likelihood or timeliness of police
response to alarm activations and thereby decrease the propensity of consumers
to purchase or maintain alarm monitoring services.
A number of local governmental authorities have considered or adopted
various measures aimed at reducing the number of false alarms. Such measures
include (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms and (v) requiring further
verification of an alarm signal before the police will respond. Enactment of
such measures could adversely affect the Company's future business and
operations.
Possible Adverse Effect of Future Government Regulations; Risks of
Litigation. The Company's operations are subject to a variety of laws,
regulations and licensing requirements of federal, state and local authorities.
In certain jurisdictions, the Company is required to obtain licenses or
permits, to comply with standards governing employee selection and training and
to meet certain standards in the conduct of the Company's business. The loss
of such licenses, or the imposition of conditions to the granting or retention
of such licenses, could have a material adverse effect on the Company. The
Company believes that it is in material compliance with applicable laws and
licensing requirements.
Risks of Liability from Operations. The nature of the services provided
by the Company potentially exposes it to greater risks of liability for
employee acts or omissions or system failure than may be inherent in other
businesses. Most of the Company's alarm monitoring agreements and other
agreements pursuant to which the Company sells its products and services
contain provisions limiting liability to subscribers and Dealers in an attempt
to reduce this risk. However, in the event of litigation with respect to such
matters there can be no assurance that these limitations will be enforced, and
the costs of such litigation could have an adverse effect on the Company.
The Company carries insurance of various types, including general
liability and errors and omissions insurance. The loss experience of the
Company and other security service companies may affect the availability and
cost of such insurance. Certain of the Company's insurance policies and the
laws of some states may limit or prohibit insurance coverage for punitive or
certain other types of damages, or liability arising from gross negligence.
7
<PAGE> 9
Competition. The security alarm industry is highly competitive and highly
fragmented. While the Company does not compete directly with many of the large
new entrants into the industry because it does not sell and install security
systems, it is nonetheless impacted by the competitive challenge these entrants
present to independent Dealers. To some extent new alarm systems installations
made by large integrated industry participants represent systems that may not be
installed by the Dealers on whom the Company's business depends. As a result,
there may be less Dealer owned Accounts for which Wholesale Monitoring can be
provided and fewer Dealer owned Accounts available for the Company to purchase.
The Company's Wholesale Monitoring services compete with those offered by an
estimated 2,000 to 3,000 companies. Of those companies, an estimated 200 firms
including the Company offer monitoring services from UL listed facilities. While
many of the companies providing monitoring services are small local operations,
several of the UL listed competitors are companies that are larger and better
financed than the Company. The Company also competes with several companies
that have Account acquisition and loan programs for independent Dealers and some
of those competitors are larger and better capitalized than the Company. There
is also the potential for other entities such as banks or finance companies to
gain a better understanding of the industry and become more active as a source
of competition for the Dealer financing portions of the Company's business.
Possible Impact of Lower Crime Rates. For the past several years crime
rates have been dropping in the United States. Particularly relevant to the
Company's business is the decrease in the number of burglaries. While the
number of homes and businesses with installed alarm systems has continued to
increase even as crime rates have decreased, there can be no assurance that
this will continue to be the case. Any significant decrease in the number of
homes and businesses installing new alarm systems could have a material adverse
effect on the Company's business.
Dependence Upon Senior Management. The success of the Company's business
is largely dependent upon the active participation of its executive officers.
The loss of the services of one or more of such officers for any reason may
have a material adverse effect on the Company's business.
Significant Ownership of Shares by Certain Stockholders. The Company's
largest stockholder owns approximately 49% of the issued and outstanding voting
stock of the Company, as well as the right to designate two members of the
Company's Board of Directors. In addition, this investor holds a warrant to
purchase 15,000 shares of Convertible Preferred Stock which is exercisable upon
the satisfaction of certain conditions. Upon exercise, this investor would
hold 56.9% of the issued and outstanding voting stock of the Company. As a
result, this investor currently has the ability to significantly influence the
outcome of matters submitted for approval of the stockholders and directors of
the Company (including the election of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) and the affairs of
the Company generally.
Restrictions on Transfer; Risk of Forfeiture. Dealers receiving Common
Stock or Warrants in return for entering into long term contractual
relationships with the Company (the "Dealer Program") will be assuming several
risks related to the securities they receive. Such Dealers will contractually
commit themselves to transfer and maintain all of their owned Accounts for
monitoring by the Company's central monitoring stations for a period of five
years. In addition, such Dealers will grant the Company (or its subsidiaries)
rights of first refusal to purchase its Accounts and for borrowings secured by
Accounts for five years. The securities issued to such Dealers will also be
subject to restrictions on transfer. The right to transfer or pledge the
securities they receive (as well as the right to exercise the Warrants) will
vest annually, at the rate of 20% a year, over a period of five years. If the
Dealer defaults on its obligations to the Company, the Dealer will forfeit all
of the securities as to which the right to transfer or pledge have not yet
vested. See "Business--Dealer Program."
Certain Antitakeover Effects. Certain provisions of Delaware law, could
delay or prevent a change in control of the Company, could discourage
acquisition proposals and could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the then
current market
8
<PAGE> 10
value of the Common Stock or over a stockholder's cost basis in the Common
Stock. See "Description of Capital Stock--Antitakeover Effects of Provisions of
the Certificate of Incorporation, By-Laws and Delaware Law." In addition, the
Board of Directors, without further stockholder approval, may issue preferred
stock which could have the effect of delaying, deferring or preventing a change
in control of the Company. The issuance of preferred stock could also adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. See "Description of Capital Stock--Preferred Stock."
Dividend Policy; Restrictions on Dividends. The Company has never paid
any cash dividends on the Common Stock and does not intend to pay any cash
dividends in the foreseeable future. The Loan Agreements prohibit the Company
from declaring or paying any dividend on, or making any other distribution in
respect of, the Company's capital stock. In addition, the Company's
outstanding series of preferred stock contain restrictions on the ability of
the Company to declare or pay any dividend or distribution on the Company's
Common Stock. See "Dividend Policy" and "Description of Capital
Stock--Preferred Stock."
Possible Volatility of Stock Price. The stock market has from time to
time experienced extreme price and volume fluctuations that have been unrelated
to the operating performance of particular companies. The market price of the
Common Stock may be significantly affected by quarterly variations in the
Company's operating results, changes in financial estimates by securities
analysts or failures by the Company to meet such estimates, litigation
involving the Company, general trends in the security alarm industry, actions
by governmental agencies, national economic and stock market conditions,
industry reports and other factors, many of which are beyond the control of the
Company.
Shares Eligible for Future Sale. Upon completion of this Offering, the
Company will have outstanding the equivalent of 10,502,663 shares of Common
Stock (including the shares issuable upon exercise of the Warrants and
conversion of the shares of Convertible Preferred Stock, assuming no exercise
of other outstanding options or warrants). Of such shares, (i) 5,355,992
shares (consisting of the 2,000,000 shares offered hereby, 778,088 being
registered for resale hereunder by Selling Stockholders, and 2,577,904 shares
previously registered or as to which the restrictions have expired pursuant to
Rule 144(k) ("Rule 144(k))" under the Securities Act of 1933, as amended (the
"Securities Act"), or other applicable exemptions from registration
requirements) will be freely tradable in the public market and (ii) 5,146,671
shares will be eligible for sale pursuant to Rule 144 ("Rule 144") under the
Securities Act.
In addition to the foregoing, certain stockholders of the Company also
have certain demand and "piggyback" registration rights pursuant to which an
aggregate of 4,197,288 shares of Common Stock (consisting of shares issued upon
conversion of the outstanding Convertible Preferred Stock and exercise of an
outstanding warrant) could become immediately available for sale in the public
market. See "Description of Capital Stock" and "Shares Eligible for Future
Sale."
SECURITIES COVERED BY THIS PROSPECTUS
2,000,000 of the shares of Common Stock and the 2,000,000 Warrants to
purchase such Common Stock are being issued directly by the Company. Those
shares and Warrants are available for the purposes stated below. They may be
issued to Dealers in order to induce them to enter into the Dealer Program. The
securities to be issued pursuant to the Dealer Program will be offered
continuously under Rule 415(a)(1)(ix) until the Dealer Program is completed
which the Company anticipates will be no sooner that twelve months following
initial effectiveness of the Registration Statement of which this prospectus is
a part. The Common Stock offered in the Dealer Program will be issued at an
assigned value of $6.00 per share, although no cash outlay or capital
investment will be made by the Dealers for such shares. See "Business--Dealer
Program."
9
<PAGE> 11
The securities being offered by the Company may also be used in connection
with acquisitions of businesses, real or personal properties or in business
combination transactions in accordance with Rule 415(a)(1) (viii).
The acquisitions described above may be made directly by the Company or
indirectly through a subsidiary, may relate to businesses or securities of
businesses similar or dissimilar to those of the Company or to properties of a
type which may or may not currently be used by the Company, and may be made in
connection with the settlement of litigation or other disputes. The
consideration offered by the Company in such acquisitions, in addition to the
shares of Common Stock and Warrants offered by this Prospectus, may include
cash, debt or other securities (which may be convertible into shares of Common
Stock covered by this Prospectus), or assumption by the Company of liabilities
of the business, properties, or securities being acquired or of their owners, or
a combination thereof. It is contemplated that the terms of acquisitions will
be determined by negotiations between the Company and the owners of the
businesses, properties, or securities to be acquired, with the Company taking
into account such factors as the quality of management, the past and potential
earning power, growth and appreciation of the businesses, properties or
securities acquired, and other relevant factors, and it is anticipated that
shares of Common Stock and Warrants issued in acquisitions will be valued at a
price reasonably related to the market value of the Common Stock either at the
time the terms of the acquisition are tentatively agreed upon or at or about the
time or times of delivery of the shares.
778,088 of the shares of Common Stock covered by this Prospectus were
issued to or are subject to issuance upon exercise of currently exercisable
options and warrants and have been registered for resale by those persons
identified elsewhere in this Prospectus under the caption "Principal and
Selling Stockholders."
The Company may from time to time, in an effort to maintain an orderly
market in the Common Stock, negotiate agreements with persons receiving Common
Stock covered by this Prospectus that will limit the number of shares that may
be sold by such persons at specified intervals. Such agreements may be more
restrictive than restrictions on sales made pursuant to the exemption from
registration requirements of the Securities Act, including the requirements
under Rule 144 or 145(d), and certain persons party to such agreements may not
otherwise be subject to such Securities Act requirements.
Sales by Selling Stockholders by means of this Prospectus may be made from
time to time privately at prices to be individually negotiated with the
purchasers, or publicly through transactions in the over-the-counter market
(which may involve block transactions), at prices reasonably related to market
prices at the time of sale or at negotiated prices. Broker-dealers
participating in such transactions may act as agent or as principal and, when
acting as agent, may receive commissions from the purchasers as well as from
the sellers (if also acting as agent for the purchasers). The Company may
indemnify any broker-dealer participating in such transactions against certain
liabilities under the Securities Act. Profits, commissions, and discounts on
sales by persons who may be deemed to be underwriters within the meaning of the
Securities Act may be deemed underwriting compensation under the Securities
Act.
Stockholders may also offer shares of stock covered by this Prospectus by
means of prospectuses under other registration statements or pursuant to
exemptions from the registration requirements of the Securities Act, including
sales which meet the requirements of Rule 144 or Rule 145(d) under the
Securities Act, and those stockholders should seek the advice of their own
counsel with respect to the legal requirements for such sales.
This Prospectus may be supplemented or amended from time to time to
reflect its use for resales by persons who have received shares of Common Stock
and for whom the Company has consented to the use of this Prospectus in
connection with resales of such shares.
10
<PAGE> 12
'
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the OTC Bulletin Board under
the symbol "LRMD" since August 1992. The following table sets forth, for the
periods indicated, the range of high and low bid quotations prices for the
Common Stock as reported on the OTC Bulletin Board. The following quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH BID LOW BID
---------- ----------
<S> <C> <C>
1995
First Quarter $ .26 $ .25
Second Quarter $ .55 $ .25
Third Quarter $ .375 $ .375
Fourth Quarter $ .51 $ .25
1996
First Quarter $ .53125 $ .52
Second Quarter $ .60 $ .375
Third Quarter $1.125 $ .46875
Fourth Quarter $2.75 $1.50
1997
First Quarter $3.5625 $3.125
Second Quarter $3.125 $2.78125
Third Quarter $4.00 $3.50
Fourth Quarter (Through October 15, 1997) $4.75 $4.00
</TABLE>
On October 15, 1997, the last reported bid price of the Common Stock was
$4.12 per share. At August 14, 1997, the Company had approximately 201
stockholders of record.
DIVIDEND POLICY
The Company currently anticipates that it will retain all of its earnings
for development of the Company's business, and does not anticipate paying any
cash dividends in the foreseeable future. Future cash dividends, if any, will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's future operations and earnings, capital
requirements and surplus, general financial condition, contractual
restrictions, loan covenants and such other factors as the Board of Directors
may deem relevant. See "Risk Factors--Dividend Policy; Restrictions on
Dividends."
11
<PAGE> 13
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data for the fiscal years ended 1994
through 1996 is derived from the Company's Consolidated Financial Statements
which have been audited by Arthur Andersen LLP, independent public accountants.
The following selected financial data for the fiscal years ended 1992 and 1993
is derived from audited financial statements. The statements of operations and
the balance sheet data as set forth below for and as of the six months ended
June 30, 1996 and 1997 have been derived from the unaudited consolidated
financial statements of the Company, which in the opinion of management,
include all adjustments necessary to present fairly the consolidated financial
position and results of operations of the Company. The selected financial data
for the six months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year. The selected financial data set
forth below should be read in conjunction with the Company's consolidated
financial statements and related notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 PRO FORMA 1996 1997
1996(1)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 526 $ 699 $ 1,397 $ 2,733 $ 3,782 $ 7,610 $ 1,654 $ 4,756
Operating income (loss)............ (893) (944) (345) (389) (591) (161) (33) (578)
Net income (loss).................. $ (1,015) $ (846) $ (457) $ (947) $ (1,718) $ (1,970) $ (320) $ (1,604)
Net income (loss) per share........ $ (.37) $ (.25) $ (.13) $ (.26) $ (.47) $ (.54) $ (.09) $ (.40)
Shares used in computing
net income per share........... 2,746,513 3,407,502 3,662,187 3,665,642 3,669,343 3,669,343 3,669,137 4,034,292
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- ----------------
1992 1993 1994 1995 1996 1997
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............. $ 22 $ 555 $ 86 $ 54 $ 632 $ 469
Working capital (deficit)............. (420) 2 (787) (2,699) (4,518) (1,755)
Total assets.......................... 844 1,984 2,690 6,030 16,533 22,236
Total debt............................ 417 1,792 3,099 6,862 12,790 18,750
Total stockholders' equity (deficit).. (183) (675) (1,132) (2,043) 1,269 106
</TABLE>
- -----------------------------
(1) The proforma data for the year ended December 31, 1996 give effect to the
acquisitions of SACC and AMJ as if each had occurred on January 1, 1996.
12
<PAGE> 14
PRO FORMA STATEMENT OF INCOME
(in thousands, except per share data)
The following unaudited Pro Forma Combined Statement of Income for the
year ended December 31, 1996 was prepared to illustrate the estimated effects
of the acquisition of the non-Company interests in SACC and of AMJ (both
central monitoring stations) as if each had occurred on January 1, 1996. The
Pro Forma Statement of Income does not purport to represent what the Company's
results of operations would actually have been if the acquisition had occurred
on the dates indicated or to predict the Company's results of operations for
any future period. The following financial information should be read in
conjunction with "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and the related Notes thereto included
elsewhere in the Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THE COMPANY(1) SACC(2) AMJ(3) ADJUSTMENT COMBINED
-------------- ------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Monitoring fees and other revenues $ 3,782 $2,346 $2,104 $(622) (4) $ 7,610
General, selling and administrative expenses 3,105 1,669 1,935 (622) (4) 6,087
Loss from disposition of contract rights 248 -- -- -- 248
Amortization and depreciation 1,020 101 23 292 (5) 1,436
-------------- ------- ------ ---------- ------------
Income (loss) from operations (591) 576 146 (292) (161)
Interest expense 1,384 105 19 (69) (6) 1,439
Interest income -- (43) -- - (43)
-------------- ------- ------ ---------- ------------
Income (loss) before income in equity of
joint venture (1,975) 514 127 (223) (1,557)
Income in equity of joint venture (257) -- -- (257) (7) --
-------------- ------- ------ ---------- ------------
Income (loss) before minority interest (1,718) 514 127 (480) (1,557)
Minority interest -- 2 -- (2) (8) --
-------------- ------- ------ ---------- ------------
Net income (loss) before income taxes (1,718) 512 127 (478) (1,557)
Income tax expense -- -- -- -- (9) --
-------------- ------- ------ ---------- ------------
Net income (loss) (1,718) 512 127 (478) (1,557)
Dividends accrued on preferred stock - -- -- 413 (10) 413
-------------- ------- ------ ---------- ------------
Net income (loss) available to common
stockholders $ (1,718) $ 512 $ 127 $(891) $ (1,970)
============== ======= ====== ========== ============
Net loss per share $ (.54)
Weighted average shares outstanding 3,669,343
</TABLE>
(1) Data for the Company is for the year ended December 31, 1996.
(2) Data for SACC is for the period January 1, 1996 to September 5, 1996.
(3) Data for AMJ is for the period January 1, 1996 to December 19, 1996.
(4) Represents the elimination of intercompany billings of $622 related to
monitoring services provided by SACC to Accounts owned by the Company for
the period January 1, 1996 to September 5, 1996.
(5) Provides for the pro forma increase in goodwill amortization expense for
the period January 1, 1996 to September 5, 1996 related to the acquisition
of SACC, and for the period January 1, 1996 to December 15, 1996 related
to the acquisition of AMJ.
(6) Eliminates the interest expense for the subordinated debt for the period
of September 5 to December 31, 1996, which was converted to preferred
stock on December 31, 1996 (as an effect of the TJS Amendment).
(7) Eliminates the income in equity of joint venture (SACC) for the period
January 1 to September 5, 1996 as a result of the acquisition of the
controlling interest in SACC and pro forma inclusion of SACC's financial
statements for such period.
(8) Eliminates the minority interest (2% of All-Security Monitoring Services,
L.L.C.) as a result of certain insignificant acquisitions made by the
Company.
(9) The proforma adjustment for income tax expense of SACC and AMJ as if they
were treated on a separate return basis would be approximately $205 and
$51, respectively, using an effective tax rate of approximately 40%.
However, no pro forma income tax expense adjustment is presented due to
the cumulative net operating losses of the Company and the acquired
subsidiaries.
(10) Represents the accrued dividends on the preferred stock (as an effect of
the TJS Amendment) for the period January 1, 1996 to December 31, 1996.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section of the Prospectus, Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used in this section, the words "anticipate," "believe," "estimate," and
"expect" and similar expressions as they relate to the Company or its
management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in or implied by these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors."
OVERVIEW
A majority of the Company's revenues are derived from recurring payments
for Retail Monitoring through contracts with subscribers and Wholesale
Monitoring pursuant to agreements with independent security alarm dealers who
subcontract monitoring services to the Company. Retail Monitoring contracts
have initial terms ranging from one to five years with provisions for automatic
renewal usually for periods of one year. Wholesale Monitoring contracts are
entered into with Dealers which generally permit cancellation with notice of 60
days. The remainder of the Company's revenues are derived from revenues from
the sale of memberships to independent dealers which entitle them to access
certain management support services offered by the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data:
<TABLE>
<CAPTION>
Six Months
Years Ending December 31 Ended June 30
---------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue $ 1,397 $ 2,733 $ 3,782 $ 1,654 $ 4,756
Operating Expenses:
General, selling & administrative 1,481 2,482 3,105 1,152 3,693
Amortization & depreciation 244 540 1,020 450 1,001
Provision for loss portfolios -- -- -- -- 345
Loss from disposition of
contract rights 17 101 249 85 296
Income (Loss) from Operations $ (345) $ (389) $ (591) $ (33) $ (578)
Interest Expense $ 251 $ 743 $ 1,384 $ 470 $ 820
Net Loss $ (457) $ (947) $ (1,718) $ (320) $ (1,604)
</TABLE>
14
<PAGE> 16
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Six Month Periods
Years Ending December 31 Ended June 30
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Total Revenue 100% 100% 100% 100% 100%
Operating Expenses:
General, selling & administrative 106% 91% 82% 70% 78%
Loss from disposition of contract
rights 1% 3% 7% 5% 6%
Amortization & depreciation 17% 20% 27% 27% 21%
Loss from Operations (24%) (14%) (16%) (2%) (12%)
Interest Expense (18%) (27%) (37%) (28%) (17%)
Net Loss (33%) (35%) (45%) (19%) (34%)
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
For the six months ended June 30, 1997, revenues of the Company were
$4,755,917 compared to $1,653,976 for the same period the prior year. This
represents an increase of $3,101,941 or 187.5%. The increase is attributable
to inclusion of Wholesale Monitoring revenues as a result of consolidation of
central monitoring station operations in September and December 1996.
Operating loss for the six months ended June 30, 1997 was $578,163 compared to
$33,154 for the same period in the prior year. This increased loss of $545,009
resulted from an increase, relative to revenues, in general, selling and
administrative expenses and loss from disposition of contract rights and the
provision for loss portfolios recorded in June 1997. General, selling and
administrative expenses increased from 70% of revenues in 1996 to 78% in 1997.
This increase was caused by an increase in salary and related expenses of
$1,535,361 from $488,657 in 1996 to $2,024,018 in 1997. The increased
percentage is attributable to inclusion of central station operations in the
consolidated 1997 results. Central monitoring stations are labor intensive and
during the period salary and related expenses were 40% of revenues for central
station operations while they were 27% for the balance of the Company. The
increase in the loss from disposition of contract rights from $84,975 to
$295,630 is attributable to the larger number of owned Accounts in the 1997
period and write-off of $145,969 on two Account purchase portfolios. Those two
portfolios represent purchases totaling 2,001 Accounts and were entered into in
March, 1995, and February, 1996. One represented a group of Accounts where the
systems were installed primarily in apartments. The selling dealer went out of
business six months after the time of the acquisition and the Company has
experienced difficulty finding a qualified servicing agent. Acquisition
policies now in place preclude purchase of apartment portfolios. The second
acquisition on which the Company has experienced excessive attrition involves
dealer fraud and the documents related to the transaction have been provided to
Federal authorities for possible criminal action. Gross annualized attrition
for the entire portfolio through September 19, 1997, inclusive of the above two
acquisitions was 10.8% while net attrition after Account replacement was 7.6%.
When the two cited acquisitions are excluded from the calculation of attrition,
the gross and net figure are 9.1% and 5.6%, respectively. A provision of
$344,718 has been recorded to accrue for the expected losses on these
portfolios. Interest expense increased from $469,927 in 1996 to $819,562 in
1997, an increase of $349,635 or 74.4% resulting from an increase in debt from
$7,423,585 at June 30, 1996 to $18,749,630 at June 30, 1997. The debt increase
of $11,326,045 provided funds for the acquisition of the central monitoring
stations described above and the acquisition of Accounts.
15
<PAGE> 17
1996 COMPARED TO 1995
Revenues. Revenues for fiscal 1996 increased by $1,048,838 or 38.4%, to
$3,782,091 from $2,733,253 for fiscal 1995. Monitoring fees increased by
$1,262,379 from $2,390,513 to $3,652,892, an increase of 52.8%. $704,028 of
the increase came from consolidation of the operations of SACC and All-Security
Monitoring Services, L.L.C. ("All-Security") beginning September 5, 1996, on
which date those entities became wholly owned subsidiaries. Prior to that
date, results of operations of the two entities were accounted for on the
equity method. Revenue from Retail Monitoring increased $558,351 or 23.4% due
to the addition of approximately 3,495 subscribers from the acquisition of
portfolios of Accounts during fiscal 1996. Revenues from memberships fees and
other dealer services decreased $213,541 to $129,199 from $342,740, a decrease
of 62.3%. This decrease resulted from decreased emphasis on this business
segment as a revenue source.
Operating Expenses. Operating expenses for fiscal 1996 increased by
$1,251,044 an increase of 40% from $3,122,514 to $4,373,558. General, selling
and administrative expenses increased from $2,482,180 to $3,104,496, an
increase of $622,316 or 25.1%, while amortization and depreciation increased
$480,793 or 89.1% from $539,634 to $1,020,427. Loss from disposition of
contract rights increased $147,935 or 146.9% from $100,700 in 1995 to $248,635
in 1996. The increased depreciation is attributable to an increase in contract
rights to monitor security systems of $1,665,476 and the increased amortization
of $201,000 is attributable to a net increase in goodwill of $6,666,373 between
year end 1995 and 1996. $3,762,724 of the goodwill increase was attributable
to the acquisition of AMJ and $2,903,649 resulted from the consolidation of the
results of All-Security following the acquisition in September, 1996, of the 1%
interest in that company held by Intec, Inc. and the 50% interest in SACC not
previously owned by the Company. The increase in general, selling and
administrative expenses is attributable to the increased level of business
activity. General, selling and administrative expenses decreased from 91% of
revenues in 1995 to 82% in 1996. This is attributable to a decrease in central
station monitoring expenses from 25% of revenues in 1995 to 9% in 1996. This
was caused by the consolidation of central station revenues and expenses in
September 1996, and elimination of the expenses for monitoring owned Accounts
in the consolidation of results from September through December and inclusion
of monitoring revenues from non-owned Accounts for the same period. Loss from
the disposition of contract rights increased from $100,700 in 1995 to $248,635
in 1996. This resulted from the fact that 6,815 Accounts were acquired in 1995
and recognition of losses increased from 3% of revenue in 1995 to 7% in 1996
primarily as a result of greater than expected losses on two Account purchase
transactions.
Interest Expense. Interest expense increased $641,580 from $742,659 in
1995 to $1,384,239 in 1996, an increase of 86.4%. This increase was caused
primarily by an increase in the debt outstanding of $3,484,065 under the
Company's credit facility from $3,819,935 at the end of fiscal 1995 to
$7,304,000 at the end of 1996. In addition, the Company incurred interest
expense of $9,370 in 1996 in connection with borrowings under a $5,000,000
subordinated loan agreement. $500,000 was outstanding under this agreement at
year-end 1996.
1995 COMPARED TO 1994
Revenues. Revenues for 1995 increased by $1,336,256 or 95.7% to
$2,733,253 from $1,396,997 for 1994. Monitoring revenue increased by
$1,273,305 or 114.0% which was the result of the addition of approximately
6,815 subscribers during 1995. Membership fees and other revenues increased
from $279,789 to $342,740, an increase of $62,951 or 22.5%.
Operating Expenses. Operating expenses increased $1,380,480 or 79.2% from
$1,742,034 in 1994 to $3,122,514 in 1995. General, selling and administrative
expenses increased $1,001,005 or
16
<PAGE> 18
67.6% from $1,481,175 to $2,482,180, while amortization and depreciation
increased $295,677 or 121.2% from $243,957 to $539,634. Loss from disposition
of contract rights increased $83,798 from $16,902 in 1995 to $100,700 in 1995
an increase of 495.8%. The increase in general, selling and administrative
expense and the increase in depreciation and amortization expense is
attributable primarily to the increased level of business associated with the
acquisition of 6,815 new subscriber accounts during the year. From 1994 to
1995 revenues increased 95.6% while general, selling and administrative
expenses increased 67.6%, which caused general, selling and administrative
expenses to decrease from 106% of revenues to 91% of revenues. This change was
caused by revenues received from the 6,815 accounts acquired in 1995.
Loss from the disposition of contract rights increased from $16,902 in
1994 to $100,700 in 1995. Prior to 1994 only 1,400 Accounts were owned. During
1994 approximately 4,000 Accounts were acquired causing an increase in both the
amortization of accounts and the loss from disposition of contract rights. The
increase in the loss from disposition of contract rights was attributable to
the significantly larger number of owned Accounts. 6,815 Accounts were
acquired in 1995, bringing the total purchased Accounts at December 31, 1995 to
12,273.
Interest Expense. Interest expense increased $492,126 or 196.4% from
$250,533 in 1994 to $742,659 in 1995. The increase is attributable to
increased levels of borrowing associated with the acquisition of subscriber
Accounts. Borrowings under the Company's credit facility increased from
$672,794 at year end 1994 to $3,819,935 at the end of 1995. During that same
period, notes payable to Dealers associated with holdbacks for subscriber
Account purchases increased from $448,386 at the end of 1994 to $1,033,492 at
the end of 1995.
CAPITAL EXPENDITURES
The Company anticipates making capital expenditures during 1997 totaling
$585,000. This amount exceeds the $250,000 limit permitted in the FINOVA Loan
Agreement. The Company plans to seek a covenant waiver from FINOVA to permit
those expenditures. $528,000 of the contemplated capital expenditures are
allocated to the central monitoring stations. Should the Company not be able
to secure approval from FINOVA, the Company's operations this year would not be
seriously impacted, but projected growth for 1998 would be reduced.
LIQUIDITY AND CAPITAL RESOURCES
General. Since January 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. A substantial portion of the Company's future cash flow will be used
to acquire subscriber Account portfolios, to acquire additional central
monitoring stations and to pay down debt.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
During the six months ended June 30, 1997, contract rights to monitor
security systems, net of accumulated amortization increased $4,884,527 to
$11,490,653 due to the acquisition of 7,473 Accounts. During the same period
goodwill and covenant not to compete increased from $569,766 to $7,236,139 due
to the acquisitions of SACC, MCAP Investors, Inc., Winnetka Investors, Inc.,
AMJ and Northern Central Station.
Current liabilities decreased during the six months ended June 30, 1997,
compared to the six months ended June 30, 1996 from $6,744,912 to $4,124,179.
This change was caused primarily by
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a decrease in current maturities of long term debt as a result of the Loan
Agreement with FINOVA Capital Corporation entered into on December 31, 1996.
The Company borrowed $7,304,000 at closing and used a portion of the proceeds
to retire other borrowings totaling $6,764,498. Notes payable net of current
maturities increased to $13,055,838 and subordinated debt increased to
$4,950,000. The proceeds of these increased borrowings were used to purchase
Accounts and to acquire SACC, MCAP Investors, Inc., Winnetka Investors, Inc.,
AMJ and North Central Station.
1996 COMPARED TO 1995
For the year ended December 31, 1996, the Company's net cash used in
operating activities was $421,628, compared to $164,655 in 1995. The increase
was largely attributable to an increase in the net loss from $947,278 in 1995
to $1,718,259 in 1996, an increase of $770,981, or 81.4%. The increase in the
loss was largely the result of an increase in interest expense from $742,659 in
1995 to $1,384,239 in 1996.
The Company's net cash used in investing activities in 1996 was $3,704,026
compared to $3,667,827 in 1995, an increase of $36,199 or 1.0%. Purchases of
Accounts decreased from $3,639,934 in 1995 to $1,855,953 in 1996, while cash
used for central monitoring station acquisitions increased $1,794,021.
Current assets at December 31, 1996 were $2,227,397 compared to $467,905.
The increase results primarily from an increase of $1,002,852 in accounts
receivable and an increase in cash of $578,537. The increases are attributable
to consolidation of the central station operations for the first time on
December 31. 1996, and the acquisition of AMJ Central Station in December of
that year.
Contract rights to monitor security systems net of amortization increased
$1,181,476 to $6,606,126. Goodwill at year-end 1996 was $6,666,373. This
resulted primarily from the acquisitions of joint venture interests in Security
Associates Command Center and All-Security Monitoring Services in September
1996, and AMJ Central Station in December 1996.
Current liabilities increased from $3,166,544 at December 31, 1995, to
$6,744,911 at December 31, 1996. A $3,721,131 note payable for the acquisition
of AMJ Central Station was outstanding on December 31, 1996, and was paid in
January 1997. Current maturities of long term debt decreased from $1,858,992 on
December 31, 1995 to $413,227 on December 31, 1996, as a result of refinancing
existing debt with a new long term loan agreement. For the same period unearned
revenue increased from $543,927 in 1995 to $1,409,796 in 1996 when central
station operations was consolidated. Long term debt increased from $4,768,573
at year end 1995 to $8,019,348 on December 31, 1996, due to the closing of a
new term loan agreement.
As of December 31, 1996, total stockholders' equity was $1,268,464
compared to a deficit $2,043,057 the prior year. This increase resulted from
additional capital of $5,000,000 invested by TJS Partners, L.P. combined with a
net loss of $1,718,259 for the year ended December 31, 1996.
TJS Partners L.P.'s Investment. On September 5, 1996, TJS Partners, L.P.
("TJS") purchased a 49% interest in the Company by receiving 3,525,682 shares
of Common Stock and $3,441,649 of debt with an interest rate of 6% for a total
contribution of $5 million. This stock and debt was converted to 12%
Redeemable Preferred Stock and Convertible Preferred Stock on December 31,
1996, and a new credit facility of $5 million was provided to the Company. The
proceeds from this transaction were used by the Company, either directly or
through its subsidiaries, to purchase the equity interests in five companies.
As of August 31, 1997, $4,950,000 was outstanding under the TJS credit
facility. See "Certain Transactions."
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Loan Agreement with FINOVA Capital Corporation. On December 31, 1996, the
Company and FINOVA Capital Corporation ("FINOVA") entered into a loan agreement
(the "FINOVA Loan Agreement"). The maximum amount available under the FINOVA
Loan Agreement is $15 million. As of August 31, 1997, $13.2 million was
outstanding under the FINOVA Loan Agreement. The FINOVA Loan Agreement matures
on December 31, 2001, subject to earlier termination.
Availability under the FINOVA Loan Agreement is restricted in two ways:
(1) the total debt may not exceed 22 times RMR for Retail
Monitoring plus 12 times RMR for Wholesale Monitoring; and
(2) the ratio of total debt to operating cash flow may not exceed
3.75. This is the more restrictive of these availability tests and
resulted in remaining availability of approximately $.5 million on
August 31, 1997.
The interest rates on borrowings under the FINOVA Loan Agreement are the
base rate in effect from time to time plus the applicable margin. At August
31, 1997, the applicable margin was 2% and the interest rate was 10.5%. This
margin can decrease as the ratio of total debt to operating cash flow decreases
below 3.5. The Company paid a loan fee of $262,500 on closing and is obligated
to pay a commitment fee of .5% on the unused portion of the facility.
The FINOVA Loan Agreement contains customary covenants. The most
important covenants can be summarized as follows: until all obligations under
the FINOVA Loan Agreement are paid or performed in full, neither the Company
nor its covered subsidiaries may, except as specifically permitted: (i) incur
indebtedness; (ii) encumber their properties; (iii) merge with or acquire other
companies; (iv) incur contingent liabilities; (v) make distributions on or
redeem equity securities; (vi) prepay debt; (vii) enter into operating leases
(in excess of scheduled amounts); (viii) make investments in or loans to other
companies; (ix) make fundamental changes in their businesses; (x) change the
locations of their facilities; (xi) dispose of assets; (xii) amend their
organizational documents; (xiii) issue additional membership interests in
certain subsidiaries; (xiv) enter into contracts with affiliates; (xv) permit
the occurrence of any violations of ERISA; or (xvi) pay management compensation
in excess of permitted amounts. Financial covenants include the maintenance of
(i) a minimum ratio of operating cash flow to total debt, (ii) minimum RMR for
Retail Monitoring and Wholesale Monitoring and (iii) mandatory prepayments from
excess cash flow as defined.
The Company intends to continue to pursue growth through the acquisition
of subscriber Accounts and central monitoring stations. As a result, the
Company will be required to seek additional funding under its existing loan
agreements and from the possible sale of additional securities in the future,
which may lead to higher leverage or the dilution of the existing holders'
investment in Common Stock. Any inability of the Company to obtain funding
through external financing is likely to adversely affect its ability to
increase its investing activities. There can be no assurance that external
funding will be available to the Company on attractive terms or at all.
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RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share, which establishes
new standards for computing and reporting earnings per share. This standard
will replace the presentation of primary earnings per share with a presentation
of basic earnings per share and diluted earnings per share on the income
statement. It will also require a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation. Adoption of this
statement is required no later than with fiscal year 1998.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and display of comprehensive income. The
objective of this standard is to report a measure of changes in equity of an
enterprise that result from transactions other than with owners. Comprehensive
income is the total of net income and all other nonowner changes in equity.
Adoption of this statement is required no later than with fiscal year 1998.
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BUSINESS
INDUSTRY OVERVIEW
General
The electronic security market is characterized by a large number of small
companies involved in security alarm system installation and monitoring. A
recent survey by a nationally recognized management consulting firm indicated
that the top 100 companies account for an approximately 23% market share, with
an estimated 13,000 smaller independent dealers sharing the remainder of the
market. Other studies have estimated the number of companies involved in the
installation and servicing of burglar and fire alarm systems to be in the
12,000 to 14,000 range, including 2,000 to 4,000 participants that are active
on a limited basis. While the largest industry participants have revenues in
the hundreds of million dollars, more than one-third of all Dealers earned less
than $200,000 in gross revenues in 1994, with more than half earning less than
$400,000. It is the needs of this market of small independent Dealers that the
Company seeks to address.
The Company's management believes that another characteristic of the
security alarm industry is its potential growth. Industry statistics published
in the January 1997 edition of SDM, an industry publication, indicate that
revenues for the electronic security alarm segment of the security industry
grew from $8.8 billion in 1988 to $13.19 billion in 1996. A national brokerage
firm estimated that by the year 2000, there will be 28.1 million households in
the United States with security systems, 17.5 million of which are expected to
be monitored systems. This represents a projected increase in households with
monitored security systems to 16.9% of all households compared to an estimated
12.2% in 1996.
The Company believes that the growth in the security alarm industry has
been fueled by several factors. The aging of the population and the increase
in two career families have both contributed to an increased focus on the
security of the home. Studies cited in the 1996 Fact Book Issue of Security
Sales, an industry publication, indicate that commercial sites without alarm
systems are 4.5 times more likely to be burglarized than those with such
systems (7.59% vs. 1.66%) and that residences without alarm systems are more
than twice as likely to be burglarized as homes with such systems (14.8% vs.
6.6%). These underlying tendencies are reinforced by the practices of many
insurance companies that offer discounts to home and business owners that
install alarm systems.
Several large well-capitalized companies have recently entered the
security alarm industry directly or through acquisitions, including Republic
Industries, Inc., Western Resources, Inc. Tyco International, Inc. and
Ameritech. Security Associates' management believes that these new entrants
have been attracted by the fragmented nature of the industry, its growth
potential and in the case of the utility and telephone companies, the
similarity between the services provided in the security alarm industry and the
services they already perform, which also involve providing services via wire
connections in return for monthly fees. These characteristics are also shared
by cable television companies which represent another potential group of large
well-capitalized potential entrants. Recent developments in digital
communications technology have also made it possible to provide monitoring
services over wide geographic areas from large central monitoring stations,
where in the past a large number of geographically disbursed stations would
have been required.
As larger participants have entered the security alarm industry they have
introduced mass marketing techniques which have included heavy advertising and
"free" or low cost system installations tied to long-term monitoring contracts,
in effect subsidizing the cost of installations with the profits generated from
the long-term monitoring contracts. These long-term contracts typically have
one to five year initial terms and one year automatic renewals thereafter, if
not canceled. The result has been
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a decline in the average price of installed systems from $1,250 to $1,100
between 1993 and 1995, with an increasing number of basic systems being offered
for $200 or less and sometimes such systems are offered "free." This has been
accompanied by an increase in the average monthly monitoring fee from $20.00 a
month to $25.00 over the same period. As competition has driven the price of
installed alarm systems down, and as the competition for providing
installations has increased, independent Dealers have been pressed to find an
appropriate competitive response.
THE NEEDS OF THE INDEPENDENT DEALER COMMUNITY
Retaining Customer Accounts
The independent Dealer sells and installs the alarm system in the home or
business and at the same time enters into a long-term contract with the
subscriber to provide monitoring services. The Dealer then generally
subcontracts with a third party monitoring entity, to provide the actual
monitoring, retaining as profit the "spread" between what is charged to the
subscriber as a "retail" monitoring fee and the cost to the Dealer of buying
monitoring services on a "wholesale" basis. This recurring monthly monitoring
income is an important component of a Dealer's total revenue stream. According
to a study cited in the 1996 Fact Book of Security Sales, approximately 24% of
a Dealer's revenues consist of monitoring and service fees. These fees have
become increasingly important to Dealers as the price of installed systems have
decreased. However, Dealers cannot expect to maintain this stream of income if
their customers do not receive high quality monitoring services. As the
industry has been driven towards lower priced system installations, independent
Dealers are increasingly being forced to subsidize system installations with
the profits generated by monitoring fees. This trend has placed greater
importance on retaining the Accounts beyond the end of the initial contract
term.
Financing
For many independent Dealers, their customer Accounts represent their most
substantial assets. Banks and other commercial lenders, which are a very
important source of financing for small businesses, have historically been
unwilling to lend against customer Accounts as collateral. This represents a
competitive disadvantage for the independent Dealer trying to compete with the
larger market entrants with superior access to capital. It also limits the
ability of the independent Dealer to finance the growth and expansion of its
business. This competitive disadvantage has become more pronounced as Dealers
have been forced to finance the cost of system installations. The inability to
turn customer Accounts into the cash needed to support other aspects of their
businesses is a very important concern of independent Dealers.
Training and Support
New entrants with large marketing budgets place significant pressure on
smaller participants which market their services with limited resources.
Dealers must not only be financially sophisticated, they must also be able to
run their businesses economically and with limited resources. In addition,
Dealers must be able to choose effectively between competing new technologies
in an environment where they have limited financial resources with which to
absorb potentially expensive mistakes. Further, Dealers need the tools that
will allow them to identify and exploit new opportunities both within the alarm
industry and in related fields. Finally, Dealers must also be aware of
regulatory changes affecting the industry. There are limited resources
presently available to help the independent Dealer meet these needs.
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New Business Opportunities
The skills needed to install security alarm systems are very similar to
those required for the installation of closed circuit televisions systems, home
automation systems, audio systems, and home entertainment centers and satellite
dishes. While the entry of large new participants into the industry has
created competitive threats to independent Dealers, the Company believes that
this same phenomenon will also generate new business opportunities. Many of
these opportunities may exist in the form of strategic partnerships or
alliances with some of the new entrants, who may wish to offer their customer
base (e.g., electric utility or telephone company customers) with a broad range
of related services without incurring the expense or experiencing the
uncertainties of entering unfamiliar product markets. The Company believes
that independent Dealers must be aware of and learn how to respond to these new
market opportunities if they are to survive and prosper in the future.
THE COMPANY
Overview
Security Associates provides two types of security alarm monitoring
services for residences and businesses: (i) retail monitoring, which provides
alarm monitoring services to "Accounts" (contracts to provide monitoring
services) owned by the Company ("Retail Monitoring"), and (ii) wholesale
monitoring, which provides alarm monitoring services to Accounts owned by third
parties ("Wholesale Monitoring"), largely independent alarm system sales and
installation organizations ("Dealers"). The Company's ability to capture both
Retail Monitoring and Wholesale Monitoring business is enhanced and supported
by a network of approximately 2,000 Dealers to which the Company provides
industry-related education including technology, finance, management and
marketing training ("Dealer Network").
The Company was incorporated in 1990 as an Illinois corporation and,
through a merger in 1992, became a Delaware corporation. The Company's
original stockholders were 30 independent alarm Dealers, in addition to its
four founding stockholders. Three of the Company's four founders are still
active in the management of the Company: Ronald I. Davis, Chairman of the Board
of Directors, James S. Brannen, President, and Stephen Rubin, Senior Vice
President and Secretary. The Company conducts its operations through four
wholly-owned operating subsidiaries. Monitor Service Group, L.L.C. owns the
Accounts for Retail Monitoring. Wholesale Monitoring is conducted through
three entities, each of which operates a single central monitoring station:
All-Security Monitoring Services, L.L.C. which owns and operates a central
monitoring station located in Des Plaines, Illinois ("Des Plaines Station"),
Security Associates Command Center II, L.L.C. which owns and operates a central
monitoring station located in Grand Rapids, Michigan ("Grand Rapids Station"),
and AMJ Central Station Corporation, Inc., which owns and operates a central
monitoring station located in Pompano Beach, Florida ("Pompano Beach Station").
On June 9, 1997, the Company formed Alarm Funding Corporation, as the entity
through which it plans to offer its loan program for Dealers. See
"Business--Financing Program Strategy."
The Company also has three wholly-owned non-operating subsidiaries, MCAP
Investors, Inc., Winnetka Investors, Inc. and RMR Management Corporation.
These subsidiaries were the entities through which prior to September 1996,
outside investors owned a controlling interest in the Company's operating
subsidiaries. In September 1996, concurrent with a $5 million debt and equity
investment by a new investor, the Company redeemed all of the interests of the
outside investors with the result that all of the Company's subsidiaries are
now wholly-owned (in some cases through other wholly-owned subsidiaries) by the
Company. See "Certain Transactions."
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Security Associates' revenues generally consist of recurring payments
under written contracts to provide Retail Monitoring and Wholesale Monitoring.
For year ended December 31, 1996, the Company derived approximately 35% of its
monitoring revenues from Retail Monitoring and approximately 65% of its
revenues from Wholesale Monitoring. Total revenues increased from $699,154 for
the fiscal year ended December 31, 1993 to $3,782,091 for the fiscal year ended
December 31, 1996. Operating income improved from a loss of $944,311 for the
fiscal year ended December 31, 1993 to a loss of $591,467 for the fiscal year
ended December 31, 1996. The Company's loss per share of Common Stock for the
fiscal year ended December 31, 1996, was $0.47 per share.
The Company's Retail Monitoring services are provided to Accounts that
generally were purchased from portfolios of subscriber Accounts owned by the
Dealers that originally sold and installed the security alarm systems. As of
June 30, 1997, Security Associates owned a total of 20,650 Accounts. From
January 1, 1993 through December 31, 1996 the Company acquired 14,320 Accounts.
During the six months ended June 30, 1997, the Company acquired 7,743
Accounts. As a result the recurring monthly revenue ("RMR") that the Company
is entitled to receive from owned Accounts has increased from $28,388 ($340,656
annualized) as of December 31, 1992 to $443,860 ($5,326,320 annualized) as of
June 30, 1997.
As of June 30, 1997, the Company monitors a total of 121,983 Accounts from
its three central monitoring stations: 119,003 of said Accounts (which are
owned by 865 Dealers) are monitored on a Wholesale Monitoring basis and 2,980
of said Accounts are owned by the Company and are monitored on a Retail
Monitoring basis. From January 1, 1993 through December 31, 1996 the number of
monitored Accounts increased from 12,301 to 109,569. During the six months
ended June 30, 1997, the Company provided monitoring services to 12,414
additional Accounts. As a result, the Company's RMR from Wholesale Monitoring
has increased from $59,253 ($711,036 annualized) as of December 31, 1992 to
$557,394 ($6,688,728 annualized) as of June 30, 1997. The Company estimates
that its central monitoring stations are capable of monitoring 140,000 Accounts
without requiring substantial additional capital outlays. The Company's
current plan envisions increasing the total capacity of the Company's central
stations to 300,000 Accounts by the end of 1997, although there can be no
assurance that this goal can be achieved.
Security Associates' Dealer Network consists of approximately 2,000
Dealers nationwide that are estimated to own 600,000 Accounts, the majority of
which are presently monitored at central stations owned by other companies.
The Company hosts an annual meeting for its affiliates at which developments in
the security industry are discussed and where numerous presentations are made
by industry experts to keep Dealers abreast of new developments in technology,
marketing and management as well as new business opportunities for Dealers. In
addition, the Company distributes an "audio magazine" to the affiliates of its
Dealer Network on a quarterly basis and conducts numerous smaller meetings
throughout the year. The Company believes that its relationships with
independent Dealers are an important component of its entire operation as
Dealers are the source of the portfolios of Accounts acquired and monitored by
the Company. The Company also believes that the relationships with Dealers
established through the Wholesale Monitoring program are a potentially valuable
source for future acquisitions of portfolios of Accounts.
The Company intends to continue to acquire portfolios of Accounts from
Dealers and to increase the number of Accounts it monitors on a Wholesale
Monitoring basis. In pursuing these goals, the Company may acquire additional
central monitoring stations although no agreements are pending as of the date
of this Prospectus. In addition, the Company plans to further develop its
Dealer Network by enhancing its educational programs and by offering selected
Dealers the opportunity to own equity in the Company as part of their ongoing
relationship with Security Associates.
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STRATEGY
Independent Dealer Based Strategy
Security Associates' response to the challenges and opportunities
presented by the security alarm industry have been significantly influenced by
the personal and business experience of its founders. Both Ronald Davis, the
Chairman of the Company's Board of Directors and Stephen Rubin, its Senior Vice
President and Secretary were principals of Davis Marketing, an organization
formed in the mid-1970s to provide consulting services to alarm companies, that
evolved into a franchiser of alarm installation franchises, which later became
a dealer network, initially made up of the former franchisees. The association
provided its affiliates with group buying, training and education services. In
1990, Security Associates, Inc., the corporate predecessor to Security
Associates International, Inc. was formed to acquire Accounts for its own
portfolio and to acquire an interest in the Grand Rapids Station of which the
Company is now the sole owner. The initial stockholders (other than the
founders) were almost all independent Dealers. The Dealer network became part
of the Company and remains a key part of the Company's strategy. It is this
history that has made Security Associates keenly aware of the needs of
independent alarm Dealers and of the opportunities that those needs represent.
WHOLESALE MONITORING STRATEGY
Provide High Quality Wholesale Monitoring
A Dealer-owned Account represents a stream of income that may continue for
many years if the monitoring contracts are extended for additional renewal
terms. An enterprising Dealer can even increase the value of an Account by
selling add-on services such as, system maintenance and servicing, two-way
voice communications between the subscriber and the central monitoring station
and cellular telephone or private radio backup to the normal land line
telephone links to the central monitoring station. There is relatively little
cost to the Dealer for providing monitoring services other than the Dealer's
Wholesale Monitoring fees. Accounts are subject to attrition for many reasons
that are beyond the Dealer's control, such as nonpayment by the subscriber, the
sale of a home or business or lower cost service offerings by competitors. One
element that the Dealer can control, however, is attrition due to poor
monitoring services provided by the central station from which it purchases
Wholesale Monitoring. Dealers address this problem by contracting with
companies that have a demonstrated record of providing high quality services.
The Company's strategy is to own and operate superior central monitoring
stations with highly efficient equipment and a well trained staff to deliver
high quality monitoring services to its retail and wholesale Accounts. All of
the Company's central stations are Underwriters Laboratory ("UL") listed. To
obtain and maintain a UL listing, a central station must be located in a
building meeting UL's structure requirements, have backup and uninterruptible
power supply, have secured telephone lines and redundant computer systems that
meet UL criteria. Access to the facility must also be strictly controlled.
Security Associates' central stations are also capable of supporting a full
range of add-on services such as two way voice communications, cellular
transmission and private radio access.
The Company's goal is to increase the number of Accounts to which it
provides Wholesale Monitoring by 100,000 over the next 12 months, and to
increase the profitability of the services it provides although no assurances
can be given that these goals will be achieved. In order to achieve these
goals, Security Associates will need to add the required monitoring capacity,
integrate its monitoring operations to be able to benefit from economies of
scale, maintain and enhance the quality of the services it renders and
successfully market its services to the Dealer community. In order to assist
the Company in this regard, the Company recently appointed Ronald Carr as a
Vice President.
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Mr. Carr was formerly a Director of Ameritech's SecurityLink where he was
responsible for telecommunications and central station operations.
Increase Wholesale Monitoring Capacity
Historically, the Company's Wholesale Monitoring capacity has grown
principally through the acquisition of central monitoring stations. In October
1990 the Company obtained a 50% interest in the Grand Rapids Station and in
July 1995 the Company purchased a minority interest in of the Des Plaines
Station through a wholly-owned subsidiary. All of the interests in the Des
Plaines and Grand Rapids stations owned by outside investors were purchased by
the Company in September 1996. In December 1996 the Company purchased the
Pompano Beach Station. Subject to the availability of suitable candidates and
financing, Security Associates may acquire additional central monitoring
stations in the future. A principal advantage of purchasing an entire central
monitoring station is that the future cash flows generated from Accounts
currently being monitored may be utilized to finance a significant portion of
the purchase price.
The Company has reviewed its current operations and determined that it can
economically expand the capacity of its existing central monitoring stations to
accommodate 500,000 monitored alarm systems (300,000 by the end of 1997) and,
subject to the availability of financing, the Company intends to embark on a
program of expansion. This Company's expansion would principally involve
hiring additional personnel, purchasing additional computers and monitoring
equipment and leasing additional phone lines. The Company will then be faced
with the additional challenge of bringing in the Accounts to absorb the
increased monitoring capacity.
Integrate Operations and Realize Economies of Scale
Historically, the Company's central monitoring stations were separately
owned and operated as independent business units. The Company's acquisition of
the formerly independent entities has presented the Company with several
opportunities to increase the profitability of each of these operations by
eliminating duplicative efforts through the creation of a single centralized
accounting system and a single billing and collections department to service
all of the Company's central monitoring stations.
The availability of additional monitoring capacity in the presently owned
central stations means that the incremental cost of servicing additional
Accounts is substantially reduced. This can be illustrated by the acquisition
in February 1997 of Northern Central Station, a central monitoring station
located in New Jersey. In the Northern Central Station transaction, the New
Jersey facility was not purchased. Instead, all of the 8,860 Accounts
monitored by Northern Central were transferred in bulk (along with certain
equipment and software) to the Des Plaines Station. Only two new personnel
were hired to accommodate the additional 8,860 Accounts. The old Northern
Central Station operation had eight full-time employees plus a leased facility.
The Company is also reviewing the merits of combining its central monitoring
station operations into fewer facilities.
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Maintain and Enhance the Quality of Wholesale Monitoring Services
One of the initiatives undertaken by the Company is a review of the
operations of each of the central monitoring stations owned by the Company and
the development of a strategic plan to improve the functionality and
profitability of the Company's Wholesale Monitoring services. The Company's
three central monitoring stations use slightly different event monitoring
software and hardware. All of the existing systems are being evaluated as well
as other systems that are available in the industry. The Company also plans to
restructure and enhance its central monitoring stations' operational systems to
provide a platform from which to offer a wider selection of value-added
services to Dealers including providing Dealers with after-hours answering
services, telemarketing services for lead development, direct access to
end-user information for a Dealer's Accounts and automated interactive alarm
system testing services.
The Company is also planning to implement a user group program in order to
gain insight into both the quality of the services it is providing on an
ongoing basis, as well as to obtain Dealer input into potential new service
offerings. As presently envisioned each of the Company's central stations
would form a user group of leading Dealers in its service area. The users
groups would meet periodically and serve as a regular source of feedback for
both the central stations and for Security Associates. The Company also plans
to use the groups as forums at which it can test the attractiveness of new
service introductions before making major commitments of time and money to new
programs.
Implement Relationship Based Marketing Program for Wholesale Monitoring
The Company's goal is to increase the number of Accounts it monitors by
100,000 in the next twelve months. While there can be no assurances that this
goal can be reached, the Company is planning to undertake several initiatives
toward its accomplishment.
One important initiative is to reorganize and change the focus of its
sales force. In the past, the Company relied on the existing Account base of
the acquired central monitoring stations and the "natural increase" in Accounts
that occurs as Dealers who are already customers install additional alarm
systems. The Company's sales force has focused its efforts on purchasing
Accounts from Dealers seeking financing rather than selling Wholesale
Monitoring. In the future, the Company will direct its sales force to engage
in "relationship marketing" and present Dealers with the whole range of
services provided by the Company, including Wholesale Monitoring. As part of
its relationship marketing program, Security Associates will attempt to take
greater advantage of its existing relationships with the Dealer community by
initiating a cross-selling program. The Dealers who participate in the
Company's financing programs will be offered Wholesale Monitoring services as
will the participants in its training programs. The relationship oriented
salespeople will be supported by technical salespeople who will be able to
supply potential purchasers of Wholesale Monitoring with a complete
understanding of the capabilities of the Company's central stations.
As part of its relationship oriented strategy the Company is planning to
implement a program that will allow selected Dealers to become equity owners of
Security Associates with no cash outlay or capital investment. Those Dealers
who are interested in entering into a formal contractual relationship with the
Company, which will include a bulk transfer of their Wholesale Monitoring
Accounts to one of the Company's central monitoring stations, utilizing the
Company's central monitoring stations exclusively for their owned Accounts and
other ongoing commitments, as negotiated between them and the Company, will be
issued Common Stock or Warrants. The Company believes that this program will
be attractive to many Dealers, especially in light of the fact that the Company
will also be providing them with high quality Wholesale Monitoring services at
competitive rates. The Company believes that this program will be a central
component of its Wholesale Monitoring marketing efforts. See "Business--Dealer
Program."
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In addition to its relationship based marketing initiatives, the Company
will also consider the purchase of additional central monitoring stations
including bulk purchases of Wholesale Monitoring Accounts by acquiring smaller
central monitoring stations and transferring the actual monitoring to its own
facilities in a manner similar to the Northern Central Station transaction
noted above.
FINANCING PROGRAM STRATEGY
Provide Dealer Financing Programs
Independent alarm dealers, like many other small businesses, from time to
time need financing in order to operate their businesses. The reasons a Dealer
might need access to cash are extremely varied and include the need to deal
with seasonal cash shortfalls, to finance expansion or inventory, and to
subsidize the costs of system installation. As is common with small
businesses, access to the capital markets is limited. Sales of equity may be
impossible or undesirable. Access to the credit markets is also limited. For
many Dealers, the most significant assets they own are the contract rights in
the monitoring Accounts they retain. Unfortunately, such contract rights are
generally not treated as "assets" against which banks will lend on a secured
basis. This situation creates a dilemma for Dealers and a market opportunity
for the Company, which because of the depth of its knowledge of the security
alarm industry, is able to accurately assess the value of these assets.
The Company's Dealer financing programs are headed by Stephen Rubin who
has twenty five years of experience counseling Dealers as to their financing
options and assisting them with their financing needs. The Company presently
operates an active "Account Acquisition Program" and plans to implement a
Dealer financing program pursuant to which it will make loans to Dealers
secured by Accounts as collateral. See "Business--Implement Loan Program."
Expand the Account Acquisition Program
One important method of financing that has developed in the security alarm
industry is the sale of Accounts to third parties such as Security Associates.
All of the Company's Retail Monitoring services are provided to Accounts
that are purchased as portfolios of subscriber Accounts from the Dealers that
originally sold and installed the security alarm systems. In a typical
transaction, the Dealer will sell its Accounts for a purchase price that is a
multiple of the RMR generated by that Account. For example, if a single
contract provided for monthly payments of $25.00 per month it might sell for
$750.00 or thirty times RMR. The multiple paid in any actual transaction is
impacted by several factors including the prices paid by the Company's
competitors and the Company's prior experience with Accounts purchased from the
seller. Because Accounts typically have three year contract terms (with annual
renewals thereafter) the purchaser of the Account is generally undertaking a
significant risk related to how long the Account remains active and current on
its monthly payments. In the foregoing example, it will take thirty months for
the purchaser of the Account to receive payments equal to the purchase price.
In order for an Account acquisition to be profitable, not only must the
cash flow from the Account be sufficient to recoup the purchaser's investment,
such cash flow must also be sufficient to satisfy the cost of providing
monitoring service on a monthly basis as well as the billing, collection,
customer service, financing and other costs as well as provide a return on the
purchaser's investment. The "quality" of the Accounts purchased which is
generally measured in terms of the consistency with which the monthly
monitoring fees will be paid and the expected longevity of the Accounts are the
crucial elements in determining whether an Account acquisition is a profitable
undertaking. The Company's plan to continue the growth of its Account
Acquisition Program is dependent on several
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factors including the availability of suitable Account acquisition
opportunities, the market price at which acquisitions are being made and the
amount and cost of financing available to the Company.
Implement Relationship Based Marketing in Account Acquisition Program
The Company's relationship based marketing strategy is the foundation of
its Account Acquisition Program. One of the unique aspects of Security
Associates' position in the security alarm industry is what it does not do - it
does not sell and install security systems. As a result, the Company is not
viewed as a competitor in the Dealer community. Several of the Company's
competitors in the Account acquisition business sell and install security
systems, and some are even leading mass-marketers of low cost system
installations. In a typical Account purchase, Security Associates will hire
the selling Dealer to service the underlying burglar alarm system. Security
Associates will also refer all inquiries relating to system enhancements to the
selling Dealer. This process serves two purposes: first, in a business where
Account longevity is important, it allows the Company to take advantage of the
goodwill between the subscriber and the person it knows - the Dealer; second,
it encourages the Dealer to sell additional Accounts to Security Associates as
new installations are made. In a market where the purchase price of Accounts
is extremely competitive, the Company believes that, at least in some cases,
the depth of its relationships with Dealers gives it a competitive edge.
As noted above, the Company intends to place greater emphasis on
cross-selling its services. In this regard it intends to encourage the Dealers
to whom it provides Wholesale Monitoring services to use the Company as
purchaser when they wish to sell Accounts. Just as the Company values its
relationships with Dealers and understands that such relationships are a source
of future business and referrals, Dealers value their relationships with their
installation customers. Because Security Associates uses its own central
monitoring stations to provide Retail Monitoring to its owned Accounts and
these are the same stations that the Dealers are already familiar with as
purchasers of Wholesale Monitoring, Dealers need not be concerned that their
customer relationships are going to be disrupted because of poor monitoring
services.
In addition, as part of the Company's Dealer Program, under which it will
issue shares of Common Stock and Warrants to Dealers which enter into long term
contractual relationships with the Company, Dealers will be required to grant
the Company rights of first refusal with respect to sales of Accounts and
borrowings secured by Accounts. See "Business--Dealer Program."
Maintain Quality Controls for Acquired Accounts
The key to the profitability of an Account acquisition is the "quality" of
the Accounts purchased. Before closing on any Account acquisition, the
Company generally reviews the underlying contract of each Account to be
purchased and the payment history and credit rating of the underlying
subscribers. As part of each closing, the Company will directly pay any third
parties with liens relating to the purchased Accounts in return for a release
of such liens.
Obtain Dealer Guarantees
The Company's Account acquisition contracts contain provisions designed to
protect the Company's investment in the Accounts purchased. Generally, the
Company will pay 80-90% of the purchase price in cash (including the amount
needed to pay any lien holders) and retain the balance of the purchase price as
collateral for a guarantee period of up to two years. In the event that any
Account is canceled or stops regular payments during the guarantee period,
replacement Accounts must be delivered by the selling Dealer or otherwise a
portion of the holdback amount is retained to offset the purchase price of the
defaulted Accounts. The Company will also obtain a lien on some or all of the
other Accounts owned by the selling Dealer in order to secure the Dealer's
obligations. The guarantee
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<PAGE> 31
period becomes, in effect, a quality control testing period for the purchased
Accounts. The guarantee periods and the holdback amounts vary from transaction
to transaction. As the Company and the Dealer develop a history of successful
transactions, the holdback amounts and the guarantee periods generally will
tend to decrease.
Provide Continuing Customer Service to Company Owned Accounts
The Company maintains a staff of 10 customer service personnel who handle
customer inquiries and perform billing and collection tasks. In addition, the
Company generally enters into an agreement with the selling Dealer to provide
continuing maintenance services for the system hardware. In those cases where
the installing Dealer is unwilling or unable to provide maintenance services,
the Company will enter into a maintenance agreement with a third party for such
services.
Reduce Attrition Rates
In the normal course of its business, the Company experiences cancellation
of its owned Accounts due to subscribers relocating, cancellation for
nonpayment, problems with service and miscellaneous other reasons. This
attrition is offset somewhat by the ability of the Company to offset against
the amounts held back in Account acquisitions and by Dealers meeting their
obligation to replace Accounts that go into default during the guarantee
period. Historically, through August 31, 1997, the Company experienced gross
attrition of 11.1% and net attrition (i.e., after taking into account
replacements for canceled Accounts) of 7.8%. The Company experienced
significantly higher gross and net attrition in 1997 primarily as a result of
losses attributable to two acquisitions aggregating 2,001 Accounts. The
Company believes that it can improve its attrition experience by improving its
acquisition quality control and customer service programs. The Company's goal
is to reduce its gross attrition rate to 8% and its net attrition rate to 6% by
year end 1997, although there can be no assurance that this goal can be
achieved. See "Risk Factors--Attrition of Subscriber Accounts."
Implement Loan Program
Because high quality Accounts represent a reliable future stream of
revenue with little incremental costs, many Dealers sell them only reluctantly
and would prefer to borrow using their Accounts as collateral. Banks have been
historically reluctant to lend against Accounts as collateral. The Company
believes that only two finance companies exist with active lending programs in
the industry and both are relatively small compared to what the Company
believes is the potential demand for loans secured by Accounts. Because of its
familiarity with the security industry and its experience in providing
monitoring services, customer service and billing and collections, the Company
believes it is well prepared to both determine the value of Accounts as
collateral and to realize on the value of those Accounts in case of default.
The Company is presently in the process of developing a loan program. On June
9, 1997 the Company formed Alarm Funding Corporation as the entity through
which it will implement the loan program. The formal implementation of such a
program is subject to many contingencies including the availability of
financing and obtaining the necessary consents from the Company's lenders.
TRAINING AND SUPPORT STRATEGY
Offer High Quality Training Programs
The marketplace in which the independent alarm Dealer competes is
undergoing rapid change. The entry of large well capitalized companies is
creating uncertainty among Dealers. It is in this context that the Company
believes that its ongoing training and educational programs are not only
valuable to Dealers, but also can add depth and permanence to all of the
Company's business
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relationships with independent Dealers. The Company's Dealer training and
support efforts are headed by Ron Davis, Chairman of the Board, with twenty
five years of experience as a speaker and author on a broad range of subjects
concerning the security alarm industry, independent Dealers and the changes in
the marketplace that have and will continue to impact them.
The Company conducts approximately 50 conferences a year at locations
around the country at which issues and opportunities facing the industry are
presented. Security Associates also hosts an annual three day educational
conference attended by several hundred Dealers, where presentations are made by
both Company personnel and other professionals from within the industry, as
well as specialists in such fields as finance and marketing.
These activities are supplemented by the Company's "Audio Insight"
program. Audio Insight is an audio magazine that is distributed four times a
year. Each edition of Audio Insight is a 1 1/2-2 hour cassette magazine of
ideas, interviews and insights relating to the alarm industry, hosted by Ron
Davis. Also distributed quarterly is camera ready art for use in consumer
newsletters that can be customized by Dealers for mailing to their own customer
base as a marketing tool. The Audio Insight magazine and the consumer
newsletter program are only available to affiliates of the Company's Dealer
Network.
Assist Dealers in Identifying and Exploiting New Business Opportunities
The installation of security alarm systems requires the same array of
skills necessary for the installation of a broad range of other low-voltage
electronic systems that can be marketed to the independent alarm Dealers'
existing customer base, i.e., homeowners and businesses. These include
products such as closed circuit television systems, home automation systems,
intercoms, home entertainment centers, and satellite dishes. The Company's
training programs have for many years exposed the Dealer community to these
opportunities including how to market and install these products.
Recently, the Company entered into a joint venture agreement with EchoStar
Satellite Corporation pursuant to which Security Associates has agreed to
provide Dealers with training on the marketing and installation of the EchoStar
satellite dish program for direct broadcast television. The Company believes
that the installation of satellite dishes requires similar skills to alarm
system installation and has similar revenue generating characteristics. The
installing Dealer receives an initial payment related to the equipment purchase
and also receives monthly payments based on the homeowner's monthly
subscription payments for programming. The Company has also recently entered
into agreements with two companies that market home entertainment products and
systems. Pursuant to these agreements, participating Dealers are expected to
have access to a full range of home entertainment products.
The EchoStar joint venture and the home entertainment products are
examples of the types of business relationships that the Company hopes to
continue to develop in the future. In both situations, the Company expects to
receive fees based on the success of the joint marketing effort addressed to
the Dealer community and at the same time the Dealers are expected to receive
true "dealer" pricing for the products they purchase. As both programs are
new, they have yet to develop significant revenues.
Security Associates also anticipates that new business opportunities for
Dealers will develop as a result of "bundling" which is a new phenomenon
impacting the alarm industry. Bundling involves a single entity providing a
range of similar services and billing for all those services on a consolidated
basis. A single company could very well supply a home with local and long
distance telephone services, cable television programming and alarm monitoring,
all billed monthly on a single bill. The Company anticipates that at least
some bundlers may wish to "outsource" significant portions of the installation
and maintenance functions. Because of the breadth of its Dealer network, the
Company
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intends to present itself to the "bundlers" as an ideal way of approaching
independent installers in an efficient manner.
Expand Affiliation with the Dealer Network
The Company views its overall marketing strategy as an attempt to build a
broad range of relationships with independent Dealers through which it can
develop and market a range of services designed to address Dealer needs. At
the same time its access to, and knowledge of, the alarm industry and
independent Dealers is of value to outsiders who may wish to use the services
of, or sell products to, Dealers. The Company recognizes that increasing the
depth and breadth of its relationship with the Dealer community is an important
component of its overall strategy. This need to extend and strengthen its
relationship with Dealers has led the Company to place greater emphasis on its
affiliation program. The goal of the affiliation program is to provide the
Company with the broadest possible base of affiliates, with increased benefits
available to those affiliates with closer and more permanent relationships
with the Company.
The Company views the entire population of independent Dealers as
potential affiliates of its Dealer Network. As of the date of this Prospectus,
approximately 2,000 of the estimated 13,000 independent alarm Dealers are
Security Associates affiliates and additional efforts are expected to be
undertaken to induce more Dealers to join. The Company is currently developing
a marketing program designed to introduce the benefits of association with
Security Associates to a broader segment of the Dealer community. This program
will emphasize the education and training programs the Company offers and the
services it provides in identifying and making available new business
opportunities to its affiliates. The Company will also include information
concerning the Wholesale Monitoring and Account Acquisition programs. All
Dealers that enter into transactions with the Company, whether for Wholesale
Monitoring or in Account acquisition transactions will automatically become
affiliates.
The Company expects that its relationships with some of its affiliates
will grow into long term business relationships and plans to develop programs
to reward Dealers who develop deeper relationships with the Company. For
example, should a national retail chain approach the Company for a list of
Dealers who are potential installers for alarm systems for stores in multiple
locations, the Company would introduce those affiliates with whom it had an
existing and ongoing transactional relationship. The Company also plans to
invite some of the affiliates who use its Wholesale Monitoring services to
participate in central monitoring station based user groups designed to help
the Company improve its current performance as well as design new service
offerings.
Dealer Program
The Company also plans to offer to a select group of affiliates (i.e.,
Dealers) the opportunity to become equity owners of Security Associates
through the Company's Dealer Program. As part of the Company's Dealer Program,
the selected Dealers who participate in this Program will receive Common Stock
or Warrants, in part, for entering into long term contractual relationships
with the Company. While the terms of each contractual relationship will be
individually negotiated, it is intended that pursuant to the Dealers Program,
the Dealers will, among other things: (i) commit to transfer and maintain all
of their owned Accounts (existing and new) for monitoring by the Company's
central monitoring stations for a period of five years; and (ii) grant the
Company (or its financing subsidiaries) rights of first refusal for sales of
Accounts and borrowings secured by Accounts for a period of five years.
Pursuant to the Dealer Program, the Company will provide the monitoring
services required by each Dealer at rates based on each central monitoring
station's standard monitoring fees (which are competitive to rates charged by
other central monitoring stations for similar services) and issue
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Common Stock or Warrants to such Dealer. The number of shares of Common Stock
or Warrants issued to any Dealer will be negotiated individually with each
Dealer, but all shares of Common Stock (including Common Stock issuable upon
exercise of Warrants) will be issued at $6.00 per share. However, the Dealers
will not be required to make a cash outlay or other capital investment in the
Company for the securities. Rather, the Company will issue Common Stock or
Warrants, in part, to induce such Dealers to enter into the Dealers Program.
The securities issued under the Dealers Program will be subject to
restrictions on the rights to transfer or pledge. The restrictions on the
Dealer's right to transfer or pledge the securities it receives (as well as the
right to exercise the Warrants) under the Dealer Program will be removed
annually (on each anniversary of the closing date), at the rate of 20% a year,
over the five year period which corresponds to the term of the contractual
relationship. However, if the Dealer defaults on its obligations under the
Dealer Program, the Dealer will forfeit all of the securities as to which the
restrictions on the rights to transfer or pledge the securities (or exercise
the Warrants) have not yet been removed, but will retain all securities that
have not been forfeited (including the right to exercise all Warrants that have
not been forfeited). A Dealer will be deemed to be in default on it
obligations under the Dealers Program, if, among other things, the number of a
Dealer's Accounts monitored by the Company's central monitoring station falls
below 90% of the agreed stated minimum number of Accounts specified in the
agreement between the Company and said Dealer, or the Dealer fails to comply
with the rights of first refusal granted to the Company. The Dealer Program
provides the Dealer with a thirty day cure period under certain circumstances.
If such default continues beyond the agreed cure period, if any, the Dealer
will forfeit all of the Common Stock (or Warrants) issued to it under the
Dealer Program as to which the transfer or pledge restrictions have not been
removed. The certificates issued to the Dealers under the Dealer Program will
contain restrictive legends on the securities to which the restrictions apply.
See "Risk Factors-Restrictions on Transfer; Risk of Forfeiture."
The Company's implementation of the Dealer Program is a central component
of the Company's business plan. Efforts to implement this program are expected
to continue for at least a year.
RISK MANAGEMENT
The nature of the services provided by the Company potentially exposes it
to greater risks of liability for employee acts or omissions or system failures
than may be inherent in other businesses. Generally, the Company's Wholesale
Monitoring and Retail Monitoring agreements contain provisions limiting the
Company's liability to subscribers in an attempt to reduce this risk.
The Company carries insurance of various types, including general
liability and errors and omissions insurance providing coverage of $1.0 million
and $2.0 million, respectively. The loss experience of the Company and other
companies in the security industry may affect the cost and availability of such
insurance. Certain of the Company's insurance policies and the laws of some
states may limit or prohibit insurance coverage for punitive or other types of
damages, or liability arising from gross negligence or wanton behavior. See
"Risk Factors--Risk of Liability from Operations."
COMPETITION
The security alarm industry is highly competitive and highly fragmented.
While the Company does not compete directly with many of the large new entrants
into the industry because it does not sell and install security systems, it is
nonetheless impacted by the competitive challenge these entrants present to
independent Dealers. To some extent new alarm systems installations made by
large integrated industry participants are systems that may not be installed by
the Dealers on whom the
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Company's business depends. As a result, there may be less Dealer owned
Accounts for which Wholesale Monitoring can be provided and fewer Dealer owned
Accounts available for the Company to purchase. The Company's Wholesale
Monitoring services compete with those offered by an estimated 1,500 to 2,000
companies. Of those companies, an estimated 200 firms including the Company
offer monitoring services from UL listed facilities. While many of the
companies providing monitoring services are small local operations, several of
the UL listed competitors are companies that are larger and better financed than
the Company. The Company also competes with several companies that have Account
acquisition and loan programs for independent Dealers and some of those
competitors are larger and better capitalized than Security Associates. There
is also the potential for other entities such as banks or finance companies to
gain a better understanding of the industry and become more active as a source
of competition for the Dealer financing portions of the Company's business.
The Company's competitive strategy has three basic components: provide
the Dealer community with high quality monitoring and financial services at
competitive prices; provide Dealers with the training and access to new
business opportunities that will allow them to compete effectively and conduct
their businesses profitably; and constantly enhance and reinforce Security
Associates' relationships with independent alarm Dealers with a view to
becoming the provider of choice for each of the services the Company provides.
See "Risk Factors--Competition."
REGULATORY MATTERS
A number of local governmental authorities have adopted or are considering
various measures aimed at reducing the number of false alarms. Such measures
include: (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms, and (v) requiring further
verification of an alarm signal before the police will respond.
The Company's operations are subject to a variety of other laws,
regulations and licensing requirements of federal, state and local authorities.
In certain jurisdictions, the Company is required to obtain licenses or
permits, to comply with standards governing employee selection and training,
and to meet certain standards in the conduct of its business. Many
jurisdictions also require certain of the Company's employees to obtain
licenses or permits.
The alarm industry is also subject to requirements imposed by various
insurance, approval, listing and standards organizations. Depending upon the
type of subscriber served, the type of service provided and the requirements of
the relevant local governmental jurisdiction, adherence to the requirements and
standards of such organizations is mandatory in some instances and voluntary in
others.
The Company's alarm monitoring business utilizes telephone lines and radio
frequencies to transmit alarm signals. The cost of telephone lines and the
type of equipment which may be utilized in telephone line transmissions are
currently regulated by both federal and state governments. The operation and
utilization of radio frequencies are regulated by the Federal Communications
Commission and state public utilities commissions.
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LEGAL PROCEEDINGS
The Company from time to time experiences routine litigation in the normal
course of its business. The Company does not believe that any pending
litigation will have a material adverse effect on the financial condition or
results of operations of the Company.
EMPLOYEES
At August 31, 1997, the Company employed 129 individuals on a full-time
basis and 6 individuals on a part-time basis. Currently, none of the Company's
employees is represented by a labor union or covered by a collective bargaining
agreement. The Company believes that its relationships with its employees are
good.
FACILITIES
The Company's executive offices are located at 2101 South Arlington
Heights Road, Arlington Heights, Illinois and its central monitoring stations
are located at 2116 South Wolf Road, Des Plaines, Illinois, 1208 Butterworth,
S.W., Grand Rapids, Michigan and 1471 S.W. 12th Avenue, Pompano Beach, Florida.
All of the Company's facilities are leased. The Arlington Heights lease
expires December 31, 2000, but can be renewed by the Company at its option for
one additional five year term; the Des Plaines lease expires June 30, 2000, but
can be renewed by the Company at its option for one additional five year term;
the Grand Rapids lease expires September 4, 1998, but can be renewed by the
Company at its option for one additional one year term; and the Pompano Beach
lease expires July 31, 2000, but can be renewed by the Company at its option
for one additional five year term.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors and their respective ages
and positions as of August 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Ronald I. Davis 58 Chairman of the Board
James S. Brannen 58 President, Chief Executive Officer and Director
Daniel S. Zittnan 43 Vice President, Treasurer,
Chief Financial Officer
Stephen Rubin 50 Senior Vice President and Secretary
Thomas J. Salvatore 30 Director
Douglas Oberlander 47 Director
Ronald J. Carr 46 Vice President
Timothy M. McAuliff 38 Vice President
Karen Daniels 43 Vice President
Scott J. MacDougal 39 Vice President
</TABLE>
Ronald I. Davis was a founder of the Company and has been Chairman of the
Board since October 1990. Prior to formation of the Company, he had many years
of experience in the security alarm industry. He was the founder and from 1987
to 1990 Mr. Davis was chairman and principal shareholder of SAI Partners, Inc.,
an alarm dealer buying group which also provided Dealers with other support
services such as training and educational programs, consulting, group insurance
programs and certain proprietary alarm products manufactured by others. From
1982 to 1987 Mr. Davis was President of Security Alliance
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Corporation, a franchise company in the alarm industry and a joint venture with
Pittway Corporation. Prior to 1982, Davis was a full time consultant to many of
the alarm companies that now make up the affiliates of the Company's Dealer
Network. Mr. Davis attended Roosevelt University where he received a B.A.
James S. Brannen was a founder of the Company and has been a Director and
President of the Company since October 1990 and Chief Executive Officer since
1992. He was a self-employed consultant in the alarm industry from February,
1988 to October, 1990. From 1962 until 1987, Mr. Brannen was associated with
the First National Bank of Chicago where he served as a senior vice president
in both the commercial and international banking departments. In those
capacities he managed the commercial areas of the bank responsible for lending
to the cable television and paging industries. In addition he managed the
secured lending activity and was responsible for organizing and managing the
bank's first work-out lending activity. Mr. Brannen has an A.B. degree from
Dartmouth College and received MBA degree from Northwestern University.
Daniel S. Zittnan has served as Vice President, Chief Financial Officer
and Treasurer since October 7, 1997. Mr. Zittnan spent over thirteen years
with Arthur Andersen, LLP most recently as a Senior Manager. He was elected to
partner in July, 1997. Mr. Zittnan holds a BA in accounting from DePaul
University and is a member of the AICPA and ICPA Society.
Stephen Rubin was a founder of the Company and has been Senior Vice
President and Secretary since October 1990. From 1987 to 1990, he was a Senior
Vice President of SAI Partners, Inc. From 1978 to 1986, Mr. Rubin was an
officer of Davis Marketing Group and Security Alliance Corporation. Mr. Rubin
has a B.S. degree from Northern Michigan University and MBA degree from Loyola
University. Mr. Rubin has the principal responsibility for the day-to-day
relationships with the dealers in the Company's Dealer Network and for
negotiating account acquisitions.
Thomas J. Salvatore was elected as a Director of the Company in December
1996. Since 1991 Mr. Salvatore has been the Managing General Partner of TJS
Management, L.P. which is the General Partner of TJS Partners, L.P. ("TJS"), a
principal stockholder of the Company. TJS has a contractual right to designate
two directors to the Company's Board of Directors and Mr. Salvatore is one of
the designees. Mr. Salvatore holds a Bachelors Degree in Business
Administration from Fordham University.
Douglas Oberlander has been a Director since January 1994. Since 1989 Mr.
Oberlander has been President of Lease I, Inc. a commercial lease and finance
company. From 1965 to 1988 Mr. Oberlander was employed by Oberlander Security,
a security alarm dealer. Since 1991 Mr. Oberlander has served as a director of
Oberlander Alarms, a security alarm dealer.
Ronald J. Carr has been the Company's Vice President since March, 1997.
From March 1996 to March 1997 Mr. Carr was Director of Telecommunications and
Central Station Operations for Ameritech's SecurityLink subsidiary. From 1991
to 1996 he was Director of Telecommunications for ADT, Inc. Mr. Carr holds a
Bachelors Degree in Business Administration from Brookdale College.
Timothy M. McAuliff has served as Vice President since September 1996.
Mr. McAuliff served as a Vice President responsible for acquisition and credit
for Old Kent Leasing, a subsidiary of Old Kent Financial Corporation from
December 1995 to September 1996. From October 1994 to December 1995 Mr.
McAuliff was Accounting Manager for Advo, Inc., a direct mail marketing firm.
From December 1992 to October 1994 he was Division Controller for a publishing
firm, Thomson Corporation. From 1986 through 1992 Mr. McAuliff was a manager
for the Tribune Company, a publishing and broadcasting company. Mr. McAuliff
holds a bachelors degree in Business Administration from Elmhurst College.
Karen B. Daniels has served as Vice President since October 7, 1997. Ms.
Daniels has been consulting for Security Associates since March, 1997,
and prior to that with Ameritech AIIS, since 1995. From March, 1990, to June,
1995, Ms. Daniels was Vice President/Controller for Editel-Chicago, a division
of Unitel Video, Inc., a video post production company. From May, 1983 to
March, 1990, Ms. Daniels was Controller for Editel-Chicago. From 1981 to 1983,
Ms. Daniels was Manager of Financial Reporting for Bell & Howell/Columbia
Pictures, a joint venture of video related companies. From 1979 to 1981, Ms.
Daniels was Senior Accountant for Bell & Howell/Video Group. From 1977 to
1979, Ms. Daniels was Financial Analyst for Graphic Systems, a division of
Rockwell International, a manufacturer of printing presses. Ms. Daniels has a
bachelors degree in Industrial Administration-Finance from Iowa State
University. Ms. Daniels is a Certified Public Accountant.
Scott J. MacDougal has been a Vice President with the Company since
October 7, 1997, and is responsible for the Company's dealer loan program.
Previously, he was Principal of Cornerstone Funding Inc., a financial advisory
company serving small businesses. Mr. MacDougal spent five years in the
venture capital industry, as Vice President of Business Development for Kentco
Capital Corp. of Northfield, Illinois. Prior to that, he spent eight years in
the banking industry, most recently as Vice President in the Communications
Companies Division at The First National Bank of Chicago. Mr. MacDougal holds
a BA in journalism from the University of Wisconsin, and an MBA in Finance from
The Wharton School.
The Company's executive officers are appointed annually by, and serve at
the discretion of, the Board of Directors. Each executive officer is a
full-time employee of the Company. All directors hold office until the next
annual meeting of stockholders or until their successors are duly elected and
qualified. The Board of Directors currently consists of four members. Ronald
I. Davis and Stephen Rubin are brothers-in-law. There are no other family
relationships between any director or executive officer of the Company.
36
<PAGE> 38
DIRECTOR COMPENSATION
Directors who are not executive officers of the Company are reimbursed for
travel expenses incurred in connection with attending board and committee
meetings. Directors are not entitled to additional fees for serving on
committees of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation earned for the fiscal year ended December 31,
1996 for the Company's Chief Executive Officer. No executive officer of the
Company earned more than $100,000 during the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
NAME AND ANNUAL COMPENSATION
PRINCIPAL POSITION -------------------
SALARY
James S. Brannen.......................
President and Chief Executive Officer $ 94,523
The following table sets forth information regarding the number and value
of options and warrants held at December 31, 1996 by the Chief Executive
Officer. No options were exercised during 1996 by the Chief Executive Officer.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1996 AT DECEMBER 31, 1996 (1)
-------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
James S. Brannen 278,308 0 $606,711 $0
</TABLE>
DEFERRED COMPENSATION STOCK PLAN
The Board of Directors on April 28, 1997, adopted an executive deferred
compensation plan entitled "Security Associates International Inc. Supplemental
Employees' Retirement Plan ("Plan"). The Plan will establish a deferred
compensation program for participating officers. The Board of Directors will
make annual year-end awards to plan participants in the form of shares of the
Company's Common Stock, with 20% of said awards to be subject to forfeiture at
the end of each of the five years following an initial award based on the
Board's assessment of each participating officer's performance against the
Company's goals and objectives for the year. The Company had no executive
deferred compensation plan or stock plan prior to the adoption of the current
Plan. As of October 15, 1997, a total of 1,081,768 shares have been awarded
under this plan; none of said shares have vested.
401(K) PLAN
On April 28, 1997, the Board of Directors adopted the Datair Mass
Submitted Prototype Standardized Cash or Deferred Profit Sharing Plan and Trust
("401(k) Plan"). Effective June 1, 1997, any employee of the Company, including
the Company's Named Executive Officer, who has completed six months of
employment at the end of his or her first twelve months of employment or any
calendar year ending thereafter, may contribute to the 401(k) Plan. The
Company will contribute to each employee's
37
<PAGE> 39
account an amount equal to 25% of the first 4% of each employee's compensation
that is contributed by each employee.
EMPLOYMENT AGREEMENT
On August 30, 1996, the Company entered into a three year Employment
Agreement with James S. Brannen to serve as the Company's President and Chief
Executive Officer. Pursuant thereto, Mr. Brannen receives an annual salary of
$125,000, which amount is increased following an annual salary review. The
Employment Agreement provides that Mr. Brannen is entitled to severance pay
equal to 2.99 times his annual salary at the time of termination upon: (i)
expiration of the term of the Employment Agreement (including any renewals);
(ii) death or disability; or (iii) if Mr. Brannen terminates his employment
because of: (a) a diminution of his responsibilities or authority or being
assigned duties inconsistent with the position of President; (b) a requirement
that he serve from a location other than the greater Chicago metropolitan area;
(c) breach of the Employment Agreement by the Company; or (d) a change of
control of the Company. In addition, Mr. Brannen will participate in such
other benefits as offered to other executive employees of the Company.
38
<PAGE> 40
CERTAIN TRANSACTIONS
On September 5, 1996, TJS Partners, L.P. ("TJS") invested a total of $5
million in the Company. The investment consisted of the purchase of 3,525,682
shares of Common Stock for $1,558,351 pursuant to a Common Stock Purchase and
Subscription Agreement and a loan to the Company of $3,441,649 pursuant to a
Convertible Subordinated Promissory Note. The market price of the Company's
Common Stock on September 5, 1996 was $.875 bid and $1.125 asked. The shares
of Common Stock issued to TJS represented approximately 49% of the issued and
outstanding Common Stock of the Company. As part of these transactions the
Company entered into a Standby Option and Warrant Agreement pursuant to which
the Company granted TJS certain "mirror options" to purchase 1,855,243 shares
of Common Stock that are exercisable in an equivalent number and at the same
price in the event any of the Company's then existing option holders exercise
their options. The mirror options are exercisable at prices ranging from
$57.00 to $300.00 per share of Convertible Preferred Stock (the equivalent of
$0.57 to $3.00 per share of Common Stock). The Common Stock Purchase and
Subscription Agreement included a grant by TJS to Ronald I. Davis and James S.
Brannen of a voting proxy to vote all of TJS' shares of Common Stock for a
period ending on the earlier of 18 months following the closing of that
transaction or the second annual meeting of stockholders following the closing.
The proxy expired on September 19, 1997. TJS was granted certain rights of
first refusal with respect to issuance of new securities which have been
waived in connection with this offering. TJS was also granted "piggyback" and
demand registration rights for its shares of the Company's capital stock.
Those rights were waived in connection with this Offering. TJS also has the
right to designate two members of the Company's Board of Directors. Thomas J.
Salvatore, Managing General Partner of TJS Management, L.P., TJS's General
Partner is one such designee. As of the date of this Prospectus, TJS has not
designated an additional Board member.
The Convertible Subordinated Promissory Note provided the holders of that
Note with the right to convert the principal amount of that Note into Common
Stock in the event of an initial public offering or the use of Common Stock in
a business acquisition. These provisions are no longer applicable as explained
below.
On December 31, 1996, TJS and the Company agreed to restructure TJS' total
investment in the Company (the "TJS Amendment"). Pursuant to the TJS
Amendment, the shares of Common Stock originally purchased and the Convertible
Subordinated Promissory Note were canceled. In their place, the Company issued
to TJS 35,257 shares of Convertible Preferred Stock (each convertible into 100
shares of Common Stock), 344,165 shares of 12% Redeemable Preferred Stock and a
warrant to purchase 15,000 shares of Convertible Preferred Stock at $250.00 per
share. See "Description of Capital Stock." In addition, TJS entered into a
Subordinated Loan Agreement with the Company pursuant to which the Company has
a $5,000,000 line of credit. The $5,000,000 line of credit bears interest at
12% per annum payable semiannually and is due on December 31, 2002. On
November 1, 1996 TJS loaned the Company $500,000 and made further loans of
$4,200,000 on January 2, 1997 and $250,000 on May 1, 1997.
As part of the TJS Amendment the Standby Option and Warrant Agreement was
amended so that TJS' mirror options are henceforth exercisable to purchase
Convertible Preferred Stock rather than Common Stock. On April 21, 1997 TJS
purchased 5,215.88 shares of Convertible Preferred Stock (the equivalent of
521,588 shares of Common Stock) for an aggregate purchase price of $233,370
pursuant to exercise of mirror options.
On January 3, 1997 the Company paid $135,000 to Ronald I. Davis in
connection with a previously negotiated Settlement Agreement with SAI Partners,
Inc. which is wholly-owned by Mr. Davis. The Settlement Agreement concerned
commissions owed by the Company.
39
<PAGE> 41
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of June 30, 1997 by: (i) each person
known by the Company to own beneficially more than five percent of the
outstanding shares of Common Stock; (ii) each of the Company's directors; (iii)
the Named Executive Officer; (iv) each Selling Stockholder; and (v) all
directors and executive officers of the Company as a group. The Company
believes that except as noted each person or entity named below has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by such holder, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIAL OWNERSHIP BEING BENEFICIAL OWNERSHIP
PRIOR TO OFFERING OFFERED AFTER OFFERING
----------------------------- --------- ----------------------------
NAME NUMBER OF NUMBER OF
SHARES PERCENT(1) SHARES PERCENT(2)
<S> <C> <C> <C> <C> <C>
TJS Partners, L.P.(3)
52 Vanderbilt Avenue
New York, New York 10017....................... 4,047,288 49.1% 0 4,047,288 39.5%
Ronald I. Davis(4)
c/o Security Associates International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005.............. 928,422 10.7% 0 928,422 8.7%
James S. Brannen(5)
c/o Security Associates International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005.............. 538,616 6.3% 0 538,616 5.1%
Thomas J. Salvatore(6)
c/o TJS Partners, L.P.
52 Vanderbilt Avenue
New York, New York 10017....................... 4,047,288 49.1% 0 4,047,288 39.5%
Douglas Oberlander
10225 N. Knoxville Avenue
Peoria, Illinois 61615......................... 106,022 1.3% 0 106,022 1.0%
Robert Brown
IRA Account
3605 N. Robinwood Drive
Muncie, Indiana 47304.......................... 25,000 * 25,000 0 0
Bobbie Conrad
383 Adams Street
Glencoe, Illinois 60022........................ 20,000 * 20,000 0 0
Sidney Dechter
7406 Princeton Drive
Hanover Park, Illinois 60103................... 25,000(7) * 25,000 0 0
Anita M. Delmar
2324 North East Regents Drive
Portland, Oregon 97212......................... 20,000 * 20,000 0 0
Robert H. Dilworth
Baker & McKenzie
815 Connecticut Avenue, N.W.
Washington, D.C. 20006-4078.................... 50,000 * 50,000 0 0
Fred Figge
221 S. Blackstone
LaGrange, Illinois 60525....................... 98,500(7) 1.2% 98,500 0 0
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIAL OWNERSHIP BEING BENEFICIAL OWNERSHIP
PRIOR TO OFFERING OFFERED AFTER OFFERING
----------------------------- --------- ----------------------------
NAME NUMBER OF NUMBER OF
SHARES PERCENT (1) SHARES PERCENT(2)
<S> <C> <C> <C> <C> <C>
Dianne G. Freeman
P.O. Box 143
Sand Lake, New York 12153...................... 25,000 * 25,000 0 0
Phyllis Greinwald
c/o Courtney Van Lopik
18 Woodland Trail
Ogden Dunes
Portage, Indiana 46368......................... 77,000 * 77,000 0 0
Cheryl L. Grolle
W 564 Pell Lake Drive
Genoa City, Wisconsin 53128.................... 250 * 250 0 0
Raymond C. Hoven
105 Chicory Court
Rolling Meadows, Illinois 60008................ 225,539(8) 2.7% 40,000 185,539 1.8%
Infinity Partnership II
4075 N. Victoria Drive
Hoffman Estates, Illinois 60195................ 10,000(7) * 10,000 0 0
Inversiones Alange, C.A.
c/o Malcolm Caplan
Baker & McKenzie
Barnett Tower, Suite 1600
701 Bickwell Avenue
Miami, Florida 33131........................... 62,500 * 62,500 0 0
Inversiones Aparicio, C.A.
c/o Malcolm Caplan
Baker & McKenzie
Barnett Tower, Suite 1600
701 Bickwell Avenue
Miami, Florida 33131........................... 120,000 1.5% 120,000 0 0
Inversiones Erlanger, C.A.
c/o Malcolm Caplan
Baker & McKenzie
Barnett Tower, Suite 1600
701 Bickwell Avenue
Miami, Florida 33131........................... 100,000 1.2% 100,000 0 0
Irwin Jacobson
1035 Carlyle Terrace
Highland Park, Illinois 60035.................. 123,000(9) 1.5% 12,500 110,500 1.1%
Lee Jones
c/o Support Services Group
63 Calle de Industrias
Suite 550
San Clemente, California 92672................. 22,088 * 22,088 0 0
Metro Suburban Pediatrics
600 N. Court
Palatine, Illinois 60067....................... 12,500(7) * 12,500 0 0
Mark Scharmann
1661 Lakeview Circle
Ogden, Utah 84403.............................. 144,800(10) 1.7% 32,500 112,300 1.1%
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIAL OWNERSHIP BEING BENEFICIAL OWNERSHIP
PRIOR TO OFFERING OFFERED AFTER OFFERING
----------------------------- --------- ----------------------------
NAME NUMBER OF NUMBER OF
SHARES PERCENT(1) SHARES PERCENT(2)
<S> <C> <C> <C> <C> <C>
Bernard and Samuel Sered
4023 Suffield Court
Skokie, Illinois 60076......................... 17,801(11) * 12,500 5,301 *
Lorraine R. Small
453 Raintree Drive
Glen Ellyn, Illinois 60137..................... 250 * 250 0 0
Brady E. Turner
P.O. Box 840
Brunswick, Georgia 31521 56,676(12) * 12,500 44,176 *
All Executive Officers and Directors as a group
(10 persons)(13)............................... 6,031,526 65.9% 0 6,031,526 54.1%
</TABLE>
- ----------------------
(1) Applicable percentage of ownership as of June 30, 1997 is based upon
8,246,663 shares of Common Stock outstanding (including shares issuable upon
conversion of outstanding shares of Convertible Preferred Stock). Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission, and unless otherwise noted includes voting and investment
power with respect to the shares shown as beneficially owned.
(2) Applicable percentages of ownership are based on 10,246,663 shares of
Common Stock outstanding. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, and unless otherwise
noted includes voting and investment power with respect to the shares shown as
beneficially owned. Assumes all shares being registered for resale are sold.
(3) Consists of 40,472.88 shares of Convertible Preferred Stock. Each share of
Convertible Preferred Stock is convertible into and has the voting rights of
100 shares of Common Stock. TJS Partners is the only holder of Convertible
Preferred Stock.
(4) Includes 530,114 shares owned by Mr. Davis and SAI Partners, Inc. and
398,308 shares purchasable upon the exercise of currently exercisable options
and warrants. Excludes 225 shares owned by Beverly Davis, Mr. Davis' wife, 200
shares owned by Scott Davis, Mr. Davis' son, 6,000 shares owned by Ethan Davis,
6,000 shares owned by Benjamin Davis and 5,301 shares owned by Ann Davis, Mr.
Davis' sister, as to which Mr. Davis disclaims beneficial ownership.
(5) Includes 260,308 shares owned by Mr. Brannen and 278,308 shares of Common
Stock purchasable upon exercise of currently exercisable options. Excludes
7,580 shares owned by Martha A. Brannen, Mr. Brannen's wife, 6,000 shares
owned by Craig Brannen, 6,000 shares owned by Sarah B. Ozee and 6,000 shares
owned by Peter Brannen, Mr. Brannen's children, as to which Mr. Brannen
disclaims beneficial ownership.
(6) Consists of 40,472.88 shares of Convertible Preferred Stock owned by TJS
Partners, L.P., Mr. Salvatore controls voting and disposition of these shares
through TJS Management, L.P., which is the sole general partner of TJS
Partners, L.P.
(7) Includes only shares which may be purchased pursuant to currently
exercisable options. All of such shares are being registered for resale
hereby.
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<PAGE> 44
(8) Includes 185,539 shares owned by Mr. Hoven and 40,000 shares which may be
purchased pursuant to currently exercisable options. Only the 40,000 shares
subject to the options are being registered for resale hereby.
(9) Includes 110,500 shares owned by pension plans controlled by Mr. Jacobson
and 12,500 shares which may be purchased pursuant to currently exercisable
options. Only the 12,500 shares subject to the options are being registered
for resale hereby.
(10) Includes 112,300 shares owned by Mr. Scharmann and 32,500 shares which may
be purchased pursuant to currently exercisable options issued to Mr. Scharmann
and Troika Capital a corporation controlled by Mr. Scharmann. Only the 32,500
shares subject to the options are being registered for resale hereby.
(11) Includes 5,301 shares owned by Messrs. Sered and 12,500 shares which may
be purchased pursuant to currently exercisable options. Only the 12,500 shares
subject to the options are being registered for resale hereby.
(12) Includes 44,176 shares owned by Mr. Turner and 12,500 shares which may be
purchased pursuant to currently exercisable options. Only the 12,500 shares
subject to the options are being registered for resale hereby.
(13) Includes 902,155 shares purchasable upon exercise of currently exercisable
options and warrants.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.001 per share. As of June 30, 1997, the Company
has outstanding 4,198,875 shares of Common Stock, 40,472.88 shares of
Convertible Preferred Stock and 344,165 shares of 12% Redeemable Preferred
Stock. As of August 14, 1997, there were 201 holders of record of Common Stock
and one holder of record for the Convertible Preferred Stock and 12% Redeemable
Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for the
election of directors and all other matters submitted for stockholder vote,
except matters submitted to the vote of another class or series of shares.
Holders of Common Stock are not entitled to cumulative voting rights.
Therefore, the holders of a majority of the shares voting for the election of
directors can elect all of the directors if they choose to do so. The holders
of Common Stock are entitled to dividends in such amounts and at such times, if
any, as may be declared by the Board of Directors out of funds legally
available therefor. The Company has not paid any dividends on its Common Stock
and does not anticipate paying any cash dividends on such stock in the
foreseeable future. See "Dividend Policy." Upon liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all net assets available for distribution to stockholders after
payments to creditors and after the liquidation preferences on the Company's
Preferred Stock, as described below, have been satisfied. The Common Stock is
not redeemable and has no preemptive or conversion rights.
All outstanding shares of Common Stock are, and the shares of Common Stock
to be sold by the Company in this offering when issued will be, duly
authorized, validly issued, fully paid and nonassessable.
The Common Stock is traded under the symbol "LRMD."
43
<PAGE> 45
PREFERRED STOCK
The Company's amended and restated Certificate of Incorporation authorizes
the issuance, upon resolution of the Board of Directors and without further
stockholder approval, of up to a total of 500,000 shares of Preferred Stock.
The terms of one or more classes or series of Preferred Stock, including
dividend rights, conversion prices, voting rights, redemption prices and
similar matters will be determined by the Board of Directors. Further series
of preferred stock could have voting, dividend and other rights, preferences
and privileges superior to those of the Common Stock or other classes of
Preferred Stock. See "Risk FactorsCertain Antitakeover Effects."
12% REDEEMABLE PREFERRED STOCK
Each share of 12% Redeemable Preferred Stock is senior to the Company's
outstanding Convertible Preferred Stock and senior to the Company's Common
Stock. Dividends accrue at the rate per share of 12% per annum of the stated
value which is initially $10.00 per share. In the event the Company raises $10
million in new equity, all dividends that have not been paid must be paid. If
the Company raises $15 million in new equity, the Company will have the right
to redeem the 12% Redeemable Preferred Stock for its liquidation value plus
unpaid dividends. If the Company does not redeem the 12% Redeemable Preferred
Stock at that time, the dividend rate will increase to 18% and the stockholder
will have the right to convert such stock into Common Stock at a conversion
price equal to 80% of the market price of the Common Stock at the date of
conversion. The holder of 12% Redeemable Preferred Stock will not have voting
rights (except with respect to an amendment to the Certificate of Incorporation
that would have the effect of canceling or otherwise affecting the rights of
the holders of such stock to receive dividends which have accrued but which
have not been declared). The 12% Redeemable Preferred Stock has a $10.00 per
share liquidation preference over the Convertible Preferred Stock and the
Common Stock.
CONVERTIBLE PREFERRED STOCK
Each share of Convertible Preferred Stock is senior to the Company's
outstanding Common Stock but ranks junior to the outstanding 12% Redeemable
Preferred Stock. The holder of Convertible Preferred Stock is entitled to
receive such dividends, if any, as may be declared on the Common Stock, if such
holder were the holder of the number of shares of Common Stock into which the
shares of Convertible Preferred Stock then held by such holder are then
convertible. The shares of Convertible Preferred Stock are convertible into
100 shares of Common Stock at the option of the holder at any time and
automatically upon an initial public offering by the Company. Each share of
Convertible Preferred Stock has the voting power of one share and the holders
of such stock vote together with the Common Stock as a single class. The
Convertible Preferred Stock has a $250.00 per share liquidation preference,
after payment to the holders of the 12% Redeemable Preferred Stock.
WARRANTS
The Company will issue an aggregate of 2,000,000 Warrants. Each Warrant
entitles the holder to purchase one share of Common Stock from the Company at
an exercise price of $6.00 per share. The Warrants are redeemable at the
option of the Company after no less than two years from the date of issuance at
a redemption price of $.10 per share, provided the market price of the Common
Stock equals or exceeds 150% of the exercise price for a period of 15 out of 20
consecutive trading days ending within 30 days of the date on which the notice
of redemption is given. The exercise price will be adjusted in the event of
share splits, share consolidations and certain rights offerings and share
dividends involving Common Stock. The Warrants may be exercised at any time
after issuance until six years after issuance. Warrants not exercised by that
time will expire. The Warrants do not confer upon the holder any voting
rights, preemptive rights or any other rights as a Company shareholder.
44
<PAGE> 46
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BY-LAWS
AND DELAWARE LAW
Certificate of Incorporation and By-Laws. The Company's Certificate of
Incorporation provides that the Board of Directors may issue preferred stock
with such voting rights, preferences and designations as the Board determines
in its sole discretion without stockholder approval. Further, the Certificate
of Incorporation provides that the Board of Directors shall have the power to
make, adopt, amend or repeal the Bylaws. The Bylaws provide that the Company's
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 25% of the Company's capital stock. These
provisions of the Certificate of Incorporation and By-Laws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions may enhance the likelihood of continuity and
stability in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions may reduce the
vulnerability of the Company to an unsolicited acquisition proposal. The
provisions may also discourage certain tactics that may be used in proxy
fights. However, such provisions could have the effect of discouraging others
from making tender offers for the Company's shares and, as a consequence, they
also may inhibit fluctuations in the market price of the Company's shares that
could result from actual or rumored takeover attempts. Such provisions also may
have the effect of preventing changes in the management of the Company. See
"Risk Factors--Certain Antitakeover Effects."
Delaware Takeover Statute. The Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(a) by persons who are directors and also officers and (b) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of the stockholders, and not by written consent, by the
affirmative vote of at least 66-2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
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<PAGE> 47
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability. As permitted by the Delaware General Corporation
Law, the Company's Certificate provides that directors of the Company shall not
be personally liable for monetary damages to the Company for certain breaches
of their fiduciary duty as directors, unless they violated their duty of
loyalty to the Company or its stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions, or
derived an improper personal benefit from their action as directors. This
provision would have no effect on the availability of equitable remedies or
nonmonetary relief, such as an injunction or rescission for breach of the duty
of care. In addition, the provision applies only to claims against a director
arising out of his or her role as a director and not in any other capacity
(such as an officer or employee of the Company). Further, liability of a
director for violations of the federal securities laws will not be limited by
this provision. Directors will, however, no longer be liable for monetary
damages arising from decisions involving violations of the duty of care which
could be deemed grossly negligent.
Indemnification. The Certificate provides that directors and officers of
the Company shall be indemnified by the Company to the fullest extent
authorized by Delaware law, against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of the Company. The
Certificate also authorizes the Company to enter into one or more agreements
with any person which provide for indemnification greater or different from
that provided in the Certificate. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Fidelity Transfer
Company, Salt Lake City, Utah.
46
<PAGE> 48
LEGAL MATTERS
The validity of the shares of Common Stock and Warrants offered hereby
will be passed upon for the Company by Sachnoff & Weaver, Ltd., Chicago,
Illinois.
EXPERTS
The Financial Statements and Schedules of the Company as of December 31,
1995 and 1996, and for each of the years in the three-year period ended
December 31, 1996, have been included herein in reliance upon the reports of
Arthur Andersen LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of such firm as experts in giving said
reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement, of which this Prospectus constitutes a part, on Form
S-1 under the Securities Act with respect to the Common Stock and Warrants
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules to the
Registration Statement. For further information with respect to the Company
and the Common Stock and Warrants offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete; reference is made in each instance to the copy of such contract or
document filed as an exhibit to the Registration Statement. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Registration Statement, including the
exhibits and schedules thereto, is also available at the Commission's site on
the World Wide Web at http:/www.sec.gov.
47
<PAGE> 49
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SECURITY ASSOCIATES INTERNATIONAL, INC.
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1995, 1996 and June 30,
1997 (unaudited) F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995, 1996, and the six months ended June 30, 1996 (unaudited)
and June 30, 1997 (unaudited) F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995, 1996, and the six months ended June 30, 1996
(unaudited) and June 30, 1997 (unaudited) F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995, 1996, and the six months ended June 30, 1996 (unaudited)
and June 30, 1997 (unaudited) F-6
Notes to consolidated financial statements F-7
AMJ CENTRAL STATION CORPORATION
Report of Independent Public Accountants F-17
Balance Sheets as of December 31, 1995, and December 19, 1996 F-18
Statements of Operations and Retained Earnings for the year ended
December 31, 1995 and for the period January 1, 1996 to December 19,
1996 F-19
Statements of Cash Flows for the year ended December 31, 1995 and for
the period January 1, 1996 to December 19, 1996 F-20
Notes to financial statements F-21
SECURITY ASSOCIATES COMMAND CENTER II, L.L.C.
Report of Independent Public Accountants F-23
Consolidated Balance Sheet as of September 5, 1996 F-24
Consolidated Statement of Operations and Members' Equity for the period
January 1, 1996 to September 5, 1996 F-25
Consolidated Statement of Cash Flows for the period January 1, 1996 to
September 5, 1996 F-26
Notes to consolidated financial statements F-27
</TABLE>
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Security Associates International, Inc.:
We have audited the accompanying consolidated balance sheets of SECURITY
ASSOCIATES INTERNATIONAL, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December
31, 1994, 1995 and 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Associates
International, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1994, 1995 and 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 11, 1997
F-2
<PAGE> 51
SECURITY ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
ASSETS 1995 1996 1997
------------ -------------- -------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 53,818 $ 632,355 $ 469,374
Accounts receivable, net 330,138 1,332,990 1,587,944
Notes receivable from stockholders - 25,180 96,365
Other current assets 83,949 236,872 216,100
----------- ----------- -----------
Total current assets 467,905 2,227,397 2,369,783
----------- ----------- -----------
INVESTMENT IN JOINT VENTURES 85,556 - -
FIXED ASSETS, net 33,589 417,899 570,108
OTHER ASSETS:
Contract rights to monitor security systems, net 5,424,650 6,606,126 11,490,653
Goodwill and covenant not to compete, net - 6,666,373 7,236,139
Other assets, net 18,354 614,928 569,134
----------- ----------- -----------
Total other assets 5,443,004 13,887,427 19,295,926
----------- ----------- -----------
Total assets $ 6,030,054 $16,532,723 $22,235,817
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 140,105 $ 615,775 $ 290,750
Note payable for acquisition - 3,721,131 -
Current maturities of long-term notes payable 1,858,992 413,227 743,792
Current maturities of notes payable--related parties 96,748 136,000 -
Accrued expenses 499,748 439,660 1,344,487
Unearned revenues 543,927 1,409,796 1,744,752
Other 27,024 9,322 398
----------- ----------- -----------
Total current liabilities 3,166,544 6,744,911 4,124,179
NOTES PAYABLE, net of current maturities 4,768,573 8,019,348 13,055,838
NOTES PAYABLE-related parties, net of current maturities 137,994 500,000 4,950,000
----------- ----------- -----------
Total liabilities 8,073,111 15,264,259 22,130,017
----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $10.00 par value; 35,478
shares and 40,473 outstanding on December 31, 1996 and
June 30, 1997, respectively (liquidation value of
$8,869,500 at December 31, 1996 and $10,118,250 at June
30, 1997) - 354,780 404,730
12% redeemable preferred stock, $10.00 par value; 344,165 shares
outstanding on December 31, 1996 and June 30, 1997 - 3,441,650 3,441,650
Common stock, $.001 par value; 50,000,000 shares
authorized; 3,688,087, 3,699,375 and 4,198,875 shares
outstanding on December 31, 1995, 1996 and June 30,
1997, respectively 3,668 3,699 4,199
Additional paid-in capital 2,724,761 3,958,080 4,349,190
Retained deficit (4,771,486) (6,489,745) (8,093,969)
----------- ----------- -----------
Total stockholders' equity (deficit) (2,043,057) 1,268,464 105,800
----------- ----------- -----------
Total liabilities and stockholders' equity (deficit) $ 6,030,054 $16,532,723 $22,235,817
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE> 52
SECURITY ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Monitoring fees $1,117,208 $ 2,390,513 $ 3,652,892 $ 1,585,934 $ 4,677,820
Membership fees and other 279,789 342,740 129,199 68,042 78,097
---------- ----------- ----------- ----------- -----------
Total revenues 1,396,997 2,733,253 3,782,091 1,653,976 4,755,917
OPERATING EXPENSES:
General, selling and administrative 1,481,175 2,482,180 3,104,496 1,152,197 3,692,533
Amortization and depreciation 243,957 539,634 1,020,427 449,958 1,001,199
Provision for loss portfolios - - - - 344,718
Loss from disposition of contract rights 16,902 100,700 248,635 84,975 295,630
---------- ----------- ----------- ----------- -----------
Total operating expenses 1,742,034 3,122,514 4,373,558 1,687,130 5,334,080
---------- ----------- ----------- ----------- -----------
Income (loss) from operations (345,037) (389,261) (591,467) (33,154) (578,163)
INTEREST EXPENSE 250,533 742,659 1,384,239 469,927 819,562
---------- ----------- ----------- ----------- -----------
Loss before income in equity of joint venture (595,570) (1,131,920) (1,975,706) (503,081) (1,397,725)
INCOME IN EQUITY OF JOINT VENTURE 71,960 184,642 257,447 183,423 -
---------- ----------- ----------- ----------- -----------
Loss before income taxes (523,610) (947,278) (1,718,259) (319,658) (1,397,725)
PROVISION FOR INCOME TAXES - - - - -
---------- ----------- ----------- ----------- -----------
Net loss before minority interest (523,610) (947,278) (1,718,259) (319,658) (1,397,725)
MINORITY INTEREST 66,385 - - - -
---------- ----------- ----------- ----------- -----------
Net loss (457,225) (947,278) (1,718,259) (319,658) (1,397,725)
DIVIDENDS ACCRUED ON PREFERRED STOCK - - - - 206,499
---------- ----------- ----------- ----------- -----------
Net loss available to common stockholders $ (457,225) $ (947,278) $(1,718,259) $ (319,658) $(1,604,224)
========== =========== =========== =========== ===========
NET LOSS PER SHARE $ (.13) $ (.26) $ (.47) $ (.09) $ (.40)
========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 3,662,187 3,665,642 3,669,343 3,669,137 4,034,292
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE> 53
SECURITY ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE 12% REDEEMABLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ---------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- ------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 3,662,187 $ 3,662 - $ - - $ -
Net loss - - - - - -
--------- ------- ------ ------- ------ ----------
BALANCE, December 31, 1994 3,662,187 3,662 - - - -
Issuance of common stock 5,900 6 - - - -
Capital contribution - - - - - -
Net loss - - - - - -
--------- ------- ------ ------- ------ ----------
BALANCE, December 31, 1995 3,668,087 3,668 - - - -
Issuance of common stock for
note receivable 22,088 22 - - - -
Issuance of common stock 3,525,682 3,526 - - - -
Common stock canceled in
exchange for preferred stock (3,525,682) (3,526) - - - -
Preferred stock issued in
exchange for common stock - - 35,257 352,570 - -
Preferred stock issued in
exchange for note payable - - - - 344,165 3,441,650
Issuance of preferred stock for
note receivable - - 221 2,210 - -
Issuance of common stock for services 9,200 9 - - - -
Net loss - - - - - -
--------- ------- ------ ------- ------ ----------
BALANCE, December 31, 1996 3,699,375 3,699 35,478 354,780 344,165 3,441,650
Issuance of preferred stock (unaudited) - - 4,995 49,950 - -
Issuance of common stock (unaudited) 499,500 500 - - - -
Accrued dividends (unaudited) - - - - - -
Net loss (unaudited) - - - - - -
--------- ------- ------ ------- ------ ----------
BALANCE, June 30,1997(Unaudited) 4,198,875 $ 4,199 40,473 $404,730 344,165 $3,441,650
========== ======== ======= ========= ======== ===========
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY (DEFICIT)
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1993 $2,688,042 $(3,366,983) $ (675,279)
Net loss - (457,225) (457,225)
---------- ----------- -----------
BALANCE, December 31, 1994 2,688,042 (3,824,208) (1,132,504)
Issuance of common stock 1,469 - 1,475
Capital contribution 35,250 - 35,250
Net loss - (947,278) (947,278)
---------- ----------- -----------
BALANCE, December 31, 1995 2,724,761 (4,771,486) (2,043,057)
Issuance of common stock for
note receivable 12,568 - 12,590
Issuance of common stock 1,554,825 - 1,558,351
Common stock canceled in
exchange for preferred stock (1,554,825) - (1,558,351)
Preferred stock issued in
exchange for common stock 1,205,781 - 1,558,351
Preferred stock issued in
exchange for note payable - - 3,441,650
Issuance of preferred stock for
note receivable 10,380 - 12,590
Issuance of common stock for services 4,591 - 4,600
Net loss - (1,718,259) (1,718,259)
---------- ----------- -----------
BALANCE, December 31, 1996 3,958,081 (6,489,745) 1,268,464
Issuance of preferred stock (unaudited) 170,829 - 220,779
Issuance of common stock (unaudited) 220,280 - 220,780
Accrued dividends (unaudited) - (206,499) (206,499)
Net loss (unaudited) - (1,397,725) (1,397,725)
---------- ----------- -----------
BALANCE, June 30,1997(Unaudited) $4,349,190 $(8,093,969) $ 105,800
========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE> 54
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31 JUNE 30,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (457,225) $ (947,278) $(1,718,259) $(319,658) $(1,604,224)
Adjustments to reconcile net loss to net cash
used for operating activities-
Income in equity of joint venture (71,960) (184,642) (257,447) 268,979 -
Issuance of common stock for services - - 4,600 -
Amortization and depreciation 243,957 539,634 1,020,427 449,958 1,001,199
Loss from disposition of contract rights - - 248,635 84,975 295,630
Provision for loss portfolios - - - - 344,718
Minority interest (66,385) - - - -
Changes in assets and liabilities-
Accounts Receivables, net (28,552) (195,531) 136,036 (193,875) (81,954)
Note receivables (125,000) 125,000 - - (71,185)
Prepaid monitoring expense and other current
assets (4,881) (73,504) (126,992) (32,248) 20,772
Other long-term assets (3,523) (15,160) - - -
Accounts payable (4,276) 77,776 41,334 58,909 (325,025)
Bank overdraft 7,580 (35,568) - - -
Accrued expenses 74,975 252,430 (172,208) 232,232 560,109
Unearned revenue (79,512) 408,948 425,148 (263,362) 8,648
Other current liabilities (4,139) (116,760) (22,902) 4,126 (8,924)
----------- ----------- ----------- --------- -----------
Net cash provided by (used for)
operating activities (518,941) (164,655) (421,628) 290,036 139,764
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract rights to monitor security
systems, net (1,289,036) (3,639,934) (1,855,953) (752,761) (4,775,684)
Purchase of fixed assets - (37,893) (54,052) (6,008) (258,799)
Cash paid for acquisition, net - - (1,794,021) - -
Net cash used for investing ----------- ----------- ----------- --------- -----------
activities (1,289,036) (3,677,827) (3,704,026) (758,769) (5,034,483)
----------- ----------- ----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital - 36,725 1,558,351 - 441,559
Deferred financing costs - - (596,879) - -
Proceeds from notes receivable from stockholders 33,085 10,358 - - 25,180
Repayment of notes payable to related parties (32,897) (54,349) (98,742) - (136,000)
Proceeds from notes payable to related parties - - 3,941,649 - 4,450,000
Repayment of notes payable (98,705) (774,720) (7,404,188) (336,388) (4,929,731)
Proceeds from notes payable 1,438,050 4,592,090 7,304,000 742,670 4,880,730
----------- ----------- ----------- --------- -----------
Net cash provided by financing
activities 1,339,533 3,810,104 4,704,191 406,282 4,731,738
----------- ----------- ----------- --------- -----------
INCREASE (DECREASE) IN CASH (468,444) (32,378) 578,537 (62,451) (162,981)
CASH, beginning of year 554,640 86,196 53,818 53,818 632,355
----------- ----------- ----------- --------- -----------
CASH, end of year $ 86,196 $ 53,818 $ 632,355 $ (8,633) $ 469,374
=========== =========== =========== ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE> 55
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994, 1995 AND 1996
(DATA WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 ARE UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
COMPANY BACKGROUND
Security Associates International, Inc. and Subsidiaries (the "Company") is
composed of Security Associates International, Inc. ("SAI") and its
subsidiaries, RMR Management Corp. ("RMR"), MCAP Investors, Inc., a Delaware
Corporation ("MCAP"), Winnetka Investors, Inc., a Delaware corporation
("Winnetka"), Security Associates Command Center II, LLC, a Michigan Limited
Liability Company ("SACC"), Monitor Service Group, LLC, an Illinois Limited
Liability Company ("MSG"), All-Security Monitoring Services, LLC, an
Illinois Limited Liability Company ("All-Security") and AMJ Central Station
Corporation, a Delaware Corporation ("AMJ").
The Company was organized for the primary purpose of acquiring service
contracts for remote electronic monitoring of security systems in businesses
and homes throughout the United States and providing monitoring services to
independent alarm dealers on a subcontract basis. Revenues are composed
primarily of fees for monitoring services and dealer/membership support
services.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of Security Associates
International Inc., and its wholly owned subsidiaries. All intercompany
items and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
SIX MONTHS ENDED DATA (UNAUDITED)
In the opinion of management, the unaudited financial statements for the
six-month periods ended June 30, 1996 and 1997, are presented on a basis
consistent with the audited financial statements and contain all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. The results of operations for interim periods are not
necessarily indicative of results of operations for the full year.
REVENUE RECOGNITION
Revenue is recognized for each source as follows:
Monitoring fee revenue is recognized as earned over the related contract
period. Services may be billed in advance on a monthly, quarterly or
annual basis and any amounts not earned are included as unearned
revenues.
F-7
<PAGE> 56
The Company recognizes revenue for membership fees and other over the
term of the membership period or as products are delivered.
ACCOUNTS RECEIVABLE
The Company grants unsecured trade credit to customers in the normal course
of business. Receivables in the accompanying consolidated balance sheets
are net of reserves for doubtful accounts of approximately $29,000, $206,000
and $232,000 as of December 31, 1995, 1996 and June 30, 1997, respectively.
CONTRACT RIGHTS TO MONITOR SECURITY SYSTEMS
The Company actively pursues the acquisition of contract rights to monitor
security systems. These contract rights are recorded at the Company's
purchase price. The Company has arrangements with a number of dealers from
which it has purchased contract rights to receive replacement contract
rights of canceled contracts for a period ranging up to three years. These
arrangements are secured, in some cases, by liens on dealers' unsold
accounts. Accounts which are replaced are carried at the book value of the
replaced account. The Company's historical attrition rate as of December
31, 1996 for accounts not replaced is approximately 6% (4% net of replaced
accounts from dealers). As of June 30, 1997 the Company's historical
attrition rate for accounts not replaced is approximately 11.5% (8% net of
replaced accounts from dealers). The net attrition rate is affected by the
age of the portfolio and may increase as the guarantee period on recent
account purchases expires. Amortization is calculated on a straight-line
basis over an estimated useful life of 10 years. When an account is
canceled, the Company will record a loss from disposition of contract rights
for any unamortized portion. Contract rights to monitor security systems in
the accompanying consolidated balance sheets are net of accumulated
amortization of approximately $866,000, $1,350,000 and $1,901,000 as of
December 31, 1995, 1996 and June 30, 1997, respectively. The Company's
continued growth and profitability is dependent, in part, upon the
availability of monitored service accounts for purchase at reasonable rates.
GOODWILL AND COVENANT NOT TO COMPETE
Goodwill is recorded as the cost of purchased businesses in excess of
the fair value of the net assets acquired and is amortized on a
straight-line basis over a period of fifteen years. The Company regularly
reviews the performance of acquired businesses to evaluate the realizability
of the underlying goodwill based upon expected future undiscounted operating
cash flows. In conjunction with an acquisition on February 27, 1997, the
seller signed a covenant not to compete. The covenant not to compete valued
at approximately $850,000 is being amortized over the three year life of the
agreement. Goodwill and covenant not to compete in the accompanying
consolidated balance sheets is net of accumulated amortization of
approximately $201,000 and $536,000 as of December 31, 1996, and June 30,
1997, respectively.
OTHER LONG-TERM ASSETS
Other long-term assets consist primarily of deferred financing costs. The
deferred financing costs are being amortized over 5 years, the life of the
related loan. Other long-term assets in the accompanying consolidated
balance sheets are net of accumulated amortization of approximately $2,000,
$7,000 and $49,000 as of December 31, 1995, 1996 and June 30, 1997,
respectively.
F-8
<PAGE> 57
FIXED ASSETS
Fixed Assets are stated at cost. Depreciation is calculated using
accelerated methods for both financial statement and income tax purposes.
The depreciable lives by major class of assets are as follows:
<TABLE>
<S> <C>
Equipment 3-7 years
Office furniture and fixtures 5-7 years
Automobiles/trucks 5 years
Leasehold improvements 15 years
</TABLE>
The following is a summary of fixed assets by major class of assets:
<TABLE>
<CAPTION>
DECEMBER 31
------------------ JUNE 30,
1995 1996 1997
-------- -------- ----------
(unaudited)
<S> <C> <C> <C>
Equipment $243,839 $744,277 $ 945,635
Office furniture and fixtures 79,334 54,496 103,931
Automobiles/trucks - 20,188 20,188
Leasehold improvements - 53,834 53,835
-------- -------- ----------
323,173 872,795 1,123,589
Less accumulated depreciation 289,584 454,896 553,481
-------- -------- ----------
Fixed assets, net $ 33,589 $417,899 $ 570,108
======== ======== ==========
</TABLE>
RENT EXPENSE
The Company leases its office building and the facilities from which their
central stations operate for various periods and amounts through the year
2000. Rent expense was approximately $35,000, $36,000, $206,000 for the
years ended December 31, 1994, 1995 and 1996, respectively, and
approximately $181,000 for the six months ended June 30, 1997.
Future minimum lease payments, as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $330,995
1998 327,885
1999 304,331
2000 224,272
========
</TABLE>
ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------- JUNE 30,
1995 1996 1997
-------- --------- --------
(unaudited)
<S> <C> <C> <C>
Accrued interest $224,355 $114,833 $ 485,631
Accrued service fees 124,580 - -
Accrued payroll 86,721 181,244 133,350
Accrued loss portfolios - - 344,718
Other 64,092 143,583 380,788
-------- -------- ----------
$499,748 $439,660 $1,344,487
======== ======== ==========
</TABLE>
F-9
<PAGE> 58
UNEARNED REVENUES
Unearned revenues consist primarily of prebilled monitoring fees to
customers and dealers and prebilled memberships to dealers. As of December
31, 1995, 1996, and June 30, 1997, unearned revenues related to monitoring
fees were approximately $499,000, $1,380,000 and $1,737,000, respectively,
and unearned revenues related to memberships and other were approximately
$45,000, $30,000 and $8,000, respectively.
PREFERRED STOCK
In conjunction with the sale of 49% interest of the Company, $5 million of
common stock and debt were converted to 379,422 shares of preferred stock on
December 31, 1996. Additionally, on December 31, 1996 this stockholder
exercised options for purchase of 221 shares of preferred stock at $57 per
share, in the form of a stockholder note receivable which was paid after
year-end.
Of the 379,643 shares of preferred stock issued and outstanding as of
December 31, 1996, 344,165 shares are 12% Redeemable Preferred Stock, $10
par and liquidation value with dividends deferred. As of June 30, 1997,
cumulative dividends deferred was $206,500. In the event that the Company
raises $10,000,000 in new equity, all dividends that have not been paid must
be paid. If the Company raises $15,000,000 in new equity, the Company will
have the right to redeem the 12% Redeemable Preferred Stock for its
liquidation value plus unpaid dividends. If the Company does not redeem the
12% Redeemable Preferred Stock at that time, the dividend rate will increase
to 18% and the stockholder will have the right to convert this preferred
stock into common stock at a conversion price equal to 80% of the market
price of the common stock at the date of conversion. The remaining 35,478
shares of preferred stock issued and outstanding are nondividend Convertible
Preferred Stock with a $250 liquidation preference, each share convertible
into 100 shares of common stock of the Company.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). As of December 31, 1995, 1996 and June 30, 1997, the
Company had net operating loss carryforwards of approximately $3.2 million,
$5.9 million and $7.1 million, respectively. The tax net operating losses
begin to expire in 2005. As of December 31, 1995, 1996 and June 30, 1997,
no tax benefit has been recognized for these loss carryforwards.
NET LOSS PER SHARE
Net loss per share is computed based upon the weighted average number of
common shares outstanding during the periods presented. Stock options and
Convertible Preferred Stock have not been included in the calculation of net
loss per share as their effect would be antidilutive.
F-10
<PAGE> 59
STATEMENT OF CASH FLOWS
The Company considers investments purchased with an original maturity of
three months or less to be cash equivalents. Supplemental cash flow
information includes the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------ JUNE 30,
1994 1995 1996 1997
-------- -------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Supplemental schedule of cash flow
information-
Cash paid during the year for interest $170,215 $618,119 $1,493,761 $ 445,207
Supplemental schedule of noncash activities-
Issuance of stock for services - - 4,600 -
Issuance of stock for note receivable - - 25,180 -
Conversion of note payable to stock - - 3,441,650 -
Issuance of note payable for acquisition - - 3,721,131 1,053,000
Holdback notes reduced due to account
attrition 74,000 182,348 245,000 -
Purchase of contract rights with notes 353,517 909,581 636,900 629,217
Unearned revenue assumed in purchase of
contract rights - - - 326,307
======== ======== ========== ==========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt, which approximates the
carrying value, is estimated based on the current rates offered to the
Company for debt of the same remaining maturities. The carrying value of
current assets and current liabilities approximates fair value due to the
short-term maturities of these items.
3. ACQUISITIONS
On September 5, 1996, an outside investor purchased a 49% interest in the
Company, by receiving 3,525,682 shares of common stock and $3,441,649 of
debt, with an interest rate of 6% for a total contribution of $5 million.
This stock and debt was converted to redeemable and convertible preferred
stock on December 31, 1996, and a new credit facility of $5 million was
provided to the Company. The proceeds from this transaction were used by
Security Associates International, Inc., either directly or through its
subsidiaries, to purchase the equity interests in five companies. The terms
of the transactions were as follows:
MCAP--The Company purchased 100% of the equity of MCAP for $261,020 in
cash, the assumption of liabilities of $2,600 and options to purchase
310,000 shares of the Company's common stock at $0.442 per share (which
approximated fair value). The Company received assets with a fair value
of $1,309 and recorded goodwill of $262,311. As a result of this
transaction, the Company obtained indirect ownership of the 25.2% of MSG
owned by MCAP.
WINNETKA--The Company purchased 100% of the equity of Winnetka for
$159,980 in cash, the assumption of liabilities of $2,600 and options to
purchase 190,000 shares of the Company's common stock at $0.442 per
share (which approximated fair value). The Company received assets with
a fair value of $1,344 and recorded goodwill of $161,236. As a result
of this transaction, the Company obtained indirect ownership of the
14.8% of MSG owned by Winnetka.
Pursuant to the MCAP and Winnetka transactions the Company obtained
indirect ownership of 40% of MSG. It directly owned the remaining 60%
of MSG prior to the acquisitions of MCAP and Winnetka.
SACC AND ALL-SECURITY--On October 23, 1990, SAI entered into a joint
venture agreement with Johnson
F-11
<PAGE> 60
Electric Company, d.b.a. Midstate Security ("MS"), to form Security
Associates Command Center. In July, 1995, SAI transferred its interest
in the joint venture to MSG. On August 23, 1995, MSG and MS contributed
all their partnership interests in Security Associates Command Center to
SACC. SACC was owned 50% by MSG and 50% by MS, who maintained
controlling interests. MSG accounted for its investment in SACC under
the equity method.
On September 5, 1996, the Company purchased the remaining 50% of the
membership interests in SACC. The consideration for the purchase was
$1,500,000 in cash and the assumption of $732,874 in SACC bank debt.
The Company received assets with a fair value of $1,075,877 and recorded
additional goodwill of $1,156,997.
As a result of these transactions, the Company now directly owns 50% of
SACC and indirectly owns the remaining 50% through its direct and
indirect ownership of MSG (see MCAP and Winnetka above). The Company
also now owns 100% of All-Security either directly or indirectly through
its ownership of SACC.
AMJ--On December 19, 1996, the Company purchased assets of AMJ Central
Station Corporation, a Florida corporation, which were transferred to a
newly formed and wholly owned subsidiary, AMJ Central Station
Corporation, Inc. The purchase price was $3,745,684, including a note
payable of $3,721,131 and cash payments of $24,552, in cash and the
assumption of certain liabilities totaling $622,501. The Company
received certain assets with a fair value of $605,461 and recorded
goodwill of $3,762,724. The Company did not acquire certain assets and
liabilities totaling $86,965 and $19,808, respectively.
On a pro forma basis, the net sales, net loss and net loss per share of
the Company (unaudited) would have been approximately $7.6 million, $1.8
million and $0.50 per share in 1996 and $6.2 million, $1.2 million and $0.34
per share in 1995. These pro forma amounts assume that the acquisitions of
SACC and AMJ would have occurred at the beginning of each period presented.
4. LONG-TERM NOTES PAYABLE
On September 5, 1996, subsequently amended December 31, 1996, the Company
entered into a Subordinated Loan Agreement with its major stockholder
allowing for borrowings of up to $5,000,000. As of December 31, 1996, and
June 30, 1997, the Company had borrowings of $500,000 and $4,950,000,
respectively, outstanding under this loan agreement. Interest is charged on
outstanding balances at 12% per year. Accrued interest thereon is payable
semiannually, and all outstanding borrowings are payable at the earlier of
January 2, 2003, or when the Company raises $15,000,000 in new equity.
On December 31, 1996, the Company entered into a Loan Agreement with FINOVA
Capital Corporation under which the Company borrowed $7,304,000 on the
closing date. Proceeds were used to pay existing debt, pay costs of the
transaction and for working capital. Under the agreement, $7,696,000
remains available for advances through December 31, 1997, with proceeds to
be used for account acquisitions, acquisition of third-party monitoring
stations and transaction costs. The loan is secured by virtually all the
assets of the Company. Interest is charged on outstanding advances at
Citicorp's Base rate plus 2% per year (10.25% at December 31, 1996) and is
payable monthly. A fee of 1/2% is payable on the unused balance of the
facility.
The principal balance is repayable as follows:
3.5% per quarter, beginning January, 1998
4.0% per quarter, beginning January, 1999
4.5% per quarter, beginning January, 2000
5.0% per quarter, beginning January, 2001
Remaining balance due last business day of 2001
F-12
<PAGE> 61
Long-term debt consists of the following notes payable:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Note payable to bank, bearing interest at
10.25% as of December 31, 1996 and 10.50% as
of June 30, 1997 $ - $7,304,000 $12,184,730
Notes payable to alarm dealers, 6%-12% interest 1,033,492 1,098,819 1,595,095
Notes payable to individuals, 12% interest,
secured by contract rights to monitor security
systems, payable monthly through December,
1996 432,826 - -
Notes payable to unrelated investors, 6%-8%
interest, payable monthly, secured by all
assets of MSG, payable in 1998 800,000 - -
Notes payable to an individual, 12% interest,
payable in quarterly installments through
July, 1997 267,000 - -
Notes payable to individuals, 14% interest,
payable semiannually through July, 1997,
secured by a junior interest in the Company's
assets, convertible to 85,000 shares at $2 per
share 170,000 - -
Notes payable to outside parties, 18%-20%
interest, payable monthly through 2000 3,819,935 - -
Other 104,312 29,756 7,097
----------- ----------- -----------
6,627,565 8,432,575 13,786,922
Current maturities (1,858,992) (413,227) (731,084)
----------- ----------- -----------
Total long-term debt $ 4,768,573 $8,019,348 $13,055,838
=========== ========== ===========
Notes payable to a related party, 8.5%
interest, $2,000 of principal paid monthly
until paid, or 1996 $ 9,065 $ - $ -
Note payable to a related party, at no
interest, $1,500 of principal paid monthly
until paid, or 1997 12,000 - -
Notes payable to related parties, 12%
interest, secured by contract rights to
monitor security systems, payable through
December, 1996 71,177 - -
Note payable to a related party at no
interest, $500 of principal paid monthly until
March, 1997 7,500 1,000 -
Commitment to related parties, paid in 1997 135,000 135,000 -
Note payable to stockholder, bearing interest
at 12%, payable in full with accrued interest
in January, 2003 - 500,000 4,950,000
----------- ----------- -----------
234,742 636,000 4,950,000
Current maturities--related parties (96,748) (136,000) -
----------- ----------- -----------
Total long-term debt-related parties $ 137,994 $ 500,000 $ 4,950,000
=========== ========== ===========
</TABLE>
Future maturities of long-term debt, as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 549,227
1998 2,058,293
1999 1,348,255
2000 1,314,720
2001 3,798,080
----------
$9,068,575
==========
</TABLE>
F-13
<PAGE> 62
5. RELATED-PARTY TRANSACTIONS
On December 31, 1993, SAI issued 254,717 shares of its common stock to SAI
Partners, Inc.("SPI") in satisfaction of the total commission expense owed
by SAI. In December, 1993, SAI terminated this commission agreement with
SPI and undertook the following obligations: (a) to pay SPI $45,000 on each
of January 1, 1997, 1998 and 1999 ($135,000 paid in 1997 pursuant to an
amended agreement); (b) to pay to SPI $50,168 and $49,500 in notes with
interest ranging from prime to prime plus 2%; and (c) to issue warrants to
purchase 200,000 shares of SAI's common stock at $1.00 per share, said
warrants exercisable through December 31, 1999. These warrants are
redeemable by SAI after January 1, 1996, so long as the average trade price
of SAI's stock exceeds $3.00 for the previous calendar month. As of June
30, 1997, the Company has not elected to redeem these warrants.
SAI and MSG have entered into a service agreement whereby SAI will solicit
and investigate monitoring service accounts exclusively on behalf of MSG for
purchase by MSG. In return SAI will receive a monthly account service fee
not to exceed $0.75 for each account owned by MSG plus a service fee
calculated pursuant to the service agreement, as defined. In accordance
with this agreement, service fees paid by MSG to SAI were $480,000,
$1,054,000, and $1,138,000, for the years ended December 31, 1994 and 1995,
and for the period January 1, 1996, to September 5, 1996, respectively.
This agreement was terminated effective September 5, 1996.
In accordance with the joint venture agreement, SACC provides monitoring
services to accounts owned by SAI and MSG. Pursuant to the terms of the
agreements, SAI and MSG incurred monitoring service expenses of $252,000,
$550,000, and $621,954 for the years ended December 31, 1994 and 1995, and
for the period January 1, 1996, to September 5, 1996, respectively. SAI had
payables outstanding to SACC of $0 and MSG had payables outstanding to SACC
of $184,000 as of December 31, 1996. On September 5, 1996, the Company
purchased the remaining 50% interest in SACC from MS.
As of December 31, 1995, 1996 and June 30, 1997, the Company has
approximately $235,000, $636,000 and $4,950,000, respectively, of debt
outstanding to related parties.
6. STOCK OPTIONS AND WARRANTS
At the discretion of management and approval by the Board of Directors, the
Company may grant options and warrants to purchase shares of the Company's
common stock and convertible preferred stock to certain individuals. The
exercise price may not be less than fair market value of the common stock at
the date of grant. Vesting and expiration periods are determined by
management and the Board of Directors at the time of grant.
The Company applies APB Opinion No. 25 in accounting for options and
warrants. Accordingly, no compensation cost has been recognized for the
stock options and warrants granted. Had compensation costs for the stock
options and warrants issued been determined based on the fair value at their
grant date consistent with the method of FASB Statement No. 123 ("SFAS
123"), the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------- JUNE 30, JUNE 30,
1995 1996 1996 1997
----------- ----------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss-
As reported $ (947,278) $(1,718,259) $(319,659) $(1,604,224)
Pro forma (1,047,653) (1,796,189) (327,448) (1,604,224)
Primary earnings per share-
As reported $(.26) $(.47) $(.09) $(.40)
Pro forma $(.28) $(.49) $(.09) $(.40)
=========== =========== ========= ===========
</TABLE>
F-14
<PAGE> 63
Because the method of accounting prescribed in SFAS 123 has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The compensation cost for stock options issued for services rendered
other than employee services has been included in the pro forma net loss.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions;
risk-free interest rates between 5.17% and 6.30%; zero dividend yield;
expected lives through the expiration dates; and volatility between 39.11%
and 144.19%.
The following summarizes the stock options and warrants for common stock as
of December 31, 1994, 1995, 1996 and June 30, 1997 (unaudited), and the
changes during the years and the three months ending on those dates,
respectively:
<TABLE>
<CAPTION>
1994 1995 1996 1997
------------------- ------------------- ------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- --------- -------- --------- -------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of year 1,208,673 $.64 1,291,173 $.69 1,463,673 $.75 1,833,155 $.74
Granted 82,500 1.45 172,500 1.14 611,000 .65 - -
Exercised - - 22,088 .57 499,500 .44
Canceled - - 219,430 .57 - -
--------- ---------- ---------
End of year 1,291,173 $.69 1,463,673 $.75 1,833,155 $.74 1,333,655 $.85
========= ========== ========= =========
Exercisable as of
end of year/period 1,216,173 1,388,673 1,758,155 1,258,655
========= ========== ========= =========
</TABLE>
The future expiration of the common stock options as of December 31, 1996,
are as follows:
<TABLE>
<S> <C>
1997 500,000
1998 85,000
1999 320,000
2000 928,155
=======
</TABLE>
The Company has granted stock options and warrants to purchase shares of
convertible preferred stock which mirror the Common Stock options and
warrants listed above and are only exercisable upon exercise of the
respective Common Stock options and warrants. Additionally, the Company
granted warrants for 15,000 shares of convertible preferred stock which are
fully exercisable and expire in the year 2003.
F-15
<PAGE> 64
The following summarizes the stock options and warrants for convertible
preferred stock as of December 31, 1996, and June 30, 1997 (unaudited) and
the changes during the year and the six months then ended:
<TABLE>
<CAPTION>
1996 1997
---------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- ------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Beginning of year - $ - 33,332 $153.65
Granted 33,553 153.01 - -
Exercised 221 57.00 4,995 44.20
Canceled - - - -
------ ------- ------ -------
End of year/period 33,332 $153.65 28,337 $172.19
====== ======= ====== =======
</TABLE>
7. SUBSEQUENT EVENTS
In February 1997, the Company acquired a monitoring station for
$1,053,000. Total net assets of the acquired monitoring station were
approximately $200,000. The excess purchase price was allocated to a
covenant not to compete with a three-year life.
In April 1997, the Company adopted an executive deferred compensation
plan. Under this plan, awards of the Company's common stock may be made to
plan participants based upon performance against the Company's goals and
objectives and approval by the Board of Directors. Shares will vest ratably
over a five-year period.
In April 1997, the Company also adopted a 401(k) and profit sharing plan.
Effective June 1, 1997, employees, meeting certain criteria, may participate
by making contributions to the plan with the Company providing a matching
contribution of up to 25% of the first 4% of each employee's compensation
that is contributed by such employee.
F-16
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
AMJ Central Station Corporation:
We have audited the accompanying balance sheets of AMJ CENTRAL STATION
CORPORATION as of December 31, 1995, and December 19, 1996, and the related
statements of operations and retained earnings and cash flows for the year
ended December 31, 1995 and for the period January 1, 1996, to December 19,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AMJ Central Station
Corporation as of December 31, 1995, and December 19, 1996, and the results of
its operations and its cash flows for the year ended December 31, 1995, and the
period January 1, 1996, to December 19, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 2, 1997
F-17
<PAGE> 66
AMJ CENTRAL STATION CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 19,
ASSETS 1995 1996
- ----------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,995 $ 1,426
Accounts receivable, net 583,505 521,788
Notes receivable - shareholders 20,481 15,648
Prepaid expenses 9,619 7,513
-------- --------
Total current assets 615,600 546,375
FIXED ASSETS, NET 159,735 146,051
-------- --------
Total assets $775,335 $692,426
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- -----------------------------------------
CURRENT LIABILITIES
Cash overdraft $ 6,353 $ 30,364
Line of credit 74,839 75,489
Accounts payable 285,427 133,367
Accrued expenses 56,763 55,224
Current maturities of leases payable 15,361 15,361
Unearned revenue 231,901 302,456
-------- --------
Total current liabilities 670,644 612,261
LEASES PAYABLE, net of current maturities 44,128 30,048
-------- --------
Total liabilities 714,772 642,309
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, 1,000 shares authorized,
500 shares issued and outstanding, $1.00
par value 500 500
Additional paid-in capital 500 500
Retained earnings 59,563 49,117
-------- --------
Total stockholders' equity 60,563 50,117
-------- --------
Total liabilities and
stockholders' equity $775,335 $692,426
======== ========
</TABLE>
The notes to financial statements are an integral part of these balance sheets.
F-18
<PAGE> 67
AMJ CENTRAL STATION CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED JANUARY 1, TO
DECEMBER 31, DECEMBER 19,
1995 1996
------------- --------------
<S> <C> <C>
REVENUES FROM MONITORING FEES $2,293,305 $2,103,857
OPERATING EXPENSES:
General, selling and administrative 2,393,119 1,934,573
Amortization and depreciation 23,767 22,776
---------- ----------
Total operating expenses 2,416,886 1,957,349
---------- ----------
Income (loss) from operations (123,581) 146,508
INTEREST EXPENSE 18,496 19,001
---------- ----------
Net income (loss) (142,077) 127,507
RETAINED EARNINGS, BEGINNING OF PERIOD 201,640 59,563
DISTRIBUTIONS TO STOCKHOLDER - (137,953)
---------- ----------
RETAINED EARNINGS, END OF PERIOD $ 59,563 $ 49,117
========== ==========
</TABLE>
The notes to financial statements are an integral part of these statements.
F-19
<PAGE> 68
AMJ CENTRAL STATION CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR PERIOD
ENDED JANUARY 1, TO
DECEMBER 31, DECEMBER 19,
1995 1996
---------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Net income (loss) $(142,077) $ 127,507
Adjustments to reconcile net income (loss) to cash
provided by operating activities-
Depreciation and amortization 23,767 22,776
Changes in current assets and liabilities-
Accounts receivable, net (45,727) 61,717
Prepaid expenses (1,505) 2,106
Cash overdraft (44,603) 24,011
Accounts payable 73,386 (152,060)
Accrued expenses 51,930 (1,539)
Unearned revenue 24,656 70,555
--------- ---------
Net cash provided by (used for) operating activities (60,173) 155,073
--------- ---------
CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES:
Purchases of fixed assets (2,517) (9,092)
--------- ---------
CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES:
Line of credit, net change 74,839 650
Proceeds (repayments) from notes payable - shareholder (293) 4,833
Repayments of debt (15,061) (14,080)
Distributions to stockholder - (137,953)
--------- ---------
Cash provided by (used for ) financing activities 59,485 (146,550)
--------- ---------
DECREASE IN CASH (3,205) (569)
CASH, beginning of period 5,200 1,995
--------- ---------
CASH, end of period $ 1,995 $ 1,426
========= =========
Cash paid for interest $ 18,496 $ 19,001
========= =========
</TABLE>
The notes to financial statements are an integral part of these statements.
F-20
<PAGE> 69
AMJ CENTRAL STATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND DECEMBER 19, 1996
1. DESCRIPTION OF THE BUSINESS
COMPANY BACKGROUND
AMJ Central Station Corporation (the "Company") (a Florida Company) owns
and operates a central monitoring station in Pompano Beach, Florida to
provide security monitoring for security dealers throughout the continental
United States.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Monitoring fee revenue is recognized as earned over the related contract
period. Services may be billed in advance on a monthly, quarterly, or
annual basis and any amounts not earned are included as unearned revenue.
CASH
For purposes of the statement of cash flows, cash includes bank deposits
and petty cash funds of the Company.
ACCOUNTS RECEIVABLE
The Company grants unsecured trade credit to customers in the normal course
of business. Receivables in the accompanying balance sheets are net of
reserves for doubtful accounts of approximately $80,000.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is calculated using
accelerated methods for both financial statement and income tax purposes.
The depreciable lives by major class of assets are as follows:
<TABLE>
<S> <C>
Equipment 3-7 years
Furniture and fixtures 5-7 years
Leasehold improvements 15 years
</TABLE>
F-21
<PAGE> 70
Fixed assets at December 31, 1995, and December 19, 1996, consists of the
following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Equipment $223,772 $232,864
Furniture and Fixtures 50,857 50,857
Leasehold Improvements 20,020 20,020
-------- --------
294,649 303,741
Less - accumulated depreciation 134,914 157,690
-------- --------
Fixed assets, net $159,735 $146,051
======== ========
</TABLE>
LEASES
The Company operates primarily in leased facilities. Effective December 1,
1996 the Company entered into a new lease agreement through July, 2000 for
$10,000 a month. Total rent expense related to these facilities for the
year ended December 31, 1995 and the period January 1, 1996, to December
19, 1996, was approximately $108,000 and $109,000, respectively.
Additionally, the Company leases certain equipment used in their
operations. Total lease expense under these leases was approximately
$59,000 for the period January 1, 1996, to December 19, 1996, and $32,000
for the year ended December 31, 1995.
Future minimum lease payments at December 19, 1996 is as follows:
<TABLE>
<CAPTION>
For the year ended December 19 -
<S> <C>
1997 $120,000
1998 120,000
1999 120,000
2000 70,000
========
</TABLE>
INCOME TAXES
The Company elected to have its income taxed with that of its shareholders
for federal income tax purposes (an S Corporation election). Consequently,
there are no federal income taxes payable by the Company. Had the Company
not elected to have its income taxed with that of its shareholders, income
tax expense would have been approximately $51,000.
3. RELATED-PARTY TRANSACTIONS
The Company had notes receivable from a shareholder at December 31, 1995
and December 19, 1996. The notes are due on demand and are unsecured.
4. LINE OF CREDIT
The Company has an unsecured line of credit with a bank bearing interest at
10.25%. Subsequent to December 19, 1996 this line was paid in full.
F-22
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Security Associates Command Center II, L.L.C.:
We have audited the accompanying consolidated balance sheet of SECURITY
ASSOCIATES COMMAND CENTER II, L.L.C., as of September 5, 1996, and the related
consolidated statements of operations and members' equity and cash flows for
the period January 1, 1996 to September 5, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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 Security Associates Command
Center II, L.L.C. as of September 5, 1996, and the results of its operations
and its cash flows for the period January 1, 1996 to September 5, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 2, 1997
F-23
<PAGE> 72
SECURITY ASSOCIATES COMMAND CENTER II, L.L.C.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 5,
ASSETS 1996
- ----------------------------------------- ------------
<S> <C>
CURRENT ASSETS:
Cash $ 155,807
Accounts receivable, net 916,019
Prepaid expenses 22,945
----------
Total current assets 1,094,771
----------
FIXED ASSETS, net 163,462
----------
OTHER ASSETS, NET 1,462,789
----------
Total assets $2,721,022
==========
LIABILITIES AND MEMBERS' EQUITY
- -----------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 87,760
Advance billings 434,121
Current maturities of long-term debt 1,489,724
Notes payable - related party 16,162
----------
Total current liabilities 2,027,767
LONG-TERM DEBT, net of current maturities 7,413
MINORITY INTEREST 2,377
----------
Total liabilities 2,037,557
----------
MEMBERS' EQUITY: 683,465
----------
Total liabilities and members' equity $2,721,022
==========
</TABLE>
The notes to financial statements are an integral part of this balance sheet.
F-24
<PAGE> 73
SECURITY ASSOCIATES COMMAND CENTER II, L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
January 1, 1996 to
September 5, 1996
------------------
<S> <C>
REVENUES FROM MONITORING FEES $2,346,077
OPERATING EXPENSES:
General, selling and administrative 1,668,487
Amortization and depreciation 101,316
----------
Total operating expenses 1,769,803
----------
Income from operations 576,274
INTEREST INCOME 43,477
INTEREST EXPENSE (104,857)
----------
Income before minority interest 514,894
----------
MINORITY INTEREST 2,538
----------
Net Income 512,356
MEMBERS EQUITY, BEGINNING OF PERIOD 171,109
DISTRIBUTIONS -
----------
MEMBERS EQUITY, END OF PERIOD $ 683,465
==========
</TABLE>
The notes to financial statements are an integral part of this statement.
F-25
<PAGE> 74
SECURITY ASSOCIATES COMMAND CENTER II, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
January 1, 1996 to
September 5, 1996
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 512,356
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 101,316
Minority interest 2,538
Changes in current assets and liabilities-
Accounts receivable, net (237,304)
Prepaid expenses (5,191)
Other assets, net 904
Accounts payable and accrued expenses (73,880)
Advance billings (231,851)
---------
Cash provided by operating activities 68,888
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (43,391)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable from related party 190,288
Repayment of note payable to related party (366,408)
Proceeds from note payable to related party 16,162
Repayment of debt (486,022)
Proceeds from debt 625,000
---------
Total cash used in financing activities (20,980)
---------
INCREASE IN CASH 4,517
CASH, beginning of period 151,290
---------
CASH, end of period $ 155,807
=========
</TABLE>
The notes to the financial statements are an integral part of this statement.
F-26
<PAGE> 75
SECURITY ASSOCIATES COMMAND CENTER II, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 5, 1996
1. DESCRIPTION OF THE BUSINESS
COMPANY BACKGROUND
Security Associates Command Center II, L.L.C. ("Company") owns and operates
a central monitoring station in Grand Rapids, Michigan to provide alarm
monitoring for security alarm dealers throughout the continental United
States. For the period January 1, 1996 to September 5, 1996, approximately
30% of the Company's revenues were from related parties (Note 2). The
Company became a limited liability company during 1995. The members'
liability is limited to their capital account.
The Company's subsidiary, All-Security Monitoring Services, L.L.C.,
("Subsidiary") owns and operates a central monitoring station in Chicago,
Illinois to provide alarm monitoring for security alarm dealers throughout
the continental United States. The Subsidiary was formed on August 23, 1995
as a limited liability company. The members' liability is limited to their
capital account. The Subsidiary acquired the net assets of All Security
Products and Services, Inc. d/b/a All-Security Monitoring Services, Inc.,
L.L.C. on August 23, 1995. The net assets were recorded by the Subsidiary
at the acquisition cost. Such acquisition cost included a premium of
$1,510,647 above the estimated fair values of the net assets acquired, which
has been reflected on the subsidiary's balance sheet as goodwill.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Security
Associates Command Center II, L.L.C. and All-Security Monitoring Services,
L.L.C. The Company owns 98% of All-Security Monitoring Services, L.L.C.
All significant intercompany accounts, transactions and unrealized profits
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Monitoring fee revenue is recognized as earned over the related contract
period. Services may be billed in advance on a monthly, quarterly or annual
basis and any amounts not earned are reflected as unearned revenue in the
accompanying balance sheet.
ACCOUNTS RECEIVABLE
The Company grants unsecured trade credit to customers in the normal course
of business. Receivables in the accompanying balance sheet is net of
reserves for doubtful accounts of approximately $32,000.
F-27
<PAGE> 76
CASH
Cash includes bank deposits and petty cash funds of the Company.
OTHER ASSETS
Goodwill is being amortized on a straight-line basis over a 15-year period.
Organizational costs consist of legal and professional fees associated with
the start-up of the Company's subsidiary, All-Security Monitoring Services,
L.L.C. These costs are being amortized on a straight-line basis over 5
years.
Other assets are comprised of the following:
<TABLE>
<S> <C>
Goodwill, net of amortization of $100,710 $1,409,937
Organization Costs, net of amortization of $12,756 35,356
Deposits 17,496
----------
Total other assets $1,462,789
==========
</TABLE>
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is calculated using
accelerated methods for both financial statement and income tax purposes.
The following is a summary of fixed assets by major class of assets:
<TABLE>
<S> <C>
Automobiles $ 20,188
Leasehold Improvements 38,336
Furniture and Equipment 266,303
--------
324,827
Less-accumulated depreciation 161,365
--------
Fixed assets, net $163,462
========
</TABLE>
The depreciable lives by major class of assets are as follows:
<TABLE>
<S> <C>
Automobiles 5 years
Leasehold Improvements 15 years
Furniture and Equipment 5-7 years
</TABLE>
LEASES
The Company operates primarily in leased facilities. Total rent expense
related to these facilities for the period January 1, 1996 to September 5,
1996 was $49,560.
Additionally, the Company leases certain equipment used in their operations.
Total lease expense under these leases was $47,319 for the period January
1, 1996 to September 5, 1996.
F-28
<PAGE> 77
Future minimum rental obligations at September 5, 1996 for all operating
leases is as follows:
For the year ended September 5:
<TABLE>
<S> <C>
1997 $187,804
1998 158,891
1999 86,142
2000 59,399
========
</TABLE>
INCOME TAXES
The Company and its Subsidiary ("Companies") are formed as limited liability
companies. The Companies are treated as partnerships for tax purposes and
each member is taxed on their proportionate share of the Companies' taxable
income. Therefore, these statements do not include any provision for income
taxes. Had the Company not elected to have its income taxed with that of
its members, income tax expense would have been approximately $205,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt, which approximates the
carrying value, is estimated based on the current rates offered to the
Company for debt of the same remaining maturities.
3. LONG-TERM DEBT
Long-term debt at September 5 consists of:
<TABLE>
<S> <C>
Bank note payable, secured by all assets of the
Company, interest at 1% over prime, payable
in monthly installments of $10,500 including
interest, paid in full in September, 1996 $ 115,706
Bank note payable, secured by vehicle, interest
at 8.95%, payable in monthly installments of
$605 including interest through September, 1998. 13,705
Bank note payable, secured by all assets of the
Company, interest at 8.75%, payable in monthly
installments of $17,375 plus interest through
May 31, 1999, paid in full in September, 1996 590,250
Other, secured by all assets of All Security
Monitoring Services, Inc., L.L.C., interest at
10.75%, payable in monthly installments of
$20,000 including interest through 2000 plus a
single installment of $273,111 due February 1996,
paid in full in December, 1996 777,476
----------
1,497,137
----------
Current maturities 1,489,724
----------
Total long-term debt $ 7,413
==========
</TABLE>
F-29
<PAGE> 78
Long-term debt maturities at September 5, 1996 are:
For the year ended September, 5:
<TABLE>
<S> <C>
1997 $1,489,724
1998 7,413
==========
</TABLE>
4. NOTE PAYABLE TO RELATED PARTY
At September 5, 1996, the Company had a note payable to Midstate Security (a
member) secured by all personal property including accounts receivable,
goods, machinery, equipment, vehicles, fixtures, cash, negotiable
instruments, general intangibles, securities, leases, dealer agreements, and
accounts covered by dealer agreements and contract rights. Interest is
payable at the lending rate available to Midstate Security through its
commercial lending institution. At September 5, 1996, this rate was 8.5%.
The Company has agreed to make payments on the note to the extent that there
is positive cash flow from operations and positive net worth as defined.
Midstate Security has agreed not to demand payment unless the above
conditions are met.
5. RELATED PARTY TRANSACTIONS
The Company is a limited liability company which is owned equally by
Security Associates International, Inc. and Subsidiaries and Intec Company,
Inc. doing business as Midstate Security, both of which are provided
monitoring services by the Company.
Revenues for services provided to related parties for the period January 1,
1996 to September 5, 1996, are as follows:
<TABLE>
<S> <C>
Security Associates International, Inc.
and Subsidiaries $621,954
Midstate Security 77,427
--------
$699,381
========
</TABLE>
The Company had trade accounts receivable with related parties at December
31 as follows:
<TABLE>
<S> <C>
Security Associates International, Inc.
and Subsidiaries $184,000
Midstate Security 2,482
--------
$186,482
========
</TABLE>
The Company does not employ all of its personnel, but reimburses Midstate
Security for actual costs including fringe benefits of individuals providing
services for the Company. Substantially all personnel that provide services
for the Company are included in a defined contribution plan of Midstate
Security. Contributions to the plan are determined by the Board of
Directors of Midstate Security at the conclusion of its fiscal year, which
is May 31. There were no contributions made to the plan for the fiscal year
ended May 31, 1996.
F-30
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All the amounts
shown are estimated, except the SEC registration fee.
<TABLE>
<S> <C> <C>
SEC registration fee ................................. $ 5,051.07
Blue Sky filing fees and expenses .................... 5,310.00
Printing expenses..................................... 50,000.00
Legal fees and expenses............................... 54,000.00
Auditors' accounting fees and expenses ............... 55,000.00
Transfer Agent and Registrar fees and expenses ....... 2,400.00
Officers and directors liability insurance premiums .. 31,000.00
Miscellaneous expenses................................ 10,000.00
-----------
Total .................... $212,761.07
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation, subject to the applicable
indemnification provisions of the General Corporation Law of the State of
Delaware (the "DGCL"). Section 145 of the DGCL empowers a Delaware corporation
to indemnify, subject to the standards therein prescribed, any person in
connection with any action, suit or proceeding brought or threatened because
such person is or was a director, officer, employee or agent of the corporation
or was serving as such with respect to another corporation or other entity at
the request of such corporation.
In accordance with Section 102(b)(7) of the DGCL, Article IX of the
Company's Amended and Restated Certificate of Incorporation provides that "a
director of the Corporation shall be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit."
The Company's Certificate of Incorporation and By-Laws contain provisions
that require the Company to indemnify its directors and officers to the fullest
extent permitted by Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1994, the Company has issued the following securities that
were not registered under the Securities Act:
II-1
<PAGE> 80
Sale of Convertible Notes and Options
- -------------------------------------
On August 9, 1994, Metro Suburban Pediatrics Pension Plan was issued a 14%
Convertible Secured Note due July 31, 1997 plus options to purchase 12,500
shares of Common Stock at $0.57 per share expiring December 31, 1998 for total
consideration of $25,000.
On August 9, 1994, Bernard and Samuel Sered was issued a 14% Convertible
Secured Note July 31, 1997 plus options to purchase 12,500 shares of Common
Stock at $0.57 per share expiring December 31, 1998 for total consideration of
$25,000.
On August 9, 1994, Fred Figge was issued a 14% Convertible Secured Note
July 31, 1997 plus options to purchase 12,500 shares of Common Stock at $0.57
per share expiring December 31, 1998 for total consideration of $25,000.
On May 22, 1995, Infinity Partnership II was issued a 14% Convertible
Secured Note July 31, 1997 plus options to purchase 10,000 shares of Common
Stock at $0.57 per share expiring December 31, 1998 for total consideration of
$20,000.
On June 7, 1995, Brady E. Turner was issued a 14% Convertible Secured Note
July 31, 1997 plus options to purchase 12,500 shares of Common Stock at $0.57
per share expiring December 31, 1998 for total consideration of $25,000.
On October 19, 1995, Sidney Dechter IRA was issued a 14% Convertible
Secured Note July 31, 1997 plus options to purchase 25,000 shares of Common
Stock at $0.57 per share expiring December 31, 1998 for total consideration of
$50,000.
No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Sales were made
to a very limited number of purchasers. All of the Notes have since been
repaid.
II. Issuance for Services
In August 1995, Star Security Systems, Inc. was issued options to purchase
25,000 shares of Common Stock at $1.00 per share expiring October 1, 2000 in
return for services.
In August 1995, Metronet Installations, Inc. was issued options to
purchase 25,000 shares of Common Stock at $1.00 per share expiring October 1,
2000 in return for services.
In August 1995, Jack and Gillian Schultz was issued options to purchase
25,000 shares of Common Stock at $1.00 per share expiring October 1, 2000 in
return for services.
On October 1, 1995, Fred Figge was issued options to purchase 50,000
shares of Common Stock at $0.53 per share expiring April 1, 2000 in return for
services.
On January 21, 1996, Fred Figge was issued options to purchase 19,000
shares of Common Stock at $0.53 per share expiring April 1, 2000 in return for
services.
On August 1, 1996, Fred Figge was issued options to purchase 17,000 shares
of Common Stock at $0.53 per share expiring April 1, 2000 in return for
services.
On October 10, 1996, Buttonwood Advisory Group was issued options to
purchase 25,000 shares of Common Stock at $1.25 per share expiring October 10,
1999 in return for services.
II-2
<PAGE> 81
On October 10, 1996, Buttonwood Advisory Group was issued options to
purchase 25,000 shares of Common Stock at $2.00 per share expiring October 10,
1999 in return for services.
On October 10, 1996, Buttonwood Advisory Group. was issued options to
purchase 25,000 shares of Common Stock at $3.00 per share expiring October 10,
1999 in return for services.
No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Sales were made
to a very limited number of purchasers. No cash consideration was received by
the Company.
III. TJS Partners' Investment
On September 5, 1996, TJS Partners, Ltd. purchased 3,525,682 shares of
Common Stock for $1,558,351 and was granted certain options pursuant to a
Standby Option and Warrant Agreement and lent the Company $3,441,649 pursuant
to a Convertible Subordinate Promissory Note.
TJS Partners investment in the Company was restructured effective December
31, 1996 (the "TJS Amendment") Pursuant to the TJS Amendment the shares of
Common Stock issued on 9/5/96 and the Convertible Subordinated Note were
canceled. In lieu thereof, the Company issued to TJS Partners 35,257 shares of
Convertible Preferred Stock (each convertible into 100 shares of Common Stock),
344,165 shares of 12% Redeemable Preferred Stock and a Warrant to purchase
15,000 shares of Convertible Preferred Stock. The Standby Option and Warrant
Agreement was amended so that upon exercise of any standby option or Warrant
TJS would receive shares of Convertible Preferred Stock rather than Common
Stock at a purchase price per share equal to 100 times the purchase price per
share of Common Stock prior to the amendment.
Under the terms of the Standby Option and Warrant Agreement dated
September 5, 1996, and the Amendment thereto effective December 31, 1996, TJS
Partners, L.P. may purchase the number of shares of Convertible Preferred Stock
determined by dividing the number of shares purchased by the exercising option
or warrant holder by 100 whenever other current holders (as of the date of the
Agreement) of an option or warrant to purchase the Company's Common Stock
exercises that option or warrant.
In connection with the foregoing sale of securities, ProFinance
Associates, Inc. was paid a fee of $109,110. No underwriters were engaged in
connection with the foregoing sales of securities. Such sales were made in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act. Sales were made to only one purchaser.
IV. Buyout of Winnetka Investors, Inc. and MCAP Investors, Inc.
On September 5, 1996 the Company purchased all of the outstanding capital
stock of two Delaware corporations, Winnetka Investors, Inc. ("Winnetka") and
MCAP Investors, Inc. ("MCAP"). Both Winnetka and MCAP were companies involved
in joint ventures with the Company in the account acquisition business and in
the provision of monitoring services through joint ownership of the
subsidiaries that purchased the accounts and owned the Company's central
monitoring station. The total cash consideration for the Winnetka purchase was
$159,980 or $210.50 per share. The total cash consideration for the MCAP
purchase was $261,020 or $210.50 per share. In addition, the Company assumed
or paid off the liabilities of both Winnetka and MCAP and those of the two
joint venture companies through which the Company pursued its arrangements with
Winnetka and MCAP.
The parties agreed that the Winnetka and MCAP investors would also retain
options, exercisable for a period of one year to purchase shares of the
Company's Common Stock at $0.442 per share, the same price at which TJS
purchased Common Stock in a contemporaneous transaction. At the time of the
transaction the parties ascribed a "zero" or de minimis value to the options.
The name of the parties receiving the options and the number of shares of
Winnetka and MCAP stock previously owned is set forth below.
II-3
<PAGE> 82
<TABLE>
<CAPTION>
Options Name Winnetka/MCAP Shares
------- ---- --------------------
<S> <C> <C> <C>
1. 20,000 Bonnie Conrad 80 Shares of Winnetka
2. 20,000 Anita M. Dalmar 80 Shares of Winnetka
3. 50,000 Robert H. Dilworth 200 Shares of Winnetka
4. 25,000 Dianne Freeman 100 Shares of Winnetka
5. 75,000 Phyllis V. Greinwald 300 Shares of Winnetka
6. 25,000 Robert Brown 100 Shares of MCAP
7. 2,000 Phyllis V. Greinwald 8 Shares of MCAP
8. 250 Cheryl Grolle 1 Share of MCAP
9. 250 Lorraine Small 1 Share of MCAP
10. 120,000 Inversiones Aparacio, C.A. 480 Shares of MCAP
11. 62,500 Inversiones Alanje, C.A. 250 Shares of MCAP
12. 100,000 Inversiones Erlanger, C.A. 400 Shares of MCAP
</TABLE>
No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Sales were made
to a very limited number of purchasers. All of the parties had previous
business relationships with the Company through the joint ventures with the
Company which their respective companies had engaged in for several years.
V. Exercise of Options
On December 31, 1996, Lee Jones exercised options to purchase 22,088
shares of Common Stock for a total consideration of $12,590.60.
On March 18, 1997, Robert Brown exercised options to purchase 25,000
shares of Common Stock for a total consideration of $11,050.
On March 18, 1997, Bobbie Conrad exercised options to purchase 20,000
shares of Common Stock for a total consideration of $8,840.
On March 18, 1997, Anita M. Delmar exercised options to purchase 20,000
shares of Common Stock for a total consideration of $8,840.
On March 18, 1997, Robert H. Dilworth exercised options to purchase 50,000
shares of Common Stock for a total consideration of $22,100.
On March 18, 1997, Dianne G. Freeman exercised options to purchase 25,000
shares of Common Stock for a total consideration of $11,050.
II-4
<PAGE> 83
On March 31, 1997, Phyllis Greinwald exercised options to purchase 77,000
shares of Common Stock for a total consideration of $34,034.
On March 31, 1997, Inversiones Alanje, C.A. exercised options to purchase
62,500 shares of Common Stock for a total consideration of $27,625.
On March 31, 1997, Inversiones Aparicio, C.A. exercised options to
purchase 120,000 shares of Common Stock for a total consideration of $53,040.
On March 31, 1997, Inversiones Erlanger, C.A. exercised options to
purchase 100,000 shares of Common Stock for a total consideration of $44,200.
On April 22, 1997, TJS Partners, L.P. exercised options to purchase
5,215.88 shares of Convertible Preferred Stock for a total consideration of
$233,369.60.
On August 21, 1997, Cheryl L. Grolle exercised options to purchase 250
shares of Common Stock for a total consideration of $110.50.
On August 25, 1997, Lorraine Small exercised options to purchase 250
shares of Common Stock for a total consideration of $110.50.
No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Sales were made
to a very limited number of purchasers. Mr. Jones' options were issued in 1991
in return for services.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company*
3.2 By-Laws of the Company*
3.3 Certificate of Designations, Rights, Preferences and Limitations of 12% Redeemable Preferred Stock,
$10.00 par value per share, of Security Associates International, Inc.*
3.4 Certificate of Designations, Rights, Preferences and Limitations of Convertible Preferred Stock, $10.00 par
value per share, of Security Associates International, Inc.*
4.1 Specimen Common Stock certificate*
5.1 Opinion of Sachnoff & Weaver, Ltd.*
10.1 Employment Agreement between Registrant and James S. Brannen dated August 29, 1996*
10.2 Employment Agreement between Registrant and Ronald I. Davis dated August 29, 1996*
10.3 Employment Agreement between Registrant and Stephen Rubin dated August 30, 1996*
10.4 Adoption Agreement for the Datair Mass-Submitter Prototype Standardized Cash or Deferred Profit
Sharing Plan & Trust*
10.5 Supplemental Employees' Retirement Plan*
10.6 Equity-Based Benefit Plan*
10.7 Purchase of Stock of Winnetka Investors, Inc. by Registrant dated September 5, 1996*
10.8 Purchase of Stock of MCAP Investors, Inc. by Registrant dated September 5, 1996*
10.9 Common Stock Subscription and Purchase Agreement between Registrant and TJS Partners, L.P., dated
September 5, 1996*
</TABLE>
II-5
<PAGE> 84
<TABLE>
<S> <C>
10.10 Amendment to Common Stock Subscription and Purchase Agreement between Registrant and TJS
Partners, L.P., dated December 31, 1996*
10.11 Purchase of Membership Interests of Limited Liability Agreements between Registrant and Intec
Company, Inc. dated September 5, 1996*
10.12 Asset Purchase Agreement between Registrant and AMJ Central Station Corporation dated December 19,
1996*
10.13 Asset Purchase Agreement between All-Security Monitoring Services, L.L.C. and Northern Central
Station, Inc. dated February 25, 1997*
10.14 Loan Agreement among Registrant, Security Associates Command Center II, L.L.C., Monitor Service
Group, L.L.C., All-Security Monitoring Services, L.L.C. and FINOVA Capital Corporation dated
December 31, 1996*
10.15 Amendment to Loan Instruments among Registrant, Security Associates Command Center II, L.L.C.,
Monitor Service Group, L.L.C., All-Security Monitoring Services, L.L.C. and Finova Capital
Corporation dated February 28, 1997*
10.16 Lease Agreement between American National Bank and Trust Company of Chicago as Trustee under
Trust No. 59948 and Registrant dated November 21, 1995*
10.17 Amendment to Lease Agreement between American National Bank and Trust Company of Chicago as Trustee under
Trust No. 59948 and Registrant dated December 9, 1996*
10.18 Lease between Intec Company, Inc. and Security Associates Command Center II, L.L.C. dated
September 4, 1996*
10.19 Sublease Agreement between William Jackson and Elizabeth Jackson and Registrant dated December 29,
1996*
10.20 First Amendment to Lease between William Jackson and Elizabeth Jackson and Registrant dated February 7,
1997*
10.21 Subordinated Loan Agreement between Registrant and TJS Partners, L.P.*
10.22 Standby Option and Warrant Agreement between Registrant and TJS Partners, Ltd. dated September 5,
1996*
10.23 Amended Standby Option and Warrant Agreement between Registrant and TJS Partners, Ltd. dated
December 31, 1996*
10.24 Warrant dated December 31, 1996 issued to TJS Partners, Ltd.*
10.25 Form of Warrant*
10.26 Echo Star Joint Venture Agreement*
21.1 Subsidiaries of Registrant*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Sachnoff & Weaver, Ltd. (to be included in Exhibit 5.1)*
24.1 Power of Attorney (included herein on signature page)*
24.2 Power of Attorney
27.1 Financial Data Schedule*
</TABLE>
*Previously filed.
(b) Financial Statement Schedule(s).
Report of Independent Public Accountants
Schedule Description
-------- -----------
II Valuation and Qualifying Accounts
II-6
<PAGE> 85
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. If a claim for indemnification against such liability (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Company hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
II-7
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Arlington Heights, State of Illinois, on October 15, 1997.
SECURITY ASSOCIATES INTERNATIONAL, INC.
By: /s/ James S. Brannen
-------------------------------------
James S. Brannen
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities on the 15th day of October, 1997.
SIGNATURE TITLE
/s/ James S. Brannen President (Principal Executive Officer)
-------------------- and Director
James S. Brannen
/s/ Ronald I. Davis* Director
--------------------
Ronald I. Davis
/s/ Thomas J. Salvatore* Director
------------------------
Thomas J. Salvatore
/s/ Douglas Oberlander* Director
-----------------------
Douglas Oberlander
/s/ Daniel S. Zittnan* Vice President, Treasurer and Chief
----------------------- Financial Officer (Principal Financial and
Daniel S. Zittnan Accounting Officer)
*By/s/ Howard Schickler Attorney-In-Fact
-----------------------
Howard Schickler
II-8
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the stockholders of Security Associates International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Security Associates International,
Inc. and Subsidiaries included in this Registration Statement and issued our
report thereon dated April 11, 1997. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule of Valuation and Qualifying Accounts is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not a part
of the basic financial statements. This schedule has been subject to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 11, 1997
II-9
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Security Associates Command Center II, L.L.C. and
the Board of Directors of AMJ Central Station Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of AMJ Central Station Corporation and the
consolidated financial statements of Security Associates Command Center II,
L.L.C. included in this Registration Statement and issued our reports thereon
dated July 2, 1997 and July 2, 1997, respectively. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule of Valuation and Qualifying Accounts is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not a part of the basic financial statements. This schedule has been subject
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 2, 1997
II-10
<PAGE> 89
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END OF
DESCRIPTION PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ----------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowances deducted from related accounts
receivable balance sheet accounts of:
Security Associates International, Inc.
Year ended December 31, 1994 5,000 10,000 -- -- 15,000
Year ended December 31, 1995 15,000 14,000 -- -- 29,000
Year ended December 31, 1996 29,000 177,000 -- -- 206,000
AMJ Central Station Corporation
Year ended December 31, 1995 80,000 -- -- -- 80,000
Period January 1, 1996 to
December 19, 1996 80,000 -- -- -- 80,000
Security Associates Command
Center II, L.L.C.
Period January 1, 1996 to
September 5, 1996 26,000 6,000 -- -- 32,000
</TABLE>
II-11
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Re: Security Associates International, Inc.
Amendment No. 3 to
Form S-1 Registration Statement
(Registration Statement No. 333-31775)
As independent public accountants, we hereby consent to the use of our
reports dated April 11, 1997 and July 2, 1997 and to all references to our Firm
included in or made a part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
October 15, 1997
<PAGE> 1
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS JAMES S. BRANNEN AND HOWARD SCHICKLER
AND EACH OF THEM SINGLY, AS HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS
WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME,
PLACE AND STEAD, IN ANY AND ALL CAPACITIES TO SIGN THE REGISTRATION STATEMENT
FILED HEREWITH AND ANY OR ALL AMENDMENTS TO SAID REGISTRATION STATEMENT
(INCLUDING POST-EFFECTIVE AMENDMENTS AND REGISTRATION STATEMENTS FILED PURSUANT
TO RULE 462(b) UNDER THE SECURITIES ACT OF 1933, AND ANY OR ALL AMENDMENTS
THERETO, AS AMENDED AND OTHERWISE), AND TO FILE THE SAME, WITH ALL EXHIBITS
THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND
EXCHANGE COMMISSION GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS THE FULL
POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE
AND NECESSARY TO BE DONE IN AND ABOUT THE FOREGOING, AS FULL TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL
THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR HIS OR HER
SUBSTITUTE, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities on the 15th day of October, 1997.
SIGNATURE TITLE
/s/ Daniel S. Zittnan
- ------------------------------- Vice President, Treasurer and Chief
Daniel S. Zittnan Financial Officer (Principal Financial and
Accounting Officer)
- -------------------------------
- -------------------------------
- -------------------------------
