<PAGE> 1
SECURITY ASSOCIATES INTERNATIONAL, INC.
----------------------
SUPPLEMENT NO. 4 DATED FEBRUARY 4, 1998
TO PROSPECTUS DATED OCTOBER 20, 1997
On October 20, 1997, Security Associates International, Inc. (the
"Company") commenced its offering of an aggregate of 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"). The Company hereby
expands upon, amends, modifies and supersedes certain information contained in
its Prospectus dated October 20, 1997, as supplemented by Supplement No. 1 dated
November 13, 1997, Supplement No. 2 dated December 15, 1997 and Supplement # 3
dated January 13, 1997 (the "Supplemented Prospectus"). This Supplement No. 4
must be read in conjunction with the Supplemented Prospectus. Unless otherwise
defined, capitalized terms used herein shall have the same meanings as in the
Supplemented Prospectus.
1. The section entitled "DESCRIPTION OF CAPITAL STOCK -
Convertible Preferred Stock" (page 44) is hereby amended in its entirety and
replaced in the Supplemented Prospectus as follows:
"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 holders of Convertible Preferred
Stock are entitled to receive such dividends, if any, as may be
declared on the Common Stock. The dividends will be paid as if such
holder of the Convertible Preferred Stock were the holder of the number
of shares of Common Stock into which the shares of Convertible
Preferred Stock 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 the number of shares of Common
Stock into which it is convertible (i.e., one share of Convertible
Preferred Stock has the voting power of 100 shares of Common Stock) and
votes 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."
2. A new section entitled "Telecommunications Associates Group,
Inc. (D/B/A Emergency Response Center) Financial Statements as of November 24,
1997 together with Auditor's Report" is hereby included in the Supplemented
Prospectus as follows:
<TABLE>
<CAPTION>
Telecommunications Associates Group, Inc. Page
----
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheet as of November 24, 1997 F-2
Statement of Operations for the period January 1 to November 24, 1997 F-3
Statements of Cash Flow for the Period January 1 to November 24, 1997 F-4
Notes to Financial Statements F-5
</TABLE>
<PAGE> 2
3. A new section entitled "Pro Forma Financial Information" is
hereby included in the Supplemented Prospectus as follows:
<TABLE>
<S> <C>
Pro forma combined Balance Sheet as of September 30, 1997 F-9
Pro forma combined Statement of Income for the nine
month period ended September 30, 1997 F-11
Pro forma combined Statement of Income for the year ended
December 31, 1996 F-12
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Telecommunications Associates Group, Inc.:
We have audited the accompanying balance sheet of TELECOMMUNICATIONS ASSOCIATES
GROUP, INC. (an Ohio corporation doing business as Emergency Response Center) as
of November 24, 1997, and the related statements of operations and cash flows
for the period from January 1, 1997, to November 24, 1997. 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 Telecommunications Associates
Group, Inc. as of November 24, 1997, and the results of its operations and its
cash flows for the period from January 1, 1997, to November 24, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 13, 1998
F-1
<PAGE> 4
TELECOMMUNICATIONS ASSOCIATES GROUP, INC.
BALANCE SHEET
AS OF NOVEMBER 24, 1997
<TABLE>
<CAPTION>
ASSETS
- -------------------------------------------------------------------------------------------
<S> <C>
CURRENT ASSETS:
Cash $ 81,106
Accounts receivable, net 246,036
Prepaid expenses 8,054
-----------
Total current assets 335,196
OTHER ASSETS:
Contract rights to monitor security systems, net 689,665
Other assets 3,900
-----------
Total other assets 693,565
-----------
FURNITURE AND EQUIPMENT, net 124,860
-----------
Total assets $1,153,621
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
<S> <C>
CURRENT LIABILITIES:
Current maturities of notes payable $ 178,461
Accounts payable 96,890
Accrued expenses 205,590
Unearned revenue 776,577
-----------
Total current liabilities 1,257,518
NOTES PAYABLE, net of current portion 244,594
-----------
Total liabilities 1,502,112
-----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 750 shares authorized, 491
shares issued and outstanding 71,000
Retained earnings, beginning of year (276,580)
Shareholder distributions (210,155)
Net income 67,244
-----------
Retained earnings, end of year (419,491)
-----------
Total stockholders' equity (348,491)
-----------
Total liabilities and stockholders' equity $1,153,621
===========
</TABLE>
The notes to financial statements are
an integral part of this balance sheet.
F-2
<PAGE> 5
TELECOMMUNICATIONS ASSOCIATES GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1 TO NOVEMBER 24, 1997
<TABLE>
<S> <C>
REVENUES FROM MONITORING FEES $3,431,078
-----------
OPERATING EXPENSES:
General, selling and administrative 3,086,124
Contract rights written off 98,216
Amortization and depreciation 130,729
-----------
Total operating expenses 3,315,069
-----------
Income (loss) from operations 116,009
INTEREST EXPENSE 48,765
-----------
Net income $ 67,244
===========
</TABLE>
The notes to financial statements are
an integral part of this statement.
F-3
<PAGE> 6
TELECOMMUNICATIONS ASSOCIATES GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1 TO NOVEMBER 24, 1997
<TABLE>
<S> <C>
CASH PROVIDED FROM OPERATING ACTIVITIES:
Net income (loss) $ 67,244
Adjustments to reconcile net income (loss) to cash provided by
operating activities-
Depreciation and amortization 130,729
Contract rights written off 98,216
Changes in current assets and liabilities-
Accounts receivable (16,737)
Prepaid expenses 27,620
Other Assets 600
Accounts payable (11,701)
Accrued expenses (47,665)
Unearned revenue 68,308
---------
Net cash provided by operating activities 316,614
---------
CASH USED FOR INVESTING ACTIVITIES:
Purchase of fixed assets (32,249)
Purchases of contract rights to monitor security systems (45,808)
---------
Net cash used for investing activities (78,057)
---------
CASH USED FOR FINANCING ACTIVITIES:
Repayments of debt (55,058)
Distributions to shareholders (210,155)
---------
Cash used for investing activities (265,213)
---------
Total decrease in cash (26,656)
CASH, beginning of period 107,762
---------
CASH, end of period $ 81,106
=========
CASH PAID FOR INTEREST $ 48,765
=========
</TABLE>
The notes to financial statements are
an integral part of this statement.
F-4
<PAGE> 7
TELECOMMUNICATIONS ASSOCIATES GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF NOVEMBER 24, 1997
1. DESCRIPTION OF THE BUSINESS
COMPANY BACKGROUND
Telecommunications Associates Group, Inc. (the "Company") (an Ohio Company
doing business as Emergency Response Center) owns and operates central
monitoring stations in Cleveland, Ohio and Austin, Texas 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.
REVENUES
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 its customers in the normal
course of business. Receivables in the accompanying balance sheet are net
of reserves of $100,000.
CONTRACT RIGHTS TO MONITOR SECURITY SYSTEMS
The Company acquires contract rights to monitor security systems from its
customers. These contract rights are recorded at the Company's purchase
price. The Company generally receives a guarantee from the seller to
replace any contracts which cancel monitoring service for a period of one
year. Accounts which are replaced are carried at the book value of the
replaced account. The net annual attrition rate of these accounts is
F-5
<PAGE> 8
approximately 10%. The contract rights are amortized on a straight-line
basis over a ten year period. Contract rights to monitor security systems
in the accompanying balance sheet are net of accumulated amortization of
approximately $185,000 as of November 24, 1997.
FURNITURE, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost. Maintenance and repairs are
charged to operations as incurred. When property, equipment and
improvements are disposed of, the costs and accumulated depreciation or
amortization are removed from the accounts and any resulting gains or
losses are reflected in income. Depreciation and amortization is provided
for financial reporting purposes using accelerated methods over five to
seven years.
Furniture and equipment at November 24, 1997, consists of the following:
<TABLE>
<S> <C>
Equipment $624,500
Furniture and fixtures 69,602
--------
694,102
Accumulated depreciation 569,242
--------
$124,860
========
</TABLE>
LEASES
The Company operates exclusively in leased facilities. Total rent expense
related to these facilities for the period ended November 24, 1997, was
approximately $104,300.
Additionally, the Company leases certain equipment used in its operations.
Total lease expense under these leases was approximately $47,800 for the
period ended November 24, 1997.
Future minimum lease payments at November 24, 1997 is as follows:
<TABLE>
<S> <C>
1998 $156,100
1999 114,700
2000 82,500
2001 82,500
2002 81,100
Thereafter 159,600
========
</TABLE>
F-6
<PAGE> 9
ACCRUED EXPENSES
Accrued expenses are comprised of the following:
<TABLE>
<S> <C>
Accrued Payroll $ 101,271
Accrued Vacation 50,000
Other 54,319
-----------
$ 205,590
===========
</TABLE>
UNEARNED REVENUE
Unearned revenue consists primarily of prebilled monitoring fees to
customers. Monitoring services are billed on a monthly, quarterly,
semi-annual and annual basis.
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.
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. NOTES PAYABLE
Debt at November 24, 1997, consists of the following:
<TABLE>
<S> <C>
Line of credit, interest at 9.5%, due May, 1998 $ 65,250
Notes payable to bank, interest at 10% payable in monthly
installments of $9,869, maturing in August, 1999 210,917
Notes payable to bank, interest at 10% payable in monthly
installments of $2,604, maturing in April, 2001 102,603
Notes payable to financial institution, interest at 10%, payable
in monthly installments of $ 2,659, maturing in May, 1999 44,285
--------
423,055
Current maturities 178,461
--------
Total long-term debt $244,594
========
</TABLE>
F-7
<PAGE> 10
Debt matures as follows:
<TABLE>
<S> <C>
1998 $246,834
1999 136,114
2000 31,248
2001 8,859
--------
$423,055
========
</TABLE>
F-8
<PAGE> 11
PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997
(in thousands, except per share data)
The following unaudited Pro Forma Combined Balance Sheet as of
September 30, 1997 was prepared to illustrate the estimated effects of the
acquisition of Telecommunications Associates Group, Inc. (TAG) as if it had
occurred on September 30, 1997. The Pro Forma Balance Sheet does not purport to
represent what Security Associates International, Inc.'s (the "Company")
financial position would actually have been if the acquisition had occurred on
the dates indicated or to predict the Company's financial position for any
future period. The following financial information should be read in conjunction
with the audited Financial Statements of Telecommunications Associates Group,
Inc. and the related Notes thereto included elsewhere in this filing.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THE COMPANY(1) TAG(2) ADJUSTMENT COMBINED
------------- ------ ---------- ---------
Assets
<S> <C> <C> <C> <C>
Cash $ 527 $ 30 $ 557
Accounts Receivable, net 1,992 242 2,234
Other 217 7 224
--------------------------------------------- ----------
Total current assets 2,736 279 3,015
--------------------------------------------- ----------
Contract Rights to monitor security
systems, net 11,814 699 $ 103 (3) 12,616
Goodwill and other intangible assets, net 7,660 7 5,088 (3) 12,755
Fixed assets, net 609 144 157 (3) 910
--------------------------------------------- ----------
Total assets $ 22,819 $ 1,129 $ 5,348 $ 29,296
--------------------------------------------- ----------
Liabilities and Equity
Accounts Payable $ 436 $ 104 $ 540
Current Maturities of long term debt 787 216 $ (150) (4) 853
Accrued Expenses 1,477 129 1,606
Unearned Revenue 2,087 758 2,845
--------------------------------------------- ----------
Total current liabilities 4,787 1,207 (150) 5,844
--------------------------------------------- ----------
Notes Payable, net of current maturities 19,017 270 567 (4) 19,854
--------------------------------------------- ----------
Total liabilities 23,804 1,477 417 25,698
--------------------------------------------- ----------
Common Stock 4 71 (70) (5) 5
Preferred Stock 3,847 -- 237 (5) 4,084
Additional Paid in Capital 4,349 -- 4,345 (5) 8,694
Retained Earnings (9,185) (419) 419 (5) (9,185)
--------------------------------------------- ----------
Total liabilities and stockholders' equity $ 22,819 $ 1,129 $ 5,348 $ 29,296
============================================= ==========
</TABLE>
(1) Data for the Company is as of September 30, 1997.
(2) Data for TAG is as of September 30, 1997.
(3) Provides for the pro forma step up of contract rights and fixed assets
to fair market value and pro forma goodwill generated from the
acquisition of TAG.
(4) Provides for the pro forma increase in debt of $417. Total new debt of
$800 was used by the Company to acquire TAG, of which $383 was used to
retire TAG debt.
(5) Provides for the pro forma equity which was raised by the Company in
October and November, 1997 through the exercise of options and warrants
and eliminates TAG equity.
F-9
<PAGE> 12
PRO FORMA COMBINED STATEMENT OF INCOME FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(in thousands, except per share data)
The following unaudited Pro Forma Combined Statement of Income for the
nine month period ended September 30, 1997 was prepared to illustrate the
estimated effects of the acquisition of Telecommunications Associates Group,
Inc. (TAG) as if it had occurred on January 1, 1997. The Pro Forma Statement of
Income does not purport to represent what Security Associates International,
Inc.'s (the "Company") 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 the audited Financial Statements of
Telecommunications Associates Group, Inc. and the related Notes thereto included
elsewhere in this filing.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THE COMPANY(1) TAG(2) ADJUSTMENT COMBINED
-------------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Monitoring fees and other revenues $7,417 $2,772 $10,189
General, selling and administrative
expenses 5,701 2,498 8,199
Loss from disposition of contract rights 1,079 97 1,176
Amortization and depreciation 1,708 98 $333 (3) 2,139
--------------------------------------------------- ---------------
Income (loss) from operations (1,071) 79 (333) (1,325)
Interest expense 1,314 37 39 (4) 1,390
--------------------------------------------------- ---------------
Income (loss) before income taxes (2,385) 42 (372) (2,715)
Income tax expense -- -- -- (5) --
--------------------------------------------------- ---------------
Net income (loss) (2,385) 42 (372) (2,715)
Dividends accrued on preferred stock 310 -- -- 310
--------------------------------------------------- ---------------
Net income (loss) available to common
Stockholders $(2,695) $42 $(372) $(3,025)
--------------------------------------------------- ---------------
Net loss per share $(.77)
Weighted average shares outstanding 4,034,292
</TABLE>
(1) Data for the Company is for the nine month period ended September 30,
1997.
(2) Data for TAG is for the period January 1, 1997 to September 30, 1997.
(3) Provides for the pro forma increase in amortization expense related to
contract rights and goodwill amortization for the period January 1,
1997 to September 30, 1997.
(4) Provides for the pro forma increase in interest expense for the nine
month period ended September 30, 1997 related to the Company's increase
in debt of $800 less $383 used to retire TAG debt at 12.5%.
(5) The pro forma adjustment for income tax expense of TAG as if it were
treated on a separate return basis would be approximately $17 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.
F-10
<PAGE> 13
PRO FORMA COMBINED STATEMENT OF INCOME FOR
THE YEAR ENDED DECEMBER 31, 1996
(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
Security Associates International, Inc.'s (the "Company") acquisition of the
non-Company interests in SACC and of AMJ and Telecommunications Associates
Group, Inc. ("TAG") (all 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 the audited Financial Statements and related
Notes thereto of TAG included elsewhere in this filing.
<TABLE>
<CAPTION>
THE PRO FORMA PRO FORMA
COMPANY(1) SACC(2) AMJ(3) TAG(4) ADJUSTMENT COMBINED
---------- ------- ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Monitoring fees and other revenues $3,782 $2,346 $2,104 $3,346 $(622) (5) $10,956
General, selling and administrative expenses 3,105 1,669 1,935 3,067 (622) (5) 9,154
Loss from disposition of contract rights 248 -- -- 39 -- 287
Amortization and depreciation 1,020 101 23 129 739 (6) 2,012
----------------------------------------------------------- -----------
Income (loss) from operations (591) 576 146 111 (739) (497)
Interest expense 1,384 105 19 37 (17) (7) 1,528
Interest income -- (43) -- -- -- (43)
----------------------------------------------------------- -----------
Income (loss) before income in equity of
joint venture (1,975) 514 127 74 (722) (1,982)
Income in equity of joint venture (257) -- -- -- (257) (8) --
----------------------------------------------------------- -----------
Income (loss) before minority interest (1,718) 514 127 74 (979) (1,982)
Minority interest -- 2 -- -- (2) (9) --
----------------------------------------------------------- -----------
Net income (loss) before income taxes (1,718) 512 127 74 (977) (1,982)
Income tax expense -- -- -- -- -- (10) --
----------------------------------------------------------- -----------
Net income (loss) (1,718) 512 127 74 (977) (1,982)
Dividends accrued on preferred stock -- -- -- -- 413 (11) 413
----------------------------------------------------------- -----------
Net income (loss) available to common
Stockholders $(1,718) $512 $127 $74 $(1,390) $(2,395)
----------------------------------------------------------- -----------
Net loss per share $(.65)
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) Data for TAG is for the year ended December 31, 1996.
(5) 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.
(6) Provides for the pro forma increase in depreciation expense and
goodwill amortization expense for the period January 1, 1996 to
September 5, 1996 related to the acquisition of SACC, for the period
January 1, 1996 to December 15, 1996 related to the acquisition of AMJ
and for the year ended December 31, 1996 related to the acquisition of
TAG.
(7) Eliminates the interest expense for the subordinated debt of $69 for
the period of September 5 to December 31, 1996, which was converted to
preferred stock on December 31, 1996 and adds interest expense of $52
related to the additional debt incurred for the TAG acquisition.
(8) 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.
(9) Eliminates the minority interest (2% of All-Security Monitoring
Services, L.L.C.) as a result of certain insignificant acquisitions
made by the Company.
(10) The pro forma adjustment for income tax expense of SACC, AMJ and TAG as
if they were treated on a separate return basis would be approximately
$205, $51 and $30, respectively, using an effective tax rate
F-11
<PAGE> 14
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.
(11) Represents the accrued dividends on the preferred stock for the period
January 1, 1996 to December 31, 1996.
F-12
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
Re: Security Associates International, Inc.
Supplement No. 4 to
Form S-1 Registration Statement
(Registration Statement No. 333-31775)
As independent public accountants, we hereby consent to the use of our report
dated January 23, 1998 and to all references to our Firm included in or made a
part of this Registration Statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 3, 1998
