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As filed with the Securities and Exchange Commission on April 9, 1998
REGISTRATION STATEMENT NO. _________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
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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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 (847)
956-8650
(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 (847)
956-8650
(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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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 (2) PRICE PER SHARE(1) PRICE(1) REGISTRATION FEE
- ------------------------------ -------------------- -------------------- ------------- --------------------------------
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Common Stock, $0.001 par value 1,000,000 shares(3) $6.875 $6,875,000 $2,028 (4)(5)
- ------------------------------ -------------------- -------------------- ------------- --------------------------------
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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) 2,778,088 shares (including shares registered for resale by certain
selling stockholders) and 2,000,000 Warrants were registered pursuant to a
Registration Statement on Form S-1, Registration No. 333-31775, declared
effective on October 20, 1997. The 2,778,088 shares registered included
2,000,000 shares which may be issued upon the exercise of the Warrants.
(3) Includes 1,000,000 shares which are being registered for resale, with the
consent of the Registrant, by certain selling stockholders who may wish to
sell such shares under circumstances requiring or making desirable the use
of the Prospectus contained herein.
(4) The Registrant previously paid a fee of $5,051.07 in connection with the
registration of the shares and Warrants referred to in footnote No. 2
above.
(5) Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus filed as part of this Registration Statement relates to the
securities registered hereby and also relates to 2,778,088 shares of the
Registrant's common stock (including shares registered for resale by
certain selling stockholders) and 2,000,000 Warrants to purchase such
common stock under its Registration Statement on Form S-1 (File No.
333-31775).
_________________
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
PROSPECTUS
3,778,088 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 independent security alarm system sales and installation
organizations ("Dealers") to induce them to enter into long term contractual
relationships with the Company (the "Dealer Program") 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. The
exercise of the Warrants will require a cash outlay of $6.00 per share. The
Company will receive no proceeds from the issuance of Common Stock to the
Dealers.
This Prospectus also covers 1,778,088 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."
Dealers receiving Common Stock or Warrants under the Dealer Program will
be assuming several risks related to the securities they receive. The Dealer
will be required to enter into an individually negotiated multi-year agreement
whereby the Dealer agrees that after entering the Dealer Program (defined
herein) it will not transfer Accounts (defined herein) monitored by the
Company's central monitoring stations on the date they join the Dealer Program
to a central monitoring station not owned by the Company or a subsidiary of the
Company. In addition, the Dealer will grant the Company (or its subsidiaries)
rights of first refusal to purchase the Dealer's Accounts and for borrowings
secured by Accounts during the term of the agreement. The securities issued to
a Dealer will also be subject to restrictions on transfer. The right to
transfer or pledge 25% of the securities the Dealer receives (as well as the
right to exercise the Warrants) will vest at closing, and will vest with
respect to the remaining 75%, annually at the rate of 25% per year, over a
period of three 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."
The Common Stock is traded on the American Stock Exchange under the symbol
IDL. On April 6, 1998, the last reported sale price of the Common Stock was
$6.875. See "Price Range of Common Stock."
_________________________
THESE ARE SPECULATIVE SECURITIES.
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 ______________, 1998
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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
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PROSPECTUS SUMMARY ............................................. 3
RISK FACTORS ................................................... 5
SECURITIES COVERED BY THIS PROSPECTUS .......................... 10
USE OF PROCEEDS ................................................ 12
PRICE RANGE OF COMMON STOCK .................................... 12
STOCKHOLDER RETURN AND PERFORMANCE GRAPH ....................... 13
DIVIDEND POLICY ................................................ 13
SELECTED FINANCIAL DATA ........................................ 14
PRO FORMA COMBINED STATEMENT OF INCOME ......................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................... 16
BUSINESS ....................................................... 22
MANAGEMENT ..................................................... 38
CERTAIN TRANSACTIONS ........................................... 44
PRINCIPAL AND SELLING STOCKHOLDERS ............................. 47
DESCRIPTION OF CAPITAL STOCK ................................... 53
LEGAL MATTERS .................................................. 57
EXPERTS ........................................................ 57
ADDITIONAL INFORMATION ......................................... 57
INDEX TO FINANCIAL STATEMENTS ..................................F-1
</TABLE>
Certain statements in this Prospectus that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Discussions containing such forward-looking statements may be found
of in the material set forth in the sections entitled "Risk Factors",
"Prospectus Summary", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business", as well in the Prospectus
generally. In addition, when used in the Prospectus the words "anticipates,"
"intends," "seeks," "believes," "estimates," and "expects" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. Such statements are subject to a
number of risks and uncertainties. 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." The Company undertakes no obligation to revise these forward-looking
statements to reflect any future events or circumstances.
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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" INCLUDES THE COMPANY AND ITS SUBSIDIARIES.
THE COMPANY
Security Associates International, Inc. ("Security Associates" or the
"Company") provides security alarm monitoring services for both residences and
businesses. These services are provided either directly to "Accounts" (which
are contracts to provide monitoring services) owned by the Company or to
Accounts owned by third parties, who are largely independent alarm system sales
and installation organizations ("Dealers"). The Company's ability to capture
monitoring business is enhanced and supported by a network of approximately
2,000 Dealers to which the Company provides industry-related education relating
to technology, finance, management and marketing (the "Dealer Network"). The
Company presently owns and operates four central monitoring stations located in
Des Plaines, Illinois, Pompano Beach, Florida, Euclid, Ohio and Austin,
Texas.
Security Associates' revenues generally consist of recurring monthly
revenue ("RMR") payments under written contracts to provide monitoring
services. For the year ended December 31, 1997, the Company derived
approximately 45% of its monitoring revenues from monitoring Company owned
Accounts and approximately 55% of its revenues from monitoring Dealer owned
Accounts. Total revenues increased from $699,154 for the fiscal year ended
December 31, 1993 to $10,814,087 for the fiscal year ended December 31, 1997.
Operating income decreased from a loss of $944,311 for the fiscal year ended
December 31, 1993 to a loss of $2,662,040 for the fiscal year ended December
31, 1997. The Company's loss per share of Common Stock for the fiscal year
ended December 31, 1997, was $1.16 per share. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As of December 31, 1997, Security Associates owned a total of 24,311
Accounts, of which 2,178 Accounts were monitored by other central stations.
From January 1, 1993 through December 31, 1997, the Company acquired 22,987
Accounts (net of attrition). During the year ended December 31, 1997, the
Company acquired 12,018 Accounts. As a result, the RMR that the Company is
entitled to receive from owned Accounts increased from $28,388 ($340,656
annualized) as of December 31, 1992 to $552,853 ($6,634,236 annualized) as of
December 31, 1997.
As of December 31, 1997, the Company monitored a total of 227,983 Accounts
from its five then operating central monitoring stations: 205,850 of the
Accounts were owned by 1,346 Dealers and 22,133 of the Accounts were owned by
the Company. From January 1, 1993 through December 31, 1997, the number of
owned and/or monitored Accounts increased from 12,301 to 230,161. During the
year ended December 31, 1997, the Company provided monitoring services to
117,217 additional Accounts as compared to 1996. The Company's RMR from
monitoring Dealer owned Accounts increased from $59,253 ($711,036 annualized)
as of December 31, 1992 to $739,953 ($8,879,436 annualized) as of December 31,
1997. The Company estimates that its central monitoring stations are capable
of monitoring 350,000 Accounts without requiring substantial additional
capital outlays. The Company's current plan envisions increasing the total
capacity of the Company's central stations to 500,000 Accounts by the end of
1998, 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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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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YEARS ENDED DECEMBER 31,
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PRO FORMA
1993 1994 1995 1996 1997 1997(1)
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STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 699 $ 1,397 $ 2,733 $ 3,782 $ 10,814 $ 14,245
Operating loss.............. $ (944) $ (354) $ (389) $ (591) $ (2,662) $ (2,942)
Net (loss) available to
common stockholders......... $ (846) $ (457) $ (947) $ (1,718) $ (4,938) $ (5,307)
Net loss per share.......... $ (.25) $ (.13) $ (.26) $ (.47) $ (1.16) $ (1.24)
Shares used in computing
net income per share........ 3,407,502 3,662,187 3,665,642 3,669,343 4,266,151 4,266,151
</TABLE>
<TABLE>
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YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
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BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 555 $ 86 $ 54 $ 632 $ 5,522
Working capital (deficit)........................ $ 2 $ (787) $(2,699) $(4,518) $ 1,625
Total assets..................................... $1,984 $ 2,690 $ 6,030 $16,533 $36,009
Total debt....................................... $1,792 $ 3,099 $ 6,862 $12,790 $22,919
Total stockholders' equity (deficit)............. $ (675) $(1,132) $(2,043) $ 1,269 $ 7,231
</TABLE>
(1) Pro forma data for the year ended December 31, 1997 gives effect to
the acquisition of Telecommunications Associates Group, Inc., an Ohio
corporation ("TAG") as if it had occurred on January 1, 1997.
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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
December 31, 1997, the Company's consolidated indebtedness was approximately
$22.9 million, and the Company had unused borrowing capacity of approximately
$13.6 million under the Company's $30 million senior loan facility. The
Company has also fully utilized its borrowing capacity under a $5 million
subordinated loan facility. The Company's lending subsidiary, Alarm Funding
Corporation, had unused borrowing capacity of $1,000,000 related to a
$1,500,000 subordinated loan facility. (All of the foregoing loan facilities
are collectively known as the "Loan Agreements"). Future acquisitions of
Account portfolios and central monitoring stations and future lending activity
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, loans to Dealers, 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 or to make loans to Dealers; (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." 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.
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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 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.
Risk Related to Concentration. As of March 31, 1998, approximately 11.8%
of the Company's active Account portfolio was acquired from a single Dealer and
maintenance services for those Accounts are provided by that Dealer. Should
that Dealer be unable to perform its maintenance obligations and were the
Company unable to find an adequate substitute service provider, the Company's
relations with subscribers of those Accounts might degenerate and the Company
might experience higher than normal attrition rates with respect to those
Accounts.
History of Losses. The Company incurred losses of $4.9 million for
fiscal 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, 1996 and 1997, the Company
invested a total of approximately $21.2 million in acquisitions of portfolios
of Accounts and central monitoring stations. The Company used a combination of
equity sales and 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 acquisition of subscriber Accounts and central
monitoring stations and through loans to Dealers. The Company will be required
to seek additional funding under the Loan Agreements, new loans or 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. The
Company is dependent on entering into and maintaining relationships with
Dealers who will either sell their Accounts directly to the Company or
6
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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. The Company also seeks to grow by providing loans to Dealers under its
loan program. The Company faces competition from other lenders to Dealers,
including companies who are better capitalized than the Company and who may
offer more favorable loan terms to Dealers. 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 Accounts. The Company experiences attrition of 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 Accounts if the Company does not
service those Accounts adequately or does not 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 significantly 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
more than 300 acquisitions made over the past six years. Losses related to
those acquisitions were accrued during 1997 and the amortization period was
reduced to eighteen months for the remaining Accounts purchased in these two
acquisitions beginning June 30, 1997.
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
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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.
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.
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 monitoring can be
provided and fewer Dealer owned Accounts available for the Company to purchase.
The Company's 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.
8
<PAGE> 10
Significant Ownership of Shares by Certain Stockholders. The Company's
largest stockholder owns approximately 51.4% 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. As a result, this investor currently has the
ability to determine 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 be required to
enter into an individually negotiated multi-year agreement whereby the Dealer
agrees that after entering the Dealer Program it will not transfer Accounts
monitored by the Company's central monitoring stations on the date the Dealer
joins the Dealer Program to a central monitoring station not owned by the
Company or a subsidiary of the Company. In addition, the Dealer will grant the
Company (or its subsidiaries) rights of first refusal to purchase the Dealer's
Accounts and for borrowings secured by Accounts during the term of the
agreement. The securities issued to the Dealer will also be subject to
restrictions on transfer. The right to transfer or pledge 25% of the
securities the Dealer receives (as well as the right to exercise the Warrants)
will vest at closing, and will vest with respect to the remaining 75%, annually
at the rate of 25% per year, over a period of three 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 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, Bylaws 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 15,660,738 shares of Common
Stock (including the shares issuable upon exercise of the Warrants and
conversion of the shares of Convertible Preferred Stock and assuming the
9
<PAGE> 11
exercise of other outstanding options or warrants). Of such shares, (i)
8,532,530 shares (consisting of the 2,000,000 shares offered hereby,
1,778,088 being registered for resale hereunder by Selling Stockholders, and
4,754,442 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) 7,128,208 shares will be eligible for sale pursuant to Rule 144 ("Rule
144") under the Securities Act (assuming the exercise of all outstanding
options and warrants).
Certain stockholders of the Company, whose shares are included above, also
have certain demand and "piggyback" registration rights pursuant to which an
aggregate of 6,458,443 shares of Common Stock (consisting of shares issued upon
conversion of the outstanding Convertible Preferred Stock) could become
immediately available for sale in the public market. See "Description of
Capital Stock."
Likelihood of Immediate and Substantial Dilution upon Exercise of the
Warrants. The exercise price of the Warrants (i.e., $6.00 per share) is
substantially higher than the present net tangible book value per share of the
Common Stock. Depending upon the net tangible book value per share of Common
Stock at the time of the exercise of the Warrants, Warrantholders who exercise
their Warrants may incur substantial dilution. Because the number of Warrants
that will be issued in this offering, the number of Warrants that will be
exercised, the dates they will be exercised, and the net tangible book value
per share of Common Stock on the date of any exercise are impossible to
determine, the exact amount of dilution, if any, that will be experienced by
any exercising Warrantholder cannot be predicted at this time. To the extent
outstanding options to purchase the Company's Common Stock are exercised, there
will be further dilution.
Current Prospectus and State Registration Required to Exercise Warrants.
Holders of Warrants will only be able to exercise the Warrants if: (i) a
current prospectus under the Securities Act of 1933, as amended, relating to
the securities underlying the Warrants is then in effect, and (ii) such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of
Warrants reside. Although the Company will use its best efforts to maintain
the effectiveness of a current prospectus covering the securities underlying
the Warrants, there can be no assurance that the Company will be able to do so.
There also can be no assurance that exemptions from the registration or
qualification requirements of those states in which the Company's securities
are not currently registered or qualified will be available at the time a
Warrantholder wishes to exercise his or her Warrant. The value of the Warrants
may be greatly reduced if a current prospectus, covering the securities
issuable upon the exercise of the Warrants, is not kept effective or if such
securities are not qualified, or exempt from qualification, in the states in
which the holders of Warrants reside.
SECURITIES COVERED BY THIS PROSPECTUS
2,000,000 of the shares of Common Stock and the 2,000,000 Warrants to
purchase such shares of Common Stock are being issued directly by the Company.
The Warrants and shares of Common Stock are available for issuance primarily
for the purpose of inducing Dealers 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 than 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. The exercise of the
Warrants will require a cash outlay of $6.00 per share. See "Business-Dealer
Program."
10
<PAGE> 12
The securities being offered by the Company may also be used in connection
with acquisitions of businesses, real or personal properties 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 securities.
1,778,088 of the shares of Common Stock covered by this Prospectus were
issued to certain stockholders 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 on the American Stock Exchange
(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.
11
<PAGE> 13
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of any shares
of Common Stock or Warrants issued to Dealers in the Dealer Program (except
those issued upon exercise of the Warrants as described below) or from the sale
of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Company expects that any proceeds to the Company from the sale of
shares of Common Stock upon the exercise of Warrants offered hereby at an
exercise price of $6.00 per share (payable in cash upon the exercise of the
Warrants) will be used for general corporate purposes, including working
capital. Pending such use, the net proceeds from the exercise of the Warrants
will be deposited in the Company's bank accounts or invested in short-term,
investment grade, interest-bearing securities. The foregoing notwithstanding,
there can be no assurance that any of the Warrants will be issued, or if
issued, exercised.
PRICE RANGE OF COMMON STOCK
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. On March 4, 1998 the Company's Common
Stock began trading on the American Stock Exchange under the symbol "IDL". 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 and the last reported sales prices as reported on the American Stock
Exchange for the period beginning March 4, 1998. 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>
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 $ 2.75
Third Quarter $ 4.00 $ 3.50
Fourth Quarter $ 4.875 $ 3.90
1998
First Quarter (through March 3, 1998) $ 5.625 $ 4.625
</TABLE>
<TABLE>
<CAPTION>
LAST REPORTED SALES
----------------------
HIGH LOW
---------- ----------
<S> <C> <C>
1998
First Quarter (from March 4, 1998 to April 6, 1998) $ 8.875 $ 5.50
</TABLE>
On April 6, 1998, the last reported sale price of the Common Stock was
$6.875 per share. At April 6, 1998, the Company had approximately 212
stockholders of record.
12
<PAGE> 14
STOCKHOLDER RETURN AND PERFORMANCE GRAPH
Set forth below is a line graph comparing the percent change in the
cumulative total Stockholder return on the Company's Common Stock against the
Russell 2000 Index and the Mallon Global Security Index. The graph assumes
that $100 was invested on January 1, 1993 at the price of $3.50 per share in
the Company's Common Stock, and each of the Russell 2000 Index and the Mallon
Global Security Index, and that all dividends were reinvested.
TOTAL STOCKHOLDER RETURNS
PERFORMANCE GRAPH FOR SECURITY ASSOCIATES INTERNATIONAL, INC.
Prepared by Buttonwood Advisory Group
Produced on February 11, 1998 Including Data to December 31, 1997
$100 invested January 1, 1993
(assumes all dividends reinvested)
GRAPHIC REPRESENTATION OF THE
INFORMATION CONTAINED IN THE TABLE BELOW.
ASSUMES $100 INVESTED ON JANUARY 1, 1993
ASSUMES DIVIDENDS REINVESTED THROUGH
FISCAL YEAR ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
Measurement Period Russell 2000 Index Mallon Global Security Index The Company
- ------------------ ------------------ ---------------------------- -----------
<S> <C> <C> <C>
January 1, 1993 $100.00 $100.00 $100.00
FYE 1993 $117.00 $129.40 $ 21.40
FYE 1994 $113.25 $127.76 $ 7.13
FYE 1995 $142.90 $189.98 $ 11.60
FYE 1996 $164.00 $268.82 $ 80.15
FYE 1997 $203.00 $323.40 $151.40
</TABLE>
DIVIDEND POLICY
The Company currently anticipates that it will retain all of its earnings
for development of its business, and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. Future cash dividends,
if any, on its Common Stock 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. The Company currently accrues
dividends on its 12% Redeemable Preferred Stock at the rate of 12% annually.
Payment of those dividends are not required until such time as the Company
raises $10 million in new equity (as defined in the Certificate of Designation
of Rights, Preferences and Limitations (the "Certificate of Designations")).
The terms of the 12% Redeemable Preferred Stock as they relate to the thresholds
of new equity which may be raised by the Company before triggering certain
rights of the holder and the Company may be
13
<PAGE> 15
increased as a result of a proposal to be considered at the 1998 Annual Meeting
of Stockholders. See "Certain Transactions." Payment of such dividends is also
subject to satisfaction of covenants contained in the Amended and Restated Loan
Agreement with FINOVA Capital Corporation ("FINOVA").
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data for the fiscal years ended 1995
through 1997 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 1993 and 1994
is derived from audited financial statements. 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 thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
Pro Forma
1993 1994 1995 1996 1997 1997(1)
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................... $ 699 $ 1,397 $ 2,733 $ 3,782 $ 10,814 $ 14,245
Operating income (loss)..... $ (944) $ (354) $ (389) $ (591) $ (2,662) $ (2,942)
Net (loss) available to
Common stockholders......... $ (846) $ (457) $ (947) $ (1,718) $ (4,938) $ (5,307)
Net loss per share.......... $ (.25) $ (.13) $ (.26) $ (.47) $ (1.16) $ (1.24)
Shares used in computing net
Income per share............ 3,407,502 3,662,187 3,665,642 3,669,343 4,266,151 4,266,151
</TABLE>
(1) The pro forma data for the year ended December 31, 1997 gives effect to
the acquisition of TAG as if it had occurred on January 1, 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995 1996 1997
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents. $ 555 $ 86 $ 54 $ 632 $ 5,522
Working capital (deficit). $ 2 $ (787) $(2,699) $(4,518) $ 1,625
Total assets.............. $1,984 $ 2,690 $ 6,030 $16,533 $36,009
Total debt................ $1,792 $ 3,099 $ 6,862 $12,790 $22,919
Total stockholders' equity
(deficit)................. $ (675) $(1,132) $(2,043) $ 1,269 $ 7,231
</TABLE>
14
<PAGE> 16
PRO FORMA COMBINED STATEMENT OF INCOME
The following unaudited pro forma Combined Statement of Income for the
year ended December 31, 1997 was prepared to illustrate the estimated
effects of the acquisition of TAG as if it had occurred on January 1, 1997.
The pro forma Combined 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.
(in thousands, except per share data)
<TABLE>
<CAPTION>
The Company(1) TAG(2) Pro Forma Adjustment Pro Forma Combined
------------- ------ -------------------- ------------------
<S> <C> <C> <C> <C>
Monitoring fees and other revenues... $10,814 $3,431 -- $ 14,245
General, selling and administrative
Expenses............................. $ 9,772 $3,086 -- $ 12,858
Write-off of contract rights......... $ 1,278 $ 98 -- $ 1,376
Amortization and depreciation........ $ 2,426 $ 131 $ 396(3) $ 2,953
_______ ______ _____ __________
Income (loss) from operations........ $(2,662) $ 116 $(396) $ (2,942)
Interest expenses.................... $ 1,863 $ 49 $ 40(4) $ 1,952
_______ ______ _____ __________
Income (loss) before income taxes.... $(4,525) $ 67 $(436) $ (4,894)
Income tax expense................... -- -- --(5) --
_______ ______ _____ __________
Net income (loss).................... $(4,525) $ 67 $(436) $ (4,894)
Dividends accrued on Preferred Stock. $ 413 -- -- $ 413
_______ ______ _____ __________
Net income (loss) available to common
Stockholders......................... $(4,938) $ 67 $(436) $ (5,307)
======= ====== ===== ==========
Net loss per share................... $ (1.24)
Weighted average shares outstanding.. 4,266,151
==========
</TABLE>
(1) Data for the Company is for the year ended December 31, 1997.
(2) Data for TAG is for the period January 1, 1997 to November 24, 1997.
(3) Provides for the pro forma change in depreciation
expense, amortization expense related to contract rights and
goodwill amortization for the period January 1, 1997 to November
24, 1997.
(4) Provides for the pro forma increase in interest expense
for the year ended December 31, 1997 related to the Company's
increase in debt of $800 less $383 used to retire TAG debt at
10.5%.
(5) The pro forma adjustment for income tax expense of TAG as
if it were treated on a separate return basis would be
approximately $27 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.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Prospectus that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Discussions containing such forward-looking statements may be found
in the material set forth in the sections entitled "Risk Factors",
"Prospectus Summary", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business", as well in the Prospectus
generally. In addition, when used in the Prospectus the words "anticipates,"
"intends," "seeks," "believes," "estimates," and "expects" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. Such statements are subject to a
number of risks and uncertainties. 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." The Company undertakes no obligation to revise these forward-looking
statements to reflect any future events or circumstances.
OVERVIEW
The Company's revenues are derived from recurring payments for
monitoring services provided to subscribers and Dealers pursuant to
agreements. Monitoring contracts have initial terms ranging from one to
five years usually with provisions for automatic renewal for periods of one
to three years. Monitoring contracts entered into with Dealers generally
permit cancellation with notice of 60 days.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data:
<TABLE>
Years Ending December 31,
------------------------------------
1995 1996 1997
--------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
Revenue...........................................$2,733 $ 3,782 $10,814
Operating Expenses:
General, selling & administrative...............$1,591 $ 1,394 $ 4,257
Payroll and related expense.....................$ 891 $ 1,710 $ 4,653
Amortization & depreciation.....................$ 540 $ 1,020 $ 2,426
Write-off of contract rights....................$ 101 $ 249 $ 1,278
Deferred compensation expense................... -- -- $ 862
______ _______ _______
Loss from Operations..............................$ (389) $ (591) $(2,662)
Interest Expense..................................$ 743 $ 1,384 $ 1,863
______ _______ _______
Net Loss..........................................$ (947) $(1,718) $(4,525)
Dividends accrued on Preferred Stock.............. -- -- $ 413
______ _______ _______
Net loss available to common stockholders.........$ (947) $(1,718) $(4,938)
Net loss per share................................$ (.26) $ (.47) $ (1.16)
====== ======= =======
Total weighted average number of common shares
Outstanding....................................3,665,642 3,669,343 4,266,151
</TABLE>
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
16
<PAGE> 18
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Total Revenue........................100% 100% 100%
Operating Expenses:
General, selling & administrative.....58% 37% 39%
Payroll and related expense...........33% 45% 43%
Amortization & depreciation...........20% 27% 22%
Write-off of contract rights.......... 3% 7% 12%
Deferred compensation expense.........-- -- 8%
Loss from Operations..................(14%) (16%) (24%)
Interest Expense......................(27%) (37%) (17%)
Net Loss..............................(35%) (45%) (41%)
</TABLE>
1997 COMPARED TO 1996
Revenues. Revenues for fiscal 1997 increased by $7,031,996, or 185.9%, to
$10,814,087 from $3,782,091 for fiscal 1996. The increase in revenues is
primarily related to acquisitions completed at the end of 1996 which resulted
in a full year's revenue generated in 1997 as opposed to a partial year in
1996, and to a lesser extent, to acquisitions completed during 1997. The
increase in revenues related to acquisitions are as follows: increase related
to the acquisitions of Security Associates Command Center II, L.L.C. ("SACC")
and All-Security Monitoring Services, L.L.C. ("AllSec") was approximately
$2,294,000, this acquisition was completed on September 5, 1996; increase
related to the acquisition of AMJ Central Station Corporation, Inc. ("AMJ") was
approximately $2,144,000, this acquisition was completed in December 1996;
and the acquisitions of Northern Central Station, Inc. ("NC"), completed
February 1997, and Telecommunications Associates Group, Inc. ("TAG"), completed
November 24, 1997, increased revenues by approximately $627,000. The balance
of the increase in revenue between the years of 1997 and 1996 of approximately
$1,967,000 is as a result of a net increase in the number of Accounts owned
(12,018) during the year.
Operating Expenses. Operating expenses increased $9,102,569 or 208.1% in
1997 from $4,373,558 to $13,476,127. General, selling and administrative
expenses increased from $1,394,244 to $4,257,360, an increase of $2,863,116 or
205.4%. This increase is related to the following: increase related to the
acquisitions of SACC and AllSec of approximately $910,000; increase related to
the acquisition of AMJ of approximately $693,000; increase related to the
acquisitions of NC and TAG of approximately $130,000; increase related to the
existing business of $1,130,000 (primarily due to an increase in professional
fees of $284,000 related to acquisitions), an increase in bad debt expense of
$504,000 related to an increase in reserves of $189,000 (net of acquisitions)
and the write-off of receivables associated with canceled Accounts. The
remaining increase of $342,000 is related to the overall growth in the existing
business of the Company.
Payroll and related expenses increased by $2,942,938, or 172.1%, from
$1,710,252 to $4,653,190. This increase is related to the following: increase
related to the acquisitions of SACC and
17
<PAGE> 19
AllSec of approximately $887,000; increase related to the acquisition of AMJ of
approximately $996,000; increase related to the acquisitions of NC and TAG of
approximately $418,000. The remaining increase in payroll and related expenses
of $642,000 is primarily due to the Company hiring four additional management
personnel and an increase in staff of five personnel during the year as a
result of the Company's growth.
Amortization and depreciation increased by $1,405,492, or 137.7%, from
$1,020,427 to $2,425,919 due to an increase in the amortization of goodwill
related to the acquisitions of SACC, AllSec, NC and TAG, and the amortization
of deferred financing costs of $598,968, an increase in amortization of
contract rights of $703,895 due to the net increase in contract rights of
$7,302,352 and an increase in depreciation expense of $102,630.
Expense related to the write-off of canceled Accounts increased by
$1,028,989, or 413.9%, from $248,635 to $1,277,624. This increase is related
to an increase in the number of Accounts purchased (over 12,000 net in 1997)
and an increase in the net attrition rate from 7% to 9% primarily related to
greater than expected losses on two Account purchase transactions.
The deferred compensation expense of $862,034 in 1997 is related to a
stock based deferred compensation plan instituted during 1997. Awards under
this plan are approved annually by the Board of Directors.
Interest Expense. Interest expense increased $478,367 from $1,384,239 in
1996 to $1,862,606, an increase of 34.6%. This increase was caused primarily
by an increase in borrowings under the Company's credit facility with FINOVA
from $7,304,000 at the end of fiscal 1996 to $16,521,813 at the end of 1997.
In addition, the Company incurred interest expense of $585,000 in 1997 compared
to $9,370 in 1996 related to outstanding debt on subordinated borrowings from
its principal stockholder. The Company had $5,500,000 of debt outstanding
under subordinated notes at the end of 1997, compared to $500,000 outstanding
at the end of 1996.
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 AllSec
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 monitoring Company owned
Accounts 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 these activities 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 $4,373,932. General, selling
and administrative expenses decreased from $1,590,860 to $1,394,244, a decrease
of $196,616, or 12.4%, due to an effort to control costs. Payroll and related
expenses increased by $818,932 from $891,320 to $1,710,252, or 91.9%, due to
additional management personnel added as a result of the overall growth of the
Company. 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 increase in
amortization and depreciation is primarily attributable to a net increase in
contract rights to monitor security systems of $1,181,476 and 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
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resulted from the consolidation of the results of AllSec 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. Payroll
and related expenses increased from 33% of revenues in 1995 to 45% of revenues
in 1996. This increase is attributable to additional personnel added as a
result of the Company's growth. The decrease in general, selling and
administrative expenses is attributable to a concerted effort to reduce these
costs. General, selling and administrative expenses decreased from 58% of
revenues in 1995 to 37% in 1996. This is attributable to a decrease in central
station monitoring expenses. 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 debt outstanding of $3,484,065 under the Company's
credit facility with FINOVA 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 with its principal stockholder. $500,000 was
outstanding under this agreement at year-end 1996.
CAPITAL EXPENDITURES
The Company made capital expenditures during 1997 totaling $311,612 to
upgrade phone systems in the central stations and purchase computer equipment.
The Company is contemplating upgrading or replacing its current technology
in order to more effectively operate the business. Cost estimates related to
the upgrading or replacement range from $800,000 to $4,000,000. This
undertaking is expected to be complete by mid 1999.
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, acquisition of central monitoring stations
and loans to Dealers (which are secured by Accounts). A substantial portion of
the Company's future cash flow will be used to acquire subscriber Account
portfolios, to acquire additional central monitoring stations, to pay down debt
and to make loans to Dealers (secured by Accounts).
1997 Compared to 1996
During the year ended December 31, 1997, contract rights to monitor
security systems, net of accumulated amortization increased $7,302,352 to
$13,908,478 due to the acquisition of over 12,000 Accounts. During the same
period goodwill, net of accumulated amortization, increased from $6,666,373 to
$11,919,949 due to the acquisitions of NC and TAG.
Current liabilities increased during the year ended December 31, 1997
compared to 1996 from $6,744,911 to $6,756,199. This change was caused
primarily by the payment of a note related to the acquisition of AMJ in January
1997 of $3,721,131 and a note paid to a related party of $136,000, offset by
increases in accrued liabilities, unearned revenue and current maturities of
debt. The major increases in accrued liabilities are related to accrued
dividends on Preferred Stock of $412,998, an increase in
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<PAGE> 21
accrued interest of $691,925 and an accrual for losses on contracts of
$229,812. Unearned revenue increased due to the acquisition of TAG and overall
growth of the Company. The increase in current maturities is related to
holdback notes maturing in 1998, senior debt borrowings increased by $8,502,465
and subordinated borrowing increased by $5,000,000. The proceeds of the
Company's borrowings were used primarily to fund the TAG acquisition ($800,000)
and the acquisition of contract rights from Dealers ($8,056,738).
Net capital of $9,987,836 was raised during the year through warrant and
option exercises for the purchase of common and preferred stock ($5,030,836)
and the sale of Common Stock through a private placement ($4,980,000 net of
expenses). This capital was used to fund the purchase of TAG $4,800,000, for
the purchase of fixed assets and for general corporate purposes. The Company
had $5,521,633 in cash on hand at year end 1997, which will be used to fund
future acquisitions of central stations and contract rights to monitor security
systems and loans to Dealers (secured by Accounts).
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 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 SACC and
AllSec in September 1996, and AMJ 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 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
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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. During 1997,
TJS exercised a warrant pursuant to which it purchased 15,000 shares of
Convertible Preferred Stock for the total consideration of $3,750,000, and
exercised options to purchase an additional 14,107 shares of Convertible
Preferred Stock for a purchase price of $821,290. In November 1997, TJS agreed
to establish a $1.5 million five year subordinated credit facility for Alarm
Funding Corporation, the Company's Dealer loan subsidiary ("AFC"). In
connection with this facility, AFC issued to TJS a one year option to purchase
a twenty percent interest in AFC for $1,000. As of December 31, 1997, a total
of $5.5 million was outstanding under the Company's subordinated loan
facilities with TJS. See "Certain Transactions."
Loan Agreement with FINOVA Capital Corporation. On December 31, 1996, the
Company and FINOVA entered into a loan agreement (the "FINOVA Loan Agreement").
The maximum amount available under the FINOVA Loan Agreement was originally
$15 million. On December 2, 1997, the Company's Loan Agreement with FINOVA
was amended and restated (the "Amended and Restated FINOVA Loan Agreement").
Pursuant to the Amended and Restated Loan Agreement, the Company's credit
facility with FINOVA was increased to $30 million from $15 million. The
Amended and Restated FINOVA Loan Agreement matures on December 31, 2002,
subject to earlier termination.
Availability under the Amended and Restated FINOVA Loan Agreement is restricted
in two ways:
(1) the total debt may not exceed 22 times RMR for monitoring
Company owned Accounts plus 12 times RMR for monitoring Dealer owned
Accounts; and
(2) the ratio of total debt to operating cash flow may not exceed
4.00.
The interest rates on borrowings under the Amended and Restated FINOVA
Loan Agreement are the base rate in effect from time to time plus the
applicable margin. At February 9, 1998, 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 the original closing in December 1996, and an additional $222,000
on the effective date of the increase in December 1997, and is obligated to pay
a commitment fee of .5% on the unused portion of the facility.
The Amended and Restated 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 monitoring Dealer and Company owned Accounts, and
(iii) mandatory prepayments from excess cash flow as defined in the Amended and
Restated FINOVA Loan Agreement.
FINOVA has agreed (subject to completion of definitive documentation) to
allocate up to $4 million of the Company's credit facility to Alarm Funding
Corporation to fund loans to Dealers (the "AFC Sub-Facility"). The AFC
Sub-Facility will be subject to a separate set of covenants.
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The Company intends to continue to pursue growth through the acquisition
of subscriber Accounts and central monitoring stations and through loans to
Dealers. 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.
Private Placement. On December 31, 1997 the Company completed the sale of
one million shares of its Common Stock. The shares were privately placed with
a group of accredited investors consisting of individuals, corporations and
privately held investment companies. No underwriter or placement agent was
used. The Company received $5,000,000 in consideration in exchange for the
shares and realized approximately $4,980,000 after estimated offering expenses
of $20,000. The Company has agreed to file a registration statement to
register the shares for resale no later than September 30, 1998. These
securities are among the securities being offered pursuant to this Prospectus.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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 non-owner changes in equity.
Adoption of this statement is required no later than with fiscal year 1998.
YEAR 2000 ISSUE
The Company has reviewed all of its current computer applications with
respect to the year 2000 issue. The Company believes all of its applications
are substantially year 2000 compliant and that any additional costs with
respect to year 2000 compliance will not be material to the Company. The
Company is currently unable to determine the effects of year 2000 compliance on
its Dealers or vendors.
BUSINESS
INDUSTRY OVERVIEW
Overview
Security Associates International, Inc. ("Security Associates" or the
"Company") provides security alarm monitoring services for both residences and
businesses. These services are provided either directly to "Accounts" (which
are contracts to provide monitoring services) owned by the Company or to
Accounts owned by third parties, who are largely independent alarm system sales
and installation organizations ("Dealers"). The Company's ability to capture
monitoring business is enhanced and supported by a network of approximately
2,000 Dealers to which the Company provides industry-related education relating
to technology, finance, management and marketing (the "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 thirty 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
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S. Brannen, President, and Stephen Rubin, Senior Vice President. The Company
conducts its operations directly and through five wholly-owned operating
subsidiaries. Security Associates and Monitor Service Group, L.L.C. acquire
and own the Company's Accounts. Monitoring is conducted through three entities
which operate central monitoring stations: All-Security Monitoring Services,
L.L.C. which owns and operates a central monitoring station located in Des
Plaines, Illinois ("Des Plaines Station"); AMJ Central Station Corporation,
Inc., which owns and operates a central monitoring station located in Pompano
Beach, Florida ("Pompano Beach Station"); and Telecommunications Associates
Group, Inc. ("TAG") which owns and operates central monitoring stations located
in Euclid, Ohio ("Cleveland Station") and Austin, Texas ("Austin Station"). On
June 9, 1997, the Company formed Alarm Funding Corporation, as the entity
through which it offers its loan program for Dealers. See "-Dealer Financing
Programs-Dealer Loan Program."
The Company also previously owned three 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 were
wholly-owned (in some cases through other wholly-owned subsidiaries) by the
Company. In the first quarter of 1998, all of these companies were merged into
the Company as part of the Company's efforts to reduce costs. Also in the
first quarter of 1998, all of the Accounts monitored at a central monitoring
station located in Grand Rapids, Michigan ("Grand Rapids Station"), which was
formerly owned by Security Associates Command Center II, L.L.C. ("SACC"), were
transferred to TAG, and in the second quarter of 1998, SACC will be dissolved
or merged into another of the Company's subsidiaries. The Company intends to
continue its efforts to simplify its corporate structure. See "Certain
Transactions."
Security Associates' revenues generally consist of recurring monthly
revenue ("RMR") payments under written contracts to provide monitoring
services. For the year ended December 31, 1997, the Company derived
approximately 45% of its monitoring revenues from monitoring Company owned
Accounts and approximately 55% of its revenues from monitoring Dealer owned
Accounts. Total revenues increased from $699,154 for the fiscal year ended
December 31, 1993 to $10,814,087 for the fiscal year ended December 31, 1997.
Operating income decreased from a loss of $944,311 for the fiscal year ended
December 31, 1993 to a loss of $2,662,040 for the fiscal year ended December
31, 1997. The Company's loss per share of Common Stock for the fiscal year
ended December 31, 1997, was $1.16 per share. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As of December 31, 1997, Security Associates owned a total of 24,311
Accounts, of which 2,178 Accounts were monitored by other central stations.
From January 1, 1993 through December 31, 1997, the Company acquired 22,987
Accounts (net of attrition). During the year ended December 31, 1997, the
Company acquired 12,018 Accounts. As a result, the RMR that the Company is
entitled to receive from owned Accounts increased from $28,388 ($340,656
annualized) as of December 31, 1992 to $552,853 ($6,634,236 annualized) as of
December 31, 1997.
As of December 31, 1997, the Company monitored a total of 227,983 Accounts
from its five then operating central monitoring stations: 205,850 of the
Accounts were owned by 1,346 Dealers and 22,133 of the Accounts were owned by
the Company. From January 1, 1993 through December 31, 1997, the number of
owned and/or monitored Accounts increased from 12,301 to 230,161. During the
year ended December 31, 1997, the Company provided monitoring services to
117,217 additional Accounts as compared to 1996. The Company's RMR from
monitoring Dealer owned Accounts increased from $59,253 ($711,036 annualized)
as of December 31, 1992 to $739,953 ($8,879,436 annualized) as of December 31,
1997. The Company estimates that its central monitoring stations are capable
of
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monitoring 350,000 Accounts without requiring substantial additional capital
outlays. The Company's current plan envisions increasing the total capacity of
the Company's central stations to 500,000 Accounts by the end of 1998, 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, approximately
400,000 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 its various programs and
services are a potential source for future sales of monitoring services and
loans to Dealers under the Company's Dealer Loan Program (described below).
See "-Dealer Financing Programs -Dealer Loan Program."
The Company intends to continue to acquire portfolios of Accounts and to
increase the number of Accounts it monitors. In pursuing these goals, the
Company anticipates acquiring additional central monitoring stations. It also
intends to continue making loans to Dealers secured by Dealer owned Accounts.
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. See "-Dealer Program."
General
The electronic security market is characterized by a large number of small
companies involved in security alarm system installation and monitoring. A
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, approximately 42% of all Dealers earned less
than $250,000 in gross revenues in 1997, with approximately 68% earning less
than $500,000 during the same period. 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 1998 edition of Security Sales, an industry publication,
indicate that revenues for the electronic security alarm segment of the
security industry grew from $9.7 billion in 1991 to $13.9 billion in 1997. 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 during this period 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. Security Sales reported in January 1998 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
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burglarized as homes with such systems (14.8% vs. 6.6%). These factors 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 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 group of large well-capitalized potential entrants.
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 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 trend of offering low cost systems has been
accompanied by an increase in the average monthly monitoring fee from $20.00 a
month to $22.00 per month, and in many cases $25.00 to $30.00 per month, 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 monitoring fee and the cost to the Dealer of buying monitoring
services from a contract or third party central station. This recurring
monthly monitoring income is an important component of a Dealer's total revenue
stream. According to a study cited in the 1997 Security Sales Dealer Survey,
approximately 26% of a Dealer's revenues consist of monitoring and service
fees. 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. However,
Dealers cannot expect to maintain this stream of income if their customers do
not receive high quality monitoring services. 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
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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 into the industry 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 generally available to help the independent Dealer meet
these needs.
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. To this
end, the Company provides ongoing training and management development programs,
as well as, what the Company believes is the industry's premier educational
event, the Security Associates International, Inc. Annual Conference, now in
its sixteenth year.
BUSINESS
Alarm Monitoring
Independent Dealer Relationships
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 Ron Davis, the
Chairman of the Company's Board of Directors and Stephen Rubin, its Senior Vice
President, were principals of the Davis Marketing Group, an organization formed
in the mid-1970s to provide consulting services to alarm companies. This group
evolved into a franchiser of alarm installation franchises, which later became
a network of Dealers, initially made up of the former franchisees. The network
provided its affiliates with group buying, training and education services. In
1990, Security Associates, Inc., the corporate predecessor to the Company was
formed to acquire Accounts for its own portfolio and to acquire an interest in
the Grand Rapids Station. The initial stockholders (other than the founders)
were almost all independent Dealers. The relationship with the Dealer Network
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.
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Monitoring Services to Independent Dealers
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
cost for obtaining the monitoring services. 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, to some extent, 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 monitoring services. 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. 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 structural
requirements, have a backup and uninterruptible power supply and 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 monitoring services by up to 35% 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 additional 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. To assist the
Company in this regard, the Company recently appointed Ronald Carr as a Vice
President. Mr. Carr was formerly a Director of Ameritech's SecurityLink where
he was responsible for telecommunications and central station operations.
Increase Monitoring Capacity
Historically, the Company's 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 the Des Plaines Station through a
wholly-owned subsidiary. All of the interests in the Des Plaines Station and
Grand Rapids Station which were owned by outside investors were purchased by
the Company in September 1996. In December 1996, the Company purchased the
Pompano Beach Station. In November 1997, the Company purchased TAG which owns
and operates central monitoring stations located in Austin, Texas and Euclid,
Ohio. Accounts monitored at the Grand Rapids Station were moved to TAG in the
first quarter of 1998, as part of the Company's effort to consolidate
operations and reduce costs. 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 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
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systems by the end of 1998. The Company intends to embark on this program of
expansion. This expansion would principally involve hiring additional
personnel, purchasing additional computers and monitoring equipment and leasing
additional phone lines. The Company will then have the opportunity and
challenge of bringing in additional 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, Inc. ("NC"), a central monitoring
station located in New Jersey. In the NC transaction, the New Jersey facility
was not purchased. Instead, all of the 8,860 Accounts monitored by NC were
transferred in bulk, along with certain equipment and software, to the Des
Plaines Station. Only two new personnel were necessary to accommodate the
additional 8,860 Accounts. By contrast, the old NC operation required eight
full-time employees plus a leased facility.
In the first quarter of 1998, the Company consolidated the Grand Rapids
Station into the TAG station located in Euclid, Ohio, which was acquired on
November 24, 1997. The consolidation is expected to reduce costs by reducing
management and supervisory expense and by eliminating the rent and computer
hardware and software support costs of the Grand Rapids Station.
Maintain and Enhance the Quality of Monitoring Services
One of the initiatives undertaken by the Company is a review of the
operations of each of its central monitoring stations combined with the
development of a strategic plan to improve the functionality and profitability
of the Company's monitoring services. The Company's four central monitoring
stations currently use slightly different event monitoring software and
hardware. All of the Company's existing systems are being evaluated against
other systems that are available in the industry to determine the optimum
configuration for the Company's needs. 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,
internet or 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. These user
groups would meet periodically and serve as a regular source of feedback for
both the central station and for Security Associates as a whole. The Company
also plans to use the user groups as forums at which it can test the
attractiveness and demand for proposed new services before making major
commitments of time and money to new programs.
The Company believes that these initiatives will greatly enhance the
quality of monitoring services, and, therefore, their attractiveness to
Dealers.
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Implement Relationship Based Marketing Program for Monitoring
The Company's goal is to increase the number of Accounts it monitors by up
to 35% in the next twelve months. While there can be no assurances that this
goal can be reached, the Company is undertaking several initiatives toward its
accomplishment.
The Company has reorganized and changed 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.
Additionally, the Company's sales force has traditionally focused its efforts
on purchasing Accounts from Dealers who are seeking financing rather than
selling monitoring services or offering financing alternatives. The Company
has directed its sales force to engage in "relationship marketing" whereby
Dealers are presented with the entire range of services provided by the
Company, including monitoring services and the Dealer Loan Program (described
below). Specifically, as part of its relationship marketing program, Security
Associates attempts to take greater advantage of its existing relationships
with the Dealer community through a cross-selling program. The relationship
oriented salespeople are supported by technical support staff who supply
potential purchasers of monitoring services with a detailed explanation of the
capabilities of the Company's central stations.
As part of its relationship oriented strategy, the Company is implementing
a program (the "Dealer Program") that allows selected Dealers to become equity
owners of Security Associates. Under this program, a Dealer will enter into an
individually negotiated multi-year formal contractual relationship with the
Company pursuant to which the Dealer transfers and retains some or all of its
Accounts at one of the Company's central stations and agrees that during the
term of the contractual relationship the Dealer will not transfer its Accounts
monitored by the Company's central monitoring stations to a central monitoring
station not owned by the Company or a subsidiary of the Company. In return,
the Company will issue to the Dealer a negotiated amount of Common Stock or
Warrants to purchase Common Stock. These securities will be issued without the
requirement of any cash outlay by the Dealers, however, the exercise of the
Warrants will require a cash outlay of $6.00 per share. Additionally, the
Dealer will be required to grant the Company rights of first refusal with
respect to sales of Accounts and borrowings secured by Accounts. 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 monitoring services at competitive rates. The Dealer Program is a
central component of its marketing efforts to Dealers. See "Business-Dealer
Program."
Provide Continuing Service to Company Owned Accounts
The Company maintains a staff of fifteen 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,
which the Dealer originally installed. 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 sometimes experiences
cancellation of its owned Accounts due to subscribers relocating, cancellation
for nonpayment, problems with service and miscellaneous other reasons. This
attrition is somewhat compensated for by the ability of the Company to offset
against the Holdback Amounts, as defined herein, and by Dealers meeting their
obligation to replace Accounts that go into default during the guarantee
period. Historically, through February 28, 1998, the Company experienced gross
attrition of 11.9% and net attrition (i.e., after taking into account
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replacements for canceled Accounts and application of the Holdback Amount) of
7.6%. The Company experienced significantly higher gross and net attrition in
1997 primarily as a result of losses attributable to two acquisitions
aggregating approximately 2,000 Accounts. The Company believes that it will
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 11% and maintain its net attrition rate at 7.5% to 8.0%
during 1998, although there can be no assurance that this goal can be achieved.
Dealer Financing Programs
General
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 manage
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 and
Scott MacDougal. Stephen Rubin has over twenty-five years of experience
counseling Dealers as to their financing options and assisting them with their
financing needs. Scott MacDougal joined the Company in September 1997. Scott
MacDougal's prior experience includes both the venture capital industry and
commercial banking. The Company presently operates an active "Account
Acquisition Program" and a "Dealer Loan Program" (under which the Company makes
loans secured by Accounts as collateral). See "-Dealer Financing
Programs-Dealer Loan Program."
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 owned Accounts are purchased as portfolios of subscriber
Accounts from Dealers. 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
market price of Accounts, the Company's prior experience with Accounts
purchased from the Dealer, the geographic location of the Accounts, number of
Accounts purchased, the RMR of the Accounts and the type of monitoring
equipment used by the subscriber. Because Accounts typically have original
contract terms ranging from two to five years (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 cover the cost associated with the
maintenance of Accounts such as providing monitoring service on a monthly
basis, 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
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of the Accounts, is the crucial element 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 factors
including the availability of suitable Account acquisition opportunities, the
market price of Accounts and the amount and cost of financing available to the
Company.
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
contract with the selling Dealer to service the underlying alarm system.
Security Associates will also refer all inquiries relating to system
enhancements to the selling Dealer. This process serves two purposes: first,
it allows the Company to capitalize on the relationship between the subscriber
and the Dealer; and second, it encourages the Dealer to sell additional
Accounts to Security Associates as new installations are made. In a market
where the demand for Accounts is high, the Company believes that 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 monitoring services to use the Company as a
purchaser when they wish to sell Accounts, and as a lender when they wish to
borrow. 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 monitors its owned Accounts at the same stations
that the Dealers use for monitoring services, Dealers' Accounts receive the
same attention and high quality monitoring services as the Company provides to
its owned Accounts.
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
(the "Holdback Amount") in the form of a promissory note 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 by the Company to offset the lost RMR and 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 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.
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Dealer Loan Program
Because high quality Accounts represent a reliable future stream of
revenue with little incremental costs, some Dealers prefer to borrow using
their Accounts as collateral. Historically, banks have been reluctant to lend
against Accounts as collateral. The Company believes that only two sizable
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, billing and collections, the Company believes it is well prepared to
both determine the value of Accounts as collateral and to realize the value of
those Accounts in case of default. On June 9, 1997 the Company formed Alarm
Funding Corporation the entity through which it is implementing its Dealer Loan
Program. The Company, through Alarm Funding Corporation, made its first loan
in December 1997. As of February 16, 1998, the Company has made loans totaling
$550,000 to two Dealers. The initial funding for this subsidiary consisted of
a $1,500,000 subordinated credit facility from TJS Partners, L.P. (of which
$500,000 has been drawn down as of March 29, 1998) and an equity investment of
$500,000 made by the Company in January 1998. The Company also expects that in
the first quarter of 1998 that it will reach an agreement for the allocation to
Alarm Funding Corporation of $4 million from the Company's $30 million credit
facility with FINOVA Capital Corporation ("FINOVA"). The growth and
profitability of the Dealer Loan Program is subject to many contingencies
including the availability of low-cost financing, the aggressiveness of the
competition and controlling the costs of servicing the loan portfolio.
Dealer Program
The Company also plans to offer to a select group Dealers the opportunity
to become equity owners of Security Associates through the Company's Dealer
Program. Under the Dealer Program, a Dealer will enter into an individually
negotiated multi-year formal contractual relationship with the Company pursuant
to which the Dealer transfers and retains some or all of its Accounts at one of
the Company's central stations and agrees that during the term of the
contractual relationship the Dealer will not transfer Accounts monitored by the
Company's central monitoring stations to a central monitoring station not owned
by the Company or a subsidiary of the Company. In return, the Company will
issue to the Dealer a negotiated amount of Common Stock or Warrants to purchase
Common Stock.
Of the securities issued under the Dealer Program, 25% will be freely
tradable upon issuance and the remaining 75% will have their restrictions
removed annually (on each anniversary of the closing date), at the rate of 25%
per year, over a three year period. 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 have not yet been removed, but will
retain all securities that have not been forfeited. A Dealer will be deemed to
be in default on its obligations under the Dealer Program, if, among other
things, the Dealer, during the term of the contractual relationship, transfers
Accounts monitored by the Company's central monitoring stations or the Dealer
fails to comply with the rights of first refusal granted to the Company. The
certificates issued to a Dealer under the Dealer Program will contain
restrictive legends on the securities to which the restrictions apply.
Pursuant to the Dealer Program, the Company will provide the monitoring
services required by each Dealer at rates which are competitive to rates
charged by other central monitoring stations for similar services. 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 a stated value of
$6.00 per share. 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 to induce such Dealers to enter into the Dealer
Program. The exercise of the Warrants will require a cash outlay of $6.00 per
share.
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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.
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 and management development
programs are not only valuable to Dealers, but also can add depth and
permanence to all of the Company's business relationships with independent
Dealers. The Company's efforts in this respect are headed by Ron Davis,
Chairman of the Board, with more than 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 numerous seminars each 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 which contains
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 cassette 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.
The Company entered into a joint venture agreement with EchoStar Satellite
Corporation on July 19, 1997 related to the marketing and installation of the
EchoStar satellite dish program for direct broadcast television. The Company
also has 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. Based upon its
experience to date, the Company does not expect to derive meaningful revenues
from these programs, but will continue to operate them as a service to its
Dealer Network. 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 so as to enhance its relationships with
Dealers.
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
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single entity providing a range of similar services with 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 intends to present itself to the
bundlers as an ideal way of approaching independent installers in an efficient
manner.
Expand 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, the Company believes 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 March 29, 1998,
approximately 2,000 of the estimated 13,000 independent alarm Dealers are
Security Associates affiliates. The Company intends to introduce the benefits
of association with Security Associates to a broader segment of the Dealer
community with a view to expanding and strengthening its relationships with
Dealers.
Recent Central Station Acquisitions
Acquisition of Telecommunications Associates Group, Inc.
On November 24, 1997, the Company purchased all of the outstanding capital
stock of Telecommunications Associates Group, Inc., an Ohio corporation ("TAG")
from an unaffiliated third party. TAG is a third-party alarm monitoring
company which provides monitoring services to approximately 100,000 Accounts
from central monitoring stations located in Euclid, Ohio and Austin, Texas.
The purchase price was $5,000,000 (which was paid in cash at the closing), plus
the assumption of TAG's liabilities (of approximately $1,500,000). $4,800,000
of the purchase price was financed from the Company's general corporate funds
and the balance was either liabilities assumed by the Company or financed by
drawing on the Company's existing credit facility with FINOVA. The acquisition
was accounted for under the "purchase method" for financial accounting
purposes. The acquisition allows the Company to offer central monitoring
services from a broader geographical base.
Acquisition of Alert Answering Service
On March 2, 1998, the Company purchased all of the operating assets of
Camak, Inc., D/B/A Alert Communications D/B/A Alert Answering Service, an Ohio
corporation ("Alert") from an unaffiliated third party. Alert is a third-party
alarm monitoring company which provides monitoring services to approximately
1,966 Accounts and also is a direct answering service business serving
approximately 250 subscribers. In March 1998, the monitoring portion of the
business was moved to TAG. Alert currently conducts its answering service
business from a central monitoring station located in Cleveland, Ohio. It is
anticipated that the answering service business will be transferred to another
of the Company's central monitoring stations in the second quarter of 1998.
The purchase price was $306,105 (which was paid in cash at the closing), plus
the assumption of Alert's liabilities (of approximately $28,985). All of the
purchase price was financed from the Company's general corporate funds and the
balance were liabilities assumed by the Company.
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The acquisition was accounted for under the "purchase method" for financial
accounting purposes. The acquisition allows the Company to provide expanded
telephone answering services for its independent alarm Dealers.
Acquisition of Guardian Security Systems, Inc.
On March 6, 1998, the Company purchased all of the outstanding capital
stock of Guardian Security Systems, Inc., an Ohio corporation ("Guardian") from
an unaffiliated third party. Guardian is a third-party alarm monitoring
company which provides monitoring services to approximately 3,270 Dealer owned
Accounts and 1,349 owned Accounts from a central monitoring station located in
Columbus, Ohio. The purchase price was $1,215,833 (which was paid in cash at
the closing), plus the assumption of Guardian's liabilities (of approximately
$218,430 (out of $887,717) and debt of $328,116). All of the purchase price
was financed from the Company's general corporate funds and the balance were
liabilities assumed by the Company. The acquisition was accounted for under
the "purchase method" for financial accounting purposes. In the first quarter
of 1998, all of the assets and operations of Guardian were transferred to TAG,
and in the second quarter of 1998, it is anticipated that Guardian will be
dissolved or merged into TAG.
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 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 million
and $2 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 for liability arising from gross negligence or wanton behavior.
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 monitoring can be provided
and fewer Dealer owned Accounts available for the Company to purchase. The
Company's 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.
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
35
<PAGE> 37
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.
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 March 29, 1998, the Company employed 263 individuals on a full-time
basis and 22 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.
36
<PAGE> 38
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; 1471 S.W. 12th
Avenue, Pompano Beach, Florida; 1514 East 191 Street, Euclid, Ohio; and 6448
Highway 290 East, Suite 110, Austin, Texas. All of the Company's facilities
are leased. The Arlington Heights lease expires December 31, 2002, 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 Pompano Beach lease expires
December 31, 2001, but can be renewed by the Company at its option for one
additional five year term. The Euclid lease expires December 31, 2004, but can
be renewed by the Company at its option for one additional five year term. The
Austin lease expires July 31, 1999.
37
<PAGE> 39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Ronald I. Davis 59 Chairman of the Board and Director
James S. Brannen 59 President, Chief Executive Officer and Director
Daniel S. Zittnan 43 Vice President, Treasurer, Chief Financial Officer
Stephen Rubin 51 Senior Vice President
Michael B. Jones 46 Director
Thomas J. Salvatore 30 Director
Douglas Oberlander 47 Director
Ronald J. Carr 46 Vice President
Timothy M. McAuliff 39 Vice President
Karen Daniels 43 Vice President
Scott J. MacDougal 39 Vice President
</TABLE>
RONALD I. DAVIS, age 59, is 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, the chairman and principal stockholder of SAI Partners,
Inc., an alarm dealer buying group which also provided alarm 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
Corporation, a franchise company in the alarm industry and a joint venture with
Pittway Corporation. Prior to 1982, Mr. 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, age 59, is 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
employed by 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 an MBA degree from Northwestern University.
DANIEL S. ZITTNAN, age 43, has served as Vice President, Chief Financial
Officer and Treasurer of the Company since October 7, 1997. Mr. Zittnan spent
over thirteen years with Arthur Andersen LLP, most recently as a senior
manager. Mr. Zittnan holds a BA in accounting from DePaul University and is a
member of the AICPA and ICPA Society. Mr. Zittnan is also a Certified Public
Accountant.
38
<PAGE> 40
STEPHEN RUBIN, age 51, is a founder of the Company and has been Senior
Vice President 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, age 30, 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 (the remaining director has not been
designated as of the date of this Prospectus). Mr. Salvatore holds a Bachelors
Degree in Business Administration from Fordham University.
DOUGLAS OBERLANDER, age 47, 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.
MICHAEL B. JONES, age 46, was appointed a Director of the Company in
January 1998. He has been president of ProFinance Associates, Inc. since he
co-founded it in 1985. ProFinance has been a Broker-Dealer firm since 1990. Mr.
Jones was with Marine Midland Bank from 1977 until 1985. He was responsible for
starting a communications/electronics lending group in 1991 and, in his last
position as group executive, for leading that group. That group was one of the
first institutional lenders to the alarm industry. Mr. Jones has a Bachelors
Degree in Liberal Arts from the University of Arizona and a Masters Degree in
International Relations from the Johns Hopkins University School of Advanced
International Studies.
RONALD J. CARR, age 46, has been a Vice President of the Company since
March 1997. Mr. Carr is also the President of Telecommunications Associates
Group, Inc., a wholly owned subsidiary of the Company, and is a member of the
board of directors of the Central Station Alarm Association. 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, age 39, has served as Vice President and Chief Credit
Officer since January 1998. Prior to becoming Chief Credit Officer, Mr.
McAuliff was Vice President of Operations starting in 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, age 43, has served as Vice President since October 7,
1997. Prior to becoming a Vice President, Ms. Daniels acted as a consultant
for the Company starting in March 1997, and prior to that for 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. Ms. Daniels has a bachelors degree in
Industrial Administration-Finance from Iowa State University. Ms. Daniels is
also a Certified Public Accountant.
39
<PAGE> 41
SCOTT J. MACDOUGAL, age 39, has been a Vice President with the Company and
president of Alarm Funding Corporation, a wholly owned subsidiary of the
Company, since October 7, 1997. 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, until their successors are duly
elected and qualified or until his or her death, resignation or removal by the
Board. Each executive officer is a full time employee of the Company.
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.
DIRECTOR COMPENSATION
Beginning January 1998, directors who are not executive officers of the
Company are paid a fee of five hundred dollars ($500) per month as compensation
for their services. All directors (other than Mr. Salvatore) 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. Mr. Jones was awarded options to
purchase 10,000 shares of the Company's Common Stock, at an exercise price of
$6.00 per share, when he joined the Board of Directors. Mr. Jones' options
expire December 31, 2002.
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded or earned by the
Company's President and Chief Executive Officer and the other most highly paid
executive officers during the year ended December 31, 1997 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------ ----------------------------------
AWARDS PAYOUTS
---------------------- --------
RESTRICTED
NAME AND PRINCIPAL OTHER ANNUAL STOCK SECURITIES LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS UNDERLYING PAYOUTS(4) COMPENSATION(5)
- ------------------ ---- -------- ---------- ------------ ------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James S. Brannen 1997 $125,000 $11,634.62 $23,835(1) -- -- $154,103 $837.57
President, Chief
Executive Officer
and Director 1996 $ 94,523 -- -- -- -- -- --
Ronald I. Davis 1997 $125,858 $11,634.62 $22,949(2) -- -- $154,103 $843.88
Chairman of the
Board(6)
Stephen Rubin 1997 $104,999 $ 8,461.54 $11,586(3) -- -- $ 95,625 $694.46
Senior Vice
President (6)
</TABLE>
- -----------------
1) Includes $22,871 for automobile allowance.
2) Includes $22,319 for automobile allowance.
3) Includes $10,752 for automobile allowance.
4) Earned awards under the Company's Supplemental Employees' Retirement
Plan. See "-Deferred Compensation Stock Plan."
5) Amount is matching funds from Company pursuant to the Company's 401(k)
Plan.
6) Annual salary and bonus did not exceed $100,000 in 1996.
40
<PAGE> 42
EXECUTIVE OPTION EXERCISES TABLE
The following table contains information concerning the stock option
exercises made by each of the Named Executive Officers in 1997:
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR END YEAR END
------------------------- -------------------------
SHARES ACQUIRED
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------- --------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James S. Brannen 278,308 $1,267,693.50 --/-- --/--
Ronald I. Davis 278,308 $1,267,693.50 120,000/--(1) $517,500/--
Stephen Rubin 185,539 $ 845,130,.38 40,000/--(2) $172,500/--
</TABLE>
1) By virtue of a warrant owned by SAI Partners, Inc. of which Mr. Davis is
the sole stockholder, the warrant has an exercise price of $1 per share
and expires December 31, 1999.
2) By virtue of a warrant with an exercise price of $1 per share which
expires December 31, 1999.
LONG-TERM INCENTIVE PLANS TABLE
The following table contains information concerning awards under the
Company's long-term incentive plan to the Named Executive Officers in 1997:
Long-Term Incentive Plans - Award in Last Fiscal Year(1)
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
PRICE-BASED PLANS
-----------------------------------------------
PERFORMANCE OR
NUMBER OF SHARES, OTHER PERIOD UNTIL
UNITS OR OTHER MATURATION OR
NAME RIGHTS PAYOUT THRESHOLD TARGET MAXIMUM
- ---------------- ----------------- ------------------ --------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
James S. Brannen 29,008 Maximum of 20% per -- 38,676.8 shares per 193,384 shares
year for each of year
five years starting
FYE 1997
Ronald I. Davis 29,008 Maximum of 20% per -- 38,676.8 shares per 193,384 shares
year for each of year
five years starting
FYE 1997
Stephen Rubin 18,000 Maximum of 20% per -- 24,000 shares per 193,384 shares
year for each of year
five years starting
FYE 1997
</TABLE>
1) Awards under the Company's Supplemental Employee's Retirement Plan. See
"-Deferred Compensation Stock Plan."
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" (the "Plan"), whereby the Board of Directors may
make annual year-end awards to plan participants in the form of shares of the
Company's Common Stock. The Plan establishes a deferred compensation program
for participating officers, by crediting an initial amount of shares to the
plan and awarding the shares in the following manner. At the end of each
fiscal year for the first five years following an award, each participant may
earn up to a maximum of 20% of the aggregate shares credited to such
participant. The actual number of shares awarded is based on the Board's
assessment of each participating officer's performance against the Company's
goals and objectives for the year. As of December 31, 1997, a total
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<PAGE> 43
of 1,081,768 shares have been credited to the Plan. For the Company's first
Plan year ending December 31, 1997, the Board awarded 75% of the eligible year
end award shares (162,265 in the aggregate) to the Plan's participants. The
Board approved a new award under the Plan whereby the 54,088.5 shares that were
not earned in 1997 plus an additional 54,088.5 shares were credited to the
participants' accounts and are eligible to be earned over a five year period
beginning January 1998. The Company had no executive deferred compensation plan
or stock plan prior to the adoption of the current Plan.
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 Officers, who has completed six months of
employment may contribute to the 401(k) Plan. The Company will contribute to
each employee's account an amount equal to 25% of the first 4% of each
employee's compensation that is contributed by each employee.
EMPLOYMENT AGREEMENTS
On August 29, 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 currently receives an annual
salary of $175,000, which amount may be 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) unless terminated for cause, as defined in the employment agreement;
(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 are offered to other executive employees of the Company.
On August 29, 1996, the Company entered into a three year employment
agreement with Ronald I. Davis to serve as the Company's Chairman of the Board
of Directors. Pursuant thereto, Mr. Davis currently receives an annual salary
of $175,000, which amount may be increased following an annual salary review.
The employment agreement provides that Mr. Davis 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)
unless terminated for cause, as defined in the employment agreement; (ii) death
or disability; or (iii) if Mr. Davis terminates his employment because of: (a)
a diminution of his responsibilities or authority or being assigned duties
inconsistent with the position of Chairman of the Board; (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. Davis will participate in such other benefits
as are offered to other executive employees of the Company.
On August 30, 1996, the Company entered into a three year employment
agreement with Stephen Rubin to serve as the Company's Senior Vice President.
Pursuant thereto, Mr. Rubin currently receives an annual salary of $120,000,
which amount may be increased following an annual salary review. The
employment agreement provides that Mr. Rubin 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) unless
terminated for cause, as defined in the employment agreement; (ii) death or
disability; or (iii) if Mr. Rubin terminates his employment because of: (a) a
diminution of his responsibilities or authority or being assigned duties
inconsistent with the position of
42
<PAGE> 44
Senior Vice 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. Rubin will participate in such other benefits as are offered to
other executive employees of the Company.
43
<PAGE> 45
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 (the "Agreement") and a loan to the Company of
$3,441,649 evidenced by a Convertible Subordinated Promissory Note. The bid
and asked prices 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 contingent
"mirror options" (or "Standby Options") to purchase 1,855,243 shares of Common
Stock that were exercisable in an equivalent number and at the same price in
the event any of the Company's then existing option holders (designated in the
Standby Option and Warrant Agreement) exercised their options. TJS must
exercise its Standby Options within 30 days of the dates on which the existing
option holders exercise their options. Under the Agreement and amendments
thereto (see paragraph below describing the 1997 restructuring of the TJS'
investment effective as of December 31, 1996), the mirror options are now
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 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 after the 1997 Annual Meeting of Stockholders held on
September 19, 1997. TJS was also granted certain rights of first refusal with
respect to issuance of new securities, which have been waived in connection
with the Company's offering pursuant to a Registration Statement which was
declared effective on October 20, 1997 on Form S-1 (the "October 1997 Offering")
and in connection with the private placement of 1,000,000 shares of the
Company's Common Stock which closed on December 31, 1997 and this Offering.
Also, TJS was granted "piggyback" and demand registration rights for its shares
of the Company's capital stock. Those rights were waived in connection with
the 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' 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 a public offering, other than the October 1997, this
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. 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, $250,000 on
May 1, 1997, and $50,000 on December 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
44
<PAGE> 46
shares of Common Stock) for an aggregate purchase price of $233,370 pursuant to
the mirror options. Since October 20, 1997, the effective date of the
Company's Registration Statement covering the Offering, TJS has purchased an
additional 8,761.55 shares of Convertible Preferred Stock (the equivalent of
876,155 shares of Common Stock) pursuant to the exercise of Standby Options,
for an aggregate price of $588,079.40. On November 12, 1997, TJS also
exercised its warrant to purchase 15,000 shares of Convertible Preferred Stock
(the equivalent of 1,500,000 shares of Common Stock) for a total exercise price
of $3,750,000. Thus TJS now owns a total of 64,584.43 shares of Convertible
Preferred Stock (of the 68,810 shares of Convertible Preferred Stock
designated). TJS may purchase the remaining 4,225.57 designated but unissued
shares of Convertible Preferred Stock if and when the remaining option holders
identified in the Amended Standby Option and Warrant Agreement exercise their
options.
On January 22, 1998, TJS agreed to amendments to the Certificate of
Designations with respect to the 12% Redeemable Preferred Stock and to the
Subordinated Loan Agreement, which will allow the Company to raise additional
capital without triggering TJS' rights 1) to receive payment of accrued but
unpaid dividends from the 12% Redeemable Preferred Stock; 2) to a receive a
higher dividend rate (18% instead of 12%); 3) to convert the 12% Redeemable
Preferred Stock into Common Stock according to a conversion ratio determined by
dividing the stated value of the 12% Redeemable Preferred Stock ($10.00 per
share) plus accrued but unpaid dividends per share by 80% of the per share
market value of the Common Stock at the date of conversion; and 4) to receive
payment of all of the Corporation's obligations under the Subordinated Loan
Agreement. As a result of this agreement, the "new equity thresholds" will be
$20 million (increased from $10 million previously) with respect to the right
to receive payment of accrued but unpaid dividends and $30 million (increased
from $15 million previously) with respect to the other three enumerated rights.
This amendment will be placed before the Company's stockholders at the 1998
Annual Meeting of Stockholders to be convened on May 19, 1998. The Company and
TJS have agreed to amend the Subordinated Loan Agreement and the Company's
Board has recommended to the Stockholders that the Certificate of Designations
for the 12% Redeemable Preferred Stock be amended consistent with the foregoing
terms.
On December 18, 1997, the Company's Board elected Michael B. Jones, the
principal stockholder of ProFinance Associates, Inc., to serve as a Director of
the Company effective January 1, 1998. In consideration of his agreement to
become a Director, on January 6, 1998, the Company also granted Mr. Jones an
option to purchase 10,000 shares of the Company's Common Stock at an exercise
price of $6.00 per share, said option to expire on December 31, 2002. The
Company has also agreed to pay him and the other two non-employee Directors
(Thomas J. Salvatore and Douglas Oberlander) Directors' Fees of $500.00 per
month.
ProFinance Associates, Inc., a registered broker-dealer, was due a
financing fee of $218,208 in connection with the foregoing sales of securities
to TJS, pursuant to an agreement with the Company. On December 31, 1997, the
Company and ProFinance entered into an agreement to settle this obligation as
follows: 1) payment of $175,000 cash (offset by $50,000 owed to the Company by
a joint venture between ProFinance and the Company); and 2) issuance of an
option to ProFinance to purchase 25,000 shares of the Company's Common Stock at
an exercise price of $6.00 per share, said option, which was issued on January
6, 1998, to expire December 31, 2002.
In connection with the December 31, 1997 agreement with ProFinance, the
Company engaged ProFinance as an investment banker and has agreed to pay it a
monthly retainer of $2,500 for financial advisory services to be rendered to
the Company for a period of one year. Under the agreement, ProFinance will
introduce the Company to acquisition opportunities and it will be entitled to
receive transaction fees according to the standard "Lehman Formula" (as defined
in that agreement) for each purchase that is closed.
On December 12, 1997, TJS was issued an option to purchase 20% of the
Common Stock of the Company's wholly-owned subsidiary Alarm Funding
Corporation, at an exercise price of $1,000, in consideration of TJS' agreement
to lend the subsidiary up to $1,500,000.
45
<PAGE> 47
On December 12, 1997, ProFinance Associates, Inc. was issued an option to
purchase 20% of the Common Stock of the Company's wholly-owned subsidiary Alarm
Funding Corporation, at an exercise price of $1,000, in consideration of leads
to be provided identifying potential borrowers.
On January 3, 1997, the Company paid $135,000 to Ronald I. Davis in
connection with a previously negotiated agreement with SAI Partners, Inc. which
is wholly-owned by Mr. Davis.
Since October 20, 1997, Messrs. Brannen, Davis and Rubin have exercised
options and Warrants to acquire shares for an aggregate exercise price of
$423,028.35 as set forth below:
<TABLE>
<CAPTION>
Average
Option Exercise Number of Aggregate Per-Share
(a) (b) (c) Exercise (d) Exercise
Holder Date Shares Price Price
- ----------------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Ronald I. Davis 10/30/97 278,308 158,635.56 0.57
James S. Brannen 10/30/97 278,308 158,635.56 0.57
Stephen Rubin 10/30/97 185,539 105,757.23 0.57
Totals 742,155 $423,028.35
</TABLE>
46
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of March 31, 1998 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
----------------------- ---------- ----------------------------
NUMBER OF NUMBER OF
NAME 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........................ 6,458,443 51.4% 0 6,458,443 39.5%
Ronald I. Davis(4)
C/o Security Associates International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005............... 928,422 7.3% 0 928,422 5.6%
James S. Brannen(5)
C/o Security Associates International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005............... 528,616 4.2% 0 528,616 3.2%
Stephen Rubin(7)
c/o Security Associates International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005............... 362,078 2.9% 0 362,078 2.2%
Thomas J. Salvatore(6)
c/o TJS Partners, L.P.
52 Vanderbilt Avenue
New York, New York 10017........................ 6,458,443 51.4% 0 6,458,443 39.5%
Douglas Oberlander
10225 N. Knoxville Avenue
Peoria, Illinois 61615.......................... 96,022 * 0 96,022 *
Michael B. Jones (15)
33 Riverside Avenue
Westport, CT 06880.............................. 41,000 * 0 41,000 *
Allen Investments II, LLC
711 Fifth Ave 9th FL
New York, New York 10019........................ 80,000 * 80,000 0 0
Alternative Strategies
880 Third Ave. 3rd FL
New York, New York 10022........................ 60,000 * 60,000 0 0
Ask Company
David Broser
1700 Broadway 14th FL
New York, New York 10000........................ 50,000 * 50,000 0 0
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIAL OWNERSHIP BEING BENEFICIAL OWNERSHIP
PRIOR TO OFFERING OFFERED AFTER OFFERING
----------------------- ---------- ----------------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT(1) SHARES PERCENT(2)
- ------------------------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Douglas A. Brown
1 Dogwood Ln.
Tenafly, New Jersey 07670....................... 4,000 * 4,000 0 0
Robert Brown
IRA Account
3605 N. Robinwood Drive
Muncie, Indiana 47304........................... 25,000 * 25,000 0 0
Bohemond Corp.
Holding Capital
104 Crandon Blvd #419
Biscayne, Florida 33149......................... 25,000 * 25,000 0 0
Bohemond Corp.
Holding Capital
104 Crandon Blvd #419
Biscayne, Florida 33149......................... 4,000 * 4,000 0 0
John S. Coates
28638 11th Ave South
Federal Way, Washington 98003................... 52,000 * 52,000 0 0
William R. Colaianni
Holding Capital
685 Fifth Ave.
New York, New York 10019........................ 4,000 * 4,000 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. Dalmar
2324 North East Regents Drive
Portland, Oregon 97212.......................... 20,000 * 20,000 0 0
Karl D. Dillon
1325 Fifth Ave.
Seattle, Washington 98101....................... 10,000 * 10,000 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(8) * 98,500 0 0
Dianne G. Freeman
P.O. Box 143
Sand Lake, New York 12153....................... 25,000 * 25,000 0 0
Gamelam Capital Fund
Hauptman
1661 Highway One
Fairfield, Iowa 52556........................... 10,000 * 10,000 0 0
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIAL OWNERSHIP BEING BENEFICIAL OWNERSHIP
PRIOR TO OFFERING OFFERED AFTER OFFERING
----------------------- ---------- ----------------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT(1) SHARES PERCENT(2)
- ------------------------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
GEM Management, Ltd.
P.O. Box 860
11 Bath Street
St. Helier Jersey, Channel Islands.............. 10,000 * 10,000 0 0
Phyllis Greinwald
14238 N. 2nd Street
Phoenix, Arizona 85023.......................... 77,000 * 77,000 0 0
Cheryl L. Grolle
W 564 Pell Lake Drive
Genoa City, Wisconsin 53128..................... 250 * 250 0 0
Holding Capital Management, LLC
7 Ridgewood Drive
Bridgewater, CT 06752........................... 100,000 * 100,000 0 0
Raymond C. Hoven
3251 Midlane Drivet
Wadsworth, Illinois 60083....................... 225,539(9) 1.8% 40,000 185,539 1. 1%
Infinity Partnership II
4075 N. Victoria Drive
Hoffman Estates, Illinois 60195................. 10,000(8) * 10,000 0 0
Inversiones Alanje , C.A.
c/o Carlos Delgado
Apartado Postal 1286
Caracas, Venezuela 1010-A....................... 62,500 * 62,500 0 0
Inversiones Aparicio, C.A.
c/o Modesto Aparicio
Jet Cargo (M-571)
P.O. Box 020010
Miami, Florida 33102-0010....................... 120,000 1.0% 120,000 0 0
Inversiones Erlanger, C.A.
c/o Malcolm Caplan
M-287 Jet Cargo International
P.O. Box 020010
Miami, Florida 33102-0010....................... 100,000 * 100,000 0 0
Irwin Jacobson
1035 Carlyle Terrace
Highland Park, Illinois 60035................... 123,000(10) 1.0% 12,500 110,500 *
Jessand Corp Profit Sharing Plan and Trust
7 Ridgewood Drive
Bridgewater, CT 06752........................... 5,000 * 5,000 0 0
Lee Jones
c/o Support Services Group
63 Calle de Industrias
Suite 550
San Clemente, California 92672.................. 22,088 * 22,088 0 0
Martin & Associates Management Consultants, Inc.
8056 Steeplechase Dr
Palm Beach Gardens, Florida 33418............... 4,000 * 4,000 0 0
Metro Suburban Pediatrics
600 N. Court
Palatine, Illinois 60067........................ 12,500(8) * 12,500 0 0
</TABLE>
49
<PAGE> 51
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIAL OWNERSHIP BEING BENEFICIAL OWNERSHIP
PRIOR TO OFFERING OFFERED AFTER OFFERING
----------------------- ---------- ----------------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT(1) SHARES PERCENT(2)
- ------------------------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
John M. McMahon
West Lake Road
Tuxedo Park, New York 10987..................... 20,000 * 20,000 0 0
Peter T. Joeseph
Rosecliff, Inc.
712 Fifth Ave. 34th FL
New York, New York 10019........................ 80,000 * 80,000 0 0
Kaplan Choate Special Situations
880 Third Ave. 3rd FL
New York, New York 10022........................ 40,000 * 40,000 0 0
Mark Scharmann
1661 Lakeview Circle
Ogden, Utah 84403............................... 144,800(11) 1.2% 32,500 112,300 *
Bernard and Samuel Sered
4023 Suffield Court
Skokie, Illinois 60076.......................... 17,801(12) * 12,500 5,301 *
Lorraine R. Small
453 Raintree Drive
Glen Ellyn, Illinois 60137...................... 250 * 250 0 0
Jan Sussman
9 Sterling Ln.
Sands Point, New York 11050..................... 30,000 * 30,000 0 0
Tall Oaks Group, LP
L. Hite
40 Beckman Terrace
Summit, New Jersey 07901........................ 20,000 * 20,000 0 0
Alfred Robert Taylor TTEE
387 Spring Cove Road
Waynesville, North Carolina 28786............... 10,000 * 10,000 0 0
TPR Investment Associates, Inc.
9 West 57th Street #3900
New York, New York 10019........................ 52,000 * 52,000 0 0
Brady E. Turner
P.O. Box 840
Brunswick, Georgia 31521........................ 56,676(13) * 12,500 44,176 *
UMB Bank, NA
Evergreen National, LP
200 East Highway 32 Box 129
Lebanon, Missouri 65536......................... 300,000 2.4% 300,000 0 0
Harold Wit
Allen & Company
711 Fifth Ave 9th Fl
New York, New York 10019........................ 30,000 * 30,000 0 0
All Executive Officers and Directors as a group
(10 persons)(14).............................. 8,412,681 66.1% 0 8,412,681 51.0%
</TABLE>
- -----------------------
(1) Applicable percentage of ownership as of March 31, 1998 is based upon
12,568,673 shares of Common Stock outstanding (including 6,458,443 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.
50
<PAGE> 52
(2) Applicable percentages of ownership are based on 16,346,761 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 64,584.43 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 is the only holder of Convertible
Preferred Stock.
(4) Includes 808,422 shares owned by Mr. Davis and SAI Partners, Inc. and
120,000 shares purchasable upon the exercise of a currently exercisable
warrant. Excludes 225 shares owned by Beverly Davis, Mr. Davis' wife, 8,200
shares owned by Scott Davis, Mr. Davis' son, 3,000 shares owned by Ethan Davis,
Mr. Davis' grandson, 3,000 shares owned by Benjamin Davis, Mr. Davis' grandson,
and 9,301 shares owned by Ann Davis, Mr. Davis' sister, as to which Mr. Davis
disclaims beneficial ownership.
(5) Includes 526,616 shares owned by Mr. Brannen. Excludes 7,580 shares
owned by Martha A. Brannen, Mr. Brannen's wife, 10,000 shares owned by Craig
Brannen, 10,000 shares owned by Sarah B. Ozee and 10,000 shares owned by Peter
Brannen, Mr. Brannen's children, as to which Mr. Brannen disclaims beneficial
ownership.
(6) Consists of 64,584.43 shares of Convertible Preferred Stock owned by
TJS. Mr. Salvatore controls voting and disposition of these shares through TJS
Management, L.P., which is the sole general partner of TJS.
(7) Includes 362,078 shares owned by Mr. Rubin. Excludes 9,000 shares
owned by Jamie Rubin, Mr. Rubin's son, as to which Mr. Rubin disclaims
beneficial ownership.
(8) Includes only shares purchased pursuant to option exercised October 30,
1997. All of such shares are being registered for resale hereby.
(9) 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.
(10) Includes 110,500 shares owned by pension plans controlled by Mr.
Jacobson and 12,500 shares purchased pursuant to option exercised November 6,
1997. Only the 12,500 shares purchased subject to the options are being
registered for resale hereby.
(11) Includes 112,300 shares owned by Mr. Scharmann and 32,500 shares
purchased in November and December of 1997 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.
(12) 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 ergistered for resale hereby.
(13) Includes 44,176 shares owned by Mr. Turner and 12,500 shares purchased
on October 27, 1997 pursuant to currently exercisable options. Only the 12,500
shares subject to the options are being registered for resale hereby.
(14) Includes 552,500 shares purchasable upon exercise of currently
exercisable options and warrants.
(15) Includes 6,000 shares held directly; an option to purchase 10,000
shares of the Company's Common Stock at a price of $6.00 per share expiring
December 31, 2002; and an option held by ProFinance Associates, Inc. (of which
Mr. Jones is the principal stockholder) to purchase 25,000 shares of the
Company's Common Stock at a price of $6.00 per share expiring December 31,
2002.
The following table sets forth certain information regarding the
beneficial ownership of Convertible Preferred Stock as of March 31, 1998 by:
(i) each person known by the Company to own beneficially more than five percent
of the outstanding shares of Convertible Preferred Stock; (ii) each of the
Company's directors; (iii) the Named Executive Officers; (iv) each Selling
Stockholder; and (v) all directors and executive officers of the Company as a
group. The Company believes that each person named below has sole voting and
investment power with respect to all shares of convertible Preferred Stock
shown as beneficially owned by such holder, subject to community property laws
where applicable. No shares of Convertible Preferred Stock are being offered
hereby.
BENEFICIAL OWNERSHIP
----------------------------------
NAME NUMBER OF SHARES PERCENT(1)
---- ---------------- -------
TJS Partners, L.P.(2)
52 Vanderbilt Avenue
New York, New York 10017 ................ 64,584.43 100%
51
<PAGE> 53
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NAME NUMBER OF SHARES PERCENT(1)
- ----------------------------------------------- ---------------- ----------
<S> <C> <C>
Thomas J. Salvatore(3)
c/o TJS Partners, L.P.
52 Vanderbilt Avenue
New York, New York 10017....................... 64,584.43 100%
All Executive Officers and Directors as a group
(10 persons)................................. 64,584.43 100%
</TABLE>
(1) Applicable percentage of ownership as of March 31, 1998 is based upon
64,584.43 shares of Convertible Preferred 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.
(2) Consists of 64,584.43 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 is the only holder of Convertible Preferred
Stock.
(3) Consists of 64,584.43 shares of Convertible Preferred Stock owned by TJS,
Mr. Salvatore controls voting and disposition of these shares through TJS
Management, L.P., which is the sole general partner of TJS.
The following table sets forth certain information regarding the
beneficial ownership of 12% Redeemable Preferred Stock as of March 31,1998 by:
(i) each person known by the Company to own beneficially more than five percent
of the outstanding shares of 12% Redeemable Preferred Stock; (ii) each of the
Company's directors; (iii) the Named Executive Officers; (iv) each Selling
Stockholder; and (v) all directors and executive officers of the Company as a
group. The Company believes that each person named below has sole voting and
investment power with respect to all shares of 12% Redeemable Preferred Stock
shown as beneficially owned by such holder, subject to community property laws
where applicable. No shares of 12% Redeemable Preferred Stock are being
offered hereby.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NAME NUMBER OF SHARES PERCENT(1)
- ----------------------------------------------- ---------------- ----------
<S> <C> <C>
TJS Partners, L.P.(2)
52 Vanderbilt Avenue
New York, New York 10017....................... 344,165 100%
Thomas J. Salvatore(3)
c/o TJS Partners, L.P.
52 Vanderbilt Avenue
New York, New York 10017....................... 344,165 100%
All Executive Officers and Directors as a group
(10 persons)................................. 344,165 100%
</TABLE>
(1) Applicable percentage of ownership as of March 31, 1998 is based upon
344,165 shares of 12% Redeemable Preferred 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.
(2) Consists of 344,165 shares of 12% Redeemable Preferred Stock. Each share
of 12% Redeemable Preferred Stock is convertible into and has the voting rights
of 100 shares of Common Stock. TJS is the only holder of 12% Redeemable
Preferred Stock.
(3) Consists of 344,165 shares of 12% Redeemable Preferred Stock owned by TJS,
Mr. Salvatore controls voting and disposition of these shares through TJS
Management, L.P., which is the sole general partner of TJS.
52
<PAGE> 54
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 April 6, 1998, the
Company had outstanding 6,110,230 shares of Common Stock, 64,584.43 shares of
Convertible Preferred Stock and 344,165 shares of 12% Redeemable Preferred
Stock. As of April 6, 1998, there were approximately 212 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 on the American Stock Exchange under the symbol
"IDL."
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 Factors-Certain Antitakeover Effects." The Company
intends to submit to stockholders a proposal to increase the number of
Preferred Stock from 500,000 shares to 1,000,000 shares at the 1998 Annual
Meeting of Stockholders.
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
53
<PAGE> 55
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. Pursuant to an agreement between the Company and TJS Partners,
L.P., the only holder of Redeemable Preferred Stock, the Company and the holder
have agreed to amend the Certificate of Designations to increase the aforesaid
$10 million and $15 million "new equity thresholds," to $20 million and
$30 million, respectively. The amendment is subject to the consent of FINOVA
and stockholder approval at the 1998 Annual Meeting of Stockholders. See
"Certain Transactions."
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 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 Cumulative 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.
WARRANTS
Under this Prospectus, the Company may issue Warrants to purchase an
aggregate of 2,000,000 shares. Each such Warrant entitles the holder to
purchase shares of Common Stock at an exercise price of $6.00 per share payable
in cash upon the exercise of the Warrant. The currently exercisable portion of
the Warrants is 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. Except as otherwise contractually restricted under the Dealer
Program, the Warrants may be exercised at any time after issuance until four
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 stockholder.
54
<PAGE> 56
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws. 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 Bylaws 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 "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.
55
<PAGE> 57
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
non-monetary 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 their 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 LaSalle National
Bank, located at 135 South LaSalle Street, Chicago, Illinois 60628.
56
<PAGE> 58
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 of the Company as of December 31, 1996 and
1997, and for each of the years in the three-year period ended December 31,
1997, and the financial statements of Telecommunications Associates Group, Inc.
as of November 24, 1997 and for the period January 1 to November 24, 1997 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, 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, may be inspected and copied at the Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of
the Commission at 500 West Madison Street, Fourteenth Floor, Chicago, Illinois
60661 or 75 Park Place, Suite 1400, New York, New York 10007. The Commission
also maintains a site on the World Wide Web at http://www.sec.gov that
contains reports, proxy and other information statements and other information
regarding registrants that file electronically with the Commission.
57
<PAGE> 59
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, 1996 and 1997 F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996, and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996, and 1997 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996, and 1997 F-6
Notes to consolidated financial statements F-7
TELECOMMUNICATIONS ASSOCIATES GROUP, INC.
Report of Independent Public Accountants F-17
Balance Sheet as of November 24, 1997 F-18
Statement of Operations for the period January 1 to November 24, 1997 F-19
Statement of Cash Flows for the period January 1 to November 24, 1997 F-20
Notes to financial statements F-21
</TABLE>
F-1
<PAGE> 60
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, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1995, 1996 and 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 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, 1996 and 1997, and the
results of its operations and its cash flows for the years ended December 31,
1995, 1996 and 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 23, 1998
F-2
<PAGE> 61
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
ASSETS 1996 1997
- ------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 632,355 $ 5,521,633
Accounts receivable, net 1,332,990 2,626,717
Receivable from stockholders 25,180 50,000
Other current assets 236,872 182,671
----------- ------------
Total current assets 2,227,397 8,381,021
----------- ------------
FURNITURE AND EQUIPMENT, net 417,899 855,631
----------- ------------
OTHER ASSETS:
Contract rights to monitor security systems, net 6,606,126 13,908,478
Goodwill, net 6,666,373 11,919,949
Other assets, net 614,928 943,624
----------- ------------
Total other assets 13,887,427 26,772,051
----------- ------------
Total assets $16,532,723 $ 36,008,703
=========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
- ------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 615,775 $ 676,162
Note payable for acquisition 3,721,131 --
Current maturities of long-term notes payable 413,227 897,453
Notes payable--related parties 136,000 --
Accrued expenses 439,660 2,135,658
Unearned revenues 1,409,796 3,046,926
Other 9,322 --
----------- ------------
Total current liabilities 6,744,911 6,756,199
NOTES PAYABLE, net of current maturities 8,019,348 16,521,813
NOTES PAYABLE, related party 500,000 5,500,000
----------- ------------
Total liabilities 15,264,259 28,778,012
----------- ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $10.00 par value; 35,478 and 64,585
shares outstanding on December 31, 1996 and 1997, respectively
(liquidation value of $8,869,500 and $16,146,138 at December 1996
and 1997, respectively) 354,780 645,846
12% redeemable/convertible preferred stock, $10.00 par value; 344,165 shares
outstanding on December 31, 1996 and 1997 3,441,650 3,441,650
Common stock, $.001 par value; 50,000,000 shares authorized; 3,699,375 and
6,272,295 shares outstanding on December 31, 1996 and 1997,
respectively 3,699 6,272
Additional paid-in capital 3,958,080 14,564,311
Retained deficit (6,489,745) (11,427,388)
----------- ------------
Total stockholders' equity 1,268,464 7,230,691
----------- ------------
Total liabilities and stockholders' equity $16,532,723 $ 36,008,703
=========== ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE> 62
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------ ------------ ------------
REVENUES:
<S> <C> <C> <C>
Monitoring fees $ 2,390,513 $ 3,652,892 $ 10,711,935
Membership fees and other 342,740 129,199 102,152
------------ ------------ ------------
Total revenues 2,733,253 3,782,091 10,814,087
------------ ------------ ------------
OPERATING EXPENSES:
General, selling and administrative 1,590,860 1,394,244 4,257,360
Payroll and related expense 891,320 1,710,252 4,653,190
Amortization and depreciation 539,634 1,020,427 2,425,919
Write off of contract rights 100,700 248,635 1,277,624
Deferred compensation expense -- -- 862,034
------------ ------------ ------------
Total operating expenses 3,122,514 4,373,558 13,476,127
------------ ------------ ------------
Loss from operations (389,261) (591,467) (2,662,040)
INTEREST EXPENSE 742,659 1,384,239 1,862,606
------------ ------------ ------------
Loss before income in equity of joint
venture and income taxes (1,131,920) (1,975,706) (4,524,646)
INCOME IN EQUITY OF JOINT VENTURE 184,642 257,447 --
------------ ------------ ------------
Loss before income taxes (947,278) (1,718,259) (4,524,646)
PROVISION FOR INCOME TAXES -- -- --
------------ ------------ ------------
Net loss (947,278) (1,718,259) (4,524,646)
DIVIDENDS ACCRUED ON PREFERRED STOCK -- -- 412,997
------------ ------------ ------------
Net loss available to common stockholders $ (947,278) $ (1,718,259) $ (4,937,643)
============ ============ ============
NET LOSS PER SHARE $ (.26) $ (.47) $ (1.16)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,665,642 3,669,343 4,266,151
============ ============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-4
<PAGE> 63
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE 12% REDEEMABLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL TOTAL
- -------------------- ------------------- --------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
- ------ ------ ------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3,662,187 $3,662 - $ - - $ $2,688,042 $(3,824,208) $(1,132,504)
5,900 6 - - - - 1,469 - 1,475
- - - - - - 35,250 - 35,250
- - - - - - - (947,278) (947,278)
- --------- ------- ------ -------- ------- ---------- ----------- ------------ -----------
3,668,087 3,668 - - - - 2,724,761 (4,771,486) (2,043,057)
- - 35,478 354,780 344,165 3,441,650 1,216,160 - 5,012,590
9,200 9 - - - - 4,591 - 4,600
22,088 22 - - - - 12,568 - 12,590
- - - - - - - (1,718,259) (1,718,259)
- --------- ------- ------ -------- ------- ---------- ----------- ------------ -----------
3,699,375 3,699 35,478 354,780 344,165 3,441,650 3,958,080 (6,489,745) 1,268,464
- - 29,107 291,066 - - 4,267,793 - 4,558,859
162,265 162 - - - - 861,872 - 862,034
2,410,655 2,411 - - - - 5,476,566 - 5,478,977
- - - - - - - (412,997) (412,997)
- - - - - - - (4,524,646) (4,524,646)
- --------- ------- ------ -------- ------- ---------- ----------- ------------ -----------
6,272,295 $6,272 64,585 $645,846 344,165 $3,441,650 $14,564,311 $(11,427,388) $ 7,230,691
========= ======= ====== ======== ======= ========== =========== ============ ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-5
<PAGE> 64
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (947,278) $ (1,718,259) $ (4,524,646)
Adjustments to reconcile net loss to net cash (used for) provided
by operating activities-
Income in equity of joint venture (184,642) (257,447) --
Issuance of common stock for services -- 4,600 --
Amortization and depreciation 539,634 1,020,427 2,425,919
Contract rights written off -- 248,635 1,277,624
Deferred compensation expense -- -- 862,034
Changes in assets and liabilities-
Accounts Receivable, net (195,531) 136,036 (1,047,691)
Note receivables 125,000 -- --
Other current assets (73,504) (126,992) 46,147
Other long-term assets (15,160) -- (63,598)
Accounts payable 77,776 41,334 (36,503)
Bank overdraft (35,568) -- --
Accrued expenses 252,430 (172,208) 1,490,408
Unearned revenue 408,948 425,148 279,937
Other current liabilities (116,760) (22,902) (9,322)
------------ ------------ ------------
Net cash (used for) provided by operating
activities (164,655) (421,628) 700,309
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract rights to monitor security systems, net (3,639,934) (1,855,953) (8,056,738)
Purchase of fixed assets (37,893) (54,052) (311,612)
Cash paid for acquisition, net -- (1,794,021) (5,818,484)
------------ ------------ ------------
Net cash used for investing activities (3,677,827) (3,704,026) (14,186,834)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital 36,725 5,000,000 9,987,836
Dividends accrued on preferred stock -- -- (412,997)
Deferred financing costs -- (596,879) (385,400)
Proceeds from stockholders receivable 10,358 -- 25,180
Repayment of notes payable to related parties (54,349) (98,742) (136,000)
Proceeds from notes payable to related parties -- 500,000 5,000,000
Repayment of notes payable (774,720) (7,404,188) (4,358,280)
Proceeds from notes payable 4,592,090 7,304,000 8,655,464
------------ ------------ ------------
Net cash provided by financing activities 3,810,104 4,704,191 18,375,803
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (32,378) 578,537 4,889,278
CASH AND CASH EQUIVALENTS, beginning of year 86,196 53,818 632,355
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 53,818 $ 632,355 $ 5,521,633
============ ============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-6
<PAGE> 65
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
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., a Delaware corporation ("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"), AMJ Central Station Corporation, a Delaware
corporation ("AMJ"), Alarm Funding Corporation, a Delaware corporation
("AFC") and Telecommunications Associates Group, Inc., an Ohio corporation
("TAG"). Subsequent to year-end, RMR, MCAP and Winnetka were merged into
the Company. Additionally, the Company plans to move the operations of
SACC to TAG in March, 1998. SACC will be liquidated after that move
occurs. A provision for shutdown expenses of approximately $77,000 has
been included in the accompanying financial statements.
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.
Alarm Funding Corporation was formed in September, 1997. The purpose of
AFC is to provide loans to independent alarm dealers. As of December 31,
1997, AFC had made one loan for $250,000. AFC has an agreement with the
Company's major stockholder which will provide up to $1,500,000 in
subordinated debt. As of December 31, 1997, AFC has borrowed $500,000 of
subordinated debt. A company and a partnership, each controlled by a
director of the Company, have received options to purchase 20% of AFC's
stock from the Company.
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.
F-7
<PAGE> 66
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 amounts not earned are included as unearned revenues.
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 $206,000
and $495,000 as of December 31, 1996 and 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. Amortization is calculated on a straight-line basis over
an estimated useful life of ten years. When accounts are canceled and not
replaced under a guarantee, the net book value of the canceled account is
written off. The Company regularly reviews the attrition rates of account
purchases to evaluate the realizability of the unamortized contract
rights. If any one account purchase experiences extraordinary
cancellations, the amortization period is reduced and losses, if any, are
accrued. Contract rights to monitor security systems in the accompanying
consolidated balance sheets are net of accumulated amortization of
approximately $1,350,000 and $2,329,000 as of December 31, 1996 and 1997,
respectively.
GOODWILL
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 three to fifteen years. The Company regularly
reviews the performance of acquired businesses to evaluate the
realizability of the underlying goodwill. Goodwill in the accompanying
consolidated balance sheets is net of accumulated amortization of
approximately $201,000 and $954,000 as of December 31, 1996 and 1997,
respectively.
OTHER LONG-TERM ASSETS
Other long-term assets consist primarily of deferred financing costs. The
deferred financing costs are being amortized over the life of the related
loan. Other long-term assets in the accompanying consolidated balance
sheets are net of accumulated amortization of approximately $7,000 and
$124,000 as of December 31, 1996 and 1997, respectively.
F-8
<PAGE> 67
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is calculated
using straight-line methods for both financial statement and income tax
purposes over an estimated useful life of three to seven years.
The following is a summary of furniture and equipment by major class of
assets:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Equipment $ 744,277 $1,148,964
Office furniture and fixtures 54,496 107,812
Automobiles/trucks 20,188 20,188
Leasehold improvements 53,834 57,861
---------- ----------
872,795 1,334,825
Less- Accumulated depreciation 454,896 479,194
---------- ----------
$ 417,899 $ 855,631
========== ==========
</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 2002. Rent expense was approximately $36,000, $206,000 and $511,000
for the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION> <S> <C>
As of December 31-
1998 $509,000
1999 449,000
2000 365,000
2001 314,000
2002 and thereafter 349,000
========
</TABLE>
ACCRUED EXPENSES
Accrued expenses are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1997
--------- ----------
<S> <C> <C>
Accrued interest $114,833 $ 806,758
Accrued dividends - 412,997
Accrued payroll and vacation 181,244 324,526
Accrual for loss contracts - 229,812
Other 143,583 361,565
-------- -----------
$439,660 $2,135,658
======== ===========
</TABLE>
F-9
<PAGE> 68
PREFERRED STOCK
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 379,422 shares of redeemable and
convertible preferred stock on December 31, 1996, and a subordinated
credit facility of $5 million was provided to the Company. Additionally,
on December 31, 1996, this stockholder exercised options for the 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. This
shareholder exercised options and warrants during 1997 totaling 29,107
shares of Convertible Preferred Stock.
Of the total shares of preferred stock issued and outstanding as of
December 31, 1997, 344,165 shares are 12% Redeemable Preferred Stock, $10
par and liquidation value with dividends deferred. In the event that the
Company raises $20,000,000 in new equity, all dividends that have not been
paid must be paid. If the Company raises $30,000,000 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 64,585 shares of preferred stock issued and outstanding are
Convertible Preferred Stock with a $250 liquidation preference. Each share
of Convertible Preferred Stock is 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, 1996 and 1997, the Company had net
operating loss carryforwards of approximately $6.1 million and
$11.1 million, respectively. The tax net operating losses begin to expire
in 2005. As of December 31, 1996 and 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 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> 69
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
--------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of cash flow information-
Cash paid during the year for interest $ 618,119 $1,493,761 $1,141,493
Supplemental schedule of noncash activities-
Issuance of stock for services -- 4,600 --
Issuance of stock for subscription
receivable paid in January, 1997 and 1998 -- 25,180 50,000
Issuance of note payable for acquisition -- 3,721,131 --
Purchase of contract rights reduced by unearned
revenue acquired -- -- 580,616
Holdback notes reduced due to account attrition
182,348 245,000 476,492
Purchase of contract rights with notes 909,581 636,900 1,021,813
========== ========== ==========
</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.
3. ACQUISITIONS
The Company entered into the following transactions during 1996 and 1997:
MCAP--SAI 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 SAI's common stock at $0.442 per share (which
approximated fair value). SAI received assets with a fair market
value of $1,309 and recorded goodwill of $262,311. As a result of
this transaction, SAI obtained indirect ownership of the 25.2% of
MSG owned by MCAP.
WINNETKA--SAI 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 SAI's common stock at $0.442 per share
(which approximated fair value). SAI received assets with a fair
market value of $1,344 and recorded goodwill of $161,236. As a
result of this transaction, SAI obtained indirect ownership of the
14.8% of MSG owned by Winnetka.
Pursuant to the MCAP and Winnetka transactions, SAI obtained
indirect ownership of 40% of MSG. It directly owned the remaining
60% of MSG prior to the acquisitions of MCAP and Winnetka.
F-11
<PAGE> 70
SACC AND ALL-SECURITY--On September 5, 1996, SAI purchased 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. SAI received assets with a fair market value
of $1,075,877 and recorded additional goodwill of $1,156,997.
As a result of this transaction, SAI 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). SAI also
now owns 100% of All-Security either directly or indirectly through
its ownership of SACC.
AMJ--On December 19, 1996, SAI purchased the 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 in cash and the
assumption of certain liabilities totaling $465,461. SAI received
assets with a fair market value of $448,421 and recorded goodwill of
$3,762,724.
TAG--On November 24, 1997, SAI purchased the stock of
Telecommunications Associates, Inc., an Ohio corporation. The
purchase price was $5,000,000 in cash. Goodwill of approximately
$5,088,000 was recorded as a result of this transaction.
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition of TAG had occurred at the beginning
of 1996 and 1997, after giving effect to certain adjustments, including
amortization of intangible assets and increased interest expense on the
acquisition debt.
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Monitoring fees and other revenues $ 10,956 $ 14,245
General, selling and administrative expenses 9,154 12,858
Write off of contract rights 287 1,376
Amortization and depreciation 2,012 2,953
------------ -----------
Income (loss) from operations (497) (2,942)
Interest expense 1,485 1,952
------------ -----------
Income (loss) before income taxes (1,982) (4,894)
Income tax expense -- --
------------ -----------
Net income (loss) (1,982) (4,894)
Dividends accrued on preferred stock 413 413
------------ -----------
Net income (loss) available to common stockholders $ (2,395) $ (5,307)
============ ===========
Net loss per share $ (.65) $ (1.24)
Weighted average shares outstanding 3,669,343 4,266,151
=========== ===========
</TABLE>
The Pro Forma Statement of Income does not purport to represent what the
Company's results of operations would actually have been had the
acquisition been in effect for the periods presented, or to predict the
Company's results of operations for any future period.
F-12
<PAGE> 71
4. LONG-TERM NOTES PAYABLE
On September 5, 1996, subsequently amended on 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 1997, the Company had borrowings of $500,000 and $5,000,000,
respectively, outstanding under this loan agreement. Interest is charged
on outstanding balances at 12% per year. Accrued interest thereon is
payable semiannually, subordinate to the senior debt, and all outstanding
borrowings are payable at the earlier of January 2, 2003, or when the
Company raises $15,000,000 in new equity.
In the normal course of purchasing contract rights to monitor security
systems, the Company pays cash and issues notes payable to Alarm Dealers.
These notes generally represent 10%-20% of the purchase price and serve
as a guarantee against account attrition during the term of the note.
Notes Payable to Alarm Dealers bear interest at rates ranging from 0% to
12% per year.
In November, 1997, the Company's major stockholder entered into a
subordinated debt agreement whereby AFC may borrow up to $1,500,000. As
of December 31, 1997, the Company had borrowings of $500,000 outstanding
under this subordinated debt agreement. The loan bears interest at 12%
per year and is payable on January 2, 2003.
On December 2, 1997, the Company amended its Loan Agreement with Finova
Capital Corporation ("Finova") to increase the borrowing limit of the debt
facility to $30,000,000. Under the agreement, proceeds are 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, 1997) and is payable
monthly. A fee of 1/2% per year is payable on the unused balance of the
facility. The principal balance is repayable as follows:
2.5% per quarter, beginning January, 1999
4.0% per quarter, beginning January, 2000
5.0% per quarter, beginning January, 2001
5.5% per quarter, beginning January, 2002,
balance due December 31, 2002
F-13
<PAGE> 72
Long-term debt consists of the following notes payable:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
---- ----
<S> <C> <C>
Note payable to Finova $ 7,304,000 $ 16,359,731
Notes payable to Alarm Dealers 1,098,819 1,006,992
Other 29,756 52,543
------------ ------------
Total long-term debt 8,432,575 17,419,266
Current maturities (413,227) (897,453)
------------ ------------
$ 8,019,348 $ 16,521,813
============ ============
Notes payable to stockholder $ 500,000 $ 5,500,000
============ ============
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
As of December 31-
1998 $ 897,453
1999 1,798,056
2000 2,617,557
2001 3,271,946
2002 and thereafter 14,334,254
-------------
$22,919,266
=============
</TABLE>
5. DEFERRED COMPENSATION PLAN
In April, 1997, the Company adopted an executive deferred compensation
plan. Under this plan, common stock is credited to each participant's
account and is earned based on performance as determined by the Board of
Directors against criteria set by the Board over a five-year period. The
total number of shares credited to the participants' accounts were
1,081,768. The Board of Directors awarded 162,265 shares, 75% of the
current year's eligible shares, on December 31, 1997. The Board approved a
new award whereby the 1997 unearned shares from the deferred compensation
plan, 54,088.5 shares, plus an additional 54,088.5 shares were credited to
the participants' accounts and are eligible to be earned over a five-year
period beginning January 1, 1998. During 1997, the Company recorded
deferred compensation expense of $862,034 for shares awarded under these
plans.
6. EMPLOYEE BENEFIT PLAN
In April, 1997, the Company adopted a 401(k) plan. Effective June 1,
1997, employees were enrolled subject to the eligibility requirements of
the plan. The Company matches participant contributions up to 25% of the
first 4% of each participant's compensation that is contributed to the
plan. Company contributions to the plan in 1997 were approximately
$6,000.
F-14
<PAGE> 73
7. 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
---------------------
1996 1997
---- ----
<S> <C> <C>
Net income-
As reported $ (1,718,259) $ (4,524,646)
Pro forma (1,796,189) (4,670,146)
Earnings per share-
As reported (.47) (1.16)
Pro forma (.48) (1.19)
============= =============
</TABLE>
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 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%.
F-15
<PAGE> 74
The following summarizes the stock options and warrants for common stock
as of December 31, 1995, 1996 and 1997, and the changes during the years then
ending:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 1,291,173 $ .69 1,463,673 $.75 1,833,155 $ .74
Granted 172,500 1.14 611,000 .65 50,000 6.00
Exercised - 22,088 .57 1,410,655 .57
Canceled - 219,430 .57 -
--------- --------- ---------
End of year 1,463,673 $ .75 1,833,155 $.74 472,500 $ 1.76
========= ========= =========
Exercisable as of end
of year 1,388,673 1,758,155 397,500
========= ========= =========
</TABLE>
The future expiration of the common stock options are as follows:
<TABLE>
<S> <C>
As of December 31-
1998 37,500
1999 310,000
2000 75,000
2003 50,000
=======
</TABLE>
Subsequent to year-end, 25,000 options were granted to a company
controlled by a director and 10,000 options were granted to a director to
purchase common stock with an exercise price of $6.00 per share, expiring
in 2001, were granted to a director.
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 in 1996, the
Company granted warrants for 15,000 shares of convertible preferred stock
which were exercised during 1997.
The following summarizes the stock options and warrants for convertible
preferred stock as of December 31, 1996 and 1997, and the changes during
the years then ended:
<TABLE>
<CAPTION>
1996 1997
--------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ --------- ------ -----------
<S> <C> <C> <C> <C>
Beginning of year - $ - 33,332 $153.65
Granted 33,553 153.01 - -
Exercised 221 57.00 29,107 156.62
Canceled - - - -
------ ------- ------ --------
End of year/period 33,332 $153.65 4,225 $130.46
====== ======= ====== ========
</TABLE>
F-16
<PAGE> 75
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-17
<PAGE> 76
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
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
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-18
<PAGE> 77
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-19
<PAGE> 78
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-20
<PAGE> 79
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
F-21
<PAGE> 80
replaced account. The net annual attrition rate of these accounts is
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:
Equipment $624,500
Furniture and fixtures 69,602
--------
694,102
Accumulated depreciation 569,242
--------
$124,860
========
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:
1998 $156,100
1999 114,700
2000 82,500
2001 82,500
2002 81,100
Thereafter 159,600
========
ACCRUED EXPENSES
Accrued expenses are comprised of the following:
Accrued Payroll $ 101,271
Accrued Vacation 50,000
Other 54,319
---------
$ 205,590
=========
F-22
<PAGE> 81
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>
Debt matures as follows:
1998 $246,834
1999 136,114
2000 31,248
2001 8,859
--------
$423,055
========
F-23
<PAGE> 82
NO DEALER, SALES PERSON OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS 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 TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE
SECURITIES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PROSPECTUS SUMMARY.....................3
RISK FACTORS...........................5
SECURITIES COVERED BY THIS
PROSPECTUS............................10
USE OF PROCEEDS.......................12
PRICE RANGE OF COMMON STOCK...........12
STOCKHOLDER RETURN AND
PERFORMANCE GRAPH.....................13
DIVIDEND POLICY.......................13
SELECTED FINANCIAL DATA...............14
PRO FORMA COMBINED STATEMENT
OF INCOME.............................15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................16
BUSINESS..............................22
MANAGEMENT............................38
CERTAIN TRANSACTIONS..................44
PRINCIPAL AND SELLING STOCKHOLDERS....47
DESCRIPTION OF CAPITAL STOCK..........53
LEGAL MATTERS.........................57
EXPERTS...............................57
ADDITIONAL INFORMATION................57
INDEX TO FINANCIAL STATEMENTS.........F-1
UNTIL __________, 1998 (40 DAYS AFTER
THE DATE HEREOF) ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
</TABLE>
3,778,088 SHARES AND
2,000,000 WARRANTS
SECURITY ASSOCIATES
INTERNATIONAL, INC.
COMMON STOCK
AND
WARRANTS
PROSPECTUS
___________, 1998
<PAGE> 83
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>
SEC registration fee .................................. $ 2,028
---------
Blue Sky filing fees and expenses ..................... 1,000*
---------
Printing expenses ..................................... 50,000*
---------
Legal fees and expenses ............................... 20,000*
---------
Auditors' accounting fees and expenses ................ 5,000*
---------
Transfer Agent and Registrar fees and expenses ........ 4,000*
---------
Miscellaneous expenses ................................ 5,000*
=========
Total ............................ $87,028*
---------
* Estimated
</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 Bylaws 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 of 1933, as amended (the
"Securities Act"):
II-1
<PAGE> 84
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 were 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, Fred Figge 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 May 22, 1995, Infinity Partnership II was issued a 14% Convertible
Secured Note due 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
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 October 19, 1995, the Sidney Dechter IRA was issued a 14% Convertible
Secured Note due 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.
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 were 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.
II-2
<PAGE> 85
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.
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.
On November 25, 1997, James W. Osborne was issued an option to purchase
50,000 shares of Common Stock at a price of $6.00 per share, expiring November
25, 2003, in consideration of his Employment Agreement with the Company, said
option to vest at a rate of 20% (10,000 shares) per annum, and to terminate
upon any material breach of the Employment Agreement.
On January 6, 1998, Michael B. Jones was issued an option to purchase
10,000 shares of Common Stock at a price of $6.00 per share, expiring December
31, 2002, in consideration of his agreement to become a Director of the
Company.
On January 6, 1998, ProFinance Associates, Inc. was issued an option to
purchase 25,000 shares of Common Stock at a price of $6.00 per share, expiring
December 31, 2002, in consideration of brokerage services rendered to the
Company. Michael B. Jones, currently a director of the Company, is a principal
of ProFinance Associates, Inc.
On January 15, 1998, Timothy Newman was awarded (but not yet issued) 800
shares of Common Stock at an imputed price of $5.00 per share, in payment of a
$4,000 bonus for superior performance as an employee of the Company's
subsidiary All-Security Monitoring Services, L.L.C.
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.
TJS Partners' Investments
On September 5, 1996, TJS Partners, Ltd. purchased 3,525,682 shares of
Common Stock for $1,558,351 and was granted certain contingent 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 September 5, 1996, and the Convertible
Subordinated Note were canceled. In lieu thereof, the Company issued to TJS
Partners 35,257 shares of Convertible Preferred Stock (each share 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.
During 1997, TJS exercised options to purchase 14,106.55 shares of
Convertible Preferred Stock for an aggregate purchase price of $821,290, and a
warrant to purchase 15,000 shares of Convertible Preferred Stock for an
aggregate purchase price of $3,750,000. Each option and warrant exercise is
detailed below under "Exercise of Options."
II-3
<PAGE> 86
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.
<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 through which their respective companies had engaged in for several
years.
II-4
<PAGE> 87
MCAP and Winnetka owned 24.8% and 15.2% interests, respectively, in Monitor
Service Group, L.L.C., with the remaining 60% interest held by RMR Management
Corp., a wholly-owned subsidiary of the Company.
Exercise of Options and Warrants
On December 31, 1996, Lee Jones exercised options to purchase 22,088
shares of Common Stock for a total consideration of $12,590.
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.
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.
On August 21, 1997, Cheryl L. Grolle exercised options to purchase 250
shares of Common Stock for a total consideration of $110.
On August 25, 1997, Lorraine Small exercised options to purchase 250
shares of Common Stock for a total consideration of $110.
On October 22, 1997, the Sidney Dechter I.R.A. exercised options to
purchase 25,000 shares of Common Stock for a total consideration of $50,000.
On October 22, 1997, Cheryl Grolle exercised options to purchase 250
shares of Common Stock for a total consideration of $110.50.
II-5
<PAGE> 88
On October 22, 1997, Lorraine Small exercised options to purchase 250
shares of Common Stock for a total consideration of $110.50.
On October 27, 1997, Fred Figge exercised options to purchase 86,000
shares of Common Stock for a total consideration of $45,580.
On October 27, 1997, Brady E. Turner exercised options to purchase 12,500
shares of Common Stock for a total consideration of $25,000.
On October 30, 1997, Infinity Partnership II, by its General Partner James
Greco, exercised options to purchase 10,000 shares of Common Stock for a total
consideration of $20,000.
On October 30, 1997, Ronald I. Davis exercised options to purchase 278,308
shares of Common Stock for a total consideration of $158,635.
On October 30, 1997, James S. Brannen exercised options to purchase
278,308 shares of Common Stock for a total consideration of $158,635.
On October 30, 1997, Stephen Rubin exercised options to purchase 185,539
shares of Common Stock for a total consideration of $105,757.
On November 5, 1997, TJS Partners, L.P. exercised a Warrant to purchase
15,000 shares of Convertible Preferred Stock convertible to Common Stock, at a
ratio of 1 to 100, for a total consideration of $3,750,000.
On November 6, 1997, Irwin Jacobson exercised options to purchase 12,500
shares of Common Stock for a total consideration of $7,125.
On November 6, 1997, Mark Scharmann exercised options to purchase 12,500
shares of Common Stock for a total consideration of $7,125.
On November 12, 1997, TJS Partners, L.P. exercised Standby Options to
purchase 8,761.55 shares of Convertible Preferred Stock convertible to Common
Stock, at a ratio of 1 to 100, for a total consideration of $563,671.
On December 6, 1997, TJS Partners, L.P. exercised Standby Options to
purchase 250 shares of Convertible Preferred Stock convertible to Common Stock,
at a ratio of 1 to 100, for a total consideration of $14,250.
On December 7, 1997, Mark Scharmann exercised options to purchase 10,000
shares of Common Stock for a total consideration of $10,000.
On December 23, 1997, TJS Partners, L.P. exercised Standby Options to
purchase 100 shares of Convertible Preferred Stock convertible to Common Stock,
at a ratio of 1 to 100 for a total consideration of $10,000.
No underwriters or placement agents were engaged in connection with the
foregoing sales of securities, except as disclosed under the section entitled
"TJS Partners' Investments." 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.
II-6
<PAGE> 89
Private Placement
On December 31, 1997 the Company completed the sale of one million shares
of its Common Stock. The shares were privately placed with a group of
accredited investors consisting of individuals, corporations and privately held
investment companies. No underwriter or placement agent was used. The Company
received $5,000,000 in consideration in exchange for the shares and realized
approximately $4,980,000 after estimated offering expenses of $20,000. The
Company agreed to file a registration statement to register the shares for
resale no later than September 30, 1998. These securities are among the
securities being offered pursuant to this Registration Statement.
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 Bylaws 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 re Legality
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 [Intentionally deleted]
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*
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*
</TABLE>
II-7
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------
<S> <C>
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**
10.27 Amended and Restated Loan Agreement among Security Associates International, Inc.,
Security Associates Command Center II, L.L.C., Monitor Service Group, L.L.C.,
All-Security Monitoring Services, L.L.C., AMJ Central Station Corporation, Inc.,
Telecommunications Associates Group, Inc. and FINOVA Capital Corporation dated
December 2, 1997.****
10.28 Second Amendment to Lease between American National Bank and Trust Company of
Chicago as Trustee under Trust No. 59948 and Registrant dated December 10, 1997.
****
10.29 Koll Business Center Lease dated May 16, 1996 between Telecommunications Associates
Group, Inc. and TR Brell Austin Corp. ****
10.30 Lease between Indian Hill Properties, Inc. and Telecommunications Associates Group,
Inc. dated November 24, 1997. ****
10.31 Stock Purchase Agreement between Security Associates International, Inc. as
purchaser and Robert Ambros as seller dated November 21, 1997***
10.32 $500,000 Promissory Note dated December 8, 1997 from Alarm Funding Corporation to
TJS Partners, L.P. ****
10.33 Subordinated Loan Agreement dated November 14, 1997 between Alarm Funding
Corporation and TJS Partners, L.P. ****
10.34 Amended Subordinated Loan Agreement dated January 30, 1998 between Security
Associates International, Inc. and TJS Partners, L.P. ****
10.35 $5,000,000 Promissory Note dated December 31, 1996 from Security Associates
International, Inc. to TJS Partners, L.P. ****
10.36 Amended form of Warrant
21.1 Subsidiaries of Registrant*
21.2 Supplemental List of Subsidiaries of Registrant****
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Sachnoff & Weaver, Ltd. (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-12)
27.1 Financial Data Schedule****
</TABLE>
II-8
<PAGE> 91
* Previously filed with the Registrant's Registration Statement on
Form S-1 filed July 22, 1997.
** Previously filed September 8, 1997 in pre-effective Amendment No. 1 to
the Registrant's Registration Statement on Form S-1.
*** Previously filed with the Registrant's Current Report on Form 8-K filed
December 10, 1997 and dated November 25, 1997.
**** Previously filed with the Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1997 as filed on February 23, 1998, and
dated February 17, 1998.
***** Previously filed with the Registrant's Form 10-K/A Annual Report for
the fiscal year ended December 31, 1997 as filed on March 18, 1998.
Report of Independent Public Accountants
<TABLE>
<S> <C>
Schedule Description
-------- ---------------------------------
II Valuation and Qualifying Accounts
</TABLE>
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
II-9
<PAGE> 92
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-10
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Arlington
Heights, State of Illinois, on April 6, 1998.
SECURITY ASSOCIATES INTERNATIONAL, INC.
By: /s/ James S. Brannen
---------------------
James S. Brannen
President
II-11
<PAGE> 94
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Daniel S. Zittnan, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any
and all pre or post-effective amendments to the Registration Statement, and to
file the same with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that said attorney-in-fact and agent,
or his substitute, may lawfully do or cease 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 6th day of April, 1998.
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/ Michael B. Jones
- ------------------------- Director
Michael B. Jones
/s/ Daniel S. Zittnan Vice President, Treasurer and Chief
- --------------------- Financial Officer (Principal Financial and
Daniel S. Zittnan Accounting Officer)
II-12
<PAGE> 95
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 January 23, 1998. 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 9, 1998
II-13
<PAGE> 96
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Telecommunications Associates Group, Inc.:
We have audited in accordance with generally accepted auditing
standards, the financial statements of Telecommunications Associates Group,
Inc. included in this Registration Statement and issued our report thereon
dated January 13, 1998. 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 9, 1998
II-14
<PAGE> 97
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO BALANCE AT 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, 1995 $ 15,000 $ 14,000 $ -- $ -- $ 29,000
Year ended December 31, 1996 29,000 177,000 -- -- 206,000
Year ended December 31, 1997 206,000 687,000 100,000 (498,000) 495,000
Telecommunications Associates Group, Inc.
Period January 1, 1997 to
November 24, 1997 75,000 25,000 -- -- 100,000
</TABLE>
II-15
<PAGE> 1
Exhibit 5.1
[Letterhead of Sachnoff & Weaver, Ltd.]
April 9, 1998
Security Associates International, Inc.
2101 Arlington Heights Road
Arlington Heights, Illinois 60005
Ladies and Gentlemen:
We have acted as counsel to Security Associates International, Inc., a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-l (the "Registration Statement"), filed by the Company
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission (the "Commission"), relating, to the sale of up to 2,000,000 shares
(the "Shares") of the Company's Common Stock, par value $0.001 per share and
warrants to purchase 2,000,000 shares of Common Stock (the "Warrants"). We have
examined the Registration Statement and have reviewed such other documents and
have made such further investigations as we have deemed necessary to enable us
to express the opinion hereinafter set forth.
We hereby advise you that in our opinion the Shares and Warrants have been
duly authorized by the Company and, upon payment and delivery in the manner
described in the Registration Statement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Registration Statement. In giving this consent, we do not
hereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933 or the rules and regulations of
the Securities and Exchange Commission.
Very truly yours,
/s/ Sachnoff & Weaver, Ltd.
SACHNOFF & WEAVER, LTD.
<PAGE> 1
Exhibit 10.36
THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO FORFEITURE
AND RESTRICTIONS ON EXERCISE AND
TRANSFER PURSUANT TO THE PROVISIONS
OF AN ASSOCIATION AGREEMENT, A COPY OF
WHICH IS ON FILE AT THE OFFICES OF
SECURITY ASSOCIATES INTERNATIONAL, INC.,
AND MAY NOT BE EXERCISED, SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, WHETHER BY ASSIGNMENT,
OPERATION OF LAW OR OTHERWISE, EXCEPT
IN COMLIANCE WITH THE TERMS OF THAT AGREEMENT.
SECURITY ASSOCIATES INTERNATIONAL, INC.
COMMON STOCK PURCHASE WARRANT
EXPIRING
__________________________
Issued:
--------------------------
No.
WARRANTHOLDER:
-----------------------
NAME:
ADDRESS:
No. of Shares of Common Stock to be issued upon exercise in full:
For Value Received, Security Associates International, Inc., a Delaware
corporation (the "Corporation"), promises to issue to the holder of this
Warrant ("Warrantholder"), its nominees, successors or assigns the
nonassessable shares (the "Shares") of the Common Stock (as hereinafter
defined), $.001 par value, of the Corporation at any time from_____ to_____ (the
"Expiration Date") upon the payment by the Warrantholder to the Corporation of
the purchase price per share set forth in Section 2.2 hereof (the "Purchase
Price") and to deliver to the Warrantholder a certificate or certificates
representing the Shares purchased. The Warrants are initially exercisable at a
price of $6.00 per share, payable in cash or by check to the order of the
Corporation, or any combination of cash or checks, subject to adjustment as
provided in Section 2.2 below. The Warrantholder shall have the right to
exercise this Warrant in whole or in part at any time or times on or prior to
the Expiration Date. Subject to the conditions herein set forth, the
Warrantholder may sell, assign and transfer this Warrant, in
<PAGE> 2
whole or in part, and, in the event of any such sale, assignment and transfer,
the Corporation agrees to reissue a Warrant or Warrants of like tenor for the
unexercised portion hereof. The number of Shares purchasable upon exercise of
this Warrant and the Purchase Price per Share shall be subject to adjustment
from time to time as set forth herein.
1. Covenants of the Corporation. The Corporation will at all times reserve and
keep available out of its authorized shares of Common Stock or its treasury
shares, solely for the purpose of issuance upon the exercise of this Warrant as
herein provided such number of shares of Common Stock as shall then be issuance
upon the exercise of this Warrant. The Corporation covenants that all shares of
Common Stock which shall be so issued shall be duly and validly issued and
fully paid and nonassessable and free from all taxes, liens and charges with
respect to the issuance thereof. The Corporation will take all such action as
may be necessary to assure that all such shares of Common Stock may be so
issued without violation of any applicable requirements of any federal or state
securities laws. The Corporation will not take any corporate action which would
result in any adjustment of the Purchase Price as provided below if by virtue of
such adjustment the total number of shares of Common Stock issuable after such
action upon exercise of this Warrant would exceed the total number of shares of
Common Stock then authorized by the Corporation's Certificate of Incorporation.
No corporate action may be taken which would have the effect of terminating or
restricting the exercise of this Warrant except with the written consent of the
holder of this Warrant.
2. Exercise of Warrant.
2.1 Dividends. No payment or adjustment shall be made upon any exercise of
this Warrant on account of any previous cash dividends.
2.2 Purchase Price. The Purchase Price shall be $6.00 per share or, in
case an adjustment of such price has taken place pursuant to the provisions of
this paragraph 2, then the Purchase Price shall be the price as last adjusted
and in effect at the date this Warrant (or any part hereof) is surrendered for
exercise.
2.3 Adjustment of Purchase Price. Upon each adjustment of the Purchase
Price, the Warrantholder shall thereafter be entitled to purchase at the
adjusted Purchase Price, the number of shares of Common Stock obtained by
multiplying the Purchase Price in effect immediately prior to such adjustment
by the number of shares of Common Stock purchasable immediately prior to such
adjustment and dividing the product by the Purchase Price as adjusted. No
adjustment of the Purchase Price shall be made in an amount less than $.01 per
share, but any such lesser adjustment shall be carried forward and shall be
made at the time and together with the next subsequent adjustment which
together with any adjustments so carried forward shall amount to $.01 per share
or more.
2.4 Subdivision or Combination of Stock.
-2-
<PAGE> 3
(a) In case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares or declare a dividend or
retake any other distribution upon the Common Stock of the Corporation payable
in Common Stock, the Purchase Price in effect immediately prior to such
subdivision, dividend or distribution shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the Corporation
shall be combined into a smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
(b) Record Date. In case the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution payable in Common Stock, then such record date
shall be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution, as the case may be.
2.5 Reorganization, Reclassifications Consolidation Merger or Sale.
(a) Any capital reorganization, reclassification, consolidation, merger or
sale of all or substantially all of the Corporation's assets to another person
or entity which is effected in such a way that holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is
referred to herein as an "ORGANIC CHANGE." Prior to the consummation of any
Organic Change, the Corporation will make appropriate provisions to insure that
each holder of Warrants will thereafter have the right to acquire and receive
such shares of stock, securities or assets as such holder would have received
if such holder had exercised this Warrant immediately prior to such Organic
Change. In any such Organic Change, the Corporation will make appropriate
provisions to insure that the provisions of this Section 2.5 will thereafter be
applicable as nearly as may be to the Warrants. The Corporation will not effect
any consolidation, merger or sale, unless prior to the consummation thereof,
the successor corporation resulting from consolidation or merger or the
corporation purchasing such assets assumes the obligation to deliver to such
holder of Warrants such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to acquire.
(b) If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding shares of Common Stock of the
Corporation and any other classes of capital stock that vote together with the
Common Stock as a single class, the Corporation shall not effect any
consolidation, merger or sale with the person having made such offer or with
any affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holder hereof shall have been given a
reasonable opportunity to then elect to receive, upon exercise of this Warrant
either the stock, securities or assets then issuable with respect to the Common
Stock of the Corporation or the stock, securities or assets, or the equivalent,
issued to previous holders of the Common Stock in accordance with such offer.
-3-
<PAGE> 4
2.6 Notice of Adjustment. Upon any adjustment of the Purchase Price, then
and in each such case the Corporation shall give written notice thereof to the
Warrantholder, which notice shall state the Purchase Price resulting from such
adjustment, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
2.7 Other Notices. In case at any time:
(a) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any
class or other rights;
(b) there shall be any capital reorganization, or reclassification of
the capital stock of the Corporation, or consolidation or merger of
the Corporation with, or sale of all or substantially all of its
assets to, another corporation; or
(c) there shall be a voluntary dissolution, liquidation or winding up of
the Corporation;
then, in any one or more of said cases, the Corporation shall give to
the Warrantholder, (i) at least 20 days prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (ii) in the case of
any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up ,at least 20 days prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (i) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause (ii) shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the
case may be.
2.8 Redemption.
(a) The portion of the Warrants currently exercisable may be redeemed,
on not less than thirty (30) days' prior written notice, at the
option of the Corporation, given at any time after two years from
the date of issuance of
-4-
<PAGE> 5
the Warrants, at a redemption price of $.10 per Share (the
"Redemption Price"), provided that the Market Price of the Common
Stock equals or exceeds 150% of the exercise price per share
(subject to adjustment for subdivision or combination of Common
Stock) for a period of 15 out of 20 consecutive trading days ending
within 30 days of the date on which the notice of redemption (the
"Redemption Notice") is given. For purposes of this Section 2.8,
Market Price shall mean (i) the last reported sale price of the
Common Stock as reported by the primary stock exchange on which the
Common Stock is traded if the Common Stock is traded on a national
stock exchange, or the NASDAQ Stock Market, Inc. ("NASDAQ") if the
Common Stock is quoted on NASDAQ or (ii) if last sales price
information is not available, the average closing bid price of the
Common Stock as reported by NASDAQ, or, if the Common Stock is not
traded on an exchange or NASDAQ, as reported by the National
Quotation Bureau, Inc. All Warrants currently exercisable must be
redeemed if any are redeemed.
(b) The Redemption Notice shall be mailed to the Warrantholder and shall
state: (i) the date of redemption (the "Redemption Date"); (ii) the
number of Shares subject to purchase pursuant to the Warrants to be
redeemed from the holder to whom the notice is addressed; and (iii)
instructions for surrender to the Corporation, in the manner and at
the place designated, a certificate or certificates representing
the number of shares subject to purchase pursuant to the Warrants
to be redeemed from such holder.
(c) Upon receipt of the Redemption Notice, the Warrantholder shall have
the option, at its sole election, to specify what portion of its
Warrants called for redemption in the Redemption Notice shall be
redeemed as provided in this paragraph 2.8 or exercised for the
purchase of Common Stock; provided that the Warrantholder pays the
Purchase Price to the Corporation on or prior to the Redemption
Date.
(d) On or before the Redemption Date, the Warrantholder shall surrender
the required certificate or certificates representing such Warrants
to the Corporation, in the manner and at the place designated in
the Redemption Notice, and upon the Redemption Date the Redemption
Price for such Warrants shall be paid to the order of the person
whose name appears on such certificate or certificates as the owner
thereof, and each surrendered certificate shall be canceled and
retired.
2.9 Definitions of Common Stock. As used in this Paragraph 2, the term
"Common Stock" shall mean the Corporation's Common Stock, $.001 par value, of
any class as constituted on the effective date hereof, and shall also include
any capital stock of any class of the Corporation thereafter
-5-
<PAGE> 6
authorized which shall not be limited to a fixed sum or percentage of par value
in respect of the rights of the holders thereof to participate in dividends or
in the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation.
2.10 Issue Tax. The issuance of certificates for shares of Common Stock
upon exercise of this Warrant shall be made without charge to the holder hereof
for any issuance tax in respect thereof, provided that the Corporation shall
not be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the holder of this Warrant.
2.11 Closing of Books. The Corporation will not close its books against
the transfer of any shares of Common Stock issued or issuable upon the exercise
of this Warrant.
2.12 Notice. Any notice or other document required or permitted to be
given or delivered to the Warrantholder(s) and holder(s) of shares issued upon
exercise of this Warrant shall be sent by certified or registered mail, return
receipt requested, to the Warrantholder at the address now shown on this
Warrant or at such other address as the holder(s) shall furnish to the
Corporation in writing. Any notice or other document required or permitted to
be given or delivered to the Corporation at 2001 South Arlington Heights Road,
Arlington Heights, Illinois 60005 or such other address as shall have been
furnished to the Warrantholder(s) and holder(s) of Shares by the Corporation.
2.13 Exercise of Warrant. In order to exercise this Warrant, the
Warrantholder shall deliver to the Corporation (i) a written notice of such
holder's election to exercise this Warrant specifying the number of shares of
Common Stock to be purchased, and (ii) payment by cashier's or certified check
of the per share Purchase Price multiplied by the number of shares purchased.
Upon receipt of written notice, the Corporation shall within ten (10) business
days execute or cause to be executed and delivered to such holder a certificate
or certificates representing the aggregate number of Shares purchased. If this
Warrant shall have been exercised only in part, the Corporation shall also
deliver a new Warrant of like tenor evidencing the rights of such holder to
purchase the remaining Shares called for by this Warrant.
2.14 Limitation of Liability. No provisions hereof, in the absence of
affirmative action by the Warrantholder to purchase Shares hereunder, and no
mere enumeration herein of the rights or privileges of the Warrantholder shall
give rise to any liability of such holder for the Purchase Price or as a
shareholder of the Corporation (whether such liability is asserted by the
Corporation or creditors of the Corporation).
-6-
<PAGE> 7
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be
executed by its President or a Vice President, thereunto duly authorized, the
execution hereof to be attested by its Secretary or an Assistant Secretary; and
the affixing of its corporate seal effective as of the ____________ day of
______________, 199_.
SECURITY ASSOCIATES INTERNATIONAL, INC.
ATTEST
By: By:
------------------------------ -------------------------------------
Secretary President
-7-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Re: Security Associates International, Inc.
Form S-1 Registration Statement
As independent public accountants, we hereby consent to the use of our
reports dated January 23, 1998 and January 13, 1998 and to all references to
our Firm included in or made a part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
April 9, 1998
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