<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY --, 1999
REGISTRATION STATEMENT NO. 33-49897
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SECURITY ASSOCIATES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 7382 870467198
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification No.)
or Organization)
2101 SOUTH ARLINGTON HEIGHTS ROAD, ARLINGTON HEIGHTS,
ILLINOIS 6000-54142 (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, SUITE 100
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
ARNSTEIN & LEHR
120 SOUTH RIVERSIDE PLAZA, SUITE 1200
CHICAGO, ILLINOIS 60606-3913
TELEPHONE NO. (312) 876-7100
Approximate date of commencement of proposed sale of the securities to the
public: October 20, 1997
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. [ ]
<PAGE> 2
PROSPECTUS
3,778,088 SHARES
AND WARRANTS TO PURCHASE 2,000,000 SHARES
OF
[SECURITY ASSOCIATES LOGO]
SECURITY ASSOCIATES INTERNATIONAL, INC.
COMMON STOCK
Security Associates International, Inc. is offering 2,000,000 shares of its
common stock and warrants to purchase up to 2,000,000 of those shares. The
shares and warrants will not be issued for cash, but rather will be issued:
- On a continuing basis to independent security alarm dealers as an
inducement for them to enter into agreements to utilize the alarm
monitoring services we offer. See "Business - Strategic Partner
Program" and "Business - Dealer Financing Programs - The ValueBuilder
Program."
- As all or part of the price we pay in purchasing other businesses.
The warrants have an exercise price of $6.00 per share of common stock
purchased. We will not receive any cash from the initial issuance of shares or
warrants. We will receive $6.00 for each share of common stock purchased on
exercise of the warrants.
The selling stockholders identified in this prospectus may also sell up to
1,778,088 shares of common stock. If any of the selling stockholders elects to
sell its shares it may do so from time to time privately at prices individually
negotiated with the purchasers, or publicly in transactions on the American
Stock Exchange.
Our common stock is traded on the American Stock Exchange under the symbol
"SAI." On ___________ , 1999, the last reported sale price of the common stock
was $______.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK AND WARRANTS
BEING OFFERED THROUGH THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY PERSON TO TELL YOU
OTHERWISE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is dated _______________ __, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY........................................................................... 3
SUMMARY FINANCIAL DATA....................................................................... 5
RISK FACTORS................................................................................. 6
THE SECURITIES THAT ARE BEING OFFERED THROUGH THIS PROSPECTUS................................ 9
BUSINESS..................................................................................... 11
USE OF PROCEEDS.............................................................................. 26
PRICE RANGE OF COMMON STOCK.................................................................. 28
STOCKHOLDER RETURN AND PERFORMANCE GRAPH..................................................... 30
DIVIDEND POLICY.............................................................................. 30
SELECTED FINANCIAL DATA...................................................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 31
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 39
MANAGEMENT................................................................................... 39
CERTAIN TRANSACTIONS......................................................................... 44
PRINCIPAL AND SELLING STOCKHOLDERS........................................................... 45
DESCRIPTION OF CAPITAL STOCK................................................................. 55
LEGAL MATTERS................................................................................ 59
EXPERTS...................................................................................... 59
ADDITIONAL INFORMATION....................................................................... 60
FINANCIAL STATEMENTS......................................................................... F-1
</TABLE>
Some of the information in this prospectus may be forward-looking
statements under the federal securities laws. Such statements can be identified
by the use of words such as "anticipates," "intends," "seeks," "believes,"
"estimates," and "expects." These statements discuss expectations for the
future, contain projections concerning the results of our operations or our
future financial condition or state other forward looking information. Such
statements are subject to a number of risks and uncertainties. Our actual
results, performance or achievements could differ substantially from the results
expressed in, or implied by, those statements. Some of the factors that could
cause or contribute to such differences include those discussed in the "Risk
Factors" section of this prospectus and in other cautionary statements
throughout the prospectus.
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PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus, but does
not contain all the information that you should consider before investing in the
common stock or the warrants. You should read the entire prospectus carefully.
Security Associates International, Inc., which was originally funded by 30
independent alarm dealers and three members of our senior management, is the
largest contract alarm monitoring company in the United States. We have grown
rapidly in recent years, principally through the acquisition of central
monitoring stations. Over the last two years our company has experienced an
approximate 71% net annual increase in the number of systems monitored. As of
May 7, 1999 we provided security alarm monitoring to approximately 335,000
residential and business consumers primarily through recurring revenue contracts
with independent alarm dealers. We market our monitoring services to independent
alarm dealers and, as a result, do not compete directly with most of the large,
integrated alarm companies. We do not sell or install alarm systems, and are
committed to not compete with the independent alarm dealer community.
We own and operate eight central monitoring stations which are
strategically located to provide services to most of the major geographic
regions of the country, including: the Southeast, Midwest, Southwest, West and
Pacific Northwest. We also provide education and training in the areas of
marketing, finance and new products and services to alarm dealers through
one-on-one contact, periodic regional seminars and our annual convention. We
believe that the recruitment, training and motivation of dealers are key factors
in the success and growth of our company.
The electronic monitoring of alarm systems is characterized by high fixed
costs and incrementally lower variable costs, alternatively referred to as
economies of sale. Since most independent alarm dealers are small, they
outsource, or subcontract, the monitoring of their customer's alarm systems and
focus on the sale, installation and service aspects of their business.
Nothwithstanding this, we believe dealers view monitoring as an important part
of their business and frequently look to their central monitoring company for
support and additional services.
Industry statistics suggest that substantial benefits, in the form of lower
burglary rates, accrue to consumers who protect their premises with an
electronically monitored security system. Approximately 15% of residences have
monitored alarm systems. The security alarm industry has grown at a 7.3% annual
rate over the past three years, and we expect that rate to continue in the
foreseeable future. The industry has a relatively small number of large,
well-capitalized and integrated participants, but remains dominated by many
thousands of independent alarm dealers. All of our central stations are UL
listed and we are the largest contract monitoring company in the United States.
There are approximately 250 other UL listed and approximately 3000 non-UL
central stations in the United States, although most are small, locally owned
companies. We anticipate that the alarm industry will gradually converge with
other industries and small central station owners will be increasingly pressured
to provide additional products and services to help dealers grow and compete. We
believe this is a significant factor creating the opportunity for us to acquire
and possibly consolidate these small central stations. There are approximately
27 million residential and commercial electronically monitored alarm systems in
the United States, of which approximately 19 million are represented by
independent alarm dealers.
Our senior management and marketing personnel have extensive relationships
with independent alarm dealers, which have been cultivated over a combined 100
years of experience in the security industry, serving or working with
independent alarm dealers. We have the largest dealer network in the United
States, with over 3,000 dealers who install and service approximately 600,000
residential and commercial security systems in nearly every major community in
the United States. Over 2,000 of those dealers purchase all or a portion of
their monitoring services from our regional monitoring stations and have regular
contact with us. Additionally many of these dealers participate in one or more
of our educational or training programs.
We believe that our focused strategy of contract monitoring for independent
alarm dealers has advantages over an integrated sales, installation, service and
monitoring strategy. Our revenue base grows with the overall growth in the
industry, particularly with the growth of new sales and installations by
independent alarm dealers. We believe that independent alarm dealers as a group
enjoy better customer retention and relationships than the large, integrated
national
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companies by virtue of their local ownership and emphasis on quality service.
Additionally, independent alarm dealers install a large percentage of "custom"
alarm systems which we believe enjoy better retention rates than "low cost" or
"no money down" systems. As a result, as their customer base grows, we
anticipate an inherent growth in our contract monitoring business. Historically,
this growth has been accommodated with only modest, incremental capital
expenditures to increase capacity. We believe independent alarm dealers will
continue to be a dominant force in the alarm industry and we will continue to
invest in and provide programs specifically designed to assist our dealers in
achieving profitable growth.
We will continue to pursue our existing business strategy of aligning
ourselves closely with independent alarm dealers, as we believe this will
provide greater long-term value to customers, our dealers and our stockholders.
The key elements of our strategy to sustain and accelerate the growth in our
contract monitoring business and dealer network are as follows:
Alarm Dealer Network and Stock Incentive Plans. We believe that alarm
dealers are more productive, provide more revenue to us and remain associated
with us longer, if they are equity owners in our company. For this reason we
offer dealers common stock based incentive plans that allow them to become
owners of our company in return for agreeing to monitor their alarm systems in
one of our central stations.
Central Monitoring Stations. We will continue to pursue acquisitions of
central monitoring stations in order to complete a nationwide network of
strategically located regional monitoring stations. We believe that regional
contract monitoring services are more attractive to independent alarm dealers
and are consistent with the "local" marketing and service most independent alarm
dealers provide to their customers. We will continue, where appropriate, to
consolidate our monitoring businesses within the framework of our regional
operating structure. We expect that our acquisition and consolidation strategy
will significantly increase our operating margins, while maintaining the quality
of service our dealers and their customers expect.
Our dealer network has the technical capability to provide existing and
potential customers with a wide range of low-voltage products and services that
are security, communications, information, entertainment or recurring revenue
related. In fact, many of them already do provide some of these services. We
also believe that a nationwide network of secure, redundant central monitoring
facilities with substantial communication capability and capacity can facilitate
and support many additional products and services. As a result, we anticipate
that the combination of the collective customer base, market share,
installation, service and sales capability of our dealer network, and the
technical and operational capabilities of our nationwide network of electronic
monitoring stations, will provide numerous opportunities to profitably grow and
diversify the recurring revenue of our dealers and our company. We believe we
are uniquely positioned to respond to these challenges and opportunities.
Our Executive Offices are located at 2101 South Arlington Heights Road,
Suite 100, Arlington Heights, Illinois 60005. Our telephone number is (847)
956-8650.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for the fiscal years ended 1996
through 1998 is derived from our consolidated financial statements which have
been audited by Arthur Andersen LLP, independent public accountants. The
following selected financial data for the fiscal year ended 1994 and 1995 is
derived from audited financial statements. The selected financial data set forth
below should be read in conjunction with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere.
<TABLE>
<CAPTION>
Years Ended December 31,
Pro Forma
1994 1995 1996 1997 1998 1998(1)
------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ 1,397 $ 2,733 $ 3,782 $ 10,814 $ 20,203 $ 24,088
Operating (loss).............. $ (354) $ (389) $ (591) $ (2,662) $ (3,406) $ (3,204)
Net (loss) available to
common stockholders......... $ (457) $ (947) $ (1,718) $ (4,938) $ (6,798) $ (6,928)
Net loss per share............ $ (.13) $ (.26) $ (.47) $ (1.16) $ (1.06) $ (1.08)
Shares used in computing net
income per share............ 3,662,187 3,665,642 3,669,343 4,266,151 6,394,048 6,429,048
</TABLE>
(1) The pro forma data for the year ended December 31, 1998 gives effect to all
of the acquisitions made during fiscal 1998, as if they had occurred on
January 1, 1998.
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996 1997 1998
--------------- ---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 86 $ 54 $ 632 $ 5,522 $ 1,481
Working capital (deficit)..... $ (787) $(2,699) $(4,518) $ 1,625 $(4,450)
Total assets.................. $ 2,690 $ 6,030 $16,533 $36,009 $47,526
Total debt.................... $ 3,099 $ 6,862 $12,790 $22,919 $35,981
Total stockholders' equity
(deficit)................... $(1,132) $(2,043) $ 1,269 $ 7,231 $ 3,869
</TABLE>
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RISK FACTORS
You should carefully consider the following factors and the other
information contained in this prospectus before deciding to invest in shares of
our common stock or in the warrants.
We carry a large amount of indebtedness relative to our equity. At May 10,
1999, our total indebtedness was approximately $36.7 million, including $ 26.6
under our senior line of credit with FINOVA Capital Corporation and $10.0
million under our subordinated line of credit with TJS. The FINOVA debt bears
interest at a floating rate, therefore, our financial results are and will
continue to be affected by changes in prevailing interest rates. The terms of
our credit agreement with FINOVA limit, but do not prohibit the incurrence of
additional indebtedness without their consent. We expect to incur additional
indebtedness in the future to fund acquisitions of central monitoring stations
as part of our business strategy.
A large amount of indebtedness could have negative consequences, including,
without limitation:
- our ability to obtain additional financing in the future for working
capital, acquisitions, capital expenditures, general corporate and
other purposes may be impaired,
- vulnerability of SAI to a downturn in our business or the economy
generally, and
- ability of SAI to compete against less leveraged companies may be
adversely affected.
Our Loan Agreement with FINOVA contains restrictive covenants, including
covenants that require their consent to certain actions by us and to maintain
certain financial ratios in order to undertake significant acquisitions, all of
which may impose limitations on our ability to execute our business strategy.
The failure to comply with these covenants could be an event of default and
could accelerate our payment obligations and affect other obligations with
cross-default or cross-acceleration provision.
Our ability to satisfy our payment obligations will depend, in large part,
on our financial performance, which will ultimately be affected by general
economic and business factors, many of which will be outside management's
control. We believe that the cash flow from operations combined with
availability under our credit facilities will be enough to meet our expenses and
interest obligations. However, if these payment obligations can't be satisfied,
it will be necessary to find alternative sources of funds by selling assets,
restructuring, refinancing debt or seeking additional equity capital. There can
be no assurance that any of these alternative sources would be available on
satisfactory terms or at all.
Uncertainties associated with acquisitions. Acquisitions of central
monitoring stations involve a number of uncertainties. Sellers typically do not
have audited historical financial information with respect to the acquired
business. Therefore, in making acquisition decisions, we have generally relied
on our management's knowledge of the industry, due diligence procedures and
representations and warranties of the sellers. There can be no assurance that
such representations and warranties are or will be true and complete or, if such
representations and warranties are inaccurate, that we will be able to uncover
such inaccuracies in the course of our due diligence or recover damages from the
seller in an amount sufficient to fully compensate us for any resulting losses.
Risks associated with these uncertainties include, without limitation, the
following:
- the possibility of unanticipated problems not discovered prior to the
acquisition,
- higher than expected account cancellation, and
- for acquisitions that are structured as stock purchases of other
companies, the assumption of unexpected liabilities and the disposition
of unnecessary or undesirable assets of the
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acquired companies.
History of net losses. We incurred net losses of $ 6.3 million for fiscal
1998, $4.5 million for fiscal 1997, $1.7 million for fiscal 1996 and $947,000
for fiscal 1995. These losses reflect, among other factors, the substantial
non-cash charges for amortization of purchased subscriber accounts and goodwill
associated with acquired central monitoring stations and the interest on our
indebtedness.
We expect these charges to increase as we acquire additional central
monitoring stations, increase our indebtedness or if interest rates increase.
Need for additional capital. Historically, our cash needs for acquisitions
have exceeded the cash provided by our operations. We intend to continue to
pursue growth through the acquisition of central monitoring stations. This will
require us to seek additional funding under our existing lines of credit,
through new loans, or from the sale of additional securities. These fundraising
activities could result in higher levels of indebtedness or dilution to our
common stock. There can be no assurance that funding will be available to us on
attractive terms or at all.
Subscriber account cancellation. The subscriber accounts for which we
provide monitoring services may be cancelled or terminated for many reasons,
including the relocation of subscribers, adverse financial and economic
conditions generally and competition from other alarm monitoring or service
companies. We may lose existing subscriber accounts if we do not provide
satisfactory monitoring and customer service. As a result of our rapid growth we
must successfully assimilate new subscriber accounts from new dealers and
acquisitions. A significant increase in account cancellation could have a
material adverse effect on our financial performance.
Possible adverse effects of false alarm ordinances. Many municipalities
have expressed concerns about the perceived high incidence of false alarms and
the cost of responding to them. This may lead to reluctance on the part of
police to respond to alarm signals or slower police responses. If either of
these were to occur the demand for new alarm systems or monitoring services
could decline.
A number of local governments have adopted, or are considering, measures
aimed at reducing the cost of responding to false alarms and, if enacted, could
adversely affect our financial performance. Such measures include:
- subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms,
- licensing individual alarm systems and the revocation of licenses
following an excessive number of false alarms,
- imposing fines on subscribers for false alarms,
- imposing limitations on the number of times the police will respond to
alarms after an excessive number of false alarms, and
- requiring further verification of an alarm signal before the police
will respond.
Risks of litigation. The nature of our business exposes us to more
potential liability than most other businesses. Providing fire and burglary
alarm monitoring services may expose us to greater risks of liability for
employee acts or omissions or system failure than may be inherent in other
businesses. Most of our alarm monitoring agreements contain provisions limiting
our potential liability in an attempt to reduce this risk. However, in the event
of litigation there can be no assurance that these limitations will be enforced,
and the costs and results of such litigation could have an adverse effect on us.
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We carry insurance of various types, including general liability and
errors and omissions insurance. Our loss experience specifically, and the loss
experience of other security service companies generally, may affect the
availability and cost of our insurance. Certain of our 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 we do not compete directly with many of the large new
entrants or participants into the industry because we do not sell and install
security systems, we are nonetheless impacted by the competitive challenge these
entrants present to independent alarm dealers.
Our monitoring services compete with those offered by an estimated
2,000 to 3,000 companies. Of those companies an estimated 250 firms offer
monitoring services from Underwriters Laboratories (UL) listed facilities. Most
of the companies providing monitoring services are small, local operations.
Other companies have adopted a strategy similar to ours that includes
the acquisition of central monitoring stations. Some of these competitors have
greater financial resources than we do or may be willing to offer higher prices
than we are prepared to offer to acquire monitoring stations. The effect of such
competition may be to reduce our rate of growth or increase the price we pay,
which could have an adverse effect on our business. There can be no assurance
that we will be able to find acceptable acquisitions.
Dependence upon Senior Management. The success of our business is
dependent upon the collective efforts of our executive officers, several of whom
have decades of experience in the alarm industry. The loss of one or more of
these people could have an adverse effect on our business.
Stock Ownership is very concentrated. Our largest stockholder owns
approximately 50.35% of our issued and outstanding voting stock, as well as the
right to designate two members of our board of directors. As a result, this
investor currently has the ability to significantly influence the outcome of
matters submitted for approval to our stockholders and directors (including the
election of directors and any merger, consolidation or sale of all or
substantially all of our assets) and our affairs generally. Additionally, our
directors, management and alarm dealers own approximately 8,771,000 shares of
common stock, the substantial majority of which are currently subject to
restrictions on transfer or vesting, but which may become available for sale
which could result in downward pressure on our stock price. See "Principal and
Selling Stockholders."
Restrictions on transfer and possible forfeiture of common stock and
warrants. Alarm dealers receiving common stock or warrants under our Strategic
Partner Program or the ValueBuilder program will be assuming several risks
related to the securities they receive, including:
- entering into a multi-year agreement to monitor the subscriber accounts
covered by the program in one of our central monitoring stations,
- granting us rights of first refusal to purchase the dealer's subscriber
accounts and make loans secured by subscriber accounts during the term
of the agreement,
- restrictions on the right to transfer, pledge or exercise the
securities, 25% of which will vest at closing, with the balance vesting
in three equal annual installments,
- if the alarm dealer defaults on its obligations to us, the dealer will
forfeit all of the securities as to which the rights to transfer or
pledge have not yet vested.
Registration of common shares underlying warrants. Warrantholders will
receive freely tradable shares of common stock when they exercise the warrants
if; (i) a registration statement under the Securities Act of 1933, as amended,
relating to the common stock is then in effect, or (ii) the common stock is
qualified for sale or exempt from qualification
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under the applicable securities laws of the states in which the various holders
of warrants reside. Although we will use our best efforts to maintain the
effectiveness of a current registration statement covering the common stock
underlying the warrants, there can be no assurance that we will be able to do
so. Because our common stock is traded on the American Stock Exchange our common
stock is exempt from any state registration requirements. If, in the future, our
common stock is not traded on an exchange that exempts state registration
requirements, there can be no assurance that exemptions from the registration or
qualification requirements will be available at the time a warrantholder wishes
to exercise his or her warrant or that our shares will be registered or
qualified.
Year 2000 Risk
Much of the software that runs most of the computers in the United States
uses two-digit date codes to perform a number of computations and decision
making functions. These computer programs may fail if they are unable to
interpret date codes properly, misreading "00" for the year 1900 instead of the
year 2000. We believe that our Year 2000 program will make our operating systems
and software programs Year 2000 compliant in all material respects before
December 31, 1999 although we can provide no assurance in this regard. We also
believe that we will have identified substantially all of those third parties
whose inability to handle date sensitive processing could materially and
adversely affect our business and operations if corrective action is not taken
and have received adequate assurances from, or otherwise determined to our
reasonable satisfaction that, these identified parties have taken appropriate
steps to be, or that they are, Year 2000 compliant in all material respects,
although there can be no assurance in this regard. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -Year 2000 Issue."
THE SECURITIES THAT ARE BEING OFFERED THROUGH THIS PROSPECTUS
SAI is offering 2,000,000 shares of its common stock and warrants to
purchase up to 2,000,000 of those shares. The shares and warrants are intended
to be used primarily for the purpose of inducing security alarm dealers to enter
into agreements to purchase monitoring services from central monitoring stations
owned by our company or its subsidiaries and to align our company closely with
its alarm dealer/customer. See "Business-Strategic Partner Program and
Business-ValueBuilder Program." The securities to be issued to alarm dealers
under this program are part of a continuous effort by our company to increase
our Dealer Network and the number of homes and businesses to which we provide
monitoring services. The company believes that its Dealer Network is more
productive and will remain associated with us longer when they own common stock
of the company. We will continue to offer the shares and warrants for this until
all the available securities are exhausted.
We will not receive any cash payments for issuing either the shares or the
warrants to alarm dealers. What we will get in return for the securities is a
contractual commitment to purchase monitoring services from us at competitive
prices. Any dealer that receives warrants and wishes to exercise those warrants
to purchase shares of common stock will be required to pay $6.00 for each share
that it elects to purchase. See "Business-Strategic Partner Program and
Business-ValueBuilder Program."
We may also issue shares as all or part of the purchase price of businesses
that we acquire. Those businesses may be acquired by Security Associates or one
of our subsidiaries. The legal form that any such transaction takes will be
determined by negotiation and could take the form of a merger, a purchase of
securities, such as the stock of the target company or a purchase of the assets
that constitute the business we are acquiring. We expect that the value ascribed
to the securities we issue in any such transaction will be reasonably related to
their market value at the time we agree on the terms or at the time of delivery
of the securities.
1,778,088 of the shares of common stock also covered by this prospectus are
owned by stockholders or may be issued to them if they exercise options and
warrants. Those shares have been registered for resale and the owners of those
shares are identified in this prospectus under the caption "Principal and
Selling Stockholders."
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The selling stockholders may sell their shares from time to time privately
at prices negotiated with the purchasers, or publicly through transactions on
the American Stock Exchange.
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BUSINESS
INDUSTRY OVERVIEW
Overview
Security Associates International, Inc. ("SAI") provides security alarm
monitoring services for both residences and businesses. These services are
provided either directly to residences and businesses under subscriber accounts
(which are contracts to provide monitoring services) owned by us or indirectly
through contracts with independent alarm dealers for subscriber accounts owned
by them. Independent alarm dealers are primarily owner-operated companies. Our
ability to attract new monitoring business is enhanced and supported by a
network of over 3,000 independent alarm dealers to which we provide
industry-related education in the areas of technology, finance, management and
marketing.
We were incorporated in 1990 as an Illinois corporation and, through a
merger in 1992, became a Delaware corporation. Our original stockholders were
thirty independent alarm dealers, in addition to our four founders. Three of our
four founders are still active in our management: Ronald I. Davis, Chairman of
the Board of Directors, James S. Brannen, President, and Stephen Rubin, Senior
Vice President. We conduct our operations directly and through wholly-owned
operating subsidiaries which operate central monitoring stations (which are the
locations where the actual monitoring of the subscriber's alarms is conducted):
- - SAI directly owns and operates central monitoring stations located in Des
Plaines, Illinois; Portland, Oregon, Ogden, Utah and Pompano Beach,
Florida.
- - Texas Security Central, Inc., a wholly owned subsidiary, owns and operates
central monitoring stations located in Dallas, Texas, San Antonio, Texas
and Houston, Texas.
- - Telecommunications Associates Group, Inc., a wholly owned subsidiary, owns
and operates a central monitoring station located in Euclid, Ohio.
In the first quarter of 1999, all of the subscriber accounts monitored by
Alarm Central Monitoring were moved to the Texas Security Central central
monitoring station located in Dallas, Texas. We intend to continue to merge our
wholly owned subsidiaries into SAI in an effort to reduce costs and realize
economies of scale.
Our revenues generally consist of recurring monthly revenue ("RMR")
payments under written contracts to provide monitoring services to subscribers.
For the year ended December 31, 1998, we derived approximately 65.6% of our
monitoring revenues from subscriber accounts owned by alarm dealers and
approximately 33.8% of our monitoring revenues from subscriber accounts owned by
us. Total revenues increased from $1,396,997 for the fiscal year ended December
31, 1994 to $20,203,850 for the fiscal year ended December 31, 1998. Operating
cash flow increased from negative $84,178 for the fiscal year ended December 31,
1994 to positive $3,561,698 for the fiscal year ended December 31, 1998.
Operating cash flow is defined as earnings before depreciation, amortization,
interest expense, income taxes and other expenses paid for with common stock or
warrants. Our loss per share of common stock for the fiscal year ended December
31, 1998, was $1.06 per share. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As of March 31, 1999, we monitored a total of 335,020 residences and
businesses from our eight central monitoring stations: 309,239 of those were
monitored under contracts with approximately 2,300 alarm dealers for subscriber
accounts owned by them and 25,781 were monitored under subscriber accounts that
were owned by us. From January 1, 1994 through December 31, 1998, the number of
subscriber accounts we monitored increased from approximately 25,000 to 325,223.
On December 31, 1998, we provided monitoring services to 95,415 additional
subscriber accounts as compared to year end 1997.
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We estimate that our central monitoring stations are capable of monitoring
500,000 subscriber accounts with only a small capital investment required. In
August 1998, we began to make substantial capital investments to upgrade our
computer systems and to increase the total capacity of our central monitoring
stations to 750,000 subscriber accounts by the end of 1999. As of March 15,
1999, we estimate that this capital project was over 50% complete.
Our network of independent alarm dealers consists of over 3,000 dealers
nationwide that are estimated to own approximately 600,000 subscriber accounts,
some of which are presently monitored at central stations owned by other
companies. In order to attract new alarm dealers, and to continue to develop our
relationships with those dealers already using our central monitoring stations,
we host an annual convention for independent alarm dealers. At this meeting,
developments in the security industry are discussed and numerous presentations
are made by industry experts to keep the alarm dealers abreast of new
developments in technology, marketing and management as well as new business
opportunities. In addition, we distribute an "audio magazine" to our network of
dealers on a quarterly basis and conduct numerous smaller meetings throughout
the year. We believe that our relationships with independent alarm dealers are
important because dealers are our primary customers and the principal source of
our revenues.
We intend to continue to increase the number of subscriber accounts we
monitor. In pursuing this goal, we anticipate acquiring additional central
monitoring stations and adding additional subscriber accounts as the businesses
of our existing alarm dealers grow and through our Strategic Partner Program. In
addition, we plan to further develop our relationships with dealers by offering
selected alarm dealers, among other things, the opportunity to own equity in our
company as part of their ongoing relationship with us. See "Business-Strategic
Partner Program."
Industry
The electronic security alarm industry is characterized by a large number
of small individually owned companies involved in security alarm system
installation and monitoring. According to Barnes Associates, a well known
investment banking and consulting firm in the industry, the top 170 companies
account for approximately 29% of the market, with an estimated 10,000-12,000
smaller independent dealers sharing the remainder of the market. While the
largest companies in the alarm industry have revenues in the hundreds of million
dollars, approximately 75% of all alarm dealers earned less than $500,000 in
gross revenues during 1997, with approximately 59% of all dealers earning less
than $250,000 in gross revenues during the same period. It is the needs of this
market of small independent alarm dealers that we seek to address.
We believe that another characteristic of the security alarm industry is
its potential growth. Industry statistics published by Security Distributing and
Marketing Magazine, an industry publication, indicate that revenues for the
electronic security alarm segment of the security industry grew from $9.7
billion in 1990 to $15.2 billion in 1998. The Central Station Alarm Association,
in the summer of 1998 issue of Dispatch magazine, an industry publication,
reported that the security services market in the United States is expected to
grow at a rate of 6.4% annually between 1998 and 2004.
The growth in the security alarm industry has been fueled by several
factors. We believe 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 1999 that residences without alarm
systems are more than twice as likely to be burglarized as those with systems
(14.8% vs. 6.6%) and that commercial sites without alarm systems are 4.5 times
more likely to be burglarized than those with systems (7.59% vs. 1.66%). 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. We believe that these new entrants
have been attracted by the fragmented nature of the industry and its growth
potential. Additionally, utility and telephone companies are attracted by 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.
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As larger participants have entered the security alarm industry, they have
introduced mass marketing techniques which have included heavy advertising and
low cost system installations tied to multi-year monitoring contracts. These
long-term contracts typically have one to five year initial terms and one year
automatic renewals, if not canceled. The monthly cash flow generated by the
monitoring contracts subsidizes the cost of installations. Large, well
capitalized companies can afford to initially subsidize the costs of installing
alarm systems. As competition has driven the average price of installed alarm
systems down, independent alarm dealers, who have more restricted access to
capital, continue to search for an appropriate competitive response.
THE NEEDS OF THE INDEPENDENT DEALER COMMUNITY
Among the major issues confronting independent alarm dealers are:
Retaining Customer Accounts
Independent dealers sell and install alarm systems in homes and businesses
and, at the same time, enter into contracts to provide monitoring services,
typically with one to five year terms. The dealer generally subcontracts with a
third party central station to provide the actual monitoring. The dealer retains
as profit the difference between what it charges the subscriber as a monitoring
fee and the cost of buying monitoring services from the third party central
station and general and administrative expenses. This recurring monthly
monitoring revenue is an important component of a dealer's total revenue stream.
According to a study cited in the 1998 Security Distributing and Marketing
Magazine, approximately 31% of dealers' revenues consist of monitoring and
service fees. It is therefore very important that independent alarm dealers'
customers be satisfied with the monitoring services they receive and renew their
contract after their initial terms.
Financing
For most independent dealers, their subscriber accounts represent their
most substantial asset. Banks and other commercial lenders, which are a very
important source of financing for most small businesses, have historically been
unwilling to lend against subscriber accounts as collateral or to provide
financing for customer purchases of alarm systems. Because of their more limited
access to financing, independent dealers have a more difficult task competing
with the larger market entrants who have greater access to capital. This issue
has become more pronounced as dealers have been forced to finance the cost of
alarm system installations. The limited ability to turn subscriber accounts into
the cash needed to support other aspects of their businesses and to be able to
offer financing to purchasers of alarm systems is a very important concern of
independent dealers.
Training and Support
Dealers must not only be financially sophisticated, they must also be able
to run their businesses economically and with a relatively small amount of
resources. In addition, independent dealers must be able to choose effectively
between competing new technologies. Furthermore, 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 available
to help the independent dealer meet these needs.
New Business Opportunities
The skills needed to install security alarm systems can also be applied to
the installation of other low-voltage systems such as: closed circuit
television, home automation, audio and home entertainment centers and satellite
dishes. In fact, many alarm dealers currently provide these additional services
to their subscribers. While the entry of large new participants into the
industry has created competitive issues for independent dealers, we believe 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 market entrants, such as electric utilities or telephone
companies. We believe that these
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new participants will wish to offer their customer base a broad range of related
services without incurring the expense or experiencing the uncertainties of
entering unfamiliar product markets. Independent dealers must be aware of and
learn how to respond to new market opportunities if they are to survive and
prosper in the future.
ALARM MONITORING
Our Relationships with Independent Alarm Dealers
Our response to the challenges and opportunities presented by the security
alarm industry has been significantly influenced by the personal and business
experience of our founders. Both Ron Davis, the Chairman of the Board of
Directors and Steve Rubin, a Senior Vice President, were principals of the Davis
Marketing Group, an organization formed in the mid-1970s to provide consulting
services to alarm dealers. Davis Marketing evolved into a franchiser of alarm
installation businesses, which later became a network of dealers, initially made
up of the former franchisees. The network provided its members with group
buying, training and education services. In 1990, our company was formed to
purchase subscriber accounts from independent alarm dealers for our own
portfolio and to acquire an interest in a central monitoring station located in
Grand Rapids, Michigan. The initial stockholders (other than the founders) were
almost all independent alarm dealers. The relationship with our dealer network
remains a key part of our growth strategy. It is this history that has made us
keenly aware of, and uniquely able to address, the needs of independent alarm
dealers and of the opportunities that those needs represent.
One of the unique aspects of our position in the security alarm industry is
what we do not do - we do not sell and install security systems. As a result, we
are not viewed as a competitor in the alarm dealer community. Several of our
competitors in the monitoring business also sell and install security systems,
and some are even leading mass-marketers of low cost system installations. For
almost all of the subscriber accounts we own, we contract with the alarm dealer
from which we purchased the subscriber account to continue to service the
underlying alarm system. We also refer all inquiries relating to system
enhancements to the selling alarm dealer. This process serves two purposes:
first, it allows us to capitalize on the relationship between the subscriber and
the alarm dealer; and, second, it encourages the alarm dealer to utilize our
central monitoring stations as new installations are made. In a market where the
competition for providing monitoring service is high, we believe that the depth
of our relationships with alarm dealers gives us a competitive edge.
Provide High Quality Monitoring Services to Independent Dealers
A subscriber 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 a subscriber
account by selling add-on services such as:
- alarm system maintenance and servicing;
- two-way voice communications between the subscriber and the
central monitoring station; and
- cellular telephone or long-range radio backup to the normal
land line telephone links to the central monitoring station.
Subscriber accounts are subject to attrition (cancellation) 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 those services. Dealers address this problem by
contracting with companies that have a demonstrated record of providing high
quality service.
We strive 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 our central stations are Underwriters Laboratory
("UL")
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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 secure telephone lines and redundant
computer systems that meet UL criteria. Access to the facility must also be
strictly controlled. Our central stations are also capable of supporting a full
range of add-on services such as two-way voice communications, cellular
transmission and long-range radio access.
Another of our objectives is to substantially increase the number of
subscriber accounts to which we provide monitoring services and to increase the
profitability of the services we provide. We are adding additional monitoring
capacity and continuing the consolidation of our monitoring operations to
realize additional economies of scale. We will continue to maintain and further
enhance the quality of the services we provide and market our services to the
alarm dealer community. This effort is led by Ron Carr, our Senior Vice
President for Central Station Operations. Mr. Carr was formerly a director of
Ameritech's Security-Link where he was responsible for telecommunications, and
director of Telecommunications for ADT, Inc.
Increase Monitoring Capacity on a Regional Basis
Our strategy is to complete a network of central stations located in each
of the major geographic regions of the United States. Our recent central station
acquisitions were undertaken to increase our monitoring capacity, to expand our
monitored subscriber account base and to build our regional network.
The following acquisitions were undertaken primarily to build our regional
network:
- Southeast: In December 1996, we purchased the assets of AMJ Central
Station Corporation which owned and operated a central station
located in the Fort Lauderdale/Pompano Beach, Florida area.
- Midwest: In July 1995, we purchased All Security Monitoring Services
L.L.C. which owned and operated a central monitoring station located
in Des Plaines, Illinois, a suburb of Chicago. In November 1997, we
purchased Telecommunication Associates Group, Inc. which owned and
operated a central monitoring station located in Euclid, Ohio, a
suburb of Cleveland.
- Southwest: In June 1998, we purchased Texas Security Central, Inc.
which owned and operated central monitoring stations located in
Dallas, Texas; San Antonio, Texas and Houston, Texas.
- West: In May 1998, we purchased the third party monitoring business of
Fire Protection Service Corporation which owned and operated a central
monitoring station located in Ogden, Utah.
- Pacific Northwest: In October 1998, we purchased the assets of World
Security Services Corporation which owned and operated a central
monitoring station located in Portland, Oregon.
We have reviewed our current operations and undertaken a capital investment
project to expand the capacity of our existing central monitoring stations to
accommodate 750,000 monitored alarm systems by the end of 1999. We intend to
continue this program of expansion. This expansion will principally involve
hiring additional personnel, purchasing additional computers and monitoring
equipment and leasing additional phone lines. We will then have the opportunity,
and challenge, of bringing in additional subscriber accounts to absorb the
increased monitoring capacity.
Integrate Central Station Operations and Realize Economies of Scale
Historically, our central monitoring stations were separately owned and
operated as independent business units by the original owners. Our acquisition
and consolidation of the formerly independent monitoring companies has presented
us with opportunities to increase the profitability of each of these operations.
We seek to exploit these opportunities by eliminating duplicative efforts by:
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- Consolidating monitoring operations into regional central
monitoring stations.
- Implementing a single centralized accounting system.
- Creating a single billing, customer service and collections
department to service all of our central monitoring stations.
Utilizing the additional monitoring capacity in our central stations means
that the incremental cost of servicing additional subscriber accounts should be
substantially reduced. This can be illustrated by the acquisition in February
1997 of Northern Central Station, Inc., a central monitoring station located in
New Jersey. In that transaction, the physical facility located in New Jersey was
not purchased. Instead, all of the 8,860 subscriber accounts monitored there
were transferred in bulk, along with certain equipment and software, to our
central station located in Des Plaines, Illinois. Only two new personnel were
necessary to accommodate the additional 8,860 subscriber accounts. By contrast,
the old New Jersey operation required eight fulltime employees plus a leased
facility and associated expenses.
We have started to realize similar economies of scale through the
consolidation of the subscriber account bases of the following central
monitoring stations:
- Security Associates Command Center II, L.L.C. (located in Grand
Rapids, Michigan) and Guardian Security, Inc. (located in Columbus,
Ohio) into the Euclid, Ohio central monitoring station.
- Reliance Protective Services, Ltd. (located in Schaumburg, Illinois)
into the Des Plaines, Illinois central monitoring station.
- Telecommunication Associates Group, Inc. (formerly monitored out of
Austin, Texas), and Alarm Central Monitoring, Inc. (located in Dallas,
Texas) into the Texas Security Central, Inc. central monitoring
station located in Dallas, Texas.
Further consolidations will take place as we deem appropriate.
Subject to the availability of suitable candidates and financing, we intend
to 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 the subscriber accounts being monitored there may be
utilized to finance a significant portion of the purchase price.
Maintain and Enhance the Quality of Monitoring Services
One of the initiatives undertaken by us is a review of the operations of
each of our central monitoring stations combined with the development of a
strategic plan to improve the functionality and profitability of our monitoring
services. Each of our nine central monitoring stations currently use slightly
different event monitoring software and hardware. We are in the process of
upgrading the computer systems used in all of our central stations as well as in
our corporate offices. This computer upgrade is expected to be completed in the
third quarter of 1999. The goals we have set for the upgrade include:
- Standardizing the central station information systems to allow better
information flow between the central stations.
- Allowing more efficient information exchange between the central
stations and the corporate offices.
- Creating fully redundant systems in case of system failure in one or
more of the central stations.
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- Increasing the efficiency of our customer service department.
We believe that these improvements will allow us to conduct our operations
in a more efficient and cost effective manner. Furthermore, we anticipate that
the new systems will provide a platform from which to offer a wider selection of
value-added services to our alarm dealers. These services include providing
dealers with after-hours answering services, internet or direct access to
end-user information for a dealer's subscriber accounts and automated
interactive alarm system testing services.
Implement Central Station Based Regional Marketing Program
We have reorganized and changed the focus of our sales force. In the past,
we relied on the existing subscriber account base of the acquired central
monitoring stations and the "natural increase" in subscriber accounts that
occurs as alarm dealers who are already customers install additional alarm
systems. Additionally, our sales force was centrally located, and approached
alarm dealers on a national basis. We have redirected our sales effort by hiring
a sales force based in our central monitoring stations. The design of our
marketing programs has remained a corporate office function.
The salespeople in each of our central stations are responsible for selling
our services in the region where the station is located. It is our belief that
we will be more successful in selling monitoring services to alarm dealers if
our facilities, salespeople and operations managers are geographically close to
the dealers. We intend to control the growth of each central station so that no
station becomes too large for its management and salespeople to maintain
personal relationships with, and responsiveness to the needs of, each of our
dealers.
As part of our relationship oriented strategy, we have implemented a
program (the "Strategic Partner Program", formerly known as the Dealer Program)
that allows dealers to become equity owners of our company. See
"Business-Strategic Partner Program."
Reduce Attrition Rates for Subscriber Accounts Owned by SAI
In the normal course of our business, we sometimes experience cancellation
of accounts we own due, for example, to subscribers relocating, cancellation of
an account for nonpayment by the subscriber, problems with service and
miscellaneous other reasons. We seek to address the issue of accounts canceling
primarily in two ways.
First, we require alarm dealers from whom we purchased the accounts to
replace subscriber accounts that cancel. This replacement obligation lasts for a
specified period of time beginning from the date of purchase. This period is
called the guarantee period. Second, when we purchase subscriber accounts, the
entire purchase price is not paid at the closing of the transaction. Rather, a
certain percentage is held back by us during the guarantee period. This amount
is called the holdback amount. If a subscriber account cancels during the
guarantee period, we require the replacement of that account. If the alarm
dealer is unable or unwilling to replace that account, we will deduct the
purchase price of that account from the holdback amount.
Historically, through January 1, 1999, we experienced gross attrition (that
is, attrition without taking into account replacements from the dealer or
reductions in the holdback amounts) of 12.4% and net attrition (that is, after
taking into account replacements for canceled accounts and application of the
holdback amounts) of 8.3%. In calculating attrition, we divide the number of
accounts cancelled by the number of accounts originally purchased. We then
annualize the resulting number over the period that we own the purchased
accounts. This method is commonly known in the financial or investment community
as the static pool method of calculating attrition.
STRATEGIC PARTNER PROGRAM
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The Strategic Partner Program was created to induce independent alarm
dealers to use our central monitoring stations by giving them the opportunity to
share in our growth through equity ownership in our company. Under the Strategic
Partner Program, a dealer will enter into a contractual relationship with us
whereby the dealer agrees to transfer or retain some or all of its subscriber
accounts at one of our central stations. The dealer must agree that during the
term of the contractual relationship with us it will not transfer the subscriber
accounts monitored by us to a central monitoring station not owned by us. In
return, we will issue to the dealer a negotiated amount of common stock or
warrants to purchase common stock. These securities will be issued solely for
entering into the contractual relationship with us and without any cash payment
by the dealer. If the dealer is issued warrants, however, the exercise of the
warrants will require a cash payment of $6.00 per share.
The securities may be issued alone, or together with other inducements that
we may offer from time to time. We believe that this program will be attractive
to many alarm dealers, especially in light of the fact that we will also be
providing them with high quality monitoring services at competitive rates.
Of the securities issued to a dealer under the Strategic Partner Program,
25% will be freely tradable upon issuance. The remaining 75% will have
restrictions on transfer which will be removed in three equal annual increments.
If the dealer defaults on its obligations under the Strategic Partner 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
Strategic Partner Program if the dealer (or any party he sells his subscriber
accounts to), during the term of the contractual relationship, transfers the
covered subscriber accounts to a central station not owned by us or the dealer
fails to comply with our rights of first refusal. The right of first refusal is
the right we retain to meet or beat the terms of any offer by another company to
purchase the dealer's subscriber accounts.
The Strategic Partner Program is a central component of our business plan.
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DEALER FINANCING PROGRAMS
General
Alarm dealers, like many other small businesses, from time to time need
financing in order to operate and grow their businesses. The reasons a dealer
might need access to cash are extremely varied and include the need to manage
cash shortfalls, to finance expansion or inventory, and to subsidize the costs
of system installations. In addition, many dealers would like to be able to
offer financing for potential purchasers of alarm systems. As is common with
small businesses, access to equity capital is limited. Access to bank financing
is also limited for both the dealers and for their customers who may wish to
finance the purchase of the alarm system. For many dealers, the most significant
assets they own are the contract rights for monitoring the subscriber accounts.
Unfortunately, such contract rights are generally not treated as tangible assets
against which banks, or other traditional lending institutions, will lend on a
secured basis. This situation creates a dilemma for dealers, and an opportunity
for us to strengthen our relationship with our alarm dealers because we are able
to accurately assess the value of these assets and assist dealers in obtaining
financing.
Our dealer financing programs are headed by Steve Rubin. Mr. Rubin has over
twenty-seven years of experience counseling alarm dealers as to their financing
options and assisting them with their financing needs.
Subscriber Accounts Owned by SAI
One method of financing that has developed in the security alarm industry
is the sale of subscriber accounts to third parties such as us. Substantially
all of the subscriber accounts we own were purchased from independent alarm
dealers. In a typical transaction, the alarm dealer will sell subscriber
contracts for a price that may be expressed as a multiple of the current monthly
payment amount generated by that subscriber account. This monthly payment amount
is commonly called RMR in the industry, which stands for recurring monthly
revenue. For example, if a single contract provided for monthly payments of $25
per month it might sell for $750, or thirty times RMR. The multiple we paid in
any actual transaction was impacted by several factors including, but not
limited to:
- the number of subscriber accounts purchased,
- the RMR of the subscriber accounts,
- prior experience with other subscriber accounts purchased from the
particular dealer,
- the geographic location of the subscribers,
- the multiple of RMR generally paid in the industry at the time of
the purchase,
- estimated cost per month to monitor, service, bill and collect
subscriber accounts, and
- the type of monitoring equipment used by the subscriber.
Because subscriber accounts typically have original contract terms ranging
from one to five years (with annual renewals thereafter) the purchaser of the
subscriber account is generally undertaking a significant risk related to how
long each subscriber account remains active and current on its monthly payments.
In the foregoing example, it will take thirty months for the purchaser of the
subscriber account to receive payments equal to the purchase price.
For a purchase of subscriber accounts to be profitable, the cash flow from
the accounts must not only cover the purchase price, costs of providing service
and administrative expenses, but it must also provide a satisfactory return on
the purchaser's total investment. The "quality" of the subscriber accounts
purchased, which is generally measured in terms of the consistency with which
the monthly monitoring fees are paid and the expected longevity of the
subscriber accounts, is the crucial element in determining whether an
acquisition of subscriber accounts is a profitable undertaking.
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Future acquisitions of subscriber accounts by us will depend on several
factors including: the availability of suitable acquisition opportunities, the
market price of subscriber accounts, the amount and cost of financing available
to us and the attractiveness of alternative uses of our capital resources.
Assisting Dealers in Obtaining Loans
Because high quality subscriber accounts represent a reliable future stream
of revenue with little incremental costs, some dealers prefer to borrow using
their subscriber accounts as collateral. As previously mentioned, banks have
historically been reluctant to lend against subscriber accounts as collateral.
We believe that only a few sizable finance companies exist with active lending
programs for independent alarm dealers and their lending capacity is relatively
small compared to what we believe is the potential demand. Because of our
familiarity with the security industry and our knowledge of potential lenders,
we believe we are well prepared to assist alarm dealers in obtaining loans.
In 1997, we formed Alarm Funding Corporation as a wholly-owned subsidiary
to implement a dealer loan program. We concluded that alarm dealers would be
better served, and our capital resources would be better utilized, if we
introduce dealers to potential lenders rather than attempting to make loans
ourselves. In the second quarter of 1999, Alarm Funding was merged into SAI, and
Alarm Funding's loan portfolio was sold.
The Value Builder Program
The Value Builder program was developed to assist alarm dealers in
obtaining customer financing for installed alarm systems, to allow alarm dealers
to obtain substantial discounts on alarm equipment and to compete with the "low"
or "no" money down mass marketers.
Under this program, dealers are able to obtain financing for their
customers which is repaid in 36 to 48 months from the monthly monitoring fees.
From the customer's point of view, only a small down payment is required to
purchase the system. The subscriber account and its revenue stream secures the
loan. In the event the account cancels during the first year of the program, the
dealer is required to provide another account and its revenue stream to secure
payment to the finance company that advanced the funds. At the end of the
repayment period, the dealer retains all rights to the subscriber account and
the revenue stream it generates.
All dealers participating in the Value Builder program must agree that any
new subscriber account which uses the program must be monitored at one of our
central monitoring stations. As an additional incentive for participating in the
Value Builder program, we may also issue shares of common stock to participants
based on the number of Value Builder accounts monitored at our central
monitoring stations. Dealers receiving shares under the Value Builder program
are subject to the same vesting schedule as those receiving shares under the
Strategic Partner Program. See "Business - Strategic Partner Program."
DEALER SUPPORT STRATEGY
Offer High Quality Support Programs
The marketplace in which the independent alarm dealer competes is
undergoing rapid change. The entry of large, well capitalized companies creates
a much more competitive environment. It is in this context that we believe our
ongoing educational and management development program is not only valuable to
our network of alarm dealers, but also can add depth and permanence to our
relationships with independent dealers. Our efforts are headed by Ron Davis,
Chairman of the Board, with more than twenty-seven years of experience as a
speaker and author on a broad range of subjects concerning the security alarm
industry, independent alarm dealers and the changes in the marketplace that have
and will continue to impact them.
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We conduct numerous meetings each year at locations around the country at
which issues and opportunities facing the industry are presented. We also host
an annual three day educational conference attended by alarm dealers, where
presentations are made by both our personnel and other professionals from within
the industry, as well as specialists in such fields as finance and marketing and
motivational speakers.
These activities are supplemented by our Audio Insight program. Audio
Insight is an audio magazine that is distributed quarterly. Each edition of
Audio Insight is a cassette of about one hour in length which contains ideas,
interviews and insights relating to the alarm industry, hosted by Mr. Davis. We
also distribute camera ready consumer newsletters that can be customized by
alarm 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 our dealer network.
Assist Dealers in Exploiting Future Opportunities
We anticipate that new business opportunities for alarm dealers will
continue to develop as a result of "bundling". Bundling is a relatively new
phenomenon that is impacting the alarm industry. Bundling involves a single
entity, or multiple entities acting through a joint venture, providing a range
of complementary or similar services. A single entity 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 invoice. We
anticipate that at least some bundlers will include alarm monitoring in the
services they provide and may wish to "out-source" significant portions of the
installation, service and monitoring functions. Because of the size and
geographic diversity of our dealer network, we intend to present our company to
the bundlers as an easy and cost effective way of approaching independent
installers and their customers. We believe that together with the collective
strength of our independent dealer network we can more effectively exploit
market opportunities.
Build a Deeper Relationship with Independent Dealers
We view our overall marketing strategy as an attempt to build a broad range
of relationships with independent alarm dealers through which we can develop and
market a range of services designed to address alarm dealer needs and build
recurring revenue for our dealers and us. Our strategy is built around the
premise that dealers are best served when our regional central monitoring
station personnel develop a personal relationship with them. To implement this
strategy we have developed a force of regional dealer liaison personnel based in
each of our central stations. These dealer liaisons provide personalized one
stop service to alarm dealers to address their individual needs as they arise.
Their efforts are supplemented by meetings of central station based user groups.
We are implementing our user group program in order to gain insight into
the quality of the services we provide on an ongoing basis. Each of our central
stations either has or will form a user group of alarm dealer customers in its
service area. These user groups will meet periodically and serve as a regular
source of feedback for both the central stations and for our company as a whole.
We also plan to utilize the user groups as forums at which we can test the
attractiveness and demand for proposed new services before making major
commitments of time and money to new programs.
We believe that these initiatives will greatly enhance the quality of our
monitoring services, and, therefore, their attractiveness to alarm dealers. We
also believe our access to, and knowledge of, the alarm industry and independent
alarm dealers is of value to outsiders who may wish to use the services of, or
sell products to, or through, our network of alarm dealers and their customers.
RECENT CENTRAL STATION ACQUISITIONS
Telecommunications Associates Group, Inc.
On November 24, 1997, we purchased all of the outstanding capital stock of
Telecommunications Associates Group, Inc., an Ohio corporation ("TAG") from an
unaffiliated party.
21
<PAGE> 23
The purchase price was $5,000,000, which was paid in cash at closing, plus
the assumption of TAG's liabilities of approximately $1,500,000. $4,800,000 of
the purchase price was financed from our general corporate funds and the balance
were either liabilities assumed by us or financed by drawing on our existing
credit facility with FINOVA Capital Corporation. The acquisition was accounted
for under the purchase method for financial reporting purposes.
TAG was a third-party alarm monitoring company that served approximately
98,000 subscriber accounts (which included approximately 48,000 two-way voice
accounts which were scheduled to be, and were, returned to the owner's central
monitoring station by December 31, 1998) and 350 independent alarm dealers from
central monitoring stations located in Euclid, Ohio and Austin, Texas.
Texas Security Central, Inc.
On June 17, 1998, we purchased all of the outstanding capital stock of
Texas Security Central, Inc., a Texas corporation ("TSC") from unaffiliated
parties.
The purchase price was $6,846,000, which was paid in cash at closing.
$4,450,000 of the purchase price was financed by drawing on our existing credit
facility with FINOVA and the remainder of the purchase price was financed from
our general corporate funds. The acquisition was accounted for under the
purchase method for financial reporting purposes.
TSC was a third-party alarm monitoring company that served approximately
65,000 alarm monitoring subscribers and approximately 300 independent alarm
dealers from central monitoring stations located in Dallas, Texas; Houston,
Texas and San Antonio, Texas.
OTHER CENTRAL STATION ACQUISITIONS
- Alert Answering Service
On March 2, 1998, we 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 party.
Alert was a third-party alarm monitoring company that served
approximately 1,966 subscriber accounts and ten independent alarm
dealers and also is a telephone answering service business serving
approximately 250 subscribers. In March 1998 and June 1998, the
monitoring business and the answering service business,
respectively, were moved to our central monitoring station located
in Euclid, Ohio. This acquisition allows us to provide expanded
telephone answering services for our alarm dealers nationwide.
- Guardian Security Systems, Inc.
On March 8, 1998, we purchased all of the outstanding capital
stock of Guardian Security Systems, Inc., an Ohio corporation
("Guardian") from an unaffiliated party.
Guardian was a third-party alarm monitoring company that served
approximately 3,270 subscriber accounts owned by fifteen alarm
dealers and 1,349 subscriber accounts owned by Guardian from a
central monitoring station located in Columbus, Ohio. In the first
quarter of 1998, all of the assets and operations of Guardian were
transferred to our central station located in Euclid, Ohio.
- Monitoring Business of Fire Protection Services Corporation D/B/A
Mountain Alarm
On May 8, 1998, we purchased the monitoring business of Fire
Protection Service Corporation, a Utah corporation, D/B/A Mountain
Alarm ("Mountain") from an unaffiliated party.
22
<PAGE> 24
Mountain was a third-party alarm monitoring company that served
approximately 7,800 alarm monitoring subscribers and approximately
eight independent alarm dealers from a central monitoring station
located in Ogden, Utah.
- Reliance Protective Services, Ltd.
On July 17, 1998, we purchased all of the outstanding capital
stock of Reliance Protective Services, Ltd., an Illinois
corporation ("Reliance") from unaffiliated parties.
Reliance was a third-party alarm monitoring company that served
approximately 12,000 alarm monitoring subscribers and
approximately 100 independent alarm dealers from a central
monitoring station located in Schaumburg, Illinois. All of the
subscriber accounts monitored by Reliance were moved into our Des
Plaines central station.
- World Security Services Corp.
On October 13, 1998, we purchased all of the assets of World
Security Services Corp., an Oregon corporation ("World") from an
unaffiliated party.
World was a third-party alarm monitoring company that served
approximately 20,000 alarm monitoring subscribers and
approximately 180 independent alarm dealers from a central
monitoring station located in Portland, Oregon.
- Alarm Central Monitoring, Inc.
On October 23, 1998, we purchased all of the outstanding capital
stock of Alarm Central Monitoring, Inc., a Texas corporation
("ACM") from unaffiliated parties.
ACM was a third-party alarm monitoring company that served
approximately 13,000 alarm monitoring subscribers and
approximately 50 independent alarm dealers from a central
monitoring station located in Dallas, Texas. All of the subscriber
accounts monitored by ACM were moved into the TSC central station
located in Dallas, Texas.
The aggregate purchase price for all of these smaller central station
acquisitions was approximately $5,585,000 plus 89,000 shares of our common stock
which was valued at $510,032 on the dates of the acquisitions.
RISK MANAGEMENT
The nature of the services we provide potentially exposes us to greater
risks of liability for employee acts or omissions or system failures than may be
the case with other businesses. Generally, our monitoring agreements contain
provisions limiting our liability to subscribers in an attempt to reduce this
risk.
We carry insurance of various types, including general liability and errors
and omissions insurance. We believe the amount of our insurance coverage is
adequate for a company of our type and size. Our loss experience, and that of
other companies in the security industry, may affect the cost and availability
of such insurance. Certain of our 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
23
<PAGE> 25
The security alarm industry is highly competitive and highly fragmented.
While we do not compete directly with many of the large new entrants into the
industry, because we do not sell and install security systems, we are
nonetheless impacted by the competitive challenge these entrants present to
independent alarm dealers.
Our monitoring services compete with those offered by an estimated 250
companies which offer contract monitoring services from UL listed facilities.
Most of these companies are small, local operations. In addition, we believe
there are approximately 1,500 to 2,000 non-UL listed facilities.
Our competitive strategy has these basic components: provide the alarm
dealer community with high quality monitoring, provide access to financial
services at competitive prices and provide dealers with the support and access
to new business opportunities that will help them compete more effectively and
add recurring revenue. We plan to further develop our dealer network which, we
believe, will result in additional marketing opportunities for our dealers with
those companies that desire access to our dealers and their customers.
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<PAGE> 26
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:
- subjecting alarm monitoring companies and/or subscribers to fines
or penalties for transmitting false alarms,
- requiring permits for individual alarm systems and revoking such
permits following a specified number of false alarms,
- imposing fines on alarm subscribers for false alarms,
- 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
- requiring further verification of an alarm signal before the
police will respond.
Our operations are subject to a variety of other laws, regulations and
licensing requirements of federal, state and local authorities. In certain
jurisdictions, we are required to obtain licenses or permits, to comply with
standards governing employee selection and training, and to meet certain
standards in the conduct of our business. Many jurisdictions also require
certain of our employees to obtain licenses or permits.
The alarm industry is also subject to requirements imposed by various
insurance, approval 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.
Our 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
From time to time we experience routine litigation in the normal course of
our business. We do not believe that any pending litigation will have a material
adverse affect on our financial condition or results of operations.
EMPLOYEES
At _______________, 1999, we employed ________ individuals. Currently, none
of our employees are represented by a labor union or covered by a collective
bargaining agreement. We believe that relationships with our employees are good.
PROPERTIES
Our executive offices are located at 2101 South Arlington Heights Road,
Arlington Heights, Illinois and our central monitoring stations are located at:
- 2116 South Wolf Road, Des Plaines, Illinois;
25
<PAGE> 27
- 1471 S.W. 12th Avenue, Pompano Beach, Florida;
- 1514 East 191 Street, Euclid, Ohio;
- 9750 Brockbank, Dallas, Texas;
- 12610 Richmond Avenue, Houston, Texas;
- 14329 San Pedro, San Antonio, Texas;
- 4507 North Channel Avenue, Portland, Oregon; and
- 2178 Washington Boulevard, Ogden, Utah.
All of our facilities are leased. The following is a summary of the term for
each of our leases:
- The Arlington Heights lease expires December 31, 2002, but can be
renewed by us at our option for one additional five year term;
- The Des Plaines lease expires June 30, 2000, but can be renewed by us
at our option for one additional five year term;
- The Pompano Beach lease expires December 31, 2003, but can be renewed
by us at our option for one additional five year term;
- The Euclid lease expires December 31, 2004, but can be renewed by us
at our option for one additional five year term;
- The Dallas lease expires June 16, 2003, but can be renewed by us at
our option for one additional five year term;
- The Houston lease expires June 16, 2003, but can be renewed by us at
our option for one additional five year term;
- The San Antonio lease is a month-to-month lease;
- The Portland lease expires May 31, 2000, but can be renewed by us at
our option for two additional three year terms; and
- The Ogden lease expires May 8, 2003. We do not have an option to renew
this lease.
USE OF PROCEEDS
On October 20, 1997, our first registration statement on Form S-1 under the
Securities Act was declared effective. A subsequent registration statement on
Form S-1 (Registration # 33-49897) pursuant to Rule 429 of the Securities Act
was declared effective on April 22, 1998. The registration statements cover
2,000,000 shares of our common stock and warrants to purchase up to 2,000,000 of
those shares, to be issued by us: (i) in connection with offerings to alarm
dealers under Rule 415(a)(1)(ix) of Regulation C promulgated under the
Securities Act; (ii) in connection with the acquisition of other business, real
or personal properties, or securities in business combination transactions in
accordance with Rule 415(a)(1)(viii); and otherwise under Rule 415. The
registration statements also cover 1,778,088 shares of common stock
26
<PAGE> 28
which may be offered for sale by certain selling stockholders under Rule
415(a)(1)(i) and 415(a)(l)(iii). The offering by us commenced on October 20,
1997 and is continuing. We will not receive any proceeds from the securities
issued by us pursuant to the Strategic Partner Program or the ValueBuilder
program. However, the exercise of the warrants will require the exercising
warrantholder to pay us $6.00 per share of common stock purchased upon exercise.
No underwriter has been engaged in connection with the offering. The
aggregate offering price of the common stock and warrants registered on our
behalf was $12,000,000 and the aggregate offering price of the common stock
registered on behalf of the Selling Stockholders was $10,666,248. No separate
offering price was assigned to the warrants.
1998 sales of registered securities were as follows:
On May 8, 1998 we issued 54,000 shares of common stock to Fire Protection
Service Corporation of Ogden, Utah, an alarm monitoring company, in partial
payment for substantially all of its assets.
On August 27, 1998, we issued 18,002 shares of common stock to Cornerstone
Security, Inc. as partial payment for substantially all of its alarm monitoring
assets.
On August 27, 1998 and September 30, 1998, we issued a total of 17,006
shares of common stock to Armor Alarms, Inc. as partial payment for
substantially all of its alarm monitoring assets.
On September 3, 1998, we issued a total of 21,576 warrants expiring
September 3, 2002, to purchase 21,576 shares of common stock at an exercise
price of $6.00 per share, to AA Security Systems, Inc., Access Security, Inc., C
& H Systems, Inc., Life Safety Design, Inc., Loveco Enterprises, Inc., MDM
Electronics, Inc., and Rankin & Houser, Inc. in connection with our Strategic
Partner Program.
On October 1, 1998, we issued a total of 69,856 warrants expiring October
1, 2002, to purchase 69,856 shares of common stock at an exercise price of $6.00
per share, to ABC Alarm Security, Inc., Advanced Security Automation, Inc.,
Alert Security Consultants, Inc., Amsafe of Miami, Inc., Carol Electric, Inc.,
Catskill Mountain Security, Inc., Comsec Ventures International, Inc., F. M.
Security Systems, Inc., Bryant Faulkner d/b/a Faulker Security Services, Edward
and Myrna Horgan, Illinois Alarm Service, Inc., Midwest Security Systems, Inc.
Mister Security, Inc., New Age Security, Inc., On Guard, Inc., On Guard
Security, Inc., Philip Brzeski d/b/a P & B Alarm, S.O.S. Security Systems, Inc.,
Security Services Group, Inc., Robert Koenig d/b/a Security Services, Security
Tech, Inc., Star Security Systems, Inc., Universal Security, Inc., Laughton D.
Vaughn d/b/a Vaughn Security, and Brian Prinzo d/b/a Worldwide Security, in
connection with our Strategic Partner Program.
On October 23, 1998, we issued 22,750 shares of common stock to Joseph M.
Graves and 12,250 shares of common stock to Joseph M. Graves, III, in partial
payment for all of the capital stock of Alarm Central Monitoring, Inc., a Texas
corporation.
On November 13, 1998, we issued 480 shares of common stock to Loveco
Enterprises, Inc., in connection with our Strategic Partner Program.
On December 14, 1998, we issued a total of 1,392 warrants to Geauga
Security, Inc. in connection with our Strategic Partner Program.
On December 22, 1998, we issued a total of 6,768 warrants to purchase 6,768
shares of common stock at an exercise price of $6.00 per share, to A. Alarm
Company, Corp., AAA Alarms, Inc., and Everglades Advanced Security, Inc., in
connection with our Strategic Partner Program.
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<PAGE> 29
On December 31, 1998, we issued a total of 9,320 shares of common stock to
Burglar Alarms & Security Co., Inc., London Security Systems, Inc., On Guard
Security, Inc., and S.O.S. Security Systems, Inc., in connection with our
Strategic Partner Program.
1999 Sales of registered securities were as follows:
On March 5, 1999, we issued a total of 22,048 shares of common stock to
Stand Guard, Inc., Securatron Alarm Systems, Inc., Fire Security and Control
Systems, Inc., Sentinel Security, Inc., Terry King d/b/a Alarmlink and Life
Safety Systems, Automated Alarm Company, Inc., and Barney's Electrical Service,
Inc., d/b/a Barney's Security Alarms, in connection with our Strategic Partner
Program.
On March 12, 1999, we issued 4,052 shares of common stock to Armor Alarms,
Inc., in partial payment for alarm monitoring accounts.
On March 31, 1999, we issued a total of 42,720 shares of common stock to
Able Security Systems, Inc., Tom R. Hayward, Capitol Alarm, Inc., Fire Power,
Inc., Praetorian Protective Service, Inc., Protective Systems, Inc., Eddie
Roberson d/b/a Roberson Security, Securitec Safety Systems, Inc., Sentinel
Systems Corporation, Stand Guard, Inc., and David Zabrocki, in connection with
our Strategic Partner Program.
If any shares were sold by the Selling Stockholders they were sold in
independent transactions arranged by those Stockholders individually, and we are
unable to determine the number of shares sold or the amounts realized in those
sales.
We estimate that from October 20, 1997 through ______,__, 1999, we incurred
a total of $_______ in expenses in connection with the offering. Those expenses
are estimated to be as follows: legal $___________; accounting $____________;
printing $__________ and registration fees $____________. All of these expenses
represent payments to unrelated third parties and there were no direct or
indirect payments to our directors or officers or their associates, or to any
party owning ten percent or more of any class of our equity securities or any of
our affiliates. As of May 10, 1999, we have issued 202,628 shares of common
stock and warrants to purchase 121,104 shares of common stock in connection with
the offering.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the American Stock Exchange under the
symbol "SAI" since January 25, 1999. Our common stock was previously traded on
the American Stock Exchange under the symbol "IDL" beginning on March 4, 1998.
Prior to that, until March 4, 1998, the common stock was traded on the OTC
Bulletin Board. The following table sets forth, for the periods indicated, the
range of high and low bid quotations for our common stock as reported on the OTC
Bulletin Board and the high and low sales prices as reported on the American
Stock Exchange. The OTC Bulletin Board quotations reflect inter-dealer
quotations, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
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 $ 4.50
</TABLE>
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<PAGE> 30
<TABLE>
<CAPTION>
LAST REPORTED SALES
-------------------
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter (March 4, 1998 to March 31, 1998) $ 8.50 $ 5.25
Second Quarter $7.0625 $ 5.25
Third Quarter $ 5.75 $4.4375
Fourth Quarter $ 4.5 $ 3.938
1999
First Quarter $ 4.00 $ 2.50
Second Quarter (through _____, 1999)
</TABLE>
On ____________, 1999, the last reported sale price of our common stock was
$________ per share. At _____________, 1999, we had approximately __________
stockholders of record, not including beneficial owners whose stock is held in
street name.
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<PAGE> 31
STOCKHOLDER RETURN AND PERFORMANCE GRAPH
Presented below is a line graph comparing the percent change in the
cumulative total stockholder return on our common stock against the Russell 2000
Index and the Mallon Global Security Index. The graph assumes that $100 was
invested on January 1, 1994, in our 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 March 31, 1999 Including Data to December 31, 1998
$100 invested January 1, 1994
(assumes all dividends reinvested)
FISCAL YEAR ENDED DECEMBER 31, 1998
GRAPHIC REPRESENTATION OF THE
INFORMATION CONTAINED IN THE TABLE BELOW.
ASSUMES $100 INVESTED ON JANUARY 1, 1994
ASSUMES DIVIDENDS REINVESTED THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
Measurement Period Russell 2000 Index Mallon Global Security Index SAI
- ------------------ ------------------ ---------------------------- ---
<S> <C> <S> <C>
January 1, 1994(1) $100.00 $100.00 $100.00
FYE 1994 $ 96.79 $ 98.73 $ 33.32
FYE 1995 $122.14 $146.82 $ 54.12
FYE 1996 $140.17 $207.74 $374.53
FYE 1997 $173.50 $249.92 $707.48
FYE 1998 $168.69 $253.50 $524.35
</TABLE>
1) The price of our common stock was $0.75 on this date.
DIVIDEND POLICY
We currently anticipate that we will retain all of our earnings for
development of our business, and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Future cash dividends, if any, on
our common stock will be at the discretion of the Board of Directors and will
depend upon, among other things, our 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.
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<PAGE> 32
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for the fiscal years ended 1996
through 1998 is derived from our consolidated financial statements which have
been audited by Arthur Andersen LLP, independent public accountants. The
following selected financial data for the fiscal year ended 1994 and 1995 is
derived from audited financial statements. The selected financial data set forth
below should be read in conjunction with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere.
<TABLE>
<CAPTION>
Years Ended December 31,
Pro Forma
1994 1995 1996 1997 1998 1998(1)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ 1,397 $ 2,733 $ 3,782 $ 10,814 $ 20,203 $ 24,088
Operating (loss).............. $ (354) $ (389) $ (591) $ (2,662) $ (3,406) $ (3,204)
Net (loss) available to
common stockholders......... $ (457) $ (947) $ (1,718) $ (4,938) $ (6,798) $ (6,928)
Net loss per share............ $ (.13) $ (.26) $ (.47) $ (1.16) $ (1.06) $ (1.08)
Shares used in computing net
income per share............ 3,662,187 3,665,642 3,669,343 4,266,151 6,394,048 6,429,048
</TABLE>
(1) The pro forma data for the year ended December 31, 1998 gives effect to all
of the acquisitions made during fiscal 1998, as if they had occurred on
January 1, 1998.
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 86 $ 54 $ 632 $ 5,522 $ 1,481
Working capital (deficit)..... $ (787) $(2,699) $(4,518) $ 1,625 $(4,450)
Total assets.................. $ 2,690 $ 6,030 $16,533 $36,009 $47,526
Total debt.................... $ 3,099 $ 6,862 $12,790 $22,919 $35,981
Total stockholders' equity
(deficit)................... $(1,132) $(2,043) $ 1,269 $ 7,231 $ 3,869
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our revenues are derived from recurring payments for monitoring services
provided to subscribers and alarm dealers pursuant to agreements. Monitoring
contracts have initial terms typically ranging from one to five years usually
with provisions for automatic renewal for periods of one year. Monitoring
contracts entered into with alarm dealers generally permit cancellation with
notice of 30-60 days before the end of the original or any renewal term.
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<PAGE> 33
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands)
1996 1997 1998
---------------------------------------
<S> <C> <C> <C>
Revenue $ 3,782 $ 10,814 $ 20,203
Operating Expenses:
Payroll and related expense 1,710 4,653 10,279
General, selling & administrative 1,394 4,257 6,433
Amortization & depreciation 1,269 3,704 6,289
Deferred compensation expense -- 862 609
Loss from Operations (591) (2,662) (3,406)
Interest Expense 1,384 1,863 2,870
Net Loss $ (1,718) $ (4,525) $ (6,276)
Dividends accrued on Preferred Stock - $ 413 $ 522
Net loss to common stockholders $ (1,718) $ (4,938) $ (6,798)
Net loss per share $ (.47) $ (1.16) $ (1.06)
Total weighted average number of common shares
Outstanding 3,669,343 4,266,151 6,394,048
</TABLE>
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<PAGE> 34
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
-----------------------------------
<S> <C> <C> <C>
Revenues:
Total revenue 100% 100% 100%
Operating Expenses:
Payroll and related expense 45% 43% 51%
General, selling & administrative 37% 39% 32%
Amortization & depreciation 34% 34% 31%
Deferred compensation expense -- 8% 3%
Loss from Operations (16%) (24%) (17%)
Interest Expense (37%) (17%) (14%)
Net Loss (45%) (41%) (31%)
</TABLE>
1998 COMPARED TO 1997
REVENUE. Revenues for fiscal 1998 increased by $9,389,763, or 86.8%, to
$20,203,850 from $10,814,087 for fiscal 1997. The increase in revenues is
primarily related to acquisitions completed at the end of 1997 which resulted in
a full year's revenue generated in 1998 as opposed to a partial year in 1997,
and to acquisitions completed during 1998. The increase in revenues related to
Telecommunications Associates Group, Inc. ("TAG") was approximately $3,878,000.
The acquisition of TAG was completed on November 24, 1997. The increase in
revenues related to the acquisition of Texas Security Central, Inc. ("TSC") and
Alarm Central Monitoring, Inc. ("ACM") was approximately $2,237,000. The
acquisitions of TSC and ACM were completed in June and October 1998,
respectively. The acquisitions of the monitoring business of Fire Protection
Services Corporation D/B/A Mountain Alarm (acquired in May, 1998), the assets of
World Security Services Corp. (acquired in October, 1998) and Reliance
Protective Services, Ltd. (acquired in July, 1998) increased revenue by
approximately $1,040,000. The balance of the increase in revenue between the
years 1998 and 1997 of approximately $1,902,000 is the result of a net increase
in the number of subscriber accounts owned during the year and internally
generated revenue growth related to the central stations.
OPERATING EXPENSES. Operating expenses increased $10,134,019 or 75.2% in
1998 to $23,610,146 from $13,476,127. General, selling and administrative
expenses increased to $6,433,085 from $4,257,360, an increase of $2,175,725 or
51.1%. The increase in general, selling and administrative expenses related to
the acquisition of TAG was approximately $707,000. The increase in general,
selling and administrative expenses related to the acquisitions of TSC and ACM
was approximately $668,000. The increase in general, selling and administrative
expenses related to the acquisitions of Mountain Alarm, World Security and
Reliance was approximately $200,000. The increase in general, selling and
administrative expenses that relates to our existing business was approximately
$601,000. The remaining increase is attributable to overall growth.
Payroll and related expenses increased by $5,626,279, or 120.9%, from
$4,653,190 to $10,279,469. The increase in payroll and related expenses related
to the acquisition of TAG was approximately $2,184,000. The increase in payroll
and related expenses related to the acquisitions of TSC and ACM was
approximately $1,055,000. The increase in payroll and related expenses related
to the acquisitions of Mountain Alarm, World Security and Reliance was
approximately $489,000. The remaining increase in payroll and related expenses
of $1,898,000 is primarily due to our hiring four additional management
personnel in the fourth quarter of 1997 and an increase in staff during the year
as a result of our growth.
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<PAGE> 35
Amortization and depreciation increased by $2,584,946, or 69.8%, from
$3,703,543 to $6,288,489 due to an increase in the amortization of goodwill
related to acquisitions and an increase in amortization of contract rights of
$1,326,000.
Deferred compensation expense decreased from $862,034 in 1997 to $609,130
in 1998. The decrease is related primarily to the decrease in the common stock
value from $5.00 per share at the end of 1997 to $3.93 at the end of 1998, as
this plan is a variably priced plan. Awards under this plan are approved
annually by the Board of Directors. No future awards will be made under this
plan for any period after December 31, 1998.
INTEREST EXPENSE. Interest expense increased $1,006,987 from $1,862,606 in
1997 to $2,869,593 in 1998, an increase of 54.1%. This increase was caused
primarily by an increase in borrowings under our credit facility with FINOVA
Capital Corporation from $16,521,813 at the end of 1997 to $26,609,730 at the
end of 1998. In addition, we incurred interest expense of $733,055 in 1998
compared to $585,000 in 1997 related to outstanding debt on subordinated
borrowings from our principal stockholder. We had $8,500,000 of debt outstanding
under those subordinated notes at the end of 1998, compared to $5,500,000
outstanding at the end of 1997.
BUSINESS SEGMENT OPERATING RESULTS.
The following is a discussion of our industry segment operating results. We
define operating earnings as income or loss before interest and income taxes. We
do not allocate corporate general and administrative or corporate payroll
expenses to our operating segments.
CENTRAL STATION OPERATIONS. Operating income from our central station
segment increased from $816,678 to $1,684,500 or an increase of 106.2%. Revenue
related to this segment increased from $6,680,882 to $14,667,212 or an increase
of 119.5%. The increase in both operating income and revenue are the result of
acquiring seven central station operations in 1998 and internal revenue growth
from various programs of approximately 10%.
OWNED SUBSCRIBER ACCOUNTS. Operating loss related to the owned subscriber
accounts segment increased from ($724,526) to ($1,074,121) or an increase of
48.3%. Revenue increased from $5,018,234 to $6,942,036 or 38.3%. Cash flow,
defined as operating income plus depreciation and amortization, increased from
$2,216,932 to $3,218,050 or 45.2%. The increase in the operating loss in this
segment was caused by an increase in amortization and depreciation. The increase
in revenue and cash flow is directly related to accounts acquired during the
year.
CORPORATE EXPENSES. Corporate expenses increased from $2,754,192 to
$4,016,675 or 145.8%. The increase is due primarily to increased payroll costs
related to additional executive and supervisory level personnel added in 1998.
The addition of these people was required to enable us to effectively manage the
growth that occurred during 1998.
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 Securities Associates Command Center II, L.L.C. ("SACC") and
All-Security Monitoring Services, L.L.C. ("AllSec") was approximately
$2,294,000, these acquisitions were completed on September 5, 1996; increase
related to the acquisition of AMJ Central Station Corporation, Inc. ("AMJ")
completed in December , 1996, was approximately $2,144,000; 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 the
result of the acquisition of subscriber accounts during the year.
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<PAGE> 36
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 subscriber accounts.
The remaining increase of $342,000 is related to the overall growth in our
existing business.
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 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 our hiring four additional management personnel and an increase in staff of
five personnel during the year as a result of our growth.
Amortization and depreciation increased by $2,434,481, or 191.8%, from
$1,269,062 to $3,703,543 due to an increase in the amortization of goodwill
related to acquisitions, the amortization of deferred financing costs of
$598,968 and an increase in the amortization of contract rights of $1,732,884
due to the net increase in contract rights of $7,302,352.
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 our 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, we
incurred interest expense of $585,000 in 1997 compared to $9,370 in 1996 related
to outstanding debt on subordinated borrowings from our principal stockholder.
We had $5,500,000 of debt outstanding under those subordinated notes at the end
of 1997, compared to $500,000 outstanding at the end of 1996.
BUSINESS SEGMENT OPERATING RESULTS.
The following is a discussion of our industry segment operating results. We
define operating earnings as income or loss before interest and income taxes. We
do not allocate corporate general and administrative or corporate payroll
expenses to our operating segments.
CENTRAL STATION OPERATIONS. Operating income from our central station
segment increased from $3,298 to $816,678 or an increase of 24,662.8%. Revenue
related to this segment increased from $1,289,239 to $6,680,882 or an increase
of 418.2%. The increase in both operating income and revenue are the result of
merging All Security and Security Associates Command Center, which were both
joint ventures that became wholly owned subsidiaries in September, 1996. Prior
to that transaction, we did not have a central station operation that was
controlled by us. We also acquired two additional central station operations in
1997.
OWNED SUBSCRIBER ACCOUNTS. Operating loss related to the owned subscriber
accounts segment increased from income of $54,675 to a loss of ($724,526).
Revenue increased from $3,114,806 to $5,018,234 or 61.1%. Cash flow increased
from $1,052,865 to $2,216,932 or 110.6%. The increase in the operating loss in
this segment was caused by an increase in amortization and depreciation. The
increase in revenue and cash flow is directly related to accounts acquired
during the year.
CORPORATE EXPENSES. Corporate expenses increased from $649,440 to
$2,754,192 or 324.1%. The increase is due primarily to increased payroll costs
related to additional executives and supervisory level personnel added in 1997.
The
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<PAGE> 37
addition of these people was required to enable to effectively manage the
growth that occurred during 1997. We also instituted a deferred compensation
plan in 1997. This resulted in an expense of $862,034 in 1997. Increased costs
related to occupancy, insurance, professional fees and marketing also occurred
during 1997 as a result of the acquisitions and the dramatic growth of SAI
during 1997.
CAPITAL EXPENDITURES
We made capital expenditures during 1998 and 1997 totaling $1,752,860 and
$311,612, respectively. In 1998, $1,130,000 of the expenditures relates to the
installation of new financial and operating systems. The remaining expenditures
in both years relate primarily to new phone systems in the central stations and
the purchase of computer equipment.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Since January 1994, we have financed our operations and growth
from a combination of internally generated cash flow, borrowings under our
credit facilities and sales of stock. Our principal uses of cash are the
acquisition of central monitoring stations and acquisition of subscriber account
portfolios. We intend to continue to pursue growth through the acquisition of
additional central monitoring stations. However, there can be no assurance that
external funding will be available to us in the future.
1998 Compared to 1997
During the year ended December 31, 1998, contract rights to monitor
security systems, net of accumulated amortization, increased $1,344,336 to
$15,252,814 due to a net increase of 3,883 subscriber accounts. During the same
period goodwill, net of accumulated amortization, increased from $11,933,074 to
$23,123,820 due to the acquisition of seven central stations during the year.
Cash expenditures for acquisitions were $12,431,112 in 1998. Cash paid for 7,032
subscriber accounts was $3,897,659 in 1998.
Current liabilities increased during the year ended December 31, 1998
compared to 1997, from $6,756,199 to $9,850,442. Unearned revenue increased by
$662,402 due to acquisitions and our overall growth. Accrued liabilities
increased by $1,316,541 primarily due to an increase in accrued interest and
dividends due to TJS Partners, L.P. and our overall growth. Current maturities
increased by $1,276,585 during the year. Senior debt borrowings increased by
approximately $10,088,000 and subordinated borrowing increased by $3,000,000.
Net capital of $2,048,351 was raised during the year through warrant and option
exercises for the purchase of Common and Preferred Stock. These proceeds were
used to fund central station acquisitions and the acquisition of subscriber
accounts from alarm dealers, the purchase of fixed assets and for general
corporate purposes.
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 subscriber accounts. During
the same period goodwill, net of accumulated amortization, increased from
$6,666,373 to $11,933,074 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 accrued interest of
$691,925 and an accrual for loss reserves of $229,812. Unearned revenue
increased due to the acquisition of TAG and our overall growth. 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
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<PAGE> 38
$5,000,000. The proceeds of our borrowings were used primarily to fund the TAG
acquisition and the acquisition of subscriber accounts from alarm dealers.
Net capital of $9,987,836 was raised during 1997 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. We had $5,521,633 in cash on
hand at year end 1997, which was used to fund acquisitions of central stations,
subscriber accounts, loans to alarm dealers (secured by subscriber accounts) and
general corporate purposes.
TJS Partners L.P.'s Investment.
During 1998, TJS exercised options to purchase 2,075 shares of Convertible
Preferred Stock for the total consideration of $245,000, increased the amount of
Redeemable Preferred Stock it owned with an investment of $1,558,350 and
increased the amount of subordinated debt extended to us by $3,000,000. As of
December 31, 1998, a total of $8.5 million was outstanding under our
subordinated loan facilities with TJS.
Loan Agreement with FINOVA Capital Corporation.
On December 31, 1996, we entered into a loan agreement with FINOVA. The
maximum amount available under the FINOVA loan agreement was originally $15
million. On December 2, 1997, our loan agreement with FINOVA was amended. Under
the amended loan agreement, our credit facility was increased to $30 million.
Our loan agreement with FINOVA matures on December 31, 2002, subject to earlier
termination.
The interest rate on borrowings under the FINOVA loan agreement are the
base rate in effect from time to time plus the applicable margin. At December
31, 1998, the applicable margin was 2% and the interest rate was 9.75%. We 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
are obligated to pay a commitment fee of .5% on the unused portion of the
facility.
The loan agreement with FINOVA 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 we nor our
covered subsidiaries may, except as specifically permitted: (i) incur
indebtedness; (ii) encumber our 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 our businesses; (x) change the
locations of our facilities; (xi) dispose of assets; (xii) amend our
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; (xvi) pay management compensation in
excess of permitted amounts; (xvii) not allow the ratio of total debt to
operating cash flow (as defined) to exceed 5.00; or (xviii) not allow the total
debt to exceed 12 times RMR for subscriber accounts we monitor for alarm dealers
plus 22 times RMR for subscriber accounts we own. We are also required to make
mandatory prepayments from excess cash flow as defined in the loan agreement
with FINOVA. We are in compliance with, or have obtained waivers from FINOVA for
the covenants stated above.
YEAR 2000 ISSUE
Overview
We are continuing our formal program to address the effect of the Year 2000
issue on our information systems and operations. The Year 2000 issue arises
because many computer programs were originally designed with abbreviated dates
that eliminate the first two digits of any given year, assuming that such digits
are always "19". As a result, on January 1, 2000, non-Year 2000 compliant
computer programs may incorrectly recognize the date as January 1, 1900. This
would result in incorrect results from calculations and processes using these
dates, and in some cases computer systems and
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<PAGE> 39
applications may cease processing completely. This effect will also be seen
before January 1, 2000, if noncompliant software is processing calculations
using dates after December 31, 1999.
In order to address this problem we have established a formal written Year
2000 compliance program to investigate and correct Year 2000 problems in our
primary computer systems. All departments in our company and our subsidiaries
are participating in this formal program, using a standardized methodology.
Current Initiatives
We have installed a new financial system and are in the process of
upgrading our central station monitoring systems. The purpose of these upgrades
is to allow for efficient financial management and to provide a standard
platform for all central stations and allow all of the central stations to be
linked electronically. In addition to verifying our internal compliance, we are
formally surveying outside vendors whose systems pose a significant Year 2000
risk. These companies include the principal telephone companies serving our
stations, central station software vendors, telephone hardware and software
vendors, financial institutions and payroll companies. Vendors with material
Year 2000 compliance issues will be replaced.
Progress To Date
We completed the installation of a new financial system in February, 1999
and plan to complete our central station system upgrade by the third quarter of
1999. These upgrades will also ensure that all computer systems are ready to
process the Year 2000 date change without disruption. We are confident that most
of our systems already satisfy Year 2000 requirements and expect that all
internal systems will be in full compliance by the third quarter of 1999. We
have sent surveys to all of our principal vendors and are in the process of
reviewing the responses we have received to date. The target date for completing
the vendor reviews is June 30, 1999.
Estimated Costs
The total cost of these upgrades are expected to be approximately
$2,000,000, of which approximately $1,200,000 has been expended through
February, 1999. Our Board of Directors has approved the necessary capital
expenditures to complete the program.
Reasonable Worst Case Scenario
We have assessed our business exposures that would result from the failure
of our Year 2000 program, as well as those of our suppliers and customers. Such
failures would result in business consequences that could include the failure to
receive alarm signals and render the necessary service to our customers, lost
revenue, harm to our reputation, legal and regulatory exposures, and the failure
of management controls. Although we believe that our internal systems are Year
2000 compliant, there can be no assurance that the Year 2000 problem will not
have a material adverse affect on our business, financial condition and results
of operations.
Contingency Plans
We are in the process of establishing a contingency plan to mitigate the
Year 2000 problem. This plan includes full redundancy of all central station
operating systems, so that in the event one central station cannot receive
signals due to power failure, the signals can be monitored by another central
station providing that the national telecommunications network remains
functional. If the local electrical systems were to fail, all of our central
stations are equipped with backup generators which would enable us to continue
to monitor at each location for an extended period of time. As our industry is
heavily dependent on the telecommunications providers, we would not be able to
operate if the telecommunications systems on which we depend fail. We are
investigating contracting with backup telecommunications providers to minimize
the impact of our primary carrier failing.
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<PAGE> 40
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently do not invest excess funds in derivative financial
instruments or other market rate sensitive instruments for the purpose of
managing interest rate or foreign currency exchange rate risk or for any other
purpose.
We incur debt from three sources: dealers from whom we acquire
subscriber accounts, senior debt from FINOVA and fixed rate subordinated debt
from principal stockholder, TJS Partners, L.P. Debt owed to dealers is in the
form of a "holdback note" which is collateral to a guaranty of the aggregate
revenue produced by subscriber accounts purchased from the dealer for a period
of time. These notes are non-interest bearing and comprise less than 2.5% of our
total debt. At March 31, 1999 we had $9,400,000 in subordinated debt due to our
principal stockholder, which is at a fixed rate of 12% and matures in January,
2003, and $26,609,730 in senior debt due to FINOVA at an interest rate of prime
plus 2%. The prime rate applicable to this debt was 7.75% at March 31, 1999. We
do not have exposure to foreign currency fluctuations and do not use derivatives
for trading purposes.
Interest Rate Risk. The table below provides information about our debt
obligations that are sensitive to changes in interest rates. For these debt
obligations, the table presents principal cash flows and related average
interest rates by expected maturity dates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(dollars in millions) Maturity Date
- --------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Total Fair Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $9.400 $9.400 $9.400
- --------------------------------------------------------------------------------------------------------------
Average Interest Rate 12.0% 12.0%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Variable Rate Debt $1.330 $ 3.459 $4.790 $17.030 $26.610 $26.610
- --------------------------------------------------------------------------------------------------------------
Average Interest Rate 9.75% 9.75% 9.75% 9.75% 9.75%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C>
NAME AGE POSITION
Ronald I. Davis 60 Chairman of the Board and Director
James S. Brannen 60 President, Chief Executive Officer and Director
Thomas J. Salvatore 31 Director
Michael B. Jones 47 Director
Douglas Oberlander 48 Director
Ronald J. Carr 47 Senior Vice President
Stephen Rubin 52 Senior Vice President
Howard Schickler 51 General Counsel, Vice President, Secretary
Daniel S. Zittnan 44 Senior Vice President, Treasurer, Chief Financial
Officer
Karen B. Daniels 44 Vice President
Timothy M. McAuliff 40 Vice President
</TABLE>
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<PAGE> 41
RONALD I. DAVIS is one of our founders and has been our Chairman of
the Board since October 1990. He has many years of experience in the security
alarm industry. From 1987 to 1990 he was the principal owner and founder of SAI
Partners, Inc., an alarm dealer buying group. SAI Partners, Inc. 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 our network of
dealers. Mr. Davis attended Roosevelt University where he earned a Bachelors of
Arts degree.
JAMES S. BRANNEN is one of our founders and has been a Director and our
President since October 1990, and our Chief Executive Officer since 1993. 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 the commercial banking
department. In that capacity, he managed, among other things, 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 earned an A.B. Degree from Dartmouth College and a MBA
from Northwestern University.
THOMAS J. SALVATORE was elected a Director in December 1996. Since
1991, Mr. Salvatore has been the Managing General Partner of TJS Partners, L.P.
("TJS"), our principal stockholder. TJS has a contractual right to designate
two Directors to our 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 Statement. Mr. Salvatore earned a Bachelors Degree in Business
Administration from Fordham University.
MICHAEL B. JONES was elected a Director in January 1998. He has been
President of ProFinance Associates, Inc. since 1985. ProFinance has been a
securities broker-dealer, a member of the NASD, since 1990. Mr. Jones was with
Marine Midland Bank from 1977 until 1985. He was responsible for starting a
communications/electronics lending group in 1981 and, eventually, for leading
that group. That group was one of the first institutional lenders to the alarm
industry. Mr. Jones earned 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.
DOUGLAS OBERLANDER was elected a Director in January 1994. Since 1989,
Mr. Oberlander has been President of Lease I, Inc., a commercial lease and
finance company serving alarm dealers. From 1965 to 1988, Mr. Oberlander was
employed by Oberlander Security, a security alarm dealer. Since 1991, Mr.
Oberlander has served as a director of Oberlander Alarms, a security alarm
dealer.
RONALD J. CARR has been a Vice President since March 1997, and a Senior
Vice President and Chief Operating Officer for the Central Station Division
since August 1998. Mr. Carr is also the President of a number of our operating
subsidaries, and he 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 SecurityLink, a subsidiary
of Ameritech. From 1991 to 1996 he was Director of Telecommunications for ADT,
Inc. Mr. Carr earned a Bachelors Degree in Business Administration from
Brookdale College.
STEPHEN RUBIN is one of our founders and has been a Senior Vice
President since October 1990. From 1987 to 1990, he was a Senior Vice President
of SAI Partners, Inc. Mr. Rubin is primarily responsible for the design and
implementation of our marketing and dealer programs. From 1978 to 1986, Mr.
Rubin was an officer of Davis Marketing Group and Security Alliance Corporation.
Mr. Rubin earned a Bachelors Degree from Northern Michigan University and an MBA
from Loyola University.
HOWARD SCHICKLER has served as General Counsel of our company since
January 1997, was appointed Secretary on October 1997 and Vice President in
April 1998. Prior to joining us, Mr. Schickler spent eight years with Sachnoff &
Weaver, Ltd., a Chicago law firm. He became a member of that firm in 1994. Mr.
Schickler earned a
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<PAGE> 42
Bachelors Degree from Brooklyn College, MA and an MBA from The University of
Wisconsin at Milwaukee and a JD from Northwestern University.
DANIEL S. ZITTNAN has been a Senior Vice President since August 1998,
and has served as our Chief Financial Officer and Treasurer since October 1997.
Prior to joining us, Mr. Zittnan spent over thirteen years with Arthur Andersen
LLP, most recently as a Senior Manager. Mr. Zittnan earned a Bachelors Degree in
accounting from DePaul University and is a member of the AICPA and ICPA Society.
KAREN B. DANIELS has been a Vice President since October 1997, having
been a consultant to us from March to October 1997. Prior to that she was with
Ameritech AIIS since 1995. Ms. Daniels is primarily responsible for internal
financial management and reporting. 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 earned a Bachelors
Degree in Industrial Administration-Finance from Iowa State University. Ms.
Daniels is also a Certified Public Accountant.
TIMOTHY M. MCAULIFF has been a Vice President since 1998, having served
in various positions with us since 1996. Mr. McAuliff is primarily responsible
for credit operations. 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. Mr. McAuliff earned a Bachelors
Degree in Business Administration from Elmhurst College.
Our executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee. All directors hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified. The Board
of Directors currently consists of five members. Ronald I. Davis and Stephen
Rubin are brothers-in-law. There are no other family relationships between any
of our directors or executive officers.
DIRECTOR COMPENSATION
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. On January 6, 1998, when he joined the Board of Directors, Mr. Jones was
awarded options to purchase 10,000 shares of our common stock, at an exercise
price of $6.00 per share, which expire on December 31, 2002. In February 1999,
the Board terminated the $500 per month Directors' fee previously paid to Mr.
Oberlander and Mr. Jones. In lieu of the monthly fee and in recognition of their
continued commitment, on March 10, 1999, Directors Jones and Oberlander each
were awarded options under our Stock Option Plan. These options entitle
Directors Jones and Oberlander to purchase 25,000 shares of common stock each.
These options, as stated in the individual stock option agreements, are
exercisable for a period of six years, half of which are exercisable at $4.50
per share, and the other half at $6.00 per share. Each stock option agreement
also provides that if the exercise price of any option is less than the closing
price on the date of the Annual Meeting, the exercise price will be changed so
that it is equal to the closing market price of the common stock on that date.
Stock options granted to Board members vest immediately. The closing price of
the common stock on the American Stock Exchange on March 10, 1999, was $3.00.
The Stock Option Plan is subject to stockholder approval.
EXECUTIVE COMPENSATION
General
The following table is a summary of the compensation awarded or earned
by our President and Chief Executive Officer and the other most highly paid
executive officers (the "Named Executive Officers") during the last three fiscal
years:
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<PAGE> 43
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------- -----------------------------------
AWARDS PAYOUTS
------------------------- ---------
SECURITIES
UNDERLYING ALL OTHER
NAME AND OTHER ANNUAL RESTRICTED OPTIONS/ LTIP COMPEN
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS SARS(#) PAYOUTS(4) SATION(5)
- ------------------- ---- ------ ----- ------------ ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James S. Brannen 1998 $175,000 $55,000 $32,215(1) -- -- $108,888 $2,019
President and 1997 $125,000 $11,635 $23,835(1) -- -- $154,103 $ 837
Chief Executive 1996 $ 94,523 -- -- -- -- -- --
Officer
Ronald I. Davis 1998 $175,000 $55,000 $31,889(2) -- -- $108,888 $ 676
Chairman of the 1997 $125,858 $11,635 $22,949(2) -- -- $154,103 $ 843
Board(6)
Stephen Rubin 1998 $127,400 $40,000 $16,456(3) -- -- $ 67,568 $ 697
Senior Vice 1997 $104,999 $ 8,462 $11,586(3) -- -- $ 95,625 $ 694
President (6)
Ronald J. Carr 1998 $126,538 -- $10,750(8) -- -- $ 67,568 $ 646
Senior Vice
President(7)
Daniel S. Zittnan(9) 1998 $139,615 -- $ 4,000(10) -- -- $ 67,568 --
Senior Vice
President
- ------------------------------
1) Includes $22,871 and $24,965 for automobile allowances for 1997 and 1998, respectively.
2) Includes $22,319 and $25,439 for automobile allowances for 1997 and 1998, respectively.
3) Includes $10,750 and $11,856 for automobile allowances for 1997 and 1998, respectively.
4) Earned awards under our Supplemental Employees' Retirement Plan. See "Supplemental Employees'
Retirement Plan."
5) Amount is matching funds pursuant to our 401(k) Plan.
6) Annual salary and bonus did not exceed $100,000 in 1996.
7) Annual salary and bonus did not exceed $100,000 in 1996 and 1997.
8) Includes $10,750 for automobile allowance.
9) Annual salary and bonus did not exceed $100,000 in 1996 and 1997.
10) Includes $4,000 for automobile allowance.
</TABLE>
EXECUTIVE OPTION EXERCISES TABLE
The following table contains information concerning the stock option
exercises made by the Named Executive Officers in 1998. No Named Executive
Officer other than those listed in the table below exercised options in 1998. No
Named Executive Officer held options or SARs at the end of fiscal year 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SARS AT MONEY OPTIONS/SARS AT FISCAL
FISCAL YEAR END YEAR END
--------------------------- --------------------------
SHARES ACQUIRED
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------- --------------- -------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Ronald I. Davis 120,000(1) $525,000 --/-- --/--
Stephen Rubin 40,000 $175,000 --/-- --/--
- -------------
</TABLE>
1 Mr. Davis is the sole stockholder of SAI Partners, Inc., which is the
sole general partner of J, S & R Ltd., L.P., the limited partners of
which are James S. Brannen and Stephen Rubin. On June 1, 1998, SAI
Partners contributed warrants to purchase 120,000 shares of our common
stock to J, S & R as a required capital contribution under J, S & R's
limited partnership agreement. J, S & R exercised these warrants on
August 18, 1998, at the exercise price of $1.00 per share.
42
<PAGE> 44
LONG-TERM INCENTIVE PLANS TABLE
The following table contains information concerning awards under our
long-term incentive plan to the Named Executive Officers at the end of fiscal
year 1998:
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
PRICE-BASED PLANS
----------------------------------------
PERFORMANCE OR OTHER
NUMBER OF SHARES, PERIOD UNTIL MATURATION OR
NAME UNITS OR OTHER RIGHTS PAYOUT THRESHOLD TARGET MAXIMUM(1)
- ------------------ --------------------- -------------------------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
James S. Brannen 27,654 Vests 20% per year for -- 42,544 shares 212,722
each of five years per year shares
starting FYE 1997 and
1998
Ronald I. Davis 27,654 Vests 20% per year for -- 42,544 shares 212,722
each of five years per year shares
starting FYE 1997 and
1998
Stephen Rubin 17,160 Vests 20% per year for -- 26,400 shares 132,000
each of five years per year shares
starting FYE 1997 and
1998
Ronald J. Carr 17,160 Vests 20% per year for -- 26,400 shares 132,000
each of five years per year shares
starting FYE 1997 and
1998
Daniel S. Zittnan 17,160 Vests 20% per year for -- 26,400 shares 132,000
each of five years per year shares
starting FYE 1997 and
1998
</TABLE>
- -------------------------
1) The maximum numbers of shares authorized by the Board of Directors for
award to each participant over a five-year period. The "Target" column
shows the maximum number of shares that could have been awarded for
1998, and the "Number of Shares" column shows the number of shares that
were actually awarded for that year. The Board does not plan to make
any further awards under this Plan. We had no executive deferred
compensation plan prior to the adoption of this plan.
EMPLOYMENT AGREEMENTS
In August, 1996, we entered into three year employment agreements with
James S. Brannen, Ronald I. Davis and Stephen Rubin to serve as our President
and Chief Executive Officer, Chairman of the Board of Directors, and Senior Vice
President, respectively. Pursuant thereto, Mr. Brannen and Mr. Davis currently
receive an annual salary of $175,000, and Mr. Rubin receives an annual salary of
$120,000. These amounts may be increased following annual salary reviews. The
employment agreements provide that these executives are 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 they terminate their employment because of: (a) a
diminution of responsibilities or authority or being assigned duties
inconsistent with their positions; (b) a requirement that they serve from a
location other than the greater Chicago metropolitan area; (c) breach of the
employment agreement by our company; or (d) certain change of control
transactions of our company. In addition, they are entitled to participate in
such other benefits as are offered to other executive employees. The agreements
automatically renew for successive one-year periods.
We anticipate entering into Confidentiality Agreements with all of our
other executive officers. These agreements are expected to contain non-compete,
non-solicitation, and confidentiality provisions, and also provide that in the
event of termination of the executive officer as a result of a change of control
each executive officer will be paid a one-time cash payment equal to 2.99 times
his or her salary, plus an additional payment to compensate the employee for any
federal excise tax imposed as a result of this payment.
If our Stock Option Plan is approved by our stockholders, certain
executive officers will be granted options to purchase shares of our common
stock. Under the terms of each executive officer's stock option agreement, which
describes the terms of his or her options, 50% of the options will be
exercisable at $4.50 per share and 50% of the options will be
43
<PAGE> 45
exercisable at $6.00 per share. The options will expire six (6) years and will
vest over three (3) years. If our company undergoes certain change of control
transactions, however, the options will vest immediately.
CERTAIN TRANSACTIONS
On January 22, 1998, TJS agreed to amend the terms of its 12%
redeemable preferred stock. The amendments increased the threshold for
triggering TJS' rights to receive payment of accrued but unpaid dividends; to a
receive a higher dividend rate (18% instead of 12%); and to convert the 12%
redeemable preferred stock plus any accrued but unpaid dividends into common
stock.
As a result of these amendments, the threshold for triggering TJS'
right to receive accrued but unpaid dividends was raised to $20,000,000 in "new
equity" (from $10,000,000 previously) and, with respect to the other provisions,
was raised to $30,000,000 (from $15,000,000 previously). The stockholders
approved the amendments to the terms of the 12% redeemable preferred stock at
the May 19, 1998 Annual Meeting.
On January 22, 1998, our line of credit from TJS was amended to
increase the threshold for triggering TJS' right to receive payment of all
obligations to $30 million (from $15 million previously).
On June 1, 1998, we sold an additional 155,835 shares of 12% redeemable
preferred stock to TJS at $10.00 per share, bringing its total holdings of
redeemable preferred stock to 500,000 shares.
During 1998, the TJS line of credit was amended to increase the amount
of borrowing available to us from $5,000,000 to $8,500,000. In the first quarter
of 1999, this line of credit was further increased to $10,000,000 and as of the
second quarter of 1999, we have fully utilized our capacity under this line of
credit. The interest rate on these borrowings has remained unchanged at twelve
percent (12%) per annum, and the obligations fall due on December 31, 2002.
During 1998, TJS purchased an additional 2,075 shares by exercising an
option. As of April 16, 1999, TJS owns a total of 66,659.44 shares of
convertible preferred stock. Each share of convertible preferred stock is
convertible into 100 shares of common stock.
On December 18, 1997, our Board elected Michael B. Jones, the principal
stockholder of ProFinance Associates, Inc., to serve as a Director effective
January 1, 1998. In consideration of his agreement to become a Director, we
granted Mr. Jones an option to purchase 10,000 shares of our common stock at an
exercise price of $6.00 per share, expiring on December 31, 2002. We also agreed
to pay ProFinance a monthly retainer of $2,500 for financial advisory services
during 1998. Under the agreement, ProFinance is entitled to receive a
transaction fee for each transaction that it introduces and that is closed. The
amount of the transaction fee will be depend on the size of the transaction.
Effective January 1, 1999, the monthly retainer was reduced to $1,000.
In 1997, we agreed to pay ProFinance Associates, Inc. a financing fee
of $218,208 in connection with TJS' investment in our company. Under the
original agreement ProFinance was to receive additional fees if TJS were to make
additional investments in our company. On December 31, 1997, we agreed to amend
ProFinance's compensation arrangement so that its entire fee in connection with
TJS' investment would be a one time payment of $175,000, and issuance of an
option to ProFinance to purchase 25,000 shares of our common stock at an
exercise price of $6.00 per share. This option was issued to ProFinance on
January 6, 1998, and expires December 31, 2002.
On August 5, 1998, TJS and ProFinance surrendered options to purchase
up to 20% of the common stock of Alarm Funding Corporation, our wholly-owned
subsidiary, after we determined to discontinue this line of business. TJS and
ProFinance received these options in consideration of providing capital and
referring business opportunities, respectively, to Alarm Funding. The $500,000
borrowed from TJS is now part of our company's obligation to TJS.
44
<PAGE> 46
Since January 1, 1998, Ronald I. Davis and Stephen Rubin have exercised
options and warrants to acquire shares of common stock for an aggregate price of
$160,000 as shown below:
<TABLE>
<CAPTION>
Average
Option Exercise Number of Aggregate Per-Share
Holder Date Shares Exercise Price Exercise Price
------ ---- ------ -------------- --------------
<S> <C> <C> <C> <C>
Ronald I. Davis(1) 8/14/98 120,000 120,000 1.00
Stephen Rubin 8/12/98 40,000 40,000 1.00
Totals 160,000 $160,000 1.00
</TABLE>
1) Mr. Davis owned his option through SAI Partners, Inc., the sole general
partner of J, S & R Ltd., L.P., of which James S. Brannen and Stephen
Rubin are the limited partners. On June 1, 1998, SAI Partners contributed
120,000 warrants (to purchase our common stock) to J, S & R as a required
capital contribution under J, S & R's limited partnership agreement. J, S
& R exercised these warrants on August 14, 1998, at the exercise price of
$1.00 per share.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table lists certain information regarding the beneficial
owners of our common stock as of May 10, 1999, which includes: (i) each person
known to us to beneficially own more than five percent of the outstanding shares
of our common stock; (ii) each of our company's directors; (iii) the Named
Executive Officers; (iv) each selling stockholder; and (v) all of our company's
directors and executive officers as a group. We believe 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 each
holder, subject to community property laws where applicable.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering (19) Number After Offering
---------------------- of Shares --------------
Number Being Number
Name of Shares Percent(1) Offered of Shares Percent(2)
---- --------- ---------- ------- --------- ----------
Number
<S> <C> <C> <C> <C> <C>
TJS Partners, L.P.(3)
115 East Putnam Avenue
Greenwich, CT 06830 6,665,944 50.35% 0 6,665,944 39.17%
Ronald I. Davis(4)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 906,333 6.85% 0 906,333 5.33%
James S. Brannen(5)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 516,616 3.909% 0 516,616 3.04%
Stephen Rubin(6)
</TABLE>
45
<PAGE> 47
<TABLE>
<S> <C> <C> <C> <C> <C>
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 402,191 3.04% 0 402,191 2.36%
Daniel S. Zittnan(7)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 3,189 * 0 3,189 *
Ronald J. Carr(8)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 0 0 0 0 0
Thomas J. Salvatore(9)
c/o TJS Partners, L.P.
155 E. Putnam Avenue
Greenwich, CT 06830 6,665,944 50.35% 0 6,665,944 39.17%
Douglas Oberlander
10225 N. Knoxville Avenue
Peoria, Illinois 61615 96,022 * 0 96,022 *
Michael B. Jones (10)
c/o ProFinance Associates, Inc.
6540 Lusk Boulevard, Suite C-240
San Diego, CA 92121 41,000 * 0 41,000 *
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C> <C> <C> <C> <C>
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
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(11)
7406 Princeton Drive
Hanover Park, Illinois 60103 25,000 * 25,000 0 0
Anita M. Dalmar
2324 North East Regents Drive
</TABLE>
47
<PAGE> 49
<TABLE>
<S> <C> <C> <C> <C> <S>
Portland, Oregon 97212 20,000 * 20,000 0 0
</TABLE>
48
<PAGE> 50
<TABLE>
<S> <C> <C> <C> <C> <C>
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
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(12)
3251 Midlane Drivet
Wadsworth, Illinois 60083 225,539 1.70% 40,000 185,539 1.09%
Infinity Partnership II(11)
4075 N. Victoria Drive
Hoffman Estates, Illinois 60195 10,000 * 10,000 0 0
Inversiones Alanje , C.A.
c/o Carlos Delgado
Apartado Postal 1286
Caracas, Venezuela 1010A 62,500 * 62,500 0 0
</TABLE>
49
<PAGE> 51
<TABLE>
<S> <C> <C> <C> <C> <C>
Inversiones Aparicio, C.A.
c/o Modesto Aparicio
Jet Cargo (M571)
P.O. Box 020010
Miami, Florida 33102-0010 120,000 * 120,000 0 0
Inversiones Erlanger, C.A.
c/o Malcolm Caplan
M287 Jet Cargo International
P.O. Box 020010
Miami, Florida 33102-0010 100,000 * 100,000 0 0
Irwin Jacobson(13)
1035 Carlyle Terrace
Highland Park, Illinois 60035 123,000 *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,
S.C. Pension Trust (14)
600 N. Court
Palatine, Illinois 60067 12,500 * 12,500 0 0
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(15)
</TABLE>
50
<PAGE> 52
<TABLE>
<S> <C> <C> <C> <C> <C>
1661 Lakeview Circle
Ogden, Utah 84403 144,800 1.09% 32,500 112,300 *
Bernard and Samuel Sered(16)
4023 Suffield Court
Skokie, Illinois 60076 17,801 * 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(17)
P.O. Box 840
Brunswick, Georgia 31521 56,676 * 12,500 44,176 *
UMB Bank, NA
Evergreen National, LP
200 East Highway 32 Box 129
Lebanon, Missouri 65536 300,000 2.27% 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)(18) 8,716,655 65.84% 0 8,716,655 51.23%
</TABLE>
(1) Applicable percentage of ownership as of May 10, 1999, is based upon
13,239,019 shares of common stock outstanding (including 6,665,944
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.
51
<PAGE> 53
(2) Applicable percentages of ownership are based on 17,017,197 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 66,659.44 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 906,333 shares owned by Mr. Davis and J, S & R Ltd., L.P.
Excludes 337 shares owned by Beverly Davis, Mr. Davis' wife, 10,700
shares owned by Scott Davis, Mr. Davis' son, 5,500 shares owned by
Ethan Davis, Mr. Davis' grandson, 5,500 shares owned by Benjamin Davis,
Mr. Davis' grandson, and 10,500 shares owned by Ann Davis, Mr. Davis'
sister, as to which Mr. Davis disclaims beneficial ownership. Does not
include 56,662 shares which were awarded under our Supplemental
Employees' Retirement Plan.
(5) Includes 516,616 shares owned by Mr. Brannen and a family limited
partnership. 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. Does not include 56,662 shares which were awarded under our
Supplemental Employees' Retirement Plan.
(6) Includes 402,191 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. Does not include 35,160 shares which were awarded
under our Supplemental Employees' Retirement Plan.
(7) Does not include 35,160 shares which were awarded under our
Supplemental Employees' Retirement Plan.
(8) Does not include 35,160 shares which were awarded under our
Supplemental Employees' Retirement Plan.
(9) Consists of 66,659.44 shares of convertible preferred stock owned by
TJS. Mr. Salvatore controls voting and disposition of these shares as
the Managing Partner of TJS.
(10) Includes 6,000 shares held directly; an option to purchase 10,000
shares of common stock at a price of $6.00 per share expiring December
31, 2002; an option to purchase 25,000 shares of our common stock
exercisable on or before July 9, 1999 (12,500 at a price $4.50 and
12,500 at $6.00 per share; and an option held by ProFinance Associates,
Inc. (of which Mr. Jones is the principal stockholder) to purchase
25,000 shares of common stock at a price of $6.00 per share expiring
December 31, 2002.
(11) Includes only shares purchased pursuant to options exercised as of
April 21, 1999. All of such shares are being registered for resale
hereby.
(12) 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.
(13) 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.
(14) Includes only shares purchased pursuant to options exercised as of
April 21, 1999. All of such shares are being registered for resale
hereby. The Pension Trust's option to purchase 12,500 was exercised on
November 18, 1998. At the direction of the Trustee, the stock
certificate was issued to Bernard R. Sered, a beneficiary of the
Pension Trust, as a distribution, and the shares are now held in his
individual name. See Footnote 16.
52
<PAGE> 54
(15) 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.
(16) Includes 5,301 shares owned by Messrs. Sered and 12,500 shares
purchased by Samuel Sered pursuant to an exercisable option. The total
does not include 12,500 shares purchased by Bernard Sered pursuant to
an exercisable option originally held by Metro Suburban Pediatrics S.C.
Pension Trust. See Footnote 14. Only the 12,500 shares purchased
pursuant to the options are being registered for resale.
(17) 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.
(18) Includes 50,000 shares purchasable upon exercise of currently
exercisable options and warrants.
(19) Some of the listed holders of common stock who hold their shares in
street name may have already sold their shares as of the effective date
of this Prospectus. Our company has no way of identifying the
beneficial owners of stock in street name transactions.
The following table lists certain information regarding the beneficial owners of
convertible preferred stock as of May 10, 1999, by (if applicable): (i) each
person known by us to beneficially own more than five percent of the outstanding
shares of convertible preferred stock; (ii) each of our company's directors;
(iii) the Named Executive Officers; (iv) each selling stockholder; and (v) all
of our directors and executive officers as a group. We believe 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. We are not offering any shares of
convertible preferred stock under this prospectus.
<TABLE>
<CAPTION>
Beneficial
----------
Ownership
- ---------
Name
Number of Shares Percent(1)
------ --------- ----------
<S> <C> <C>
TJS Partners, L.P.(2)
115 East Putnam Avenue
Greenwich, CT 06830 66,659.44 100%
Thomas J. Salvatore(3)
c/o TJS Partners, L.P.
115 East Putnam Avenue
Greenwich, CT 06830 66,659.44 100%
All Executive Officers and Directors as a group
(10 persons) 66,659.44 100%
</TABLE>
(1) Applicable percentage of ownership as of May 10, 1999, is based upon
66,659.44 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 66,659.44 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.
53
<PAGE> 55
(3) Consists of 66,659.44 shares of Convertible Preferred Stock owned by
TJS. Mr. Salvatore controls voting and disposition of these shares
through TJS as its Managing Partner.
The following table lists certain information regarding the beneficial ownership
of 12% redeemable preferred stock as of May 10, 1999, by (if applicable): (i)
each person known to us to beneficially own more than five percent of the
outstanding shares of 12% redeemable preferred stock; (ii) each of our
directors; (iii) the Named Executive Officers; (iv) each selling stockholder;
and (v) all of our directors and executive officers as a group. We believe 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. We are not offering
any shares of 12% redeemable preferred stock under this prospectus.
54
<PAGE> 56
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Number
Name of Shares Percent(1)
---- --------- ----------
<S> <C> <C>
TJS Partners, L.P.(2)
115 East Putnam Avenue
Greenwich, CT 06830 500,000 100%
Thomas J. Salvatore(3)
c/o TJS Partners, L.P.
115 East Putnam Avenue
Greenwich, CT 06830 500,000 100%
All Executive Officers and Directors
as a group (10 persons) 500,000 100%
</TABLE>
(1) Applicable percentage of ownership as of May 10, 1999, is based upon
500,000 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 500,000 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 500,000 shares of 12% redeemable preferred stock owned by
TJS. Mr. Salvatore controls voting and disposition of these shares
through TJS as its Managing Partner.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our company is authorized to issue up to 50,000,000 shares of common
stock and 1,000,000 shares of preferred stock. As of ___, 1999, there were
___________ shares of common stock, 66,659.44 shares of convertible preferred
stock and 344,165 shares of 12% redeemable preferred stock actually issued and
outstanding. As of ______, 1999, there were approximately____holders of our
common stock and one holder of record for the convertible preferred stock and
12% redeemable preferred stock appearing on our stock ledger.
COMMON STOCK
Each share of our common stock is entitled to one vote in elections for
directors and all other matters submitted for stockholder vote. Our company does
not have cumulative voting. Therefore, holders of shares representing a majority
of the votes can elect all of the directors if they choose to do so. The holders
of common stock are only entitled to dividends if dividends are declared by our
Board of Directors. We have never paid dividends on our common stock and do not
anticipate paying any in the foreseeable future. See "Dividend Policy." If our
company were to be liquidated or dissolved, the holders of common stock would
share any assets that remain after payments to creditors are made and after
priority payments to the holders of our preferred stock have been made. The
priority payments that would be to the holders of our preferred stock are
described below.
55
<PAGE> 57
Our common stock is traded on the American Stock Exchange under the
symbol "SAI."
PREFERRED STOCK
Our Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock without stockholder approval. The terms of any preferred stock,
such as dividend rights, conversion prices, voting rights, redemption prices and
terms can also be set by the Board of Directors. Because of the broad discretion
that the Board has, future issuances of preferred stock could have voting,
dividend, liquidation and other rights superior to those of our common stock or
other classes of preferred stock. See "Risk Factors - Our company is a Delaware
corporation and certain provisions of Delaware law could affect the value of
your investment in SAI."
12% Redeemable Preferred Stock
Each share of our 12% redeemable preferred stock is senior to our
outstanding convertible preferred stock and senior to our common stock. Were our
company to be liquidated or dissolved the holders of 12% redeemable preferred
stock would be entitled to receive $10.00 per share before any payments could be
made to the holders of convertible preferred stock and the common stock.
Dividends accrue at the rate of 12% per year.
The 12% redeemable preferred stock has certain provisions that are
triggered if we raise additional equity capital. If we raise $20 million in new
equity, all accrued dividends that have not been paid must be paid immediately.
If we raise $30 million in new equity, our company has the right to redeem the
12% redeemable preferred stock for its liquidation value plus unpaid dividends.
However, if we do not redeem the 12% redeemable preferred stock at that time,
its dividend rate will increase to 18% and the holder will have the right to
convert the stock into common stock. The conversion would be at a price equal to
80% of the market price of the common stock at the date of conversion. The 12%
redeemable preferred stock does not have voting rights (except on amendments to
our certificate of incorporation that would have the effect of canceling or
otherwise affecting the rights of the holder to receive dividends which have
accrued but which have not been declared).
Convertible Preferred Stock
Each share of our convertible preferred stock is convertible into 100
shares of common stock. It ranks senior to our outstanding common stock but
junior to the outstanding 12% redeemable preferred stock. Were our company to be
liquidated or dissolved the holders of convertible preferred stock would be
entitled to receive $250.00 per share before any payments could be made to the
holders of common stock. However, no payments would be made to holders of the
convertible preferred stock until the amounts due to the holders of the 12%
redeemable preferred stock were satisfied. Dividends accrue at the rate of 12%
per year.
The holders of convertible preferred stock are entitled to receive
dividends only if the Board declares dividends on the common stock. Because each
share of the convertible preferred stock is convertible into 100 shares common
stock, the holder of a share of convertible preferred stock would receive 100
times the dividends payable on one share of common stock.
The convertible preferred stock is convertible into common stock at the
option of the holder at any time. The shares automatically convert if SAI makes
an initial public offering of its common stock.
Each 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 on all matters brought before the stockholders. The convertible preferred
stock has a $250.00 per share liquidation preference, after payment of amounts
due to the holders of the 12% redeemable preferred stock.
WARRANTS
56
<PAGE> 58
Under this prospectus, we may issue warrants to purchase up to a
maximum of 2,000,000 shares. Because we can only issue a total of 2,000,000
shares under this Prospectus, including those that would be issued upon exercise
of warrants, the total number of warrants we can actually issue will be reduced
to the extent that we issue common stock under this prospectus. Each warrant
entitles the holder to purchase shares of common stock by paying $6.00 per
share. The right to exercise the warrants is subject to certain restrictions
described elsewhere in this Prospectus. See "Business - Strategic Partner
Program."
Under certain circumstance we have the right to redeem those warrants
that are no longer subject to restrictions on exercise. Those warrants are
redeemable at the option of SAI after no less than two years from the date they
were originally issued at a redemption price of $.10 per share. This redemption
may only take place if the market price of the common stock at that time equals
or exceeds 150% of the exercise price for 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 of the warrants will be adjusted in the event of
share splits, share consolidations and certain rights offerings and share
dividends involving common stock. Warrants not exercised within four years of
their issuance will expire. The warrants do not give the holder any rights as a
stockholder of our company.
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws. Our certificate of
incorporation provides that the Board of Directors may issue preferred stock
with such voting rights, preferences and designations as the Board of Directors
determines in its sole discretion without stockholder approval. Our certificate
of incorporation also provides that the Board of Directors has the power to
make, adopt, amend or repeal our bylaws. The bylaws provide that our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 25% of our capital stock.
These provisions could discourage potential acquisition proposals and
could delay or prevent a change in control of our company. While these
provisions may increase the likelihood of continuity and stability in the
policies formulated by the serving Board of Directors they could also discourage
certain types of transactions that may involve an actual or threatened change of
control. See "Risk Factors - Our company is a Delaware corporation and certain
provisions of Delaware law could affect the value of your investment in SAI."
Delaware Takeover Statute. We are a Delaware corporation and subject to
Section 203 of the Delaware General Corporation Law ("DGCL"). Generally, Section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the time such stockholder became an interested stockholder, unless:
- Prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
- Upon consummation of the transaction which resulted in the stock
holder becoming an interested stockholder, the interested
stockholder owned at least 855 of the voting stock of the
corporation outstanding at the time the transaction commenced; or
- At or subsequent to such time, the business combination is
approved by the board of directors and authorized by the
affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Under Section 203 of the DGCL, a "business combination" includes:
- any merger or consolidation of the corporation with the interested
stockholder;
57
<PAGE> 59
- any sale, lease, exchange or other disposition, except
proportionately as a stockholder of such corporation, to or with
the interested stockholder of assets of the corporation having an
aggregate market value equal to 10% or more of either the
aggregate market value of all the assets of the corporation or the
aggregate market value of all the outstanding stock of the
corporation;
- certain transactions resulting in the issuance or transfer by
the corporation of stock of the corporation to the interested
stockholder;
- certain transactions involving the corporation which have the
effect of increasing the proportionate share of the stock of any
class or series of the corporation which is owned by the
interested stockholder; or
- certain transactions in which the interested stockholder receives
financial benefits provided by the corporation.
Under Section 203 of the DGCL, an "interested stockholder" generally is
- any person that owns 15% or move of the outstanding voting stock
of the corporation;
- any person that is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period prior
to the date on which it is sought to be determined whether such
person is an interested stockholder; and
- the affiliates or associates of any such person.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability. As permitted by the Delaware General
Corporation Law, our certificate of incorporation provides that our directors
will not be personally liable for monetary damages to our company for certain
breaches of their fiduciary duty as directors, unless they violate their duty of
loyalty to the, act in bad faith, knowingly or intentionally violate the law,
authorize illegal dividends or redemptions, or derive improper personal benefits
from their action as directors. This provision has no effect on the availability
of remedies such as an injunction or rescission of improper transactions. This
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). Liability of a director for violations of the federal securities laws
is not limited by this provision. Directors, however, will not be liable for
monetary damages arising from decisions involving violations of the duty of care
even if the decisions are grossly negligent.
Indemnification. Under our certificate of incorporation our directors
and officers are to be indemnified by our company to the fullest extent allowed
by Delaware law, against all expenses and liabilities reasonably incurred in
connection with their service for or on behalf of the Company. Our company is
also authorized to enter into indemnification agreements which provide for
indemnification greater or different from that provided in the certificate of
incorporation.
We have been advised that in the opinion of the Commission
indemnification for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is LaSalle
National Bank, located at 135 South LaSalle Street, Chicago, Illinois 60628.
58
<PAGE> 60
LEGAL MATTERS
Arnstein & Lehr, Chicago, Illinois has reviewed and will issue an
opinion about the legality of the shares of common stock and the warrants we are
offering by virtue of this prospectus.
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
59
<PAGE> 61
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 under the Securities
Act with the Security and Exchange Commission. The registration statement covers
the common stock and warrants being offered by our company and the selling
stockholders. This prospectus is a part of that registration statement. This
prospectus does not contain all of the information included in the registration
statement and its exhibits and schedules. If you would like further information
concerning our company and the common stock and warrants we are offering, please
review the complete registration statement. This prospectus contains statements
concerning contracts or other documents which are not necessarily complete.
Copies of those contracts or documents have been filed as exhibits to our
registration statement.
Our registration statement, including the exhibits and schedules, may
be viewed without charge at the Securities and Exchange Commission's offices
located at 450 Fifth Street, N.W., Washington, D.C. 20549 in the Public
Reference Room and at the regional offices of the Securities and Exchange
Commission located at 500 West Madison Street, Fourteenth Floor, Chicago,
Illinois 60661 or 75 Park Place, Suite 1400, New York, New York 10007. Copies of
all or any part of the registration statement may be obtained from these offices
after payment of fees set by the Securities and Exchange Commission. The
Securities and Exchange Commission also maintains a site on the World Wide Web
at http://www.sec.gov that contains reports, prospectus statements and other
information regarding registrants.
60
<PAGE> 62
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, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996, 1997 and 1998. 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, 1997 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1996, 1997 and 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14 (a) (2) of this Form 10-K is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated 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
January 28, 1999
F-1
<PAGE> 63
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
ASSETS 1997 1998
- ------------------------------------------------------------ -------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,521,633 $ 1,480,869
Accounts receivable, net 2,626,717 3,633,352
Receivable from stockholder 50,000 -
Other current assets 182,671 286,033
-------------- -------------
Total current assets 8,381,021 5,400,254
-------------- -------------
FURNITURE AND EQUIPMENT, net 855,631 2,974,346
-------------- -------------
OTHER ASSETS:
Contract rights to monitor security systems, net 13,908,478 15,252,814
Goodwill, net 11,933,074 23,123,820
Other assets, net 930,499 774,516
-------------- -------------
Total other assets 26,772,051 39,151,150
-------------- -------------
Total assets $36,008,703 $47,525,750
============== =============
</TABLE>
F-2
<PAGE> 64
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
- ----------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 676,162 $ 514,877
Current maturities of long-term notes payable 897,453 2,174,038
Accrued expenses 2,135,658 3,452,199
Unearned revenues 3,046,926 3,709,328
----------- -----------
Total current liabilities 6,756,199 9,850,442
NOTES PAYABLE, net of current maturities 16,521,813 25,306,462
NOTES PAYABLE, related party 5,500,000 8,500,000
----------- -----------
Total liabilities 28,778,012 43,656,904
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $10.00 par value; 64,585 and 66,660 shares
outstanding on December 31, 1997 and 1998, respectively (liquidation
value of $16,146,138 and $16,665,000 at December 1997 and 1998,
respectively) 645,846 666,596
12% redeemable/convertible preferred stock, $10.00 par value; 344,165 and
500,000 shares outstanding on December 31, 1997 and 1998,
respectively 3,441,650 5,000,000
Common stock, $.001 par value; 50,000,000 shares authorized; 6,272,295 and
6,771,807 shares outstanding on December 31, 1997 and 1998,
respectively 6,272 6,771
Warrants, net - 60,748
Additional paid-in capital 14,564,311 16,360,092
Accumulated deficit (11,427,388) (18,225,361)
----------- -----------
Total stockholders' equity 7,230,691 3,868,846
----------- -----------
Total liabilities and stockholders' equity $36,008,703 $47,525,750
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE> 65
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
REVENUES:
Monitoring fees $ 3,652,892 $ 10,711,935 $ 20,080,166
Membership fees and other 129,199 102,152 123,684
----------- ------------ ------------
Total revenues 3,782,091 10,814,087 20,203,850
----------- ------------ ------------
OPERATING EXPENSES:
Payroll and related expense 1,710,252 4,653,190 10,279,469
General, selling and administrative 1,394,244 4,257,360 6,433,085
Amortization and depreciation 1,269,062 3,703,543 6,288,489
Deferred compensation expense - 862,034 609,103
----------- ------------ ------------
Total operating expenses 4,373,558 13,476,127 23,610,146
----------- ------------ ------------
Loss from operations (591,467) (2,662,040) (3,406,296)
INTEREST EXPENSE 1,384,239 1,862,606 2,869,593
----------- ------------ ------------
Loss before income in equity of joint venture
and income taxes (1,975,706) (4,524,646) (6,275,889)
INCOME IN EQUITY OF JOINT VENTURE 257,447 - -
----------- ------------ ------------
Loss before income taxes (1,718,259) (4,524,646) (6,275,889)
PROVISION FOR INCOME TAXES - - -
----------- ------------ ------------
Net loss (1,718,259) (4,524,646) (6,275,889)
DIVIDENDS ACCRUED ON PREFERRED STOCK - 412,997 522,084
----------- ------------ ------------
Net loss available to common stockholders
$(1,718,259) $ (4,937,643) $ (6,797,973)
=========== ============ ============
NET LOSS PER SHARE $ (.47) $ (1.16) $ (1.06)
=========== ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,669,343 4,266,151 6,394,048
=========== ============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements
F-4
<PAGE> 66
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE 12% REDEEMABLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- ---------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
--------- ------- ------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1995 3,668,087 $3,668 - $ - - $ - $ -
Issuance of preferred
stock - - 35,478 354,780 344,165 3,441,650 -
Issuance of common
stock for services 9,200 9 - - - - -
Issuance of common
stock 22,088 22 - - - - -
Net loss - - - - - - -
--------- ------- ------- -------- -------- ---------- --------
BALANCE, December 31,
1996 3,699,375 3,699 35,478 354,780 344,165 3,441,650 -
Issuance of preferred
stock - - 29,107 291,066 - - -
Issuance of common
stock related to
deferred 162,265 162 - - - - -
compensation plan
Issuance of common
stock 2,410,655 2,411 - - - - -
Accrued dividends - - - - - - -
Net loss - - - - - - -
--------- ------- ------- -------- -------- ---------- --------
BALANCE, December 31, 1997 6,272,295 6,272 64,585 645,846 344,165 3,441,650 -
Issuance of preferred
stock - - 2,075 20,750 155,835 1,558,350 -
Issuance of common
stock related to
deferred 154,693 154 - - - - -
compensation plan
Issuance of common
stock 344,819 345 - - - - -
Warrants - - - - - - 60,748
Accrued dividends - - - - - - -
Net loss - - - - - - -
--------- ------- ------- -------- -------- ---------- -------
BALANCE, December 31, 6,771,807 $6,771 66,660 $666,596 500,000 $5,000,000 $60,748
1998 ========= ======= ======= ======== ======== ========== =======
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
----------- ------------- ------------
<S> <C> <C> <C>
BALANCE, December 31, $ 2,724,761 $ (4,771,486) $ (2,043,057)
1995
Issuance of preferred 1,216,160 - 5,012,590
stock
Issuance of common 4,591 - 4,600
stock for services
Issuance of common 12,568 - 12,590
stock - (1,718,259) (1,718,259)
----------- ------------- ------------
Net loss
BALANCE, December 31, 3,958,080 (6,489,745) 1,268,464
1996
Issuance of preferred
stock 4,267,793 - 4,558,859
Issuance of common
stock related to 861,872 - 862,034
deferred
compensation plan
Issuance of common 5,476,566 - 5,478,977
stock
Accrued dividends - (412,997) (412,997)
Net loss - (4,524,646) (4,524,646)
----------- ------------- ------------
14,564,311 (11,427,388) 7,230,691
BALANCE, December 31, 1997
Issuance of preferred 224,250 - 1,803,350
stock
Issuance of common
stock related to 608,949 - 609,103
deferred
compensation plan
Issuance of common 962,582 - 962,927
stock
Warrants - - 60,748
Accrued dividends - (522,084) (522,084)
Net loss - (6,275,889) (6,275,889)
----------- ------------- ------------
BALANCE, December 31, $16,360,092 $(18,225,361) $ 3,868,846
1998 =========== ============= ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-5
<PAGE> 67
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,718,259) $ (4,524,646) $ (6,275,889)
Adjustments to reconcile net loss to net cash (used for) provided
by operating activities-
Income in equity of joint venture (257,447) - -
Issuance of common stock for services 4,600 - 16,502
Amortization and depreciation 1,269,062 3,703,543 6,288,489
Deferred compensation expense - 862,034 609,103
Warrants and stock issued under dealer stock incentive
plan - - 70,402
Changes in assets and liabilities-
Accounts receivable, net 136,036 (1,047,691) (304,071)
Other current assets (126,992) 46,147 97,990
Other long-term assets - (63,598) (22,952)
Accounts payable 41,334 (36,503) (235,706)
Accrued expenses (195,110) 1,481,086 174,850
Unearned revenue 425,148 279,937 (55,703)
------------ ------------ ------------
Net cash (used for) provided by operating
activities (421,628) 700,309 363,015
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(1,855,953) (8,056,738) (3,897,659)
Purchase of contract rights to monitor security systems, net
Purchase of fixed assets (54,052) (311,612) (1,752,860)
Cash paid for acquisition, net (1,794,021) (5,818,484) (12,431,112)
------------ ------------ ------------
Net cash used for investing activities (3,704,026) (14,186,834) (18,081,631)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock 5,000,000 9,987,836 2,048,351
Dividends accrued on preferred stock - (412,997) (522,084)
Deferred financing costs (596,879) (385,400) -
Proceeds from stockholders receivable - 25,180 50,000
Repayment of notes payable to related parties (98,742) (136,000) -
Proceeds from notes payable to related parties 500,000 5,000,000 3,000,000
Repayment of notes payable (7,404,188) (4,358,280) (578,588)
Proceeds from notes payable 7,304,000 8,655,464 9,680,173
------------ ------------ ------------
Net cash provided by financing activities 4,704,191 18,375,803 13,677,852
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 578,537 4,889,278 (4,040,764)
CASH AND CASH EQUIVALENTS, beginning of year 53,818 632,355 5,521,633
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 632,355 $ 5,521,633 $ 1,480,869
============ ============ ============
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-6
<PAGE> 68
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
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, AMJ Central Station Corporation, a Delaware corporation
("AMJ"), Alarm Funding Corporation, a Delaware corporation ("AFC"),
Telecommunications Associates Group, Inc., an Ohio corporation ("TAG") and
Texas Security Central ("TSC").
The Company was organized for the primary purpose of providing monitoring
services to independent alarm dealers on a subcontract basis and acquiring
service contracts for remote electronic monitoring of security systems in
businesses and homes throughout the United States. Revenues are composed
primarily of fees for monitoring services.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements consolidate the accounts of Security Associates
International, Inc., and its wholly owned subsidiaries. All intercompany
items and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
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 $495,000
and $737,000 as of December 31, 1997 and 1998, respectively.
F-7
<PAGE> 69
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 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 $2,329,000 and $3,925,186 as of December 31, 1997 and 1998,
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 $954,000 and $2,724,000 as of December 31, 1997 and 1998,
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 $124,000 and
$301,000 as of December 31, 1997 and 1998, respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is calculated
using straightline methods for both financial statement and income tax
purposes over an estimated useful life of three to seven years.
F-8
<PAGE> 70
The following is a summary of furniture and equipment by major class of assets:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1998
---------- ----------
<S> <C> <C>
Equipment $1,256,776 $3,388,570
Automobiles/trucks 20,188 20,188
Leasehold improvements 57,861 121,054
Work in process - 113,202
---------- ----------
1,334,825 3,643,014
Less-Accumulated depreciation 479,194 668,668
---------- ----------
$ 855,631 $2,974,346
========== ==========
</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
2004. Rent expense was approximately $206,000, $511,000 and $830,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.
Future minimum lease payments are as follows:
As of December 31-
1999 $816,200
2000 723,200
2001 628,900
2002 617,500
2003 and thereafter 448,100
========
F-9
<PAGE> 71
ACCRUED EXPENSES
Accrued expenses are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1998
----------- ----------
<S> <C> <C>
Accrued interest $ 806,758 $1,569,920
Accrued dividends 412,997 935,081
Accrued payroll and vacation 324,526 377,840
Accrual for loss contracts 229,812 -
Accrued telephone - 104,900
Other 361,565 464,458
----------- ----------
$ 2,135,658 $3,452,199
=========== ==========
</TABLE>
PREFERRED STOCK
Of the total shares of preferred stock issued and outstanding as of
December 31, 1998, 500,000 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 66,660 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, 1997 and 1998, the Company had net
operating loss carryforwards of approximately $11.1 million and $17.0
million, respectively. The tax net operating losses begin to expire in
2005. As of December 31, 1997 and 1998, no tax benefit has been recognized
for these loss carryforwards.
F-10
<PAGE> 72
The components of the Company's deferred tax assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $4,273,500 $6,634,000
Temporary timing differences 312,250 360,000
---------- ----------
Total deferred tax assets 4,585,750 6,994,000
Valuation allowance (4,585,750) (6,994,000)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
</TABLE>
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.
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
------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental schedule of cash flow information-
Cash paid during the year for interest $1,493,761 $1,141,493 $2,177,909
Supplemental schedule of noncash activities-
Issuance of stock for subscription receivable paid
in January, 1997 and 1998
25,180 50,000 -
Issuance of stock for central station and contract
rights acquisitions - - 691,770
Issuance of note payable for acquisition 3,721,131 - -
Purchase of contract rights reduced by unearned 397,544
revenue acquired - 580,616
Holdback notes reduced due to account attrition 245,000 476,492 505,518
Purchase of contract rights with notes 636,900 1,021,813 863,921
========== ========== ==========
</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.
F-11
<PAGE> 73
3. ACQUISITIONS
In 1998, the Company acquired seven central monitoring stations located in
the U.S. All of these acquisitions were accounted for under the purchase
method of accounting. The Company acquired these companies with
$12,431,113 in cash plus 89,000 shares of the Company's common stock with
a fair market value of $510,062 at the time of the acquisition. Total
goodwill of $12,567,650 was recorded and is being amortized over a 315
year period. The consolidated financial statements include the results of
these acquired companies since the date of acquisition.
During November 1997, SAI purchased the stock of a central station. The
acquisition was accounted for under the purchase method of accounting. The
purchase price was $5,000,000 in cash. Goodwill of approximately
$5,088,000 was recorded as a result of this transaction and is being
amortized over 15 years.
In 1996, the Company purchased one central station and bought its partner
in a joint venture. The acquisitions were accounted for under the purchase
method of accounting. The total purchase price for these acquisitions was
$1,800,000 cash and a note payable of $3,721,131. Goodwill of
approximately $5,200,000 was recorded and is being amortized over 15
years.
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisitions had occurred at the beginning of
1996, 1997 and 1998, after giving effect to certain adjustments, including
amortization of intangible assets and increased interest expense on the
acquisition debt (in 000's):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Monitoring fees and other revenues $ 10,956 $ 21,130 $ 24,088
General, selling and administrative expenses 9,154 18,017 19,313
Payroll expense paid to terminated employees - 578 1,219
Amortization and depreciation 2,299 5,419 6,760
--------- --------- ---------
Loss from operations (497) (2,884) (3,204)
Interest expense 1,485 2,955 3,202
--------- --------- ---------
Loss before income taxes (1,982) (5,839) (6,406)
Income tax expense - - -
--------- --------- ---------
Net loss (1,982) (5,839) (6,406)
Dividends accrued on preferred stock 413 413 522
--------- --------- ---------
Net loss available to common stockholders $ (2,395) $ (6,252) $ (6,928)
========= ========= =========
Net loss per share $ (.65) $ (1.45) $ (1.08)
Weighted average shares outstanding 3,669,343 4,301,151 6,429,048
========= ========= =========
</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.
4. LONG-TERM NOTES PAYABLE
F-12
<PAGE> 74
As of December 31, 1997 and 1998, the Company had borrowings of $5,000,000
and $8,000,000, respectively, outstanding under its Subordinated Loan
Agreement with its major stockholder. 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 $30,000,000 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 generally are non-interest bearing.
In November, 1997, the Company's major stockholder entered into a
subordinated debt agreement whereby a subsidiary may borrow up to
$1,500,000. As of December 31, 1997, this 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. This loan agreement contains certain financial
covenants, including among others, a minimum cash flow coverage (as
defined in the agreement). The Company is in compliance with or has
obtained waivers for all covenants of the Loan Agreement. 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 (9.75% at
December 31, 1998) 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 July, 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> 75
Long-term debt consists of the following notes payable:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1997 1998
----------- ------------
<S> <C> <C>
Note payable to FINOVA $16,359,731 $ 26,609,730
Notes payable to Alarm Dealers 1,006,992 786,806
Other 52,543 83,964
----------- ------------
Total long-term debt 17,419,266 27,480,500
Current maturities (897,453) (2,174,038)
----------- ------------
$16,521,813 $ 25,306,462
=========== ============
Notes payable to stockholder $ 5,500,000 $ 8,500,000
=========== ============
</TABLE>
Future maturities of long-term debt are as follows:
As of December 31-
1999 $ 2,174,038
2000 3,486,484
2001 4,789,751
2002 17,030,227
-----------
$27,480,500
===========
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. The Board of Directors awarded 154,693 and 162,265 shares on
December 31, 1998 and 1997, respectively. The plan was effectively
terminated on December 31, 1998. The total shares awarded are 316,958 as
of December 31, 1998. These shares are considered to be outstanding but
not issued. During 1998, the Company recorded deferred compensation
expense of $609,000 and $862,034 in 1998 and 1997, respectively, 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 1998 were approximately $24,200.
7. STOCK OPTIONS AND WARRANTS
F-14
<PAGE> 76
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. Management and the Board of
Directors determine vesting periods and expiration dates at the time of
grant.
The Company applies APB Opinion No. 25 in accounting for options and
warrants issued to employees and directors. Accordingly, no compensation
cost has been recognized for stock options and warrants granted to those
individuals.
Had compensation costs for the stock options and warrants issued to
directors and employees been determined based on the fair value at their
grant date, 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 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss-
As reported $(1,718,259) $(4,524,646) $(6,275,889)
Pro forma (1,796,189) (4,670,146) (6,363,889)
Primary loss per share-
As reported (.47) (1.16) (1.06)
Pro forma (.48) (1.19) (1.07)
=========== =========== ===========
</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 company also issues warrants and stock to dealers under its dealer
incentive program. The stock and warrants issued under this program vest
25% upon issuance and 25% on each of the first three anniversary dates
after issuance. The number of shares and warrants issued under this
program during 1998 were 9,800 and 121,104 respectively. The amount
charged to expense related to stock and warrants issued under this program
was $70,402 during the year. The share value was determined based on the
market price of the company's stock on the date of issuance. The fair
value of each option and warrant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions;
risk-free interest rates between 4.53% and 6.17%; zero dividend yield;
expected lives through the expiration dates; and volatility between 42.30%
and 135.46%.
F-15
<PAGE> 77
The following summarizes the stock options and warrants for common stock
as of December 31, 1996, 1997 and 1998, and the changes during the years
then ending:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- --------------------- ----------------------
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 1,463,673 $.75 1,833,155 $ .74 472,500 $1.76
Granted 611,000 .65 50,000 6.00 156,104 6.00
Exercised 22,088 .57 1,410,655 .55 207,500 1.18
Canceled 219,430 .57 - - 35,000 6.00
--------- -------- --------- -------- ------- --------
End of year 1,833,155 $.74 472,500 $1.76 386,104 $3.43
========= ======== ========= ======== ======= ========
Exercisable as of end of
year 1,758,155 397,500 295,276
========= ========= =======
</TABLE>
The future expiration of the common stock options are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ---------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
As of December 31-
1999 140,000 $1.58 140,000 $1.58
2002 231,104 4.38 140,276 3.33
2003 15,000 6.00 15,000 6.00
------- -------- ------- --------
386,104 $3.43 295,276 $2.63
======= ======== ======= ========
</TABLE>
The Company has granted stock options and warrants to purchase shares of
convertible preferred stock which mirror 215,000 of the common stock
options and warrants listed above and are only exercisable upon exercise
of the respective common stock options and warrants.
The following summarizes the stock options and warrants for convertible
preferred stock as of December 31, 1996, 1997 and 1998, and the changes
during the years then ended:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- --------------------
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 $ - 33,332 $153.65 4,225 $130.46
Granted 33,553 153.01 - - - -
Exercised 221 57.00 29,107 156.62 2,075 118.07
Canceled - - - - - -
------ -------- ------ -------- ------ --------
End of year/period 33,332 $ 153.65 4,225 $130.46 2,150 $137.79
====== ======== ====== ======== ====== ========
</TABLE>
F-16
<PAGE> 78
8. SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted FASB No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
requires that public business enterprises report certain financial
information in a similar manner as reported to the chief operating
decision makers of the Company for the purposes of evaluating performance
and allocating resources to the various operating segments. For the
purposes of this disclosure, the Company has identified two operating
segments, based upon the types of customers served. The Company owns
accounts to which it invoices subscribers directly for monitoring
services. The Company also provides monitoring to dealers in its central
station operation.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income or loss before interest and income
taxes and operating cash flows as defined by operating income or loss plus
depreciation and amortization. The Company does not separately identify
interest expense, for its operating segments. Intersegment sales and
transfers are immaterial and therefore not disclosed below. The Company
also does not allocate corporate, general and administrative and payroll
expense to its operating segments.
Financial data by operating segment together with the items necessary to
reconcile these amounts to the consolidated financial statements are shown
below for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
CORPORATE
OWNED CENTRAL AND
ACCOUNTS STATION INTERCOMPANY CONSOLIDATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996-
Revenues $ 3,114,806 $ 1,289,239 $ (621,954) $ 3,782,091
Depreciation and amortization 998,190 270,872 - 1,269,062
Operating income (loss) 54,675 3,298 (649,440) (591,467)
Total assets 7,293,716 9,239,007 - 16,532,723
Capital expenditures 54,052 - - 54,052
============ ============ =========== ============
Year ended December 31, 1997-
Revenues $ 5,018,234 $ 6,680,882 $ (885,029) $ 10,814,087
Depreciation and amortization 2,941,458 762,085 - 3,703,543
Operating income (loss) (724,526) 816,678 (2,754,192) (2,662,040)
Total assets 20,531,034 15,477,669 - 36,008,703
Capital expenditures 141,419 170,193 - 311,612
============ ============ =========== ============
Year ended December 31, 1998-
Revenues $ 6,942,036 $14,667,212 $(1,405,398) $20,203,850
Depreciation and amortization 4,292,171 1,996,318 - 6,288,489
Operating income (loss) (1,074,121) 1,684,500 (4,016,675) (3,406,296)
Total assets 20,174,732 27,351,018 - 47,525,750
Capital expenditures 281,360 1,358,298 113,202 1,752,860
============ ============ =========== ============
</TABLE>
The Company is currently providing services to customers only within the United
States and all long-lived assets are located in the United States. No single
customer accounted for more than 10% of the Company's revenues.
F-18
<PAGE> 79
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)
<TABLE>
<CAPTION>
Additions
-------------------------------------------------------
Balance at Charged to Balance at
Beginning of Charged to Other End of
Description Period Expense 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, 1996 29,000 177,000 -- -- 206,000
Year ended December 31, 1997 206,000 687,000 100,000 (498,000) 495,000
Year ended December 31, 1998 495,000 248,000 340,000 (346,000) 737,000
------- ------- ------- --------- -------
</TABLE>
F-19
<PAGE> 80
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 us. 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 in
connection with this prospectus shall create any implication that the
information contained in this prospectus is correct as of any time subsequent to
its date.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY..................................................................................... 3
SUMMARY FINANCIAL DATA................................................................................. 5
RISK FACTORS........................................................................................... 6
THE SECURITIES THAT ARE BEING OFFERED THROUGH THIS PROSPECTUS.......................................... 9
BUSINESS............................................................................................... 11
USE OF PROCEEDS........................................................................................ 26
PRICE RANGE OF COMMON STOCK............................................................................ 28
STOCKHOLDER RETURN AND PERFORMANCE GRAPH............................................................... 30
DIVIDEND POLICY........................................................................................ 30
SELECTED FINANCIAL DATA................................................................................ 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................. 31
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................. 39
MANAGEMENT............................................................................................. 39
CERTAIN TRANSACTIONS................................................................................... 44
PRINCIPAL AND SELLING STOCKHOLDERS..................................................................... 45
DESCRIPTION OF CAPITAL STOCK........................................................................... 55
LEGAL MATTERS.......................................................................................... 59
EXPERTS................................................................................................ 59
ADDITIONAL INFORMATION................................................................................. 60
FINANCIAL STATEMENTS................................................................................... F-1
</TABLE>
61
<PAGE> 81
3,778,088 SHARES AND
2,000,000 WARRANTS
SECURITY ASSOCIATES
INTERNATIONAL, INC.
COMMON STOCK
AND
WARRANTS
PROSPECTUS
MAY___, 1999
62
<PAGE> 82
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.
SEC REGISTRATION FEE $ 7,454
--------
BLUE SKY FILING FEES AND EXPENSES 1,500*
--------
PRINTING EXPENSES 60,000*
--------
LEGAL FEES AND EXPENSES 123,700*
--------
AUDITORS' ACCOUNTING FEES AND EXPENSES 62,500*
--------
TRANSFER AGENT AND REGISTRAR FEES AND EXPENSES 7,000*
--------
MISCELLANEOUS EXPENSES 8,000*
========
TOTAL $270,154*
--------
* ESTIMATED
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 Amended and Restated 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 January 1, 1996, we have issued the following securities that were
not registered under the Securities Act of 1933, as amended (the "Securities
Act"):
Issuances for Services
On January 21, 1996, Fred Figge was issued options to purchase 19,000
shares of common stock at $0.53 per share. These options expire April 1, 2000,
and were issued in return for services.
II-1
<PAGE> 83
On August 1, 1996, Fred Figge was issued options to purchase 17,000 shares
of common stock at $0.53 per share. These options expire April 1, 2000, and were
issued in return for services.
On October 10, 1996, Buttonwood Advisory Group was issued options to
purchase 25,000 shares of common stock at $1.25 per share. These options expire
October 10, 1999, and were issued 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. These options expire
October 10, 1999, and were issued 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. These options expire
October 10, 1999, and were issued in return for services.
On November 25, 1997, James W. Osborne was issued options to purchase
50,000 shares of common stock at a price of $6.00 per share. These options
expire November 25, 2003, and were issued in consideration of his employment
agreement with us. This option vests at a rate of 20% (10,000 shares) per year,
and terminates upon any material breach of his employment agreement. Mr. Osborne
left our employment before the expiration of the term of his employment
agreement with us. As a result, options to purchase only 15,000 shares vested,
and the options to purchase the other 35,000 shares were cancelled.
On January 6, 1998, Michael B. Jones was issued options to purchase 10,000
shares of common stock at a price of $6.00 per share. These options expire
December 31, 2002, and were issued in consideration of his agreement to become
one of our directors.
On January 6, 1998, ProFinance Associates, Inc. was issued options to
purchase 25,000 shares of common stock at a price of $6.00 per share. These
options expire December 31, 2002, and were issued in partial consideration of
brokerage services rendered to us. Michael B. Jones, currently one of our
directors, is a principal of ProFinance Associates, Inc.
On January 15, 1998, Timothy Newman was awarded 800 shares of common stock
as a bonus for his performance as an employee.
On June 2, 1998, Gregory A. Hunigan was awarded 1,000 shares of common
stock as a bonus for his performance as an employee.
On November 4, 1998, we issued 623 shares of common stock to Kismet Group,
Ltd. in payment for services.
On December 31, 1998, we issued 1,088 shares of common stock to Kismet
Group, Ltd. in payment for services.
On March 31, 1999, we issued 1,405 shares of common stock to Kismet Group,
Ltd. in payment for services.
On March 31, 1999, we issued 35,160 shares of common stock to Scott J.
MacDougal as a distribution to him under the SAI Supplemental Employees'
Retirement Plan.
On March 31, 1999, we issued a total of 12,931 shares of common stock to a
total of eleven (11) employees as awards for 1998 performance under our
Management Incentive Plan.
In addition to the securities listed above, we issued the following
securities during 1998 that were not registered under the federal Securities
Act.
II-2
<PAGE> 84
One June 17, 1998, we issued a warrant to purchase 25,000 shares of common
stock to an employee pursuant to the terms of an employment agreement. The
warrant is exercisable within five years of the issue date at an exercise price
of $6.000 per share, and it vests (becomes exercisable) at a rate of one-third
(8,333 shares) per year.
No underwriters were engaged in connection with the foregoing sales of
securities. These 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 us.
TJS Partners' Investments
On September 5, 1996, TJS Partners, Ltd. ("TJS") purchased 3,525,682
shares of common stock for $1,558,351, was granted certain contingent options,
the terms of which were set forth in the Standby Option and Warrant Agreement,
and lent us $3,441,649 which was evidenced by a Convertible Subordinated
Promissory Note.
TJS Partners' investment in our 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 exchange, we issued to TJS 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 paid by the person exercising the related option.
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 and Warrants."
During 1998, TJS exercised options to purchase 2,075 shares of Convertible
Preferred Stock for an aggregate purchase price of $245,000. Each option
exercise is detailed below under "Exercise of Options." TJS also purchased
155,835 shares of Redeemable Preferred Stock on June 1, 1998, for a purchase
price of $1,558,350.
Buyout of Winnetka Investors, Inc. and MCAP Investors, Inc.
On September 5, 1996, we 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 us in the account acquisition business and in the provision
of monitoring services. These joint ventures were accomplished through joint
ownership of companies that purchased the subscriber accounts and owned our
central monitoring station. The total cash consideration for the Winnetka
purchase was $159,980 plus the assumption of its liabilities. The total cash
consideration for the MCAP purchase was $261,020 plus the assumption of its
liabilities.
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<PAGE> 85
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
II-4
<PAGE> 86
The parties agreed that the Winnetka and MCAP investors would also receive
options, exercisable for a period of one year to purchase shares of our 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 names of the parties
receiving the options and the number of shares of Winnetka and MCAP stock
previously owned are set forth below.
Options Name Winnetka/MCAP Shares
------- ---- --------------------
20,000 Bonnie Conrad 80 Shares of Winnetka
20,000 Anita M. Dalmar 80 Shares of Winnetka
50,000 Robert H. Dilworth 200 Shares of Winnetka
25,000 Dianne Freeman 100 Shares of Winnetka
75,000 Phyllis V. Greinwald 300 Shares of Winnetka
25,000 Robert Brown 100 Shares of MCAP
2,000 Phyllis V. Greinwald 8 Shares of MCAP
250 Cheryl Grolle 1 Share of MCAP
250 Lorraine Small 1 Share of MCAP
120,000 Inversiones Aparacio, C.A. 480 Shares of MCAP
62,500 Inversiones Alanje, C.A. 250 Shares of MCAP
100,000 Inversiones Erlanger, C.A. 400 Shares of MCAP
No underwriters were engaged in connection with the foregoing sales of
securities. These 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 us. MCAP and Winnetka owned 24.8% and 15.2% interests,
respectively, in Monitor Service Group, L.L.C., the remaining 60% of which was
owned by us.
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.
II-5
<PAGE> 87
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 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 (which is 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.
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<PAGE> 88
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 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 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 for a total consideration of
$10,000.
On May 5, 1998, Mark Scharmann exercised options to purchase 10,000 shares
of common stock for a total consideration of $10,000.
On June 1, 1998, Fred Figge exercised options to purchase 12,500 shares of
common stock for a total consideration of $25,000.
On June 5, 1998. TJS Partners, L.P. exercised contingent options to
purchase 225 shares of Convertible Preferred Stock for a total consideration of
$35,000.
On August 12, 1998, Stephen Rubin exercised options to purchase 40,000
shares of common stock for a total consideration of $40,000.
On August 14, 1998, J, S & R Ltd., L.P., an Illinois limited partnership,
exercised options to purchase 120,000 shares of common stock for a total
consideration of $120,000. The sole general partner of J, S & R Ltd., L.P. is
SAI Partners, Inc., an Illinois corporation, of which our Chairman, Ronald I.
Davis, is the sole officer, director, and shareholder. James Brannen and Stephen
Rubin are the limited partners of J, S & R Ltd., L.P. SAI Partners, Inc.
transferred the options to J, S & R Ltd., L.P. on June 1, 1998, as a capital
contribution pursuant to an Agreement of Limited Partnership.
On August 18, 1998, TJS Partners, L.P. exercised contingent options to
purchase 1,600 shares of Convertible Preferred Stock for a total consideration
of $160,000.
On November 18, 1998, Bernard R. Sered exercised options of Metro Suburban
Pediatrics, S.C. to purchase 12,500 shares of common stock for a total
consideration of $25,000. The stock was issued to Bernard R. Sered as successor
in interest to Metro Suburban Pediatrics, S.C.
On November 18, 1998, Samuel S. Sered exercised options to purchase 12,500
shares of common stock for a total consideration of $25,000.
On November 23, 1998, TJS Partners, L.P. exercised contingent options to
purchase 250 shares of Convertible Preferred Stock for a total consideration of
$50,000.
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.
Private Placement
II-7
<PAGE> 89
On December 31, 1997, we completed the sale of one million shares of our
common stock. The shares were privately placed with a group of accredited
investors. No underwriter or placement agent was used. We received $5,000,000 in
consideration for the shares, of which we realized approximately $4,980,000
after estimated offering expenses of $20,000. A registration statement to
register the shares for resale was declared effective on April 22, 1998.
II-8
<PAGE> 90
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company*
3.2 By-Laws of the Company*
3.3 Certificate of Designations, Rights, Preferences and Limitations of
12% Redeemable Preferred Stock, $10.00 par value per share, of
Security Associates International, Inc.*
3.4 Certificate of Designations, Rights, Preferences and Limitations of
Convertible Preferred Stock, $10.00 par value per share, of Security
Associates International, Inc.*
3.5 Amendment to Certificate of Designations, Rights, Preferences and
Limitations of 12% Redeemable Preferred Stock, $10.00 par value per
share, of Security Associates International, Inc.******
4.1 Specimen Common Stock certificate*
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*
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*
II-9
<PAGE> 91
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 Standard Hardware Purchase and Software License Agreement, between
Monitoring Automation Systems and Security Associates International,
Inc. dated September 21, 1998******
10.37 Form of Association Agreement******
10.38 Security Associates International, Inc. Stock Option Plan******
10.39 Security Associates International, Inc. Employee Stock Purchase
Plan******
10.40 Allonge******
10.41 Third amendment to Loan Instruments between Security Associates
International, Inc., All-Security Monitoring Services, L.L.C., AMJ
Central Station Corporation, Telecommunications Associates Group, Inc.,
Texas Security Central, Inc. and Reliance Protection Services, Ltd. And
FINOVA Capital Corporation******
10.42 Stock Purchase Agreement between Security Associates International, Inc.
and the Willis Tate, Jr. Charitable Remainder Unitrust for Southern
Methodist University, Ray Hooker and Willis Tate, Jr. dated June 17,
1998.*****
21.1 Subsidiaries of Registrant*
21.2 Supplemental List of Subsidiaries of Registrant******
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney*******
27.1 Financial Data Schedule
II-10
<PAGE> 92
* 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.
***** Previously filed with the Registrant's Current Report on Form 8-K filed
July 2, 1998, dated May 8, 1998.
****** Previously filed with the Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1998.
******* Previously filed with the Registrant's Registration Statement on Form
S-1 filed April 9, 1998.
II-11
<PAGE> 93
Report of Independent Public Accountants
Schedule Description
II Valuation and Qualifying Accounts
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
posteffective 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 posteffective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such posteffective 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 posteffective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
II-12
<PAGE> 94
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 _____, 1999.
SECURITY ASSOCIATES INTERNATIONAL, INC.
By: /s/ James S. Brannen
James S. Brannen
President
II-13
<PAGE> 95
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 30th day of April, 1999.
Signature Title
--------- -----
/s/ JAMES S. BRANNEN President (Principal Executive Officer) and
James S. Brannen Director
/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
Daniel S. Zittnan Officer (Principal Financial and Accounting
Officer)
II-14
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated January 28, 1999 and to all references to our Firm included in or
made a part of this Registration Statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,480,869
<SECURITIES> 0
<RECEIVABLES> 4,370,352
<ALLOWANCES> (737,000)
<INVENTORY> 0
<CURRENT-ASSETS> 5,400,254
<PP&E> 3,643,014
<DEPRECIATION> (668,668)
<TOTAL-ASSETS> 47,525,750
<CURRENT-LIABILITIES> 9,850,442
<BONDS> 0
0
5,666,596
<COMMON> 6,771
<OTHER-SE> (1,804,521)
<TOTAL-LIABILITY-AND-EQUITY> 47,525,750
<SALES> 0
<TOTAL-REVENUES> 20,203,850
<CGS> 0
<TOTAL-COSTS> 23,610,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,869,593
<INCOME-PRETAX> (6,275,889)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,275,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,275,889)
<EPS-PRIMARY> (1.06)
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