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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20870
SECURITY ASSOCIATES INTERNATIONAL, INC.
(Exact name of registrant as specified in the charter)
DELAWARE 87-0467198
(State or other Jurisdiction (IRS Employer
of incorporation) Identification No.)
2101 SOUTH ARLINGTON HEIGHTS ROAD, 60005-4142
SUITE 100 (Zip Code)
ARLINGTON HEIGHTS, ILLINOIS
(Address of Principal Executive Offices)
Registrant's telephone number including area code: (847) 956-8650
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Warrants to purchase Common Stock, par value $0.001 per share
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of voting stock held by non-affiliates of
the registrant based upon the closing sale price of the stock as reported on the
American Stock Exchange on March 25, 1999 was $15,109,783.
As of March 25, 1999 the registrant had outstanding 6,481,149 shares of
our $.001 par value common stock.(1)
DOCUMENTS INCORPORATED BY REFERENCE
Our definitive proxy statement which is expected to be filed with the
Commission not later than April 22, 1999, for our annual meeting of
stockholders, expected to be held on or about July 8, 1999, is incorporated by
reference into Part III of this Form 10-K.
Certain statements in this Annual Report that are not historical facts
constitute "forward-looking statements" within the meaning of the Federal
securities laws. Discussions containing such forward-looking statements may be
found in the sections entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well in this
Annual Report generally. In addition, when used in this Annual Report the words
"anticipates," "intends," "seeks," "believes," "estimates," and "expects" and
similar expressions as they relate to us or our management are intended to
identify such forward-looking statements. Such statements are subject to a
number of risks and uncertainties. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. We undertake no obligation to revise these
forward-looking statements to reflect any future events or circumstances.
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(1) Does not include 316,958 shares which were awarded or paid for but for which
certificates have not yet been issued.
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PART I
ITEM 1. BUSINESS
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 four 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 and Ogden,
Utah.
- AMJ Central Station Corporation, Inc., a wholly owned
subsidiary, owns and operates a central monitoring station
located in 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.
- Alarm Central Monitoring, Inc., a wholly owned subsidiary,
owns and operates a central monitoring station located in
Dallas, Texas.
- Telecommunications Associates Group, Inc., a wholly owned
subsidiary, owns and operates a central monitoring station
located in Euclid, Ohio.
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By the end of the first quarter of 1999, all of the subscriber accounts
monitored by Alarm Central Monitoring will be 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 December 31, 1998, we monitored a total of 325,223 residences and
businesses from our nine central monitoring stations: 301,011 of those were
monitored under contracts with approximately 2,300 alarm dealers for subscriber
accounts owned by them and 24,212 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.
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
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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 OVERVIEW
General
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
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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.
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.
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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 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.
BUSINESS
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
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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") 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
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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
SecurityLink 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.
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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:
- 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 full-time
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.
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- Telecommunications 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.
- 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
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"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.
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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,
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- 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.
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. We anticipate that by the end of the second quarter of 1999, Alarm
Funding will be merged into SAI, and Alarm Funding's loan portfolio will be
sold.
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The ValueBuilder Program
The ValueBuilder 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 ValueBuilder 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 ValueBuilder program, we may also issue shares of common stock to
participants based on the number of ValueBuilder accounts monitored at our
central monitoring stations.
STRATEGIC PARTNER PROGRAM
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 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
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<PAGE> 16
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.
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.
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
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<PAGE> 17
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 "outsource"
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.
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
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<PAGE> 18
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.
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<PAGE> 19
- 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.
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.
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<PAGE> 20
- 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
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.
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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.
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.
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LEGAL PROCEEDINGS
See Item 3- Legal Proceedings.
EMPLOYEES
At December 31, 1998, we employed 385 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.
ITEM 2. 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;
- 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
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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;
- The Ogden lease expires May 8, 2003. We do not have an option to
renew this lease;
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote to our security holders during the
fourth quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION
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
<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 (through March 25, 1999) $ 4.00 $ 2.50
</TABLE>
On March 25, 1999, the last reported sale price of our common stock was
$3.375 per share. At March 25, 1999, we had approximately 202 stockholders of
record, not including beneficial owners whose stock is held in street name.
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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.
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.
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
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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.
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
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<PAGE> 27
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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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.
<TABLE>
<CAPTION>
Options Name Winnetka/MCAP Shares
- ------- ---- --------------------
<S> <C> <C>
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
</TABLE>
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.
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<PAGE> 29
On March 18, 1997, Robert Brown exercised options to purchase 25,000
shares of common stock for a total consideration of $11,050.
On March 18, 1997, Bobbie Conrad exercised options to purchase 20,000
shares of common stock for a total consideration of $8,840.
On March 18, 1997, Anita M. Delmar exercised options to purchase 20,000
shares of common stock for a total consideration of $8,840.
On March 18, 1997, Robert H. Dilworth exercised options to purchase
50,000 shares of common stock for a total consideration of $22,100.
On March 18, 1997, Dianne G. Freeman exercised options to purchase
25,000 shares of common stock for a total consideration of $11,050.
On March 31, 1997, Phyllis Greinwald exercised options to purchase
77,000 shares of common stock for a total consideration of $34,034.
On March 31, 1997, Inversiones Alanje, C.A. exercised options to
purchase 62,500 shares of common stock for a total consideration of $27,625.
On March 31, 1997, Inversiones Aparicio, C.A. exercised options to
purchase 120,000 shares of common stock for a total consideration of $53,040.
On March 31, 1997, Inversiones Erlanger, C.A. exercised options to
purchase 100,000 shares of common stock for a total consideration of $44,200.
On April 22, 1997, TJS Partners, L.P. exercised options to purchase
5,215.88 shares of Convertible Preferred Stock for a total consideration of
$233,369.
On August 21, 1997, Cheryl L. Grolle exercised options to purchase 250
shares of common stock for a total consideration of $110.
On August 25, 1997, Lorraine Small exercised options to purchase 250
shares of common stock for a total consideration of $110.
On October 22, 1997, the Sidney Dechter I.R.A. exercised options to
purchase 25,000 shares of common stock for a total consideration of $50,000.
On October 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.
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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.
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.
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<PAGE> 31
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. Mr. Jones' options were issued in
1991 in return for services.
Private Placement
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.
USE OF PROCEEDS OF SECURITIES SOLD PURSUANT TO OUR REGISTRATION STATEMENT
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
shares of such common stock, to be issued by us: (i) in connection with
offerings to alarm dealers under Rule 415(a)(1)(ix)
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<PAGE> 32
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 which may be offered for sale by certain selling
stockholders ("Selling Stockholders") under Rule 415(a)(1)(i) and 415(a)(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. 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.,
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<PAGE> 33
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
Enterpirses, 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.
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.
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 December 31, 1998, we
incurred a total of $232,913 in expenses in connection with the offering. Those
expenses are estimated to be as follows: legal $118,734; accounting $57,500;
printing $49,225 and registration fees $7,454. 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. To date we have issued 159,908 shares of common stock and warrants
to purchase 121,104 shares of common stock in connection with the offering.
ITEM 6. SELECTED FINANCIAL 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
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<PAGE> 34
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
Pro Forma
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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Annual Report that are not historical facts
constitute "forward-looking statements" within the meaning of the Federal
securities laws. Discussions containing such forward-looking statements may be
found in the sections entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", as well in this
Annual Report generally. In addition, when used in this Annual Report the words
"anticipates," "intends," "seeks," "believes," "estimates," and "expects" and
similar expressions as they relate to us or our management are intended to
identify such forward-looking statements. Such statements are subject to a
number of risks and uncertainties. Our actual results, performance or
achievements could differ materially from the results
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<PAGE> 35
expressed in, or implied by, these forward-looking statements. We undertake no
obligation to revise these forward-looking statements to reflect any future
events or circumstances.
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.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
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<PAGE> 36
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data:
<TABLE>
<CAPTION>
(In thousands)
Years Ending December 31,
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 3,669,343 4,266,151 6,394,048
Outstanding
</TABLE>
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<PAGE> 37
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Years Ending 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
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<PAGE> 38
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.
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
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<PAGE> 39
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.
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
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<PAGE> 40
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.
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<PAGE> 41
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 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 Security
Associates 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
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<PAGE> 42
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 $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.
42
<PAGE> 43
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; or (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; (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 applications may cease processing
completely. This effect will also be seen before
43
<PAGE> 44
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
44
<PAGE> 45
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.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
45
<PAGE> 46
ITEM 7A. 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 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 TJS. Debt owed to dealers is in the form of a "holdback note" which
guarantees 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. We have $8,500,000 in subordinated
debt due to TJS which is at a fixed rate of 12% and matures in January, 2003. We
have $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 December 31, 1998. 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 $ 8.500 $ 8.500 $ 8.500
- ------------------------------------------------------------------------------------------------------------------------
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>
46
<PAGE> 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1997 and 1998 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
</TABLE>
<PAGE> 48
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-2
<PAGE> 49
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 ----------- -----------
Total assets 26,772,051 39,151,150
----------- -----------
$36,008,703 $47,525,750
=========== ===========
</TABLE>
F-3
<PAGE> 50
<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-4
<PAGE> 51
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-5
<PAGE> 52
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE 12% REDEEMABLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- -------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 3,668,087 $ 3,668 -- $ -- $ -- $ --
--------- ---------- ------ ---------- ---------- ----------
Issuance of preferred stock -- -- 35,478 354,780 344,165 3,441,650
Issuance of common stock 9,200 9 -- -- -- --
for services
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 -- -- -- -- -- --
Accrued dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ---------- ------ ---------- ---------- ----------
BALANCE, December 31, 1998 6,771,807 $ 6,771 66,660 $ 666,596 500,000 $5,000,000
========= ========== ====== ========== ========== ==========
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
WARRANTS CAPITAL DEFICIT EQUITY
-------- ------- ------- ------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 -- $ 2,724,761 $ (4,771,486) $(2,043,057)
---------- ------------ ------------ -----------
Issuance of preferred stock -- 1,216,160 -- 5,012,590
Issuance of common stock -- 4,591 -- 4,600
for services
Issuance of common stock -- 12,568 -- 12,590
Net loss -- -- (1,718,259) (1,718,259)
---------- ------------ ------------ -----------
BALANCE, December 31, 1996 -- 3,958,080 (6,489,745) 1,268,464
Issuance of preferred stock -- 4,267,793 -- 4,558,859
Issuance of common stock
related to deferred -- 861,872 -- 862,034
compensation plan
Issuance of common stock -- 5,476,566 -- 5,478,977
Accrued dividends -- -- (412,997) (412,997)
Net loss -- -- (4,524,646) (4,524,646)
---------- ------------ ------------ -----------
BALANCE, December 31, 1997 -- 14,564,311 (11,427,388) 7,230,691
Issuance of preferred stock -- 224,250 -- 1,803,350
Issuance of common stock
related to deferred -- 608,949 -- 609,103
compensation plan
Issuance of common stock -- 962,582 -- 962,927
Warrants 60,748 -- -- 60,748
Accrued dividends -- -- (522,084) (522,084)
Net loss -- -- (6,275,889) (6,275,889)
---------- ------------ ------------ -----------
BALANCE, December 31, 1998 $ 60,748 $ 16,360,092 $(18,225,361) $ 3,868,846
========== ============ ============ ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
F-6
<PAGE> 53
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <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:
Purchase of contract rights to monitor security systems, net (1,855,953) (8,056,738) (3,897,659)
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-7
<PAGE> 54
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.
F-8
<PAGE> 55
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.
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 straight-line methods for both financial statement and income tax
purposes over an estimated useful life of three to seven years.
F-9
<PAGE> 56
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:
<TABLE>
<CAPTION>
As of December 31-
<S> <C>
1999 $816,200
2000 723,200
2001 628,900
2002 617,500
2003 and thereafter 448,100
========
</TABLE>
F-10
<PAGE> 57
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-11
<PAGE> 58
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
revenue acquired -- 580,616 397,544
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>
F-12
<PAGE> 59
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt, which approximates the
carrying value, is estimated based on the current rates offered to the
Company for debt of the same remaining maturities.
3. ACQUISITIONS
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 3-15
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.
F-13
<PAGE> 60
4. LONG-TERM NOTES PAYABLE
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-14
<PAGE> 61
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:
<TABLE>
<S> <C>
As of December 31-
1999 $ 2,174,038
2000 3,486,484
2001 4,789,751
2002 17,030,227
-----------
$27,480,500
===========
</TABLE>
5. DEFERRED COMPENSATION PLAN
In April, 1997, the Company adopted an executive deferred compensation
plan. Under this plan, common stock is credited to each participant's
account and is earned based on performance as determined by the Board of
Directors. 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.
F-15
<PAGE> 62
7. STOCK OPTIONS AND WARRANTS
At the discretion of management and approval by the Board of Directors,
the Company may grant options and warrants to purchase shares of the
Company's common stock and convertible preferred stock to certain
individuals. The exercise price may not be less than fair market value of
the common stock at the date of grant. 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-16
<PAGE> 63
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-17
<PAGE> 64
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>
F-18
<PAGE> 65
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-19
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
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 Daniels 44 Vice President
Timothy M. McAuliff 40 Vice President
</TABLE>
RONALD I. DAVIS, is one of our founders and has been our Chairman of
the Board since October 1990. Prior to our incorporation, he had many years of
experience in the security alarm industry. He was the founder, and from 1987 to
1990, the chairman and principal stockholder of SAI Partners, Inc., an alarm
dealer buying group. 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 Dealer Network. Mr. Davis attended
Roosevelt University where he received a B.A.
47
<PAGE> 67
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 others, the
commercial areas of the bank responsible for lending to the cable television and
paging industries. In addition, he managed the secured lending activity and was
responsible for organizing and managing the bank's first work-out lending
activity. Mr. Brannen has an A.B. degree from Dartmouth College and received an
MBA degree from Northwestern University.
THOMAS J. SALVATORE, was elected as one of our directors in December
1996. Since 1991, Mr. Salvatore has been the Managing General Partner of TJS
Management, L.P. which is the General Partner of TJS Partners, L.P. ("TJS"), 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 Proxy Statement. Mr.
Salvatore holds a Bachelors Degree in Business Administration from Fordham
University.
MICHAEL B. JONES, was elected as one of our directors in January 1998.
He has been president of ProFinance Associates, Inc. since he co-founded it in
1985. ProFinance has been a Broker-Dealer firm since 1990. Mr. Jones was with
Marine Midland Bank from 1977 until 1985. He was responsible for starting a
communications/electronics lending group in 1991 and, in his last position as
group executive, for leading that group. That group was one of the first
institutional lenders to the alarm industry. Mr. Jones has a Bachelors Degree in
Liberal Arts from the University of Arizona and a Masters Degree in
International Relations from the Johns Hopkins University School of Advanced
International Studies.
DOUGLAS OBERLANDER, was elected as one of our directors in January
1994. Since 1989, Mr. Oberlander has been president of Lease I, Inc. a
commercial lease and finance company. From 1965 to 1988, Mr. Oberlander was
employed by Oberlander Security, a security alarm dealer. Since 1991, Mr.
Oberlander has served as a director of Oberlander Alarms, a security alarm
dealer.
RONALD J. CARR, has been one of our Vice Presidents since March 1997,
and a Senior Vice President and Chief Operating Officer for the Central Station
Division since August 12, 1998. Mr. Carr is also the President of
Telecommunications Associates Group, Inc., Texas Security Central, Inc., Alarm
Central Monitoring, Inc., Guardian Protection Services, Ltd., and AMJ Central
Station Corporation, Inc., all wholly owned subsidiaries of Security Associates
International, Inc., 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 Ameritech's
SecurityLink subsidiary. From 1991 to 1996 he was director of Telecommunications
for ADT, Inc. Mr. Carr holds a Bachelors Degree in Business Administration from
Brookdale College.
48
<PAGE> 68
STEPHEN RUBIN, is one of our founders, has been a Senior Vice President
since October 1990. From 1987 to 1990, he was a senior vice president of SAI
Partners, Inc. From 1978 to 1986, Mr. Rubin was an officer of Davis Marketing
Group and Security Alliance Corporation. Mr. Rubin has a B.S. degree from
Northern Michigan University and MBA degree from Loyola University. Mr. Rubin
has the principal responsibility for the design and implementation of our
marketing program.
HOWARD SCHICKLER, has served as General Counsel of our company since
January 3, 1997, was appointed Secretary on October 7, 1997 and Vice President
on April 13, 1998. Before joining us, Mr. Schickler spent eight years with
Sachnoff & Weaver, Ltd., a Chicago law firm. He became a member of that firm in
1994. Before embarking on his legal career, Mr. Schickler was employed in the
investment field as an institutional fixed income sales representative for The
First Boston Corporation, Morgan Stanley & Co., Blunt, Ellis and Loewi and E. F.
Hutton & Co. and as a portfolio manager at MGIC Investment Corporation. Mr.
Schickler has a B.A. degree from Brooklyn College, M.A. and M.B.A. degrees from
The University of Wisconsin at Milwaukee and a J.D. degree from Northwestern
University.
DANIEL S. ZITTNAN, was named our Senior Vice President for Finance on
August 12, 1998, and has served as our Chief Financial Officer and Treasurer
since October 7, 1997. Mr. Zittnan spent over thirteen years with Arthur
Andersen LLP, most recently as a senior manager. Mr. Zittnan holds a BA in
accounting from DePaul University and is a member of the AICPA and ICPA Society.
KAREN B. DANIELS, has served as a Vice President since October 7, 1997.
Prior to becoming a Vice President, Ms. Daniels acted as a consultant for the
Company starting in March 1997, and prior to that for Ameritech AIIS, since
1995. From March, 1990, to June, 1995, Ms. Daniels was vice president/controller
for Editel-Chicago, a division of Unitel Video, Inc., a video post-production
company. Ms. Daniels has a bachelors degree in Industrial Administration-Finance
from Iowa State University. Ms. Daniels is also a Certified Public Accountant.
TIMOTHY M. MCAULIFF, has served as a Vice President and our Chief
Credit Officer since January 1998. Prior to becoming Chief Credit Officer, Mr.
McAuliff was Vice President of Operations starting in September 1996. Mr.
McAuliff served as a vice president responsible for acquisition and credit for
Old Kent Leasing, a subsidiary of Old Kent Financial Corporation from December
1995 to September 1996. From October 1994 to December 1995, Mr. McAuliff was
accounting manager for Advo, Inc., a direct mail marketing firm. From December
1992 to October 1994, he was division controller for a publishing firm, Thomson
Corporation. From 1986 through 1992, Mr. McAuliff was a manager for the Tribune
Company, a publishing and broadcasting company. Mr. McAuliff holds a bachelors
degree in Business Administration from Elmhurst College.
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
49
<PAGE> 69
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
our definitive proxy statement, expected to be filed with the Commission prior
to April 22, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
our definitive proxy statement, expected to be filed with the Commission prior
to April 22, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
our definitive proxy statement, expected to be filed with the Commission prior
to April 22, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statements and Schedules
(1) Financial Statements. Our financial statements, together with the
Report of Independent Accountants, are set forth in Part II, Item
8 on pages F-1 through F-19 of this report.
(2) Financial Statement Schedules. The Schedule II - Valuation and
Qualifying Accounts is set forth on page A-1 of this report. All
other schedules are not submitted because they are not applicable
or because the required information is included in the financial
statements or notes to the financial statements.
(3) Exhibits. The exhibits filed as part of this report are listed in
the accompanying Index to Exhibits. We will furnish a copy of any
exhibit listed to requesting stockholders upon the payment of our
reasonable expenses in furnishing those materials.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998
We did not file a Current Report on Form 8-K during the quarter ended
December 31, 1998.
50
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SECURITY ASSOCIATES INTERNATIONAL, INC.
March 30, 1999 By: /s/ James S. Brannen
----------------------------------
James S. Brannen,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ James S. Brannen President (Principal Executive Officer) March 30, 1999
- ------------------------------------ and Director
James S. Brannen
/s/ Ronald I. Davis Director March 30, 1999
- ------------------------------------
Ronald I. Davis
/s/ Thomas J. Salvatore Director March 30, 1999
- ------------------------------------
Thomas J. Salvatore
/s/ Douglas Oberlander Director March 30, 1999
- ------------------------------------
Douglas Oberlander
/s/ Michael B. Jones Director March 30, 1999
- ------------------------------------
Michael B. Jones
/s/ Daniel S. Zittnan Senior Vice President, Treasurer and Chief March 30, 1999
- ------------------------------------ Financial Officer (Principal Financial and
Daniel S. Zittnan Accounting Officer)
</TABLE>
51
<PAGE> 71
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company*
3.2 By-Laws of the Company*
3.3 Certificate of Designations, Rights, Preferences and Limitations
of 12% Redeemable Preferred Stock, $10.00 par value per share, of
Security Associates International, Inc.*
3.4 Certificate of Designations, Rights, Preferences and Limitations
of Convertible Preferred Stock, $10.00 par value per share, of
Security Associates International, Inc.*
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*
</TABLE>
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<PAGE> 72
<TABLE>
<S> <C>
10.19 Sublease Agreement between William Jackson and Elizabeth Jackson
and Registrant dated December 29, 1996*
10.20 First Amendment to Lease between William Jackson and Elizabeth
Jackson and Registrant dated February 7, 1997*
10.21 Subordinated Loan Agreement between Registrant and TJS Partners,
L.P.*
10.22 Standby Option and Warrant Agreement between Registrant and TJS
Partners, Ltd. dated September 5, 1996*
10.23 Amended Standby Option and Warrant Agreement between Registrant
and TJS Partners, Ltd. dated December 31, 1996*
10.24 Warrant dated December 31, 1996 issued to TJS Partners, Ltd.*
10.25 Form of Warrant*
10.26 Echo Star Joint Venture Agreement**
10.27 Amended and Restated Loan Agreement among Security Associates
International, Inc., Security Associates Command Center II,
L.L.C., Monitor Service Group, L.L.C., All-Security Monitoring
Services, L.L.C., AMJ Central Station Corporation, Inc.,
Telecommunications Associates Group, Inc. and FINOVA Capital
Corporation dated December 2, 1997.****
10.28 Second Amendment to Lease between American National Bank and
Trust Company of Chicago as Trustee under Trust No. 59948 and
Registrant dated December 10, 1997. ****
10.29 Koll Business Center Lease dated May 16, 1996 between
Telecommunications Associates Group, Inc. and TR Brell Austin
Corp. ****
10.30 Lease between Indian Hill Properties, Inc. and Telecommunications
Associates Group, Inc. dated November 24, 1997. ****
10.31 Stock Purchase Agreement between Security Associates
International, Inc. as purchaser and Robert Ambros as seller
dated November 21, 1997***
10.32 $500,000 Promissory Note dated December 8, 1997 from Alarm
Funding Corporation to TJS Partners, L.P. ****
10.33 Subordinated Loan Agreement dated November 14, 1997 between Alarm
Funding Corporation and TJS Partners, L.P. ****
10.34 Amended Subordinated Loan Agreement dated January 30, 1998
between Security Associates International, Inc. and TJS Partners,
L.P. ****
10.35 $5,000,000 Promissory Note dated December 31, 1996 from Security
Associates International, Inc. to TJS Partners, L.P. ****
10.36 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
27.1 Financial Data Schedule
</TABLE>
53
<PAGE> 73
<TABLE>
<S> <C>
* Previously filed with the Registrant's Registration Statement on
Form S-1 filed July 22, 1997.
** Previously filed September 8, 1997 in pre-effective Amendment No.
1 to the Registrant's Registration Statement on Form S-1.
*** Previously filed with the Registrant's Current Report on Form 8-K
filed December 10, 1997 and dated November 25, 1997.
**** Previously filed with the Registrant's Form 10-K Annual Report
for the fiscal year ended December 31, 1997 as filed on February
23, 1998, and dated February 17, 1998.
***** Previously filed with the Registrant's Current Report on Form 8-K
filed July 2, 1998, dated May 8, 1998.
</TABLE>
54
<PAGE> 74
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>
<PAGE> 1
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT
TO CERTIFICATE OF DESIGNATIONS, RIGHTS, PREFERENCES, AND
LIMITATIONS OF 12% REDEEMABLE PREFERRED STOCK, $10.00 PAR
VALUE, OF SECURITY ASSOCIATES INTERNATIONAL, INC.
AND
DESIGNATION OF 155,835 ADDITIONAL SHARES OF 12% REDEEMABLE
PREFERRED STOCK, $10.00 PAR VALUE, OF SECURITY ASSOCIATES
INTERNATIONAL, INC.
James S. Brannen and Howard Schickler, being the President and Secretary
of Security Associates International, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), do hereby certify as follows:
1. That the Board of Directors of the Corporation by unanimous written
consent executed on February 10, 1998, in accordance with Sections 141(f) and
242 of the General Corporation Law of the State of Delaware, adopted the
Resolution set forth in Exhibit A hereto proposing an Amendment to the
Certificate of Designations, Rights, Preferences, and Limitations of 12%
Redeemable Preferred Stock, $10.00 Par Value, of the Corporation (the
"Amendment") and further directed that the Amendment be submitted to the
stockholders of the Corporation entitled to vote thereon for their
consideration and approval.
2. That the stockholders of the Corporation approved and adopted the
Amendment in accordance with Section 242 of the General Corporation Law of the
State of Delaware, by requisite affirmative vote of the stockholders entitled
to vote thereon at a meeting of such stockholders duly called and convened
pursuant to the laws of the State of Delaware on May 19, 1998.
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:05 AM 05/22/1998
981199707 - 2158389
<PAGE> 2
3. That the Board of Directors of the Corporation at a subsequent meeting
held on May 19, 1998, pursuant to its powers under Article IV (ii) of the
Corporation's Certificate of Incorporation, as amended, to fix by resolution
the number of shares designated for each series of Preferred Stock, adopted the
Resolution set forth in Exhibit B, appended hereto, increasing the number of
designated shares of 12% Redeemable Preferred Stock from 344,165 shares to
500,000 shares.
IN WITNESS WHEREOF, the undersigned, being the President and Secretary
heretofore named, for the purpose of amending the Certificate of Designations,
Rights, Preferences, and Limitations of 12% Redeemable Preferred Stock, $10.00
Par Value, of the Corporation, and designating 155,835 additional shares of
said 12% Redeemable Preferred Stock, pursuant the General Corporation Law of the
State of Delaware and the Certificate of Incorporation of the Corporation,
under penalties of perjury, do hereby declare and certify that these are the
acts and deeds of the Corporation, and the facts stated herein are true, and
accordingly they have hereunto signed this Certificate of Amendment to
Certificate of Incorporation this twenty-second day of May, 1998.
By: /s/ James S. Brannen
---------------------------
James S. Brannen, President
ATTEST:
By: /s/ Howard Schickler
---------------------------
Howard Schickler, Secretary
2
<PAGE> 3
EXHIBIT A
RESOLVED, that the following Amendments to the Corporation's Certificate of
Designations, Rights, Preferences and Limitations of 12% Redeemable Preferred
Stock be and they are hereby approved by the Stockholders of the Corporation
pursuant to the following Resolutions and preambles which are also hereby
approved and adopted:
(a) RESOLVED, that the Corporation's Certificate of Designations, Rights,
Preferences, and Limitations of 12% Redeemable Preferred Stock
("Certificate") be amended and/or restated with the following
changes:
(1) Section 3[b] of the Certificate, in amended and/or restated form,
shall specify that all unpaid dividends with respect to the
Redeemable Preferred Stock shall become immediately due and payable
whenever new equity in excess of $20 million (instead of $10 million)
is raised after January 1, 1997, as follows:
"In the event that the Corporation (which for this purpose shall
include all subsidiaries of the Corporation) shall raise new
equity after January 1, 1997, through the sale of shares of
capital stock and/or membership interests, in a cumulative
amount in excess of Twenty Million Dollars ($20,000,000.00),
excluding any inter-corporate investments among the Corporation
and its subsidiaries, all dividends accrued and unpaid with
respect to Redeemable Preferred Stock, whether or not declared,
shall become immediately due and payable. If for any reason the
Corporation is unable to pay any dividends accrued and owing
pursuant to this Section 3.b, the Corporation will pay such
dividends to the holder as soon thereafter as funds of the
Corporation are legally available for such payment. The
Corporation will take or cause to be taken such actions as are
necessary to transfer any funds held by the subsidiaries of the
Corporation in order to allow the Corporation to meet its
obligations under this Section 3.b."
(2) Section 3[c] of the Certificate, in amended and/or restated form,
shall specify that new equity raised in excess of $30,000,000
(instead of $15 million) shall constitute a "Refinancing" for the
purposes of the Certificate, as follows:
"In the event that the Corporation (which for this purpose shall
include all subsidiaries of the Corporation) shall raise new
equity after January 1, 1997 through the sale of shares of
capital stock and/or membership interests in a cumulative amount
in excess of Thirty Million Dollars ($30,000,000.00) excluding
any inter-corporate investments among the Corporation and its
subsidiaries (a "Refinancing"), then immediately upon the
achievement of the Refinancing, the dividend rate of the
Redeemable
3
<PAGE> 4
Preferred Stock shall be increased to one hundred fifty percent (150%)
of the dividend rate then in effect."
(b) RESOLVED FURTHER, that, to effectuate the foregoing, the proper Officers of
the Corporation be and they are hereby authorized and directed to file with
the Secretary of State of Delaware and any other appropriate governmental
office appropriate Articles of Amendment of the Certificate of Incorporation
of the Corporation, amending and/or restating said Certificate of
Designations, Rights, Preferences and Limitations of 12% Redeemable
Preferred Stock, and they are hereby authorized and empowered to take all
such actions as any of them may deem necessary or desirable to effectuate
the foregoing.
4
<PAGE> 1
STANDARD HARDWARE PURCHASE AND SOFTWARE LICENSE AGREEMENT
This Agreement is made and entered into as of the 21st day of September,
1998, by and between Monitoring Automation Systems ("MAS") and Security
Associates International, Inc. ("Customer").
W I T N E S S E T H:
WHEREAS, MAS is a provider of certain computer hardware and software;
WHEREAS, Customer has requested MAS to provide Customer with certain
hardware and software; and
WHEREAS, MAS is agreeable to selling and licensing such hardware and
software, respectively, to Customer on the terms and conditions set forth
herein.
NOW, THEREFORE, In consideration of the representations, warranties,
covenants and agreements herein contained, the sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. THE EQUIPMENT
1.1 SALE OF EQUIPMENT. MAS agrees to sell to Customer and Customer agrees
to buy, on the terms and conditions set forth herein, the computer equipment
listed in the System Purchase Form(s) (the "Equipment").
1.2 PRICE AND PAYMENT. The purchase price for the Equipment (excluding
freight, taxes, and insurance which Customer shall pay) to be paid by Customer
and payment terms for the Equipment are set forth in the System Purchase
Form(s).
1.3 DELIVERY, INSTALLATION AND ACCEPTANCE.
(a) MAS shall deliver the Equipment in accordance with its delivery
schedule as set forth in the System Purchase Form.
(b) Customer has elected MAS Installation Services. MAS shall install
the Equipment at Customer's site, which site shall be readied by Customer in
accordance with applicable specifications provided by MAS. Installation shall
include successful operation of the Equipment using MAS's standard test
procedures reasonably acceptable to Customer. Acceptance of the Equipment at
each location hereunder shall be deemed to have occurred upon the earlier of:
(i) the first live productive use of the Equipment, or (ii) thirty (30) days
after installation of the Equipment at Customer's location provided that within
said thirty (30) days Customer does not notify MAS, in writing, of a specific
claimed defect of the Equipment to conform in all material respects to the
<PAGE> 2
published specifications thereof which are determined by MAS to be bona fide.
Should Customer notify MAS within the time period set forth above of a defect
which is determined by MAS to be bona fide, acceptance shall occur upon MAS
remedying said defect. If a claimed defect is determined by MAS not to be bona
fide, the time for acceptance of the Equipment shall not be affected and
Customer shall reimburse MAS on a time and materials basis, including all
expenses incurred by MAS for all services performed in connection therewith.
1.4 EQUIPMENT WARRANTY. EXCEPT AS SPECIFICALLY SET FORTH HEREIN, MAS DOES
NOT MAKE, AND EXPRESSLY DISCLAIMS, ANY AND ALL WARRANTIES WITH RESPECT TO THE
EQUIPMENT PROVIDED HEREUNDER INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MAS WILL ASSIGN TO
CUSTOMER ANY WARRANTY OFFERED BY THE MANUFACTURER OF SAID EQUIPMENT TO THE
EXTENT SAID WARRANTIES MAY BE ASSIGNED.
1.5 STANDARD MANUFACTURER AGREEMENTS. To receive the Equipment Warranty and
Licensed Software (defined below) Warranties as hereinafter provided, Customer
must execute applicable agreements for either MAS's Equipment maintenance
services or other MAS approved maintenance service for the Equipment.
1.6 CONFIDENTIALITY.
(a) MAS acknowledges that in fulfilling its obligations under this
Agreement, it may have access to Customer information which is private,
confidential and proprietary in nature ("Customer Confidential Information").
MAS represents and warrants that it will restrict access to Customer
Confidential Information solely to its employees who require access to such
information in order to fulfill MAS's obligations under this Agreement. Neither
MAS, its officers, employees or agents shall disseminate or further copy,
duplicate or otherwise communicate any Customer Confidential Information to any
third party whatsoever without the written consent of an executive officer of
Customer. MAS acknowledges that a breach of the confidentiality provisions of
this Agreement may result in serious and irreparable harm to Customer for which
there is no adequate remedy at law. In the event of such a breach, Customer
shall be entitled to seek any temporary or permanent injunctive or other
equitable relief in addition to any monetary damages hereunder. MAS acknowledges
that Customer's disclosure of information regarding MAS, the Equipment or MAS's
business to Customer's State or Federal regulatory agencies as required by
applicable laws and regulations or as a result of judicial process shall not be
deemed a violation of the confidentiality provisions of this Agreement.
(b) Customer acknowledges that in fulfilling its obligations under this
Agreement, it may have access to MAS information which is private, confidential
and proprietary in nature ("MAS Confidential Information"). Customer represents
and warrants that it will restrict access to MAS Confidential Information solely
to its employees who require access to such information in order to fulfill
Customer's obligations under this Agreement. Neither Customer, its officers,
2
<PAGE> 3
employees or agents shall disseminate or further copy, duplicate or otherwise
communicate any MAS Confidential Information to any third party whatsoever
without the written consent of an executive officer of MAS. Customer
acknowledges that a breach of the confidentiality provisions of this Agreement
may result in serious and irreparable harm to MAS for which there is no adequate
remedy at law. In the event of such a breach, MAS shall be entitled to seek any
temporary or permanent injunctive or other equitable relief in addition to any
monetary damages hereunder. Customer acknowledges that MAS's disclosure of
information regarding Customer, the Equipment or Customer's business to MAS's
State or Federal regulatory agencies as required by applicable laws and
regulations or as a result of judicial process shall not be deemed a violation
of the confidentiality provisions of this Agreement.
(c) Customer Confidential Information and MAS Confidential Information
for purposes hereof shall include any and all software, agreements, policies,
customer lists, customer data and any other information which relates to
Customer's or MAS's (as appropriate) (or a third party's) data processing,
research and development, trade secrets or business affairs, but does not
include: (i) written information legally acquired prior to negotiations leading
to this Agreement, (ii) information which is or becomes a matter of public
knowledge, and (iii) information which is or becomes available from third
parties who in making such disclosure breach no confidentiality obligation.
1.7 TITLE TO EQUIPMENT. MAS warrants that it shall have good title to any
Equipment purchased by Customer under this Agreement, free and clear of all
liens and encumbrances. Title to the Equipment shall vest in and risk of loss or
damage shall pass to Customer upon delivery of the Equipment to the common
carrier for shipping ("Delivery Date"). Until Customer pays in full the total
price due for each piece of Equipment as specified in the System Purchase
Form(s), MAS shall have a security interest in such piece of Equipment. Customer
agrees to execute, promptly upon demand by MAS, any financing statement,
security agreement and like documents and to take any other action reasonably
requested by MAS in order to perfect MAS's security interest hereunder.
2. THE LICENSED SOFTWARE
2.1 THE LICENSE. Subject to the following terms, MAS hereby grants to
Customer, and Customer hereby accepts from MAS, a perpetual, non-exclusive, and
non-transferable license (the "License") to use the computer software and
documentation specified in the System Purchase Form(s) (hereinafter "Licensed
Software") terminable as provided herein. The Licensed Software and Equipment
are together referred to as the "System."
2.2 USE OF LICENSED SOFTWARE. (a) The Licensed Software shall be used only
with the Equipment and at the Customer site identified in the System Purchase
Form(s). Licensed Software may be utilized for the benefit of Customer, its
subsidiaries, affiliates and any direct or indirect parent or any subsidiary of
such parent ("Affiliate"). The Customer may not copy the Licensed Software or
permit the same to be copied, except to create three copies of the Licensed
Software in machine-readable form for bona fide back-up or archival purposes and
only in support of the use of
3
<PAGE> 4
the Licensed Software on the Equipment. Each copy shall include all copyright
and trade secret notices existing on the Licensed Software displayed in the
manner originally displayed on the Licensed Software. Customer shall not adapt
the Licensed Software in any way or use it to create a derivative work.
(b) MAS shall supply to Client the standard MAS documentation necessary
for Customer to use the System.
(c) Any updates, replacements, revisions, enhancements, additions or
conversions to the Licensed Software or any associated documentation supplied to
Customer by MAS shall become a part of the Licensed Software and be subject to
this Agreement.
2.3 TERM. The License shall commence on the Delivery Date and will remain
in effect unless terminated pursuant to this Agreement.
2.4 LICENSE FEE AND PAYMENT. The license fee and payment terms for the
Licensed Software are as set forth in the System Purchase Form(s).
2.5 LICENSED SOFTWARE OWNERSHIP; NON-INFRINGEMENT. MAS represents and
warrants that it is the owner of the Licensed Software or an authorized licensee
thereof with full right to license such Licensed Software to Customer as
provided in this Agreement, and that neither the Licensed Software or any part
thereof, nor Customer's use thereof in the manner provided for herein, infringes
or misappropriates any copyright, patent, trade secret, mask work or other
proprietary right of any third party. Subject to the terms of this Agreement,
MAS agrees to indemnify and hold Customer harmless from any damages resulting
from any infringement claim. In the event any such infringing Licensed Software
is embedded in another MAS product or in the operating system of a third party,
and the operation of such product (hardware or software) is materially affected
by the inability to use the infringing Licensed Software, Customer shall be
entitled to a full refund with respect to such product. In the event a third
party claims that the Licensed Software infringes its patent, copyright or trade
secret, or any other proprietary right, MAS will (i) procure for Customer the
right to continue using the Licensed Software, (ii) replace or modify for
Customer the Licensed Software or such infringing portion thereof so that it no
longer infringes such patent, copyright, trade secret or other proprietary
right, or (iii) refund the total amount of the fees paid by Customer if the
utility or performance of the Licensed Software is materially adversely affected
by such replacement or modification or the Licensed Software does not materially
conform with the Specifications. As long as Customer is not in default
hereunder, MAS, its agents or employees shall not deactivate the System provided
under the Agreement fully, in part, or in any other manner; further, MAS, its
agents or employees shall not introduce or install at any time deactivation
device(s) or similar program(s); provided, however, that in the event that MAS
properly takes such action hereunder, MAS shall first notify Customer at least
thirty (30) calendar days prior to taking such action. In no event shall MAS,
its agents or employees or anyone acting on its behalf, disable any other
software or hardware used by Customer.
4
<PAGE> 5
2.6 DELIVERY OF LICENSED SOFTWARE AND ACCEPTANCE/RISK OF LOSS.
(a) Each Licensed Software product, as designated on the System
Purchase Form(s) ("Licensed Software Product"), shall be delivered in accordance
with MAS's delivery schedule as set forth on the System Purchase Form.
(b) Each Licensed Software product at each of Customer's locations
hereunder, as designated on the System Purchase Form(s) ("Licensed Software
Product"), shall be delivered in substantial accordance with MAS' delivery
schedule, and deemed accepted upon the earlier of: (i) the first live productive
use of the Licensed Software Product; or (ii) thirty (30) days after the
installation of the Licensed Software Product at Customer's location provided
that within said thirty (30) days Customer does not notify MAS, in writing, of a
specific claimed defect of the Licensed Software Product to conform in all
material respects to the published specifications thereof which is determined by
MAS to be bona fide. Should Customer notify MAS within the time period set forth
above of a defect which is determined by MAS to be bona fide, acceptance shall
occur upon MAS' remedying said defect. If a claimed defect is determined by MAS
not to be bona fide, the time for acceptance of the Licensed Software shall not
be affected and Customer shall reimburse MAS on a time and materials basis,
including all expenses incurred by MAS for all services performed in connection
therewith. No payment made hereunder shall constitute acceptance by Customer of
the System or any part thereof.
2.7 LICENSED SOFTWARE WARRANTY. (a) Subject to Paragraph 4.3 herein, MAS
warrants that for a period of six (6) months from the Acceptance Date, the
Licensed Software Product shall perform in accordance with the Specifications
for the Licensed Software Product. In the event that the Licensed Software does
not perform in accordance with the Specifications, MAS shall, at no cost to
Customer, make such modifications, adjustments or additions necessary to make
the Licensed Software conform to the Specifications or (if hardware or Licensed
Software cannot be made to conform to the Specifications within a reasonable
time) provide Customer with a full refund of any fees paid.
(b) MAS represents and warrants that the System licensed or purchased
under this Agreement is capable of supporting Year 2000 functionality and will
function in a multi-century environment. For purposes hereof, "supporting Year
2000 functionality" shall mean that the System must provide fault free
performance in the processing of dates and date related data, including, but not
limited to calculating, comparing and sorting. "Fault free performance" means
the correct manipulation of data containing dates prior to, through and beyond
January 1, 2000 (including leap year computations) without human intervention.
MAS agrees that it shall be liable for any damages resulting from any breach of
this provision. Any modifications required to conform the products to Year 2000
functionality will be made by MAS free of charge.
(c) MAS warrants that the Licensed Software as delivered by MAS to
Customer or as modified by MAS hereunder is free from computer viruses
introduced into the Licensed Software as a result of the acts of MAS, its agents
and employees and that the Licensed Software will
5
<PAGE> 6
be free of software traps, time-bombs, technically limiting devices and/or
viruses, worms, or code (including any disabling device or code whatsoever)
which would interfere with the intended use of the Software in accordance with
the Specifications or which destroy or alter Customer's data.
2.8 MODIFICATIONS AND CUSTOMIZATIONS. Modifications and/or customization
services relating to the Licensed Software are available solely through MAS on a
special quotation or time and material basis subject to a separate agreement to
be entered between Customer and MAS for such services. Any and all such
modifications and/or customizations ("Custom Modifications") shall be the
property of MAS and shall be subject to the terms and conditions hereof.
3. TRAINING
3.1 TRAINING. MAS shall make available to Customer reasonable training,
pursuant to MAS's standard training procedures and fees. In providing the
training and the other services hereunder, MAS agrees to cause its employees,
contractors, and agents to obey all rules and regulations of Customer in effect
at Customer's premises, including any security requirements and any reasonable
instructions and directions issued by Customer.
4. LIMITATION OF WARRANTY AND LIABILITY
4.1 DISCLAIMER OF WARRANTY. EXCEPT AS SPECIFICALLY SET FORTH HEREIN, MAS
MAKES NO WARRANTIES, EXPRESS OR IMPLIED INCLUDING, BUT NOT LIMITED TO, IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
4.2 LIMITATION OF LIABILITY. EXCEPT FOR DAMAGES RESULTING FROM YEAR 2000
FUNCTIONALITY, INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD
PARTY OR VIOLATIONS OF THE CONFIDENTIALITY PROVISIONS OF THIS AGREEMENT, NEITHER
PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS
AGREEMENT OR OTHERWISE FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR
EXEMPLARY DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. IN NO EVENT SHALL EITHER PARTY'S LIABILITY TO THE OTHER PARTY FOR ANY
REASON AND UPON ANY CAUSE OF ACTION WHATSOEVER EXCEED THE AMOUNTS PAID
HEREUNDER.
5. INDEMNITY
5.1 Subject to the limitation of liability of MAS set forth herein, MAS
agrees to indemnify and hold Customer harmless from any liability, loss or
damage whatsoever for any injury or damage to persons or damage to physical
property caused by the acts of MAS or its agents, employees or representatives.
MAS agrees to maintain comprehensive general liability and property damage
insurance coverage for bodily injuries to persons and damage to physical
property with
6
<PAGE> 7
limits of at least $1,000,000 for bodily injury to persons and $1,000,000 for
damage to physical property.
6. SOFTWARE SUPPORT AND MAINTENANCE
6.1 SYSTEM SUPPORT OBLIGATIONS. If Customer has elected to receive system
support services, then commencing upon acceptance of both the Equipment and
Licensed Software, MAS agrees to provide the support services described in this
Section 6 ("System Support Services") for the System on an annual basis upon
payment of MAS's then standard annual support fee which shall be due and payable
as set forth in Section 7 below. System Support Services shall be automatically
renewed for successive one year terms. MAS shall invoice Customer thirty (30)
days in advance for the System Support Services fee. MAS reserves the right to
change the annual System Support Services fee at the annual renewal date,
provided that no increase in the fee will be in excess of the sum of the
Consumer Price Index plus 5%.
6.2 SYSTEM SUPPORT SERVICES. MAS will provide System Support Services as
follows:
6.2.1 Reasonable telephone consulting ("Hotline" support) for an
individual employed by Customer who shall be the MAS trained contact and an
alternate regarding Licensed Software features and procedures.
6.2.2 Maintenance of each Licensed Software Product so that each
Licensed Software Product shall conform in all material respects to the
Specifications thereof.
6.2.3 Product and user information such as newsletters.
6.3 LICENSED SOFTWARE UPDATES. For as long as Customer is subscribing to
System Support Services, MAS shall make available to Customer at no additional
charge (other than maintenance fees provided for hereunder or charges relating
to additional system requirements) all Licensed Software product updates and
documentation updates as said updates are released to MAS's general customer
base. MAS agrees to provide maintenance and support of the Licensed Software in
its then-current version as well as the two immediately prior versions.
6.4 SUPPORT AND MAINTENANCE REQUIREMENTS.
6.4.1 The Customer contact and alternate for the Licensed Software must
have both received the applicable MAS training.
6.4.2 An MAS approved modem must be available on the System to permit
MAS to diagnose and correct problems.
6.4.3 If the Licensed Software has been modified pursuant to Paragraph
2.8 above, or otherwise, Customer is responsible for incorporating those
modifications in any updated
7
<PAGE> 8
version of the Licensed Software provided by MAS hereunder. MAS will use
its reasonable best efforts to incorporate modifications in a new release
on a time and material basis upon request and subject to personnel
availability.
6.4.4 All services described in this Agreement are intended to be
performed at MAS's facility. On-site support will be made available, upon
request, MAS's then prevailing published rates plus reasonable travel
costs.
6.4.5 Ongoing support for Custom Modifications pursuant to Paragraph
2.8 herein is only available on a time and material basis and subject to
personnel availability.
6.5 [INTENTIONALLY OMITTED.]
6.6 TERMINATION OF SYSTEM SUPPORT SERVICES. Either party may terminate
System Support Services by giving ninety (90) days written notice to the other
party prior to the commencement of an annual renewal period; provided, however,
that as long as Customer is not in default hereunder, MAS shall not terminate
System Support Services prior to the fifth anniversary of the effective date of
this Agreement.
6.7 SOURCE CODE ESCROW. MAS agrees to maintain at Customer's expense the
source code for any Licensed Software licensed under the Agreement, in both
human and machine readable form in escrow for the benefit of Customer. In the
event that MAS becomes subject to any bankruptcy proceedings, whether voluntary
or involuntary, ceases its business operations or refuses or provide or allow
maintenance service as agreed by the parties (assuming no default hereunder by
Customer), Customer shall be entitled to access to the source code for the
purposes of maintaining and updating the Licensed Software.
7. RIGHTS AND OBLIGATIONS
7.1 STANDARDS OF WORK. Throughout the term of the Agreement, MAS agrees to:
(i) ensure that all work and materials furnished under this Agreement will be
strictly in accordance with all applicable Federal, state, municipal and other
laws, ordinances and regulations; (ii) comply with all installation, operation
and maintenance instructions for the System; (iii) remove and repair (at MAS's
own expense) any and all portions of the System and other work performed by MAS
not in accordance with the requirements of subsections (i) and (ii) above and
will, at its own expense, reinstall such portions of the System and perform
other work in accordance herewith; (iv) use its best efforts to notify Customer
of any observed conditions within the System's environment which seem to be
inconsistent with the Specifications.
7.2 PRICES. Prices are based on list price at the time of order as
indicated on the System Purchase Form(s) or on quoted price prior to expiration
of quotation. Any prices not set forth herein or in a System Purchase Form or
similar document are subject to change by MAS without notice. Unless otherwise
stated, all prices are exclusive of state and local sales, use, and similar
taxes. Such
8
<PAGE> 9
present or future taxes, when applicable, will appear as separate additional
items on invoices unless Customer provided MAS with a tax exemption or resale
certificate acceptable to the taxing authorities.
7.3 CANCELLATION OR RESCHEDULING. In the event Customer issues a change
order causing a delivery delay or cancels purchased products prior to the
scheduled ship date, Customer will be subject to charges shown below which are
based on the list price at the time of order of the affected products. In
addition, any change in delivery date by Customer which establishes a delivery
date greater than one hundred eighty (180) days from Customer's original order
date shall constitute a new order for the affected products and the prices shall
be adjusted to reflect the price on the latter of receipt of the change order or
six (6) months prior to the new delivery date.
<TABLE>
<CAPTION>
DAYS PRIOR TO DELIVERY SCHEDULE % OF LIST PRICE
------------------------------- ---------------
<S> <C>
90-60 DAYS 10%
59-45 DAYS 15%
44-31 DAYS 25%
30 DAYS OR LESS 35%
</TABLE>
7.4 SITE. The Customer shall be responsible for providing and maintaining
an environment for the Equipment in accordance with applicable MAS
specifications.
7.5 DELAY. Any dates or times when MAS is required to perform under this
Agreement shall be automatically postponed to the extent that MAS is prevented
from meeting such dates or times by Customer or by causes beyond MAS's
reasonable control, and provided further that the sole effect of any delay by
MAS excluding those caused by Customer shall be a delay in Customer's
obligations to make payment for the same length.
7.6 TAXES. Customer shall, in addition to the payments required hereunder,
pay all sales, use, transfer, or other duties or taxes, whether international,
national, state or local, however designated, which are levied or imposed by
reason of the transactions completed hereby excluding any taxes on the income or
employees of MAS. Customer shall reimburse MAS for the amount of any such taxes
paid or accrued by MAS as a result of the transactions contemplated hereby,
provided MAS provides prompt notice to Customer of such taxes. In the event MAS
fails to promptly notify Customer of taxes to be paid by Customer hereunder, MAS
shall reimburse Customer for fifty percent (50%) of any penalties or interest
assessed against Customer to the extent caused by such failure.
7.7 PAYMENT. All invoices are due within thirty (30) days of the invoice
date. All payments shall be made in United States Dollars. If Customer fails to
pay any undisputed amount due within thirty (30) days of the invoice date, late
charges of one and one half percent (1 2%) per month shall also become payable
by Customer to MAS.
9
<PAGE> 10
7.8 DEFAULT. In the event of a material breach of the terms of the
Agreement, the non-breaching party shall be entitled to terminate this Agreement
if the breaching party does not remedy such breach within 30 days (or 10 days if
such breach is based on Customer's failure to pay amounts properly due and owing
hereunder) after receiving written notice from the non-breaching party. In the
event that either party commences legal action to enforce the terms of this
Agreement, the prevailing party shall be entitled to recover from the
non-prevailing party, reasonable attorney's fees and costs, in addition to any
monetary damages hereunder, at both trial and appellate levels. If MAS fails to
provide the services contracted for under this Agreement when due, or otherwise
breaches this Agreement, and MAS does not cure such breach as provided in this
Agreement, Customer may, in addition to any other remedies available at law or
in equity, (i) immediately cancel or suspend this Agreement receiving a full
refund for any prepaid amounts covering products or services not received,
and/or (ii) contract with a third party to provide the required services with
MAS reimbursing Customer the commercially reasonable price of such services in
excess of the contract amount for such services hereunder (subject to the
limitation of liability of MAS hereunder).
8. GENERAL
8.1 ENTIRE AGREEMENT. This Agreement together with the System Purchase
Form(s) are the complete understanding and agreement of the parties with respect
to the subject matter hereof and supersedes and merges any prior understanding
or agreements.
8.2 ASSIGNMENT. This Agreement shall be binding upon the parties and their
respective successors and assigns. Neither party may assign this Agreement or
any of its rights, duties, or obligations hereunder, in whole or in part, to any
person or entity without the prior written consent of the other party. This
Agreement may be utilized for the benefit of Customer or any of Customer's
Affiliates. This Agreement may be assigned among any Affiliate without the
consent of MAS. The parties further agree that the transfer of control of
Customer to an Affiliate shall not require the consent of MAS.
8.3 SURVIVAL. All provisions of this Agreement relating to Year 2000,
confidentiality or non-disclosure shall survive the termination of this
Agreement.
8.4 NO WAIVER. The failure of either party to exercise any right in any
respect provided for herein shall not be deemed a waiver of such right or of any
other or future right hereunder.
8.5 SEVERABILITY. In the event that any provision of the Agreement shall be
held to be void or unenforceable by a court of law, such provision shall be
eliminated and shall not effect the validity of any remaining provision.
8.6 MODIFICATION. This Agreement may not be modified except by a writing
subscribed to by both parties.
8.7 [INTENTIONALLY OMITTED.]
10
<PAGE> 11
8.8 USE OF CUSTOMER'S NAME. MAS shall not be entitled to use Customer's
name or the name of any subsidiary, parent or affiliated entity or Customer or
any trade name, trademark or service mark belonging to the entities described
above in printed brochures, press releases, or in any form of advertising for
any product, service or technology without the prior written consent of an
executive officer of Customer.
8.9 PURCHASE ORDERS. If either party uses a purchase order or similar
document to order Licensed Software or Equipment, or portions thereof, the other
party's acceptance of such order will be conditioned upon the document's
referencing the Agreement; in addition, the terms of this Agreement, and not
those contained in such purchase order or similar document, shall apply unless
otherwise agreed in writing by both parties.
8.10 [INTENTIONALLY OMITTED.]
8.11 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed duly given if delivered in person or by courier or
if sent by certified or registered mail, postage prepaid, to the following:
If to MAS:
Monitoring Automation Systems
101 Academy, Suite 100
Irvine, CA 92612
Attention: Steven W. Keefer, President
11
<PAGE> 12
If to Customer:
Security Associates International, Inc.
2101 South Arlington Heights Road
Arlington Heights, IL 60605
Attention: Ron Carr, Vice President, C.O.O.
IN WITNESS WHEREOF, the parties hereto have caused this Standard Hardware
Purchase and Software License Agreement to be executed by their authorized
representatives on the day and year first above written.
Security Associates International, Inc. Monitoring Automation Systems
By: By:
------------------------------------ --------------------------------
Title: Title:
--------------------------------- -----------------------------
Date: Date:
---------------------------------- ------------------------------
12
<PAGE> 1
EXHIBIT 10.37
THIS ASSOCIATION AGREEMENT (the "Agreement"), dated as of
, 199 , is entered into by and between Security Associates
International, Inc., a Delaware Corporation ("SAI"), and
, a
("Dealer"). SAI and Dealer hereby agree as follows:
1. DEFINITIONS AND USE OF TERMS
1.1 DEFINITIONS. The following terms shall have the meanings
assigned below when used in this Agreement:
(a) "Account" shall mean an arrangement between a Subscriber
and Dealer, typically evidenced by a Subscriber
Agreement, pursuant to which a Subscriber purchases from
Dealer the services of a CENTRAL MONITORING STATION to
monitor, on a remote basis, the security alarm system of
the Subscriber;
(b) "Affiliate" shall mean any person that controls, is
controlled by or is under common control with, Dealer.
For purposes of this definition, any person that owns
more than 10% of the equity of another person shall be
deemed conclusively to control such other person;
(c) "Applicable Law" shall include any law, license, rule,
regulation, order, injunction, notice, approval or
judgment of any federal, state, or local government or
governmental department, agency, board or the like, which
applies to this Agreement, the DEALER AGREEMENT, the
provision of services pursuant to the DEALER AGREEMENT,
and any agreement with any such government or
governmental department, agency or board relating to
compliance with any of the foregoing;
(d) "CENTRAL MONITORING STATION" shall mean one or more
CENTRAL MONITORING STATIONs owned by SAI (or a subsidiary
of SAI) and designated in the DEALER AGREEMENT as the
CENTRAL MONITORING STATIONs that are to provide service
to all of Dealer's Accounts;
(e) "Closing Date" shall have the meaning assigned in Section
3.2;
(f) "Common Stock" means the common stock, $0.001 par value
per share, of Security Associates International, Inc., a
Delaware corporation;
(g) "DEALER AGREEMENT" means the agreement between Dealer and
SAI, or a subsidiary of SAI, pursuant to which the
CENTRAL MONITORING STATION provides services to the
Subscribers of the Accounts, in the form of Exhibit A
attached hereto;
(h) "Default" means the occurrence of any of (i) the breach
by Dealer of the performance of any of its covenants
under Sections 2.1.2, 2.1.3, 2.1.4, 2.1.5 or 2.1.7 of
this Agreement, (ii) the misrepresentation by Dealer of
any material fact set forth in this Agreement, or (iii)
any other material breach by Dealer of any other
representation, warranty, covenant or agreement contained
herein;
(i) "Effective Date" means the first day of the first month
following the signing of this Agreement;
(j) "Permits" means all governmental approvals, licenses,
registrations and permits, and applications therefor;
(k) Subscriber" shall mean the party to which the Dealer
provides monitoring services;
(l) "Subscriber Agreement" means a written agreement between
a Subscriber and Dealer, evidencing an Account, pursuant
to which the Dealer provides monitoring services to the
Subscriber in the form attached hereto as Exhibit B;
(m) "Term" means the period commencing on the date hereof and
ending on the third anniversary of the Closing Date;
(n) "Vested Shares" means those shares of Common Stock issued
to Dealer pursuant to the terms of this Agreement as to
which the risk of forfeiture under Section 3.4 hereof and
the restrictions on transfer under Section 3.5 hereof
shall have lapsed in accordance with the provisions of
Section 3.3 hereof; "Unvested Shares" means those shares
of Common Stock issued to Dealer pursuant to this
Agreement that are not Vested Shares.
2. TERMS OF ASSOCIATION.
2.1 DEALER'S RESPONSIBILITIES CONCERNING MONITORING. Upon the terms and
subject to the conditions contained in this Agreement, Dealer hereby agrees that
the CENTRAL MONITORING STATION shall be the provider of monitoring services to
all of Dealer's Accounts transferred pursuant to Section 2.1.2 or which are
presently monitored in the CENTRAL MONITORING STATION.
2.1.1 DEALER AGREEMENT. Concurrently with the execution of this Agreement,
Dealer will execute and deliver the DEALER AGREEMENT which sets forth the terms
and conditions and prices under which the CENTRAL MONITORING STATION will
provide services to Dealer's Subscribers.
2.1.2 TRANSFER OF ACCOUNTS. No later than , Dealer shall
transfer no less than Accounts to the CENTRAL MONITORING STATION for
monitoring for the entire term of the DEALER AGREEMENT. All costs associated
with the transfers, including, but not limited to visits to Subscriber's
premises and reprogramming of security systems shall be the exclusive
responsibility of Dealer. Monitoring fees for the transferred Accounts will
accrue under the DEALER AGREEMENT from the date of transfer for each transferred
Account.
2.1.3 ACCOUNTS PRESENTLY MONITORED IN THE CENTRAL MONITORING STATION.
Dealer agrees that all of Dealer's Accounts that are presently monitored at the
CENTRAL MONITORING STATION will, on the Effective Date, become subject to the
terms of the DEALER AGREEMENT for the entire term of the DEALER AGREEMENT. All
previous agreements with SAI or the CENTRAL MONITORING STATION with respect to
those Accounts are superceded by the DEALER Agreement. Accounts are
presently being monitored in the CENTRAL MONITORING STATION.
2.1.4 FEES. Dealer shall pay all fees for monitoring services and all other
amounts required to be paid, as set forth in the DEALER AGREEMENT and attached
price page, at the times and in the manner set forth therein.
2.1.5 MAINTENANCE OF ACCOUNTS. If Dealer subsequently transfers any of the
Accounts transferred pursuant to Section 2.1.2 or any of the Accounts presently
being monitored as set forth in Section 2.1.3 (collectively; the "Monitored
Accounts") to any central station other than an SAI CENTRAL MONITORING STATION
at any time during the Term of this Agreement, Dealer will be deemed to be in
breach of this Agreement as of the date of the transfer.
2.1.6 MAINTENANCE OF SUBSCRIBER RELATIONSHIPS. Dealer shall undertake its
best efforts to maintain good relationships and operational reliability with its
Subscribers and their security systems in order to maximize the number of
Monitored Accounts that remain in the CENTRAL MONITORING STATION during the
term.
2.1.7 OBLIGATIONS UNDER THE MONITORING AGREEMENT SURVIVE TRANSFER. Dealer's
obligation to have the Monitored Accounts monitored by the CENTRAL MONITORING
STATION for the duration of the Agreement shall survive the sale or other
transfer of any Account. By way of illustration, if Dealer were to sell a
Monitored Account to a third party (other than SAI or any subsidiary), Dealer
would be in breach of this Agreement, if during the Term of this Agreement said
third party attempts to or were to transfer such Account to another CENTRAL
MONITORING STATION.
2.1.8 EXCEPTIONS TO MONITORING AGREEMENT. If, and only if, the following
conditions apply, Dealer may contract with a party other than the CENTRAL
MONITORING STATION for monitoring of those Accounts to which the conditions
apply: (a) it is illegal under Applicable Law for the CENTRAL MONITORING STATION
to provide monitoring services for the Monitored Account in question, or (b) the
CENTRAL MONITORING STATION does not have the technical capability to provide the
services for which the Subscriber under that Monitored Account has contracted.
In either event, Dealer must specify in writing to SAI the Applicable Law that
would be violated or the exact service that the CENTRAL MONITORING STATION is
not capable of providing. Even if one of the two conditions applies, if there
exists an alternate CENTRAL MONITORING STATION owned by SAI (or a subsidiary)
that is capable of providing the required services on the terms set forth in the
DEALER AGREEMENT, Dealer shall transfer the Monitored Account in question to
such alternate CENTRAL MONITORING STATION.
2.1.9 SUBSCRIBER AGREEMENT. Dealer will provide CENTRAL MONITORING STATION
with a copy of the executed SAI standard form subscriber agreement for every
Account to be monitored unless Dealer has submitted and SAI has approved
Dealer's existing subscriber agreement a copy or copies, of which shall be
attached to this agreement.
2.2 RIGHTS OF FIRST REFUSAL. During the Term of this Agreement, Dealer
hereby grants to SAI the right of first refusal for any proposed sale of
Accounts by Dealer ("Account Sale") or any borrowings by Dealer which are to be
secured by Accounts ("Secured Borrowings").
2.2.1 NOTICE OF THIRD PARTY PROPOSAL. In the event that Dealer proposes to
enter into an Account Sale or a Secured Borrowing with a party other than SAI or
a subsidiary or affiliate of SAI (a "third party"), Dealer shall upon receipt of
the third party's proposal, offer to SAI the opportunity to enter into the
Account Sale or Secured Borrowing on terms equivalent or superior to Dealer than
those offered by the third party. Dealer shall convey the terms of the third
party proposal to SAI by a written notice which shall include a photocopy of the
third party proposal as well as a description of the Accounts proposed to be
sold or which are proposed as collateral for the Secured Borrowing.
2.2.2 SAI'S RESPONSE. If SAI wishes to exercise its right of first refusal
and enter into the proposed transaction, SAI will, within ten (10) days
following receipt of notice of the third party proposal, respond in writing and
offer to enter into the transaction on economic terms that are equivalent or
superior to Dealer than those offered by the third party. Any response must
include a proposal detailing the economic terms under which SAI or a subsidiary
will enter into the transaction. If those economic terms are equivalent or
superior to Dealer than those offered by the third party, the Dealer will enter
into the Account Sale or Secured Borrowing with SAI or a subsidiary on the terms
proposed by SAI. If SAI fails to respond within the required ten (10) days or
does not offer economic terms that are equivalent or superior to Dealer than
those offered by the third party, Dealer, for a period of sixty (60) days
following the expiration of such ten (10) day period, shall be free to
consummate the transaction with the third party on terms no less favorable to
Dealer than those presented to SAI pursuant to Section 2.2.1.
3. CONSIDERATION FOR ENTERING INTO THE ASSOCIATION AGREEMENT.
3.1 ISSUANCE OF SECURITIES. In consideration of the performance by Dealer
of its obligations under this Agreement and the DEALER AGREEMENT, SAI agrees to
issue to Dealer a certificate representing shares of Common Stock.
3.2 CLOSING DATE. The certificates representing the shares of Common Stock
will be issued to Dealer on the later of the Effective Date or, if applicable,
the date on which the transfer to the CENTRAL MONITORING STATION of the last of
the Accounts required to be transferred pursuant to Section 2.1.2 has occurred
(the "Closing Date").
3.3 VESTING OF COMMON STOCK. On the Closing Date, 25% of shares of Common
Stock issued to Dealer pursuant to the terms of this Agreement will be Vested
Shares and the remaining 75% will be Unvested Shares. On each anniversary of the
Closing Date, assuming that no Default on the part of Dealer has occurred, 25%
of the shares of Common Stock issued to Dealer pursuant to the terms of this
Agreement will become Vested Shares. The following table sets forth for the
Closing
<PAGE> 2
Date and each of the three anniversaries of the Closing Date, the
cumulative percentage of such shares that will be Vested Shares if no Default
has occurred prior to that anniversary :
Anniversary Percent Vested
----------- --------------
Closing Date 25%
First 50%
Second 75%
Third 100%
Stock 5-
2.19.99
3.4 REMEDY FOR DEFAULT. Dealer acknowledges and agrees that the issuance of
Common Stock to Dealer pursuant to this Agreement is in consideration of
Dealer's performance of its obligations under this Agreement and the DEALER
AGREEMENT for the entire Term. If there shall occur a Default by Dealer in the
performance of any of its obligations under this Agreement or the DEALER
AGREEMENT, Dealer will either forfeit all shares of Common Stock that remain
Unvested Shares as of the date of the Default or immediately pay to SAI the
unpaid balance due pursuant to the DEALER AGREEMENT for the balance of the Term,
whichever is greater. The following table sets forth for the Closing Date and
each of the three anniversaries of the Closing Date, the percentage of the
shares of Common Stock issued to Dealer pursuant to this Agreement that will be
forfeited if a Default by Dealer occurs any time during the year preceding the
date of such anniversary:
Anniversary Percent Forfeited
----------- -----------------
First 75%
Second 50%
Third 25%
SAI will, promptly upon becoming aware of an event that has caused the
forfeiture of Common Stock, notify Dealer of the nature of the event, the
provision of this Agreement or the DEALER AGREEMENT as to which the Default has
occurred and the number of shares of Common Stock which have been forfeited as a
result. Any disputes concerning forfeitures will be determined by binding
arbitration as provided in Section 6.5. In determining whether the "unpaid
balance" is greater than the value of the Unvested Shares, the value of the
Unvested Shares shall be determined by multiplying the closing price of SAI's
Common Stock on the date that SAI notifies Dealer of the Default by the number
of Unvested Shares.
3.5 RESTRICTIONS ON TRANSFER; RESTRICTIVE LEGENDS. Dealer understands and
agrees that it may not sell, transfer, pledge, hypothecate or otherwise dispose
of, whether by assignment, operation of law or otherwise, any Unvested Shares of
Common Stock, without SAI's prior written consent, which may be withheld in
SAI's sole discretion. As a mechanism for carrying out the provisions of Section
3.4 and this Section 3.5, all certificates representing Unvested Shares will
bear the restrictive legend set forth below:
The securities represented by this certificate are
subject to forfeiture and restrictions on transfer
pursuant to the provisions of an ASSOCIATION
AGREEMENT, a copy of which is on file at the offices
of Security Associates International, Inc., and may
not be sold, transferred, pledged, hypothecated or
otherwise disposed of, whether by assignment,
operation of law or otherwise, except in compliance
with the terms of that Agreement.
3.6 REMOVAL OF LEGEND. At any time, after each anniversary of the Closing
Date, at the written request of Dealer, and upon delivery to SAI of the
certificates bearing the restrictive legends, SAI will cancel the certificates
so delivered and issue to Dealer a new certificate bearing no restrictive legend
representing the number of shares of Common Stock which have become Vested
Shares, and an additional certificate bearing the restrictive legend
representing the balance of the shares which have not been forfeited pursuant to
Section 3.4 (i.e., the Unvested Shares).
3.7 CANCELLATION OF SECURITIES. In the event that Dealer forfeits Unvested
Shares as provided in Section 3.4, promptly upon the request of SAI, Dealer
shall deliver to SAI for cancellation all certificates held by Dealer
evidencing, in whole or in part, Unvested Shares. SAI shall immediately issue to
Dealer a new certificate evidencing the Vested Shares, if any, that were
evidenced by the certificate so cancelled. Whether or not such certificate or
certificates shall have been delivered to SAI, from the date of such forfeiture
all rights of Dealer with respect to the forfeited shares, including, without
limitation, the right to vote such shares and the right to receive dividends or
distributions with respect thereto, shall cease, such shares shall be deemed no
longer outstanding, and the certificates representing the Common Stock issued to
Dealer shall represent only the Vested Shares.
4. REPRESENTATIONS WARRANTIES AND COVENANTS OF DEALER. Dealer represents and
warrants as follows: 4.1 ORGANIZATION. Dealer is a corporation [sole
proprietorship,
partnership, limited liability company] duly organized, validly existing and in
good standing under the laws of the State of and has all requisite
[corporate] power and authority to own its assets and to conduct its business in
the manner in which it is now conducted. Dealer is duly qualified to do business
in, and is in good standing under the laws of, each jurisdiction in which the
Accounts to be monitored by the CENTRAL MONITORING STATION require such
qualification.
4.2 POWER AND AUTHORITY. Dealer has the [corporate] power and authority to
execute and deliver and perform its obligations under this Agreement and the
DEALER AGREEMENT. This Agreement and the DEALER AGREEMENT have been duly
authorized, executed and delivered by Dealer and constitute the legal, valid and
binding obligations of Dealer enforceable against Dealer in accordance with
their terms.
4.3 ACCOUNTS. Exhibit 4.3(a) is a true and complete list of all Accounts to
be transferred to the CENTRAL MONITORING STATION pursuant to Section 2.1.2 and
Exhibit 4.3(b) is a true and complete list of the Accounts presently being
monitored by the CENTRAL MONITORING STATION. Exhibit 4.3(c) is a true and
complete list of all Accounts where subscriber is currently in default to the
dealer. Except as disclosed on Schedule 4.3(c) no Subscriber is in default on
any such Account and Dealer has no present reason to believe that any such
Account will or is likely to be cancelled.
4.4 PERMITS. Dealer possesses all Permits required by Applicable Law to
sell, install and service security alarm systems and to contract with
Subscribers to provide monitoring services with the appropriate jurisdictions.
5. REPRESENTATIONS AND WARRANTIES OF SAI.
SAI represents and warrants to, and agrees with, Dealer as follows:
5.1 ORGANIZATION. SAI is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
5.2 POWER OF AUTHORITY. SAI has the power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
has been duly authorized, executed, and delivered by SAI and constitutes the
legal, valid and binding obligation of SAI enforceable against SAI in accordance
with its terms. 5.3 PROSPECTUS. SAI has delivered to Dealer a prospectus dated
April 22, 1998 pertaining to the offering of the Common Stock and Supplement No.
1 thereto, dated July 2, 1998 (as supplemented, the "Prospectus"). No
representation or warranty by SAI in this Agreement or the Prospectus contains
any untrue statement of material fact, or omits or shall omit to state a
material fact necessary in order to make the statements contained herein and
therein not misleading.
6. MISCELLANEOUS PROVISIONS.
6.1 NOTICES. Any notice, consent, request, claim, demand, instruction or
other communication to be given hereunder by SAI or Dealer shall be in writing
and shall be deemed to have been given (i) if by hand, when actually received,
(ii) if by mail, five days after deposit in the U.S. Mail, postage prepaid,
(iii) if by overnight courier, the next business day after deposit with the
overnight courier and (iv) if by telex or telefax on the next business day after
transmittal. Any such notice, consent, request, claim, demand, instruction or
other communication may be given by hand, mail, overnight courier service,
telex, or telefax, and shall be addressed as follows:
If to SAI, to: If to Dealer, to:
Security Associates International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, IL 60005-4142
Fax No. (847) 956-9360 Fax No.
Attention: President Attention: President
or to such other address as a party may from time to time designate by written
notice to the other.
6.2 COSTS. The expenses of each party in connection with this Agreement
shall be the sole responsibility of such party.
6.3 INCORPORATION BY REFERENCE. The Schedules, Exhibits, certificates and
other documents attached hereto or referred to herein are deemed to be a part of
this Agreement and are incorporated herein by this reference.
6.4 ENTIRE AGREEMENT. This Agreement and the other agreements referred to
herein set forth the entire understanding of the parties relating to the subject
matter hereof and supersede all prior agreements, understandings, and
representations, whether oral or written.
6.5 ARBITRATION. All disputes arising under this Agreement shall be
resolved by binding arbitration under the Commercial Arbitration Rules of the
American Arbitration Association (the "Rules"). Such arbitration shall be
conducted in Chicago, Illinois by a single arbitrator selected in accordance
with the Rules.
6.6 GOVERNING LAW. This Agreement shall be construed in accordance with the
law of the State of Illinois excluding its conflict of law rules.
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
SECURITY ASSOCIATES INTERNATIONAL, INC.
By:
-------------------------
Its
[---------------------------]
By: Federal Tax I.D. Number:
------------------------- ------------------
Its Stock 5-2.19.99
<PAGE> 1
EXHIBIT 10.38
SECURITY ASSOCIATES INTERNATIONAL, INC.
STOCK OPTION PLAN
I. PURPOSE AND DEFINITIONS
A. PURPOSE OF THE PLAN
The Plan is intended to encourage ownership of Shares by Key
Employees and Key Non-Employees in order to attract and retain
such Key Employees in the employ of the Company or an
Affiliate, or to attract such Key Non-Employees to provide
services to the Company or an Affiliate, and to provide
additional incentive for such persons to promote the success
of the Company or an Affiliate.
B. DEFINITIONS
Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in this Plan, have the following meanings:
1. AFFILIATE means a corporation which, for purposes of
Section 422 of the Code, is a parent or subsidiary of
the Company, direct or indirect.
2. BOARD means the Board of Directors of the Company.
3. CODE means the Internal Revenue
Code of 1986, as amended.
4. COMMITTEE means the committee to which the Board
delegates the power to act under or pursuant to the
provisions of the Plan, or the Board if no committee
is selected. If the Board delegates powers to a
committee, then, such committee shall consist
initially of not less than two (2) members of the
Board, each member of which must be a "non-employee
director," within the meaning of the applicable rules
promulgated pursuant to the Exchange Act. In
addition, no member of the Committee shall receive
any Option pursuant to the Plan or any similar plan
of the Company or any Affiliate while serving on the
Committee unless the Board determines that the grant
of such an Option satisfies the then current Rule
16b-3 requirements under the Exchange Act.
Notwithstanding anything herein to the contrary, and
insofar as the Board determines that it is necessary
in order for compensation recognized by Participants
pursuant to the Plan to be fully deductible to the
Company for federal income tax purposes, each member
of the Committee also shall be an "outside director"
(as defined in regulations or other guidance issued
by the Internal Revenue Service under Code Section
162(m)).
<PAGE> 2
5. COMPANY means Security Associates International,
Inc., a Delaware corporation, and includes any
successor or assignee corporation or corporations
into which the Company may be merged, changed, or
consolidated; any corporation for whose securities
the securities of the Company shall be exchanged; and
any assignee of or successor to substantially all of
the assets of the Company.
6. DISABILITY or DISABLED means permanent and total
disability as defined in Section 22(e)(3) of the
Code.
7. EXCHANGE ACT means the Securities Exchange Act of
1934, as amended from time to time, or any successor
statute thereto.
8. INCENTIVE OPTION means an Option which, when granted,
is intended to be an "incentive stock option," as
defined in Section 422 of the Code.
9. KEY EMPLOYEE means an employee of the Company or of
an Affiliate (including, without limitation, an
employee who also is serving as an officer or
director of the Company or of an Affiliate),
designated by the Board or the Committee as being
eligible to be granted one or more Options under the
Plan.
10. KEY NON-EMPLOYEE means a non-employee director,
consultant, or independent contractor of the Company
or of an Affiliate who is designated by the Board or
the Committee as being eligible to be granted one or
more Options under the Plan.
11. NONSTATUTORY OPTION means an Option which, when
granted, is not intended to be an "incentive stock
option," as defined in Section 422 of the Code.
12. OPTION means a right or option granted under the
Plan.
13. OPTION AGREEMENT means an agreement between the
Company and a Participant executed and delivered
pursuant to the Plan.
14. PARTICIPANT means a Key Employee to whom one or more
Incentive Options or Nonstatutory Options are granted
under the Plan, and a Key Non-Employee to whom one or
more Nonstatutory Options are granted under the Plan.
15. PLAN means this Stock Option Plan, as amended from
time to time.
16. SHARES means the following shares of the capital
stock of the Company as to which Options have been or
may be granted under the Plan: treasury shares
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or authorized but unissued Common Stock, $.001 par
value, or any shares of capital stock into which the
Shares are changed or for which they are exchanged
within the provisions of Article VI of the Plan.
II. SHARES SUBJECT TO THE PLAN
The aggregate number of Shares as to which Options may be granted from
time to time shall be One Million Eight Hundred Thousand (1,800,000)
Shares (subject to adjustment for stock splits, stock dividends, and
other adjustments described in Article VI hereof); provided, however,
that, in accordance with Section 162(m) of the Code, the aggregate
number of Shares as to which Options may be granted in any calendar
year to any one Key Employee shall not exceed Four Hundred Thousand
(400,000) (subject to adjustment for stock splits, stock dividends, and
other adjustments described in Article VI hereof).
If an Option ceases to be "outstanding," in whole or in part, the
Shares which were subject to such Option, if the Option was not
exercised, shall be available for the granting of other Options. Any
Option shall be treated as "outstanding" until such Option is exercised
in full, terminates or expires under the provisions of the Plan or
Option Agreement, or is canceled by agreement of the Company and the
Participant.
Subject to the provisions of Article VI, the aggregate number of Shares
as to which Incentive Options may be granted shall be subject to change
only by means of an amendment of the Plan duly adopted by the Company
and approved by the stockholders of the Company within one year before
or after the date of the adoption of any such amendment.
III. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. A majority of the
Committee shall constitute a quorum at any meeting thereof (including
by telephone conference) and the acts of a majority of the members
present, or acts approved in writing by a majority of the entire
Committee without a meeting, shall be the acts of the Committee for
purposes of this Plan. The Committee may authorize one or more of its
members or an officer of the Company to execute and deliver documents
on behalf of the Committee. A member of the Committee shall not
exercise any discretion respecting himself or herself under the Plan.
The Board shall have the authority to remove, replace or fill any
vacancy of any member of the Committee upon notice to the Committee and
the affected member. Any member of the Committee may resign upon notice
to the Board. The Committee may allocate among one or more of its
members, or may delegate to one or more of its agents, such duties and
responsibilities as it determines.
Subject to the provisions of the Plan, the Committee is authorized to:
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<PAGE> 4
A. interpret the provisions of the Plan or of any Option or
Option Agreement and to make all rules and determinations
which it deems necessary or advisable for the administration
of the Plan;
B. determine which employees of the Company or of an Affiliate
shall be designated as Key Employees and which of the Key
Employees shall be granted Options;
C. determine the Key Non-Employees to whom Nonstatutory Options
shall be granted;
D. determine whether the Option to be granted shall be an
Incentive Option or Nonstatutory Option;
E. determine the number of Shares for which an Option or Options
shall be granted;
F. provide for the acceleration of the right to exercise an
Option (or portion thereof); and
G. specify the terms and conditions upon which Options may be
granted;
provided, however, that with respect to Incentive Options, all such
interpretations, rules, determinations, terms, and conditions shall be
made and prescribed in the context of preserving the tax status of the
Incentive Options as incentive stock options within the meaning of
Section 422 of the Code.
All determinations of the Committee shall be reduced to writing and
signed by or on behalf of the Committee. No member of the Committee
shall be liable for any action or determination made in good faith with
respect to the Plan or any Option.
IV. ELIGIBILITY FOR PARTICIPATION
The Committee may at any time and from time to time grant one or more
Options to one or more Key Employees or Key Non-Employees and may
designate the number of Shares to be subject to each Option so granted,
provided, however, that (i) each Participant receiving an Incentive
Option must be a Key Employee of the Company or of an Affiliate at the
time an Incentive Option is granted; (ii) no Incentive Options shall be
granted after the expiration of ten (10) years from the earlier of the
date of the adoption of the Plan by the Company or the approval of the
Plan by the stockholders of the Company; and (iii) the fair market
value of the Shares (determined at the time the Option is granted) as
to which Incentive Options are exercisable for the first time by any
Key Employee during any single calendar year (under the Plan and under
any other incentive option plan of the Company or an Affiliate) shall
not exceed $100,000.
Notwithstanding the foregoing, no individual who is a member of the
Committee shall be eligible to receive an Option, unless the Board
determines that the grant of the Option satisfies the then current Rule
16b-3 requirements under the Exchange Act. If, at any time,
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<PAGE> 5
the Company is no longer subject to Section 16 of the Exchange Act,
then no individual who is a member of the Committee shall be eligible
to receive an Option under the Plan unless the granting of such Option
shall be approved by the Committee, with all of the members voting
thereon being disinterested members. For the purpose of this Article
IV, a "disinterested member" shall be any member who shall not then be,
or at any time within the year prior thereto have been, granted an
Option under the Plan or any other plan of the Company or an Affiliate,
other than an Option granted under a formula plan established by the
Company or an Affiliate.
Notwithstanding any of the foregoing provisions, the Committee may
authorize the grant of an Option to a person not then in the employ of
or serving as a director, consultant, or independent contractor of the
Company or of an Affiliate, conditioned upon such person becoming
eligible to become a Participant at or prior to the execution of the
Option Agreement evidencing the actual grant of such Option.
V. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be set forth in an Option Agreement, duly executed on
behalf of the Company and by the Participant to whom such Option is
granted. Except for the setting of the Option price under Paragraph A,
no Option shall be granted and no purported grant of any Option shall
be effective until such Option Agreement shall have been duly executed
on behalf of the Company and by the Participant. Each such Option
Agreement shall be subject to at least the following terms and
conditions:
A. OPTION PRICE
The exercise price of the Shares covered by each Option
granted under the Plan shall be determined by the Committee.
The Option price per share shall be such amount as may be
determined by the Committee in its sole discretion on the date
of the grant of the Option. In the case of an Incentive
Option, if the optionee owns directly or by reason of the
applicable attribution rules ten percent (10%) or less of the
total combined voting power of all classes of share capital of
the Company, the Option price (per share) of the Shares
covered by each Incentive Option shall be not less than the
"fair market value" of the Shares on the date of the grant of
the Incentive Option. In all other cases of Incentive Options,
the Option price shall be not less than one hundred ten
percent (110%) of the said fair market value on the date of
grant. If the Shares are listed on any national securities
exchange, the fair market value shall be the closing sales
price, if any, on the largest such exchange on the date of the
grant of the Option, or, if none, on the most recent trade
date thirty (30) days or less prior to the date of the grant
of the Option. If the Shares are not then listed on any such
exchange, the fair market value of such Shares shall be the
closing sales price if such is reported or otherwise the mean
average of the closing "Bid" and the closing "Ask" prices, if
any, as reported on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") for the date of
the grant of the Option, or if none, on the most recent trade
date thirty (30) days or less
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<PAGE> 6
prior to the date of the grant of the Option for which such
quotations are reported. If the Shares are not then either
listed on any such exchange or quoted on NASDAQ, the fair
market value shall be the mean between the average of the
"Bid" and the average of the "Ask" prices, if any, as reported
in the National Daily Quotation Service for the date of the
grant of the Option, or, if none, for the most recent trade
date thirty (30) days or less prior to the date of the grant
of the Option for which such quotations are reported. If the
fair market value cannot be determined under the preceding
three sentences, it shall be determined in good faith by the
Committee.
B. NUMBER OF SHARES
Each Option shall state the number of Shares to which it
pertains.
C. TERM OF OPTION
Each Incentive Option shall terminate not more than ten (10)
years from the date of the grant thereof, or at such earlier
time as the Option Agreement may provide, and shall be subject
to earlier termination as herein provided, except that if the
Option price is required under Paragraph A of this Article V
to be at least one hundred ten percent (110%) of fair market
value, each such Incentive Option shall terminate not more
than five (5) years from the date of the grant thereof, and
shall be subject to earlier termination as herein provided.
D. DATE OF EXERCISE
Upon the authorization of the grant of an Option, or at any
time thereafter, the Committee may, subject to the provisions
of Paragraph C of this Article V, prescribe the date or dates
on which the Option becomes exercisable, and may provide that
the Option rights become exercisable in installments over a
period of years, or upon the attainment of stated goals.
E. MEDIUM OF PAYMENT
The Option price shall be paid on the date of purchase
specified in the notice of exercise, as set forth in Paragraph
I. It shall be paid in such form (permitted by Section 422 of
the Code in the case of Incentive Options) as the Committee
shall, either by rules promulgated pursuant to the provisions
of Article III of the Plan, or in the particular Option
Agreement, provide.
F. TERMINATION OF EMPLOYMENT
1. A Participant who ceases to be an employee or Key
Non-Employee of the Company or of an Affiliate for
any reason other than death, Disability, or
termination for cause, may exercise any Option
granted to such Participant,
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<PAGE> 7
to the extent that the right to purchase Shares
thereunder has become exercisable on the date of such
termination, but only within three (3) months after
such date, or, if earlier, within the originally
prescribed term of the Option, and subject to the
condition that no Option shall be exercisable after
the expiration of the term of the Option. A
Participant's employment shall not be deemed
terminated by reason of a transfer to another
employer which is the Company or an Affiliate.
2. A Participant who ceases to be an employee or Key
Non-Employee for cause shall, upon such termination,
cease to have any right to exercise any Option. For
purposes of this Plan, cause shall be deemed to
include (but shall not be limited to) wrongful
appropriation of funds of the Company or an
Affiliate, divulging confidential information about
the Company or an Affiliate to the public, the
commission of a gross misdemeanor or felony, or the
performance of any similar action that the Board or
the Committee, in their sole discretion, may deem to
be sufficiently injurious to the interests of the
Company or an Affiliate to constitute substantial
cause for termination. The determination of the Board
or the Committee as to the existence of cause shall
be conclusive and binding upon the Participant and
the Company.
3. A Participant who is absent from work with the
Company or an Affiliate because of temporary
disability (any disability other than a permanent and
total Disability as defined at Paragraph B(6) of
Article I hereof), or who is on leave of absence for
any purpose permitted by any authoritative
interpretation (i.e., regulation, ruling, case law,
etc.) of Section 422 of the Code, shall not, during
the period of any such absence, be deemed, by virtue
of such absence alone, to have terminated his
employment or relationship with the Company or with
an Affiliate, except as the Committee may otherwise
expressly provide or determine.
4. Paragraph F(1) shall control and fix the rights of a
Participant who ceases to be an employee or Key
Non-Employee of the Company or of an Affiliate for
any reason other than death, Disability, or
termination for cause, and who subsequently becomes
Disabled or dies. Nothing in Paragraphs G and H of
this Article V shall be applicable in any such case
except that, in the event of such a subsequent
Disability or death within the three (3) month period
after the termination of employment or, if earlier,
within the originally prescribed term of the Option,
the Participant or the Participant's estate or
personal representative may exercise the Option
permitted by this Paragraph F, in the event of
Disability, within twelve (12) months after the date
that the Participant ceased to be an employee or Key
Non-Employee of the Company or of an Affiliate or, in
the event of death, within twelve (12) months after
the date of death of such Participant.
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<PAGE> 8
G. TOTAL AND PERMANENT DISABILITY
A Participant who ceases to be an employee or Key Non-Employee
of the Company or of an Affiliate by reason of Disability may
exercise any Option granted to such Participant (i) to the
extent that the right to purchase Shares thereunder has become
exercisable on or before the date such Participant becomes
Disabled as determined by the Committee, and (ii) if the
Option becomes exercisable periodically under Paragraph D, to
the extent of any additional rights that would have become
exercisable had the Participant not become so Disabled until
after the close of business on the next periodic exercise
date.
A Disabled Participant shall exercise such rights, if
at all, only within a period of not more than twelve (12)
months after the date that the Participant became Disabled as
determined by the Committee (notwithstanding that the
Participant might have been able to exercise the Option as to
some or all of the Shares on a later date if the Participant
had not become Disabled) or, if earlier, within the originally
prescribed term of the Option.
H. DEATH
In the event that a Participant to whom an Option has
been granted ceases to be an employee or Key Non-Employee of
the Company or of an Affiliate by reason of such Participant's
death, such Option, to the extent that the right is
exercisable but not exercised on the date of death, may be
exercised by the Participant's estate or personal
representative within twelve (12) months after the date of
death of such Participant or, if earlier, within the
originally prescribed term of the Option, notwithstanding that
the decedent might have been able to exercise the Option as to
some or all of the Shares on a later date if the Participant
were alive and had continued to be an employee or Key
Non-Employee of the Company or of an Affiliate.
I. EXERCISE OF OPTION AND ISSUE OF STOCK
Options shall be exercised by giving written notice
to the Company. Such written notice shall: (l) be signed by
the person exercising the Option, (2) state the number of
Shares with respect to which the Option is being exercised,
(3) contain the warranty, if any, required by Paragraph M of
this Article V, and (4) specify a date (other than a Saturday,
Sunday or legal holiday) not less than five (5) nor more than
ten (10) days after the date of such written notice, as the
date on which the Shares will be purchased. Such tender and
conveyance shall take place at the principal office of the
Company during ordinary business hours, or at such other hour
and place agreed upon by the Company and the person or persons
exercising the Option. On the date specified in such written
notice (which date may be extended by the Company in order to
comply with any law or regulation which requires the Company
to take any action with respect to the Option Shares prior to
the issuance
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<PAGE> 9
thereof, whether pursuant to the provisions of Article VI or
otherwise), the Company shall accept payment for the Option
Shares and shall deliver to the person or persons exercising
the Option in exchange therefor an appropriate certificate or
certificates for fully paid non-assessable Shares. In the
event of any failure to take up and pay for the number of
Shares specified in such written notice on the date set forth
therein (or on the extended date as above provided), the
right to exercise the Option shall terminate with respect to
such number of Shares, but shall continue with respect to the
remaining Shares covered by the Option and not yet acquired
pursuant thereto.
J. RIGHTS AS A STOCKHOLDER
No Participant to whom an Option has been granted shall have
rights as a stockholder with respect to any Shares covered by
such Option except as to such Shares as have been issued to
or registered in the Company's share register in the name of
such Participant upon the due exercise of the Option and
tender of the full Option price.
K. ASSIGNABILITY AND TRANSFERABILITY OF OPTION
Unless otherwise permitted by the Code and by Rule 16b-3 of
the Exchange Act, if applicable, and approved in advance by
the Committee, an Option granted to a Participant shall not
be transferable by the Participant and shall be exercisable,
during the Participant's lifetime, only by such Participant
or, in the event of the Participant's incapacity, his
guardian or legal representative. Except as otherwise
permitted herein, such Option shall not be assigned, pledged
or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment,
or similar process. Any attempted transfer, assignment,
pledge, hypothecation or other disposition of any Option or
of any rights granted thereunder contrary to the provisions
of this Paragraph K, or the levy of any attachment or similar
process upon an Option or such rights, shall be null and
void.
L. OTHER PROVISIONS
The Option Agreement for an Incentive Option shall contain
such limitations and restrictions upon the exercise of the
Option as shall be necessary in order that such Option can be
an "incentive stock option" within the meaning of Section 422
of the Code. Further, the Option Agreements authorized under
the Plan shall be subject to such other terms and conditions
including, without limitation, restrictions upon the exercise
of the Option, as the Committee shall deem advisable and
which, in the case of Incentive Options, are not inconsistent
with the requirements of Section 422 of the Code.
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M. PURCHASE FOR INVESTMENT
Unless the Shares to be issued upon the particular exercise
of an Option shall have been effectively registered under the
Securities Act of 1933, as now in force or hereafter amended,
the Company shall be under no obligation to issue the Shares
covered by such exercise unless and until the following
conditions have been fulfilled. In accordance with the
direction of the Committee, the persons who exercise such
Option shall warrant to the Company that, at the time of such
exercise, such persons are acquiring their Option Shares for
investment and not with a view to, or for sale in connection
with, the distribution of any such Shares, and shall make
such other representations, warranties, acknowledgments and
affirmations, if any, as the Committee may require. In such
event, the persons acquiring such Shares shall be bound by
the provisions of the following legend (or similar legend)
which shall be endorsed upon the certificate(s) evidencing
their Option Shares issued pursuant to such exercise.
"The shares represented by this certificate have been
acquired for investment and they may not be sold or
otherwise transferred by any person, including a
pledgee, in the absence of an effective registration
statement for the shares under the Securities Act of
1933 or an opinion of counsel satisfactory to the
Company that an exemption from registration is then
available."
Without limiting the generality of the foregoing, the Company
may delay issuance of the Shares until completion of any
action or obtaining any consent that the Company deems
necessary under any applicable law (including without
limitation state securities or "blue sky" laws).
VI. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; SALE OF COMPANY
In the event that the outstanding Shares of the Company are changed
into or exchanged for a different number or kind of shares or other
securities of the Company or of another corporation by reason of any
reorganization, merger, consolidation, recapitalization,
reclassification, change in par value, stock split-up, combination of
shares or dividend payable in capital stock, or the like, appropriate
adjustments to prevent dilution or enlargement of the rights granted
to, or available for, Participants shall be made in the manner and kind
of shares for the purchase of which Options may be granted under the
Plan, and, in addition, appropriate adjustment shall be made in the
number and kind of Shares and in the Option price per share subject to
outstanding Options. No such adjustment shall be made which shall,
within the meaning of Section 424 of the Code, constitute such a
modification, extension, or renewal of an Option as to cause the
adjustment to be considered as the grant of a new Option.
Notwithstanding anything herein to the contrary, the Company may, in
its sole discretion, accelerate the timing of the exercise provisions
of any Option in the event of a tender offer for the Company's Shares,
the adoption of a plan of merger or consolidation under which all
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<PAGE> 11
the Shares of the Company would be eliminated, or a sale of all or
substantially all of the Company's assets. Alternatively, the Company
may, in its sole discretion, cancel any or all Options upon any of the
foregoing events and provide for the payment to Participants in cash of
an amount equal to the difference between the Option price and the
price of a Share, as determined in good faith by the Committee, at the
close of business on the date of such event, multiplied by the number
of Shares subject to Option so canceled. The preceding two sentences of
this Article VI notwithstanding, the Company shall be required to
accelerate the timing of the exercise provisions of any Option if (i)
any such business combination is to be accounted for as a
pooling-of-interests under APB Opinion 16 and (ii) the timing of such
acceleration does not prevent such pooling-of-interests treatment.
Upon a business combination by the Company or any of its Affiliates
with any corporation or other entity through the adoption of a plan of
merger or consolidation or a share exchange or through the purchase of
all or substantially all of the capital stock or assets of such other
corporation or entity, the Board or the Committee may, in its sole
discretion, grant Options pursuant hereto to all or any persons who, on
the effective date of such transaction, hold outstanding options to
purchase securities of such other corporation or entity and who, on and
after the effective date of such transaction, will become employees or
directors of, or consultants to, the Company or its Affiliates. The
number of Shares subject to such substitute Options shall be determined
in accordance with the terms of the transaction by which the business
combination is effected. Notwithstanding the other provisions of this
Plan, the other terms of such substitute Options shall be substantially
the same as or economically equivalent to the terms of the options for
which such Options are substituted, all as determined by the Board or
by the Committee, as the case may be. Upon the grant of substitute
Options pursuant hereto, the options to purchase securities of such
other corporation or entity for which such Options are substituted
shall be canceled immediately.
VII. DISSOLUTION OR LIQUIDATION OF THE COMPANY
Upon the dissolution or liquidation of the Company other than in
connection with a transaction to which the preceding Article VI is
applicable, all Options granted hereunder shall terminate and become
null and void; provided, however, that if the rights of a Participant
under the applicable Options have not otherwise terminated and expired,
the Participant shall have the right immediately prior to such
dissolution or liquidation to exercise any Option granted hereunder to
the extent that the right to purchase shares thereunder has become
exercisable as of the date immediately prior to such dissolution or
liquidation.
VIII. TERMINATION OF THE PLAN
The Plan shall terminate (10) years from the earlier of the date of its
adoption or the date of its approval by the stockholders. The Plan may
be terminated at an earlier date by vote of the stockholders or the
Board; provided, however, that any such earlier termination shall not
affect any Options granted or Option Agreements executed prior to the
effective date of
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such termination. Except as may otherwise be provided for under
Articles VI and VII, and notwithstanding the termination of the Plan,
any Options granted prior to the effective date of the Plan's
termination may be exercised until the earlier of (i) the date set
forth in the Option Agreement, or (ii) ten (10) years from the date the
Option is granted, and the provisions of the Plan with respect to the
full and final authority of the Committee under the Plan shall continue
to control.
IX. AMENDMENT OF THE PLAN
The Plan may be amended by the Board and such amendment shall become
effective upon adoption by the Board; provided, however, that any
amendment shall be subject to the approval of the stockholders of the
Company at or before the next annual meeting of the stockholders of the
Company if such stockholder approval is required by the Code, any
federal or state law or regulation, the rules of any stock exchange or
automated quotation system on which the Shares may be listed or quoted,
or if the Board, in its discretion, determines to submit such changes
to the Plan to its stockholders for approval.
X. EMPLOYMENT RELATIONSHIP
Nothing herein contained shall be deemed to prevent the Company or an
Affiliate from terminating the employment of a Participant, nor to
prevent a Participant from terminating the Participant's employment
with the Company or an Affiliate.
XI. INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee
shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be
a party by reason of any action taken by them as members of the
Committee and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding
that the Committee member is liable for gross negligence or willful
misconduct in the performance of his or her duties. To receive such
indemnification, a Committee member must first offer in writing to the
Company the opportunity, at its own expense, to defend any such action,
suit or proceeding.
XII. SAVINGS CLAUSE
This Plan is intended to comply in all respects with applicable law and
regulations, including, (i) with respect to those Participants who are
officers or directors for purposes of Section 16 of the Exchange Act,
Rule 16b-3 of the Securities and Exchange Commission, if applicable,
and (ii) with respect to executive officers, Code Section 162(m). In
case any
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<PAGE> 13
one or more provisions of this Plan shall be held invalid, illegal, or
unenforceable in any respect under applicable law and regulation
(including Rule 16b-3 and Code Section 162(m)), the validity, legality,
and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby and the invalid, illegal, or unenforceable
provision shall be deemed null and void; however, to the extent
permitted by law, any provision that could be deemed null and void
shall first be construed, interpreted, or revised retroactively to
permit this Plan to be construed in compliance with all applicable law
(including Rule 16b-3 and Code Section 162(m)) so as to foster the
intent of this Plan. Notwithstanding anything herein to the contrary,
with respect to Participants who are officers and directors for
purposes of Section 16 of the Exchange Act, no grant of an Option to
purchase Shares shall permit unrestricted ownership of Shares by the
Participant for at least six (6) months from the date of the grant of
such Option, unless the Board determines that the grant of such Option
to purchase Shares otherwise satisfies the then current Rule 16b-3
requirements.
XIII. WITHHOLDING
Except as otherwise provided by the Committee,
A. The Company shall have the power and right to deduct or
withhold, or require a Participant to remit to the Company, an
amount sufficient to satisfy federal, state, and local taxes
required by law to be withheld with respect to any grant,
exercise, or payment made under or as a result of this Plan;
and
B. In the case of any taxable event hereunder, a Participant may
elect, subject to the approval in advance by the Committee, to
satisfy the withholding requirement, if any, in whole or in
part, by having the Company withhold Shares of Common Stock
that would otherwise be transferred to the Participant having
a Fair Market Value, on the date the tax is to be determined,
equal to the minimum marginal tax that could be imposed on the
transaction. All elections shall be made in writing and signed
by the Participant.
XIV. EFFECTIVE DATE
This Plan shall become effective upon adoption by the Board, provided
that within one (1) year before or after such adoption by the Board (or
within such earlier time period as may be required by the Exchange Act,
if applicable) the Plan is approved by the stockholders of the Company.
If such approval is not obtained, then this Plan and all Options
granted hereunder shall be null and void ab initio.
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XV. GOVERNING LAW
This Plan shall be governed by the laws of the State of Illinois and construed
in accordance therewith.
Adopted this 1st day of April, 1999.
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EXHIBIT 10.39
SECURITY ASSOCIATES INTERNATIONAL, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE
The purpose of the Security Associates International, Inc. Employee
Stock Purchase Plan is to provide eligible Employees of Security Associates
International, Inc., and its Affiliates with an opportunity to acquire a
proprietary interest in the Company through the purchase of Common Stock of the
Company on a payroll deduction basis. It is believed that participation in the
ownership of the Company will be to the mutual benefit of the eligible Employees
and the Company. It is intended that this Plan shall constitute an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended. The provisions of the Plan shall, accordingly, be
construed so as to extend and limit participation in a manner consistent with
the requirements of Code Section 423.
2. DEFINITIONS
Unless otherwise specified or unless the context otherwise requires,
the following terms, as used in this Plan, have the following meanings. Wherever
appropriate, words used in the singular shall be deemed to include the plural
and vice versa, and the masculine gender shall be deemed to include the feminine
gender.
(a) ACCOUNT means the funds accumulated with respect to an Employee as
a result of deductions from his paycheck for the purpose of purchasing
Common Stock under the Plan. The funds allocated to an Employee's
Account shall remain the property of the Employee at all times prior to
the purchase of the Common Stock, but may be commingled with the assets
of the Company and used for general corporate purposes. Except as
otherwise set forth herein, no interest shall be paid or accrued on any
funds accumulated in the Accounts of Employees.
(b) AFFILIATE means a corporation, as defined in Section 424(f) of the
Code, that is a parent or subsidiary of the Company, direct or
indirect.
(c) BOARD means the Board of Directors of the Company.
(d) CODE means the Internal Revenue Code of 1986, as amended.
(e) COMMITTEE means the committee to which the Board delegates the
power to act under or pursuant to the provisions of the Plan, or the
Board if no committee is selected.
(f) COMMON STOCK means the shares of common stock of the Company, $.001
par value.
(g) COMPANY means Security Associates International, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of
the assets or voting stock of the Company.
<PAGE> 2
(h) COMPENSATION means the compensation paid to an Employee by the
Company during a payroll period for federal income tax purposes, as
reported on an Employee's Form W-2 (or comparable reporting form) for
income tax withholding purposes.
(i) EFFECTIVE DATE means the date the Plan is adopted by, and made
effective by, the Board, subject to the limitations of Section 16.
(j) EMPLOYEE means any person who is employed by the Company or an
Affiliate on a regular full-time or part-time basis. A person shall be
considered employed on a regular full-time or part-time basis if he is
customarily employed for more than twenty (20) hours per week.
(k) OFFERING DATE means the date on which the Committee grants
Employees the option to purchase shares of Common Stock.
(l) OFFERING PERIOD means the period between the Offering Date and the
Purchase Date.
(m) PURCHASE DATE means the date on which the Committee purchases the
shares of Common Stock, which date shall be the last day of an Offering
Period.
(n) PARTICIPANT means an Employee who elects to participate in the
Plan.
(o) PLAN means the Security Associates International, Inc. Employee
Stock Purchase Plan.
3. ELIGIBILITY
All Employees of the Company and, if designated by the Board, any
Affiliate, who are employed by the Company and/or such designated Affiliate
shall be eligible to participate in the Plan on the first Offering Date
coincident with or next following the Employee's first day of employment with
the Company or an Affiliate.
4. ADMINISTRATION
The Plan shall be administered by the Committee, which shall consist of
not less than two (2) members of the Board. Subject to the provisions of the
Plan, the Committee shall be vested with full authority to make, administer, and
interpret such rules and regulations as it deems necessary to administer the
Plan, and any determination, decision, or action of the Committee in connection
with the construction, interpretation, administration, and application of the
Plan shall be final, conclusive, and binding upon all Participants and any and
all persons claiming under or through any Participant. Notwithstanding anything
to the contrary in the Plan, the Committee shall have the discretion to modify
the terms of the Plan with respect to Participants who reside outside of the
United States or who are employed by a subsidiary of the Company that has been
formed under the laws of any foreign country, if such modification is necessary
in order to conform such terms to the requirements of local laws.
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<PAGE> 3
5. STOCK
(a) The Common Stock to be sold to Participants under the Plan may, at
the election of the Company, be either treasury shares, shares acquired
on the open market, and/or shares originally issued for such purpose.
The aggregate number of shares of Common Stock that shall be made
available for purchase under the Plan shall not exceed one million
(1,000,000) shares, subject to adjustment upon changes in
capitalization of the Company as provided in subparagraph (b) below. In
the event any purchase right granted under the Plan expires or
terminates for any reason without having been exercised in full or
ceases for any reason to be exercisable in whole or in part, the
unpurchased shares subject thereto will again be available for purchase
by Employees upon the exercise of purchase rights. If the total number
of shares that otherwise would have been acquired under the Plan on any
Purchase Date exceeds the number of shares of Common Stock then
available under the Plan, the Company shall make a pro rata allocation
of the shares remaining available in as nearly a uniform manner as
shall be practicable and as it shall determine to be equitable. In such
event, the payroll deductions to be made pursuant to the Participants'
authorizations shall be reduced accordingly, or refunded to the
Participants, as the case may be, and the Company shall give written
notice of such reduction or refund to each affected Participant.
(b) Appropriate adjustments in the aggregate number of shares of Common
Stock that shall be made available for purchase under the Plan shall be
made to give effect to any stock splits, stock dividends, or other
similar changes in the capitalization of the Company occurring after
the Effective Date. The establishment of the Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations, or changes in its capital or
business structure or to merge, consolidate, dissolve, liquidate, sell,
or otherwise transfer all or any part of its business or assets.
Adjustments under this Section 5 shall be made in the sole discretion
of the Committee, and its decision shall be binding and conclusive.
(c) A Participant shall not have any interest in shares covered by his
authorized payroll deduction until shares of Common Stock are acquired
for his Account.
6. PARTICIPATION
(a) Each Employee may become a Participant in the Plan by authorizing a
payroll deduction on a form provided by the Committee. Such
authorization shall become effective on the Offering Date following the
delivery of the authorization form to the Committee (or its designated
representative); provided, (i) that the Employee is eligible under
Section 3 to participate in the Plan on such day and (ii) that if the
authorization form is delivered to the Committee later than 4:00 P.M.
C.S.T. on the last business day prior to the first day of the Offering
Date, it shall not be effective and a new authorization form must be
delivered to elect to participate in a subsequent Offering Period.
(b) At the time an Employee files his authorization for a payroll
deduction, he shall elect to have deductions made from each paycheck
that he receives, such deductions to continue until the Participant
withdraws from the Plan or otherwise becomes ineligible to participate
in the Plan. Authorized payroll deductions shall be for a minimum of
one
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<PAGE> 4
percent (1%) and a maximum of fifteen percent (15%) of the
Participant's Compensation. The deduction rate so authorized shall
continue in effect through the Offering Period and each succeeding
Offering Period, subject to the following: (i) a Participant may, at
any time during any Offering Period, reduce his rate of payroll
deduction by filing a new authorization form with the Company, which
shall become effective as soon as practicable after it is filed; and
(ii) a Participant may increase the rate of his payroll deduction
effective as of any subsequent Offering Date by filing a new
authorization form with the Committee by 4:00 p.m. C.S.T. on the last
business day prior to the next Offering Date.
(c) All Compensation deductions made for a Participant shall be
credited to his Account. Except as may otherwise be provided by the
Committee under Section 4, a Participant may not make any separate cash
payment into his Account.
7. PURCHASE OF SHARES
(a) On the date when a Participant's authorization form for a deduction
becomes effective, and on each Offering Date thereafter, he shall be
deemed to have been granted an option to purchase as many full shares
of Common Stock as he will be able to purchase with the Compensation
deductions credited to his Account during the payroll periods within
the applicable Offering Period for which the Compensation deductions
are made.
(b) The purchase price for the shares of Common Stock to be purchased
with payroll deductions from the Participant shall be equal to
eighty-five percent (85%) (or such other amount as the Committee shall
authorize, but in no event less than eighty-five percent (85%)) of the
"fair market value" of a share of Common Stock on the Offering Date.
Fair market value shall be defined as the closing sales price of the
Common Stock on the largest national securities exchange on which such
Common Stock is listed on the Offering Date. If the Common Stock is not
then listed on any such exchange, the fair market value shall be the
closing sales price if such is reported or otherwise the mean between
the closing "Bid" and the closing "Ask" prices, if any, as reported in
the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") for the date of valuation, or if none, on the most
recent trade date thirty (30) days or less prior to the date of
valuation for which such quotations are reported. If the Common Stock
is not then listed on any such exchange or quoted in NASDAQ, the fair
market value shall be the mean between the average of the "Bid" and the
average of the "Ask" prices, if any, as reported in the National Daily
Quotation Service for the date of valuation, or, if none, for the most
recent trade date thirty (30) days or less prior to the date of
valuation for which such quotations are reported. If the fair market
value cannot be determined under the preceding three sentences, it
shall be determined in good faith by the Committee.
8. TIME OF PURCHASE
From time to time, the Committee shall grant to each Participant an
option to purchase shares of Common Stock in an amount equal to the number of
shares of Common Stock that the accumulated payroll deductions to be credited to
his Account during the Offering Period may purchase at the applicable purchase
price. Each Offering Period shall be for a period of twenty-
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<PAGE> 5
seven (27) months' duration. Each Participant who elects to purchase shares of
Common Stock hereunder shall be deemed to have exercised his option
automatically on such date of purchase. Administrative and commission costs on
purchases shall be paid by the Company. The Committee shall cause to be
delivered periodically to each Participant a statement showing his aggregate
Compensation deductions for the Offering Period, the price per share paid for
the shares of Common Stock purchased for him during the Offering Period, and the
amount of cash, if any, remaining in his Account at the end of the Offering
Period.
As soon as practicable following the Purchase Date, the Company shall
deliver to the Participant a certificate representing the number of shares of
Common Stock purchased for the Participant's Account. All of the cash deposits
in his Account shall be paid to him promptly after receipt of notice of
withdrawal, with interest at the rate of 3-1/2%, compounded annually. Shares of
Common Stock to be delivered to a Participant under the Plan shall be registered
in the name of the Participant or, if the Participant so directs in writing to
the Committee, in the name of the Participant and such person(s) as may be
designated by the Participant, to the extent permitted by applicable law, and
delivered to the Participant as soon as practicable after the request for a
withdrawal.
9. CESSATION OF PARTICIPATION
A Participant may cease participation in the Plan at any time by
notifying the Committee in writing of his intent to cease his participation. If
such notice is received by the Committee the Company shall distribute to the
Participant all of his accumulated payroll deductions, with interest at the rate
of 3-1/2%, compounded annually. If any Participant ceases participation in the
Plan, no further Compensation deductions shall be made on his behalf after the
effective date of his cessation, except in accordance with a new authorization
form filed with the Committee as provided in Section 6. Upon ceasing
participation in the Plan, a Participant shall not be permitted to reenter the
Plan until six (6) months have elapsed from the date his cessation becomes
effective.
10. INELIGIBILITY
An Employee must be employed by the Company or an Affiliate on the
Purchase Date in order to participate in the purchase for that Offering Period.
If an option expires without first having been exercised, all funds credited to
the Participant's Account shall be refunded, with interest at the rate of
3-1/2%, compounded annually. If a Participant becomes ineligible to participate
in the Plan at any time, all Compensation deductions made on behalf of the
Participant that have not been used to purchase shares of Common Stock shall be
paid to the Participant within sixty (60) days after the Committee determines
that the Participant is not eligible to participate in the Plan.
11. DESIGNATION OF BENEFICIARY
A Participant may file a written designation of a beneficiary who shall
receive any shares of Common Stock (or remaining Compensation deductions)
credited to the Participant's Account under the Plan in the event of such
Participant's death prior to delivery to him of the certificates for such shares
(or remaining Compensation deductions). The designation of a beneficiary may be
changed by the Participant at any time by written notice given in accordance
with rules and
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<PAGE> 6
procedures established by the Committee. Upon the death of a Participant, and
upon receipt by the Company of proof of the identity and existence, at the
Participant's death, of a beneficiary validly designated by him under the Plan,
the Company shall deliver such shares of Common Stock (or remaining Compensation
deductions) to such beneficiary. In the event of the death of the Participant,
and in the absence of a beneficiary validly designated under the Plan who is
living at the time of such Participant's death, the Company shall deliver such
shares (or remaining Compensation deductions) to the executor or administrator
of the estate of the Participant, or if no such executor or administrator has
been appointed, the Company, in its sole discretion, may deliver such shares (or
remaining Compensation deductions) to the Participant's spouse or to any one or
more dependents or relatives of the Participant, or to such other person or
persons as the Company may designate on behalf of the estate of such deceased
Participant.
12. TRANSFERABILITY
Neither Compensation deductions credited to a Participant's Account nor
any rights with regard to Plan participation or the right to purchase shares of
Common Stock under the Plan may be assigned, transferred, pledged, or otherwise
disposed of in any way by a Participant other than by will or the laws of
descent and distribution; provided, however, that shares of Common Stock
purchased on behalf of a Participant and left in his Account shall be subject to
his absolute control. Any attempted assignment, transfer, pledge, or other
disposition shall be void and without effect.
13. AMENDMENT OR TERMINATION
The Board may, without further action on the part of the stockholders
of the Company, at any time amend the Plan in any respect, or terminate the
Plan, except that it may not:
(a) Permit the sale of more shares of Common Stock than are authorized
under Section 5;
(b) Change the class of Affiliates whose Employees are eligible to
participate in the Plan; or
(c) Effect a change inconsistent with Section 423 of the Code or the
regulations issued thereunder.
14. NOTICES
All notices or other communications by a Participant under or in
connection with the Plan shall be deemed to have been duly given when received
in writing by the Chief Financial Officer of the Company or when received in the
form specified by the Committee at the location and by the person designated by
the Committee for the receipt thereof.
15. LIMITATIONS
Notwithstanding any other provisions of the Plan:
(a) The Company intends that this Plan shall constitute an employee
stock purchase plan within the meaning of Section 423 of the Code. Any
provisions required to be
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<PAGE> 7
included in the Plan under said Section, and under regulations issued
thereunder, are hereby included as though set forth in the Plan at
length.
(b) No Employee shall be entitled to participate in the Plan if,
immediately after the grant of an option hereunder, the Employee would
own stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or an
Affiliate. For purposes of this Section 15, stock ownership shall be
determined under the rules of Section 424(d) of the Code and stock that
the Employee may purchase under outstanding options shall be treated as
stock owned by the Employee.
(c) No Employee shall be permitted to purchase Common Stock hereunder
if his right and option to purchase Common Stock under this Plan and
under all other employee stock purchase plans (as defined in Section
423 of the Code) of the Company or any Affiliates would result in an
entitlement to purchase Common Stock in any one (1) calendar year in
excess of a fair market value of $25,000 (determined at the time of
grant).
(d) All Employees shall have the same rights and privileges under the
Plan, except that the amount of Common Stock that may be purchased
pursuant to the Plan shall bear a uniform relationship to an Employee's
Compensation. All rules and determinations of the Committee shall be
uniformly and consistently applied to all persons in similar
circumstances.
(e) Nothing in the Plan shall confer upon any Employee the right to
continue in the employment of the Company or any Affiliate or affect
the right that the Company or any Affiliate may have to terminate the
employment of such Employee.
(f) No Participant shall have any right as a stockholder unless and
until certificates for shares of Common Stock are issued to him or
allocated to his Account.
(g) If under any provision of the Plan that requires a computation of
the number of shares of Common Stock to be purchased, the number so
computed is not a whole number of shares of Common Stock, such number
of shares of Common Stock shall be rounded down to the next whole
number.
(h) The Plan is intended to provide shares of Common Stock for
investment and not for resale. The Company does not, however, intend to
restrict or influence any Participant in the conduct of his own
affairs. A Participant, therefore, may sell shares of Common Stock
purchased under the Plan at any time he chooses, subject to compliance
with any applicable federal or state securities laws or any applicable
Company restriction or blackout periods; provided, however, that
because of certain federal tax requirements, each Participant shall
agree, by entering the Plan:
(i) promptly to give the Company notice of any shares of Common
Stock disposed of within two (2) years after the date of grant of
the applicable option, or within one (1) year of the Purchase Date,
and the number of such shares disposed of (a "disqualifying
disposition");
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(ii) that the Company may withhold, pursuant to Code ss.ss. 3102,
3301, and 3402, from his wages and other cash compensation paid to
him in all payroll periods following in the same calendar year, any
additional taxes the Company may become liable for in respect of
amounts includable in his income as additional compensation as a
result of a disqualifying disposition of Common Stock acquired
under the Plan, or as a result of the acquisition of Common Stock
under the Plan; and
(iii) that he shall repay the Company any amount of additional
taxes the Company may become liable for in respect of amounts
includable in his income as additional compensation as a result of
a disqualifying disposition of Common Stock acquired under the
Plan, or as a result of the acquisition of Common Stock under the
Plan, that cannot be satisfied by withholding from the wages and
other cash compensation paid to him by the Company.
(i) This Plan is intended to comply in all respects with applicable law
and regulations, including with respect to Participants who are
officers or directors for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended from time to time, Rule 16b-3 of the
Securities and Exchange Commission. In case any one or more provisions
of this Plan shall be held invalid, illegal, or unenforceable in any
respect under applicable law and regulations (including Rule 16b-3),
the validity, legality, and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby and the invalid,
illegal, or unenforceable provision shall be deemed null and void;
however, to the extent permitted by law, any provision that could be
deemed null and void shall first be construed, interpreted, or revised
retroactively to permit this Plan to be construed in compliance with
all applicable law (including Rule 16b-3), so as to further the intent
of this Plan. Notwithstanding anything herein to the contrary, with
respect to Participants who are officers and directors for purposes of
Section 16(b) of the Securities Exchange Act of 1934, as amended from
time to time, and if required to comply with the rules promulgated
thereunder, such Participants shall not be permitted to direct the sale
of any Common Stock purchased hereunder until at least six (6) months
have elapsed from the date of a purchase, unless the Committee
determines that the sale of the Common Stock otherwise satisfies the
then current Rule 16b-3 requirements.
16. EFFECTIVE DATE AND APPROVALS
The Plan shall become effective at a time when:
(a) the Plan has been adopted by the Board; and
(b) a registration statement on Form S-8 under the Securities Act of
1933, as amended, has become effective with respect to the Plan; and
(c) the Committee has notified the eligible Employees that they may
commence participation in the Plan; and
(d) the Plan is approved by the holders of a majority of the
outstanding shares of Common Stock of the Company, which approval must
occur within the period ending
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twelve (12) months after the date the Plan is adopted by the Board. In
the event such stockholder approval is not obtained, the Plan shall
terminate and have no further force or effect, and all amounts
collected from the Participants during any initial Offering Period(s)
hereunder shall be refunded.
Unless sooner terminated by the Board, or as set forth above, the Plan shall
terminate upon the earlier of (i) the tenth (10th) anniversary of the adoption
of the Plan by the Board, or (ii) the date on which all shares available for
issuance under the Plan shall have been sold under the Plan.
17. APPLICABLE LAW
All questions pertaining to the validity, construction, and administration of
the Plan shall be determined in conformity with the laws of Illinois, to the
extent not inconsistent with Section 423 of the Code and the regulations
thereunder.
Adopted the 13th day of November, 1998.
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<PAGE> 1
EXHIBIT 10.40
ALLONGE
This Allonge, dated and effective as of November 13, 1998, is attached
to and made part of that certain Promissory Note (the "Note") dated December 31,
1996 in the original principal amount of Five Million Dollars and no cents
($5,000,000.00) made by Security Associates International, Inc., a Delaware
corporation, payable to TJS Partners, L.P., a New York limited partnership.
All references in the Note to "Five Million and No/100
Dollars" and "$5,000,000.00" shall be changed to read "EIGHT MILLION
DOLLARS AND NO/100" AND "$8,000,000.00."
IN WITNESS WHEREOF, each of Security Associates International, Inc. and
TJS Partners, L.P. has executed this Allonge as of the date set forth above.
SECURITY ASSOCIATES
INTERNATIONAL, INC.
By:____________________________
James S. Brannen
Its: President
TJS PARTNERS, L.P.
BY: TJS MANAGEMENT, L.P.
ITS: GENERAL PARTNER
By:____________________________
Thomas J. Salvatore
Its: Managing Partner
<PAGE> 1
EXHIBIT 10.41
THIRD AMENDMENT TO LOAN INSTRUMENTS
This THIRD AMENDMENT TO LOAN INSTRUMENTS (this "Third Amendment"),
dated as of March __, 1999, is among SECURITY ASSOCIATES INTERNATIONAL, INC., a
Delaware corporation ("SAI"), ALL-SECURITY MONITORING SERVICES, L.L.C., an
Illinois limited liability company ("ASMS"), AMJ CENTRAL STATION CORPORATION,
INC., a Delaware corporation ("AMJ"), TELECOMMUNICATIONS ASSOCIATES GROUP, INC.,
an Ohio corporation ("ERC") (SAI, ASMS, AMJ and ERC sometimes hereinafter are
referred to individually as an "Original Borrower" and collectively as the
"Original Borrowers"), TEXAS SECURITY CENTRAL, INC., a Texas corporation ("TSC")
(the Original Borrowers and TSC sometimes hereinafter are referred to
individually as an "Existing Borrower" and collectively as the "Existing
Borrowers"), and RELIANCE PROTECTION SERVICES, LTD., an Illinois corporation
("Reliance") (the Existing Borrowers and Reliance sometimes hereinafter are
referred to individually as a "Borrower" and collectively as "Borrowers"), and
FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), in its individual
capacity and as agent for all Lenders (this and all other capitalized terms used
herein are defined in Section 2 below).
R E C I T A L S
A. The Original Borrowers, Security Associates Command Center II,
L.L.C., a Michigan limited liability company ("SACC"), Monitor Service Group,
L.L.C., a Delaware limited liability company ("MSG"), and FINOVA entered into an
Amended and Restated Loan Agreement dated as of December 2, 1997 (the "Original
Loan Agreement"), as amended by a First Amendment to Loan Instruments dated as
of June 17, 1998 (the "First Amendment") among the Existing Borrowers, SACC, MSG
and FINOVA, and as further amended by a Second Amendment to Loan Instruments
dated as of July 17, 1998 (the "Second Amendment") among the Borrowers and
FINOVA (such Original Loan Agreement, as so amended, hereinafter is referred to
as the "Loan Agreement"), pursuant to which Lenders agreed to make loans and
other financial accommodations to the Borrowers, SACC and MSG.
B. Borrowers have requested that FINOVA further amend the Loan
Agreement to (i) waive the Event of Default arising from Borrowers' violation of
Section 7.18 of the Loan Agreement, (ii) reset certain covenants, and (iii)
defer certain principal payments.
C. Subject to the terms and conditions of this Third Amendment, FINOVA
is willing to agree to the request of Borrowers.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and subject to the terms and conditions hereof, Borrowers, Agent and
Lenders agree as follows:
1. INCORPORATION OF RECITALS. The Recitals set forth above are
incorporated herein, are acknowledged by Borrowers to be true and correct and
are made a part hereof.
<PAGE> 2
2. DEFINITIONS. All capitalized terms used but not elsewhere defined
herein shall have the respective meanings ascribed to such terms in the Loan
Agreement, as amended by this Third Amendment.
3. AMENDMENTS TO LOAN INSTRUMENTS. The Loan Instruments are amended
as set forth below:
(a) SECTION 1.1 - AMENDED DEFINITION. Section 1.1 of the Loan
Agreement is amended by deleting the current version of the following
definition contained herein and substitution therefor the following
version of such definition:
Applicable Ratio: on any day during a period set forth below, the
ratio set forth opposite such period:
Each Day During the Period Ratio
-------------------------- -----
Closing Date through 9/29/98 5.00
9/30/98 through 12/30/98 5.00
12/31/98 through 3/30/99 5.00
3/31/99 through 4/30/99 5.30
5/1/99 through 6/30/99 5.30
7/1/99 through 9/30/99 3.25
10/1/99 through 3/31/00 3.00
4/1/00 through 9/30/00 2.75
10/1/00 through 3/31/01 2.50
4/01/01 through 9/30/01 2.25
10/1/01 and thereafter 2.00
(b) SECTION 2.5.2. Section 2.5.2 of the Loan Agreement is deleted
in its entirety and the following is substituted therefor:
"SECTION 2.5.2 PRINCIPAL. The Principal Balance shall be
payable in consecutive quarterly installments on the first Business
Day of each quarter set forth below in an amount equal to the
product of (i) the percentage set forth below opposite such
quarter, multiplied by (ii) the outstanding Principal Balance as
of the end of the first Loan Year as follows:
Percentage of Outstanding
Principal Balance as of end
of first Loan Year Due as
Quarter Beginning an Installment
----------------- --------------
July, 1999 2.5%
2
<PAGE> 3
October, 1999 2.5%
January, 2000 2.5%
April, 2000 4.0%
July, 2000 4.0%
October, 2000 4.0%
January, 2001 4.0%
April, 2001 5.0%
July, 2001 5.0%
October, 2001 5.0%
January, 2002 5.0%
April, 2002 5.5%
July, 2002 5.5%
October, 2002 5.5%
The remaining Principal Balance, together with any other sums which
then are due and payable pursuant to the terms of the Loan Instruments,
shall be due and payable in full on the last Business Day of the
quarter commencing October, 2002.
(c) EXHIBITS TO LOAN AGREEMENT. Exhibit 7.6 (Capital Expenditures)
attached to the Loan Agreement is deleted in its entirety and the
Amended Exhibit 7.6 attached to this Third Amendment is substituted
therefor.
4. WAIVER OF DEFAULT. The parties hereto recognize that as of
December 31, 1998 the Covenant Leverage Ratio of Borrowers did not meet the
requirements of the Loan Agreement. Agent hereby waives its rights to pursue its
remedies on account of any Default that may arise as a result of the foregoing
covenant violation of Borrowers, but only as a result of such covenant
violation. The foregoing waiver shall not be deemed a waiver of any other Event
of Default which has occurred or hereafter may occur under the Loan Agreement
and shall not be deemed to establish a custom or course of dealing among Agent
and Borrowers. Except as specifically set forth herein, Agent reserves all of
its rights and remedies under the Loan Agreement.
5. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Third
Amendment shall be subject to the satisfaction of all of the following
conditions in a manner, form and substance satisfactory to FINOVA:
(a) DELIVERY OF DOCUMENTS. The following shall have been
delivered to FINOVA, each duly authorized and executed and each in
form and substance satisfactory to FINOVA:
(1) this Third Amendment;
(2) such other instruments, documents, waivers and consents
as FINOVA reasonably may request.
3
<PAGE> 4
(b) PERFORMANCE; NO DEFAULT. Each Borrower shall have performed
and complied with all agreements and conditions contained in the Loan
Instruments to be performed by or complied with by it prior to or on
the date hereof, and no Event of Default or Incipient Default shall
exist, except as waived herein.
(c) SECURITY INTERESTS. All filings of Uniform Commercial Code
financing statements and all other filings and actions necessary to
perfect and maintain the Security Interests as first, valid and
perfected Liens in the Property covered thereby shall have been filed
or taken and FINOVA shall have received such UCC, state and federal
tax Lien, pending suit, judgment and other Lien searches as it deems
reasonably necessary to confirm the foregoing.
(d) MATERIAL ADVERSE CHANGE. No event shall have occurred since
July 17, 1998 which has had or could have a Material Adverse Effect.
The date on which all of the conditions set forth in this Paragraph 5 have been
satisfied is referred to herein as the "Effective Date."
6. REFERENCES. From and after the Effective Date, all terms used in
the Loan Instruments which are defined in the Loan Agreement shall be deemed to
refer to such terms as amended by this Third Amendment.
7. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby confirms to
Lenders that the representations and warranties set forth in the Loan
Instruments, as amended by this Third Amendment, to which such Borrower is a
party are true and correct in all material respects as of the date hereof, and
shall be deemed to be remade as of the date hereof. Each Borrower represents and
warrants to Lenders that (i) such Borrower has full power and authority to
execute and deliver this Third Amendment and to perform such Person's
obligations hereunder, (ii) upon the execution and delivery hereof, this Third
Amendment will be valid, binding and enforceable upon each Borrower in
accordance with its terms, (iii) the execution and delivery of this Third
Amendment does not and will not contravene, conflict with, violate or constitute
a default under (A) the articles of incorporation, articles of organization,
by-laws or operating agreement of any Borrower or (B) any applicable law, rule,
regulation, judgment, decree or order or any agreement, indenture or instrument
to which any Borrower is a party or is bound or which is binding upon or
applicable to all or any portion of any Borrower's Property and (iv) as of the
date hereof no Incipient Default or Event of Default exists, except as waived
herein.
8. COSTS AND EXPENSES. Borrowers agree to reimburse FINOVA for all
fees and expenses incurred in the preparation, negotiation and execution of this
Third Amendment and the consummation of the transactions contemplated hereby,
including, without limitation, the fees and expenses of counsel for FINOVA.
4
<PAGE> 5
9. NO FURTHER AMENDMENTS; RATIFICATION OF LIABILITY. Except as
amended hereby, the Loan Agreement and each of the other Loan Instruments shall
remain in full force and effect in accordance with its respective terms. Each
Borrower hereby ratifies and confirms its liabilities, obligations and
agreements under the Loan Agreement and the other Loan Instruments, all as
amended by this Third Amendment, and the Liens created thereby, and acknowledges
that (i) it has no defenses, claims or set-offs to the enforcement by FINOVA of
such liabilities, obligations and agreements, (ii) FINOVA has fully performed
all obligations to each Borrower which it may have had or has on and as of the
date hereof and (iii) other than as specifically set forth herein, FINOVA does
not waive, diminish or limit any term or condition contained in the Loan
Agreement or the other Loan Instruments. FINOVA's agreement to the terms of this
Third Amendment or any other amendment of the Loan Agreement shall not be deemed
to establish or create a custom or course of dealing among FINOVA and Borrowers.
The Loan Instruments, as amended by this Third Amendment, contain the entire
agreement among FINOVA and Borrowers with respect to the transactions
contemplated by this Third Amendment.
10. COUNTERPARTS. This Third Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.
11. FURTHER ASSURANCES. Each Borrower covenants and agrees that it
will at any time and from time to time do, execute, acknowledge and deliver, or
will cause to be done, executed, acknowledged and delivered, all such further
acts, documents and instruments as reasonably may be required by FINOVA in order
to effectuate fully the intent of this Third Amendment.
12. SEVERABILITY. If any term or provision of this Third Amendment or
the application thereof to any party or circumstance shall be held to be
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, the validity, legality and enforceability of the remaining terms
and provisions of this Third Amendment shall not in any way be affected or
impaired thereby, and the affected term or provision shall be modified to the
minimum extent permitted by law so as most fully to achieve the intention of
this Third Amendment.
13. CAPTIONS. The captions in this Third Amendment are inserted for
convenience of reference only and in no way define, describe or limit the scope
or intent of this Third Amendment or any of the provisions hereof.
(remainder of this page intentionally left blank)
5
<PAGE> 6
IN WITNESS WHEREOF, this Third Amendment has been executed and
delivered by each of the parties hereto by a duly authorized officer of each
such party on the date first set forth above.
SECURITY ASSOCIATES INTERNATIONAL, INC.
and AMJ CENTRAL STATION CORPORATION,
INC., each a Delaware corporation
By:
--------------------------------------------
James S. Brannen
President of each of the foregoing corporations
ALL-SECURITY MONITORING SERVICES, L.L.C.,
an Illinois limited liability company
By:
--------------------------------------------
James S. Brannen, Manager
TELECOMMUNICATIONS ASSOCIATES GROUP, INC.,
an Ohio corporation d/b/a ERC, TEXAS SECURITY
CENTRAL, INC., a Texas corporation, and
RELIANCE PROTECTION SERVICES, LTD., an
Illinois corporation
By:
--------------------------------------------
Ronald J. Carr
President
FINOVA CAPITAL CORPORATION, a Delaware
corporation, in its individual capacity and
as agent for all Lenders
By:
--------------------------------------------
David J. Alexander
Vice President
6
<PAGE> 7
AMENDED EXHIBIT 7.6
-------------------
CAPITAL EXPENDITURES
--------------------
Closing Date - December 31, 1997 $ 25,000
1998 $ 1,800,000
1999 $ 1,800,000
2000 and each year thereafter $ 500,000
7
<PAGE> 1
SUBSIDIARIES OF
SECURITY ASSOCIATES INTERNATIONAL, INC., A DELAWARE CORPORATION
AS OF MARCH 29, 1999
Texas Security Central, Inc., a Texas corporation
Alarm Central Monitoring, Inc., a Texas corporation
Telecommunications Associates Group, Inc. (ERC), an Ohio corporation
Guardian Security Systems, Inc., an Ohio corporation
AMJ Central Station Corporation, Inc., a Delaware corporation
Alarm Funding Corporation, a Delaware corporation
<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)
<EPS-DILUTED> 0
</TABLE>
