<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended
June 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file No. 0-20870
Security Associates International, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 87-0467198
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2101 South Arlington Heights Road, Suite 100, Arlington Heights,
Illinois 60005-4142
(Address of principal executive office, including zip code)
(847) 956-8650
(Registrant's telephone number, including area code)
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 [ ]
As of August 10, 1999 the Registrant had outstanding 6,910,784 shares of its
$.001 par value Common Stock.
<PAGE> 2
Security Associates International, Inc.
Quarter Ended June 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements.......................................................3
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998......................................................3
Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998...............................................4
Consolidated Statements of Cash Flows for the three months
ended June 30, 1999 and 1998...............................................5
Notes to Financial Statements..............................................6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................8
Item 3 Quantitative and Qualitative Disclosures About Market Risk................12
Part II - OTHER INFORMATION
Item 1 Legal Proceedings.........................................................13
Item 2 Changes in Securities and Use of Proceeds.................................13
Item 3 Defaults Upon Senior Securities...........................................14
Item 4 Submission of Matters to a Vote of Security Holders.......................14
Item 5 Other Information.........................................................14
Item 6 Exhibits and Reports on Form 8-K..........................................15
SIGNATURES.........................................................................16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
ASSETS JUNE 30, 1999 DECEMBER 31, 1998
------ ------------- -----------------
<S> <C> <C>
Current Assets:
Cash $ 3,867,961 $ 1,480,869
Accounts receivable, net 2,346,677 3,633,352
Other current assets 393,038 286,033
------------ ------------
Total current assets 6,607,676 5,400,254
------------ ------------
FIXED ASSETS, net $ 3,511,574 2,974,346
Contract rights to monitor security systems, net - 15,252,814
Goodwill 21,687,413 23,123,820
Other assets, net - 774,516
------------ ------------
Total other assets 25,198,987 42,125,496
------------ ------------
TOTAL ASSETS $ 31,806,663 $ 47,525,750
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 536,975 $ 514,877
Current maturities of long - term notes payable 2,332,541 2,174,038
Accrued expenses 6,962,079 3,452,199
Unearned revenue 1,914,799 3,709,328
------------ ------------
Total current liabilities 11,746,394 9,850,442
------------ ------------
NOTES PAYABLE, net of current maturities 6,682,848 25,306,462
Subordinated Debt 10,000,000 8,500,000
------------ ------------
Total liabilities 28,429,242 43,656,904
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT) Convertible preferred
stock, $10.00 par value; 66,660 shares outstanding on
June 30, 1999 and December 31, 1998, respectively
(liquidation value of $16,665,000 at June 30, 1999 and
December 31, 1998) 666,596 666,596
12% redeemable preferred stock, $10.00 par value; 500,000
shares outstanding on June 30, 1999 and December 31, 1998 5,000,000 5,000,000
Common stock, $.001 par value; 50,000,000 shares
authorized; 6,887,683 and 6,771,807 shares outstanding on
June 30, 1999 and December 31, 1998, respectively 6,888 6,771
Warrants, net 86,218 60,748
Additional paid-in capital 16,560,917 16,360,092
Retained deficit (18,943,198) (18,225,361)
------------ ------------
Total stockholders' equity (deficit) $ 3,377,421 $ 3,868,846
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 31,806,663 $ 47,525,750
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Revenue $ 6,330,216 $ 4,482,828 $ 12,630,568 $ 8,629,317
Direct Expenses 3,911,327 2,612,192 7,645,012 5,025,266
------------ ------------ ------------ ------------
Direct Margin 2,418,889 1,870,636 4,985,556 3,604,051
------------ ------------ ------------ ------------
Amortization and depreciation 2,041,835 1,654,205 3,680,562 2,880,266
General and administrative 737,964 841,869 1,539,708 1,392,614
Selling and marketing 519,610 353,238 1,035,285 688,271
Deferred compensation expense - 360,000 - 720,000
------------ ------------ ------------ ------------
Total expenses 3,299,409 3,209,312 6,255,555 5,681,151
------------ ------------ ------------ ------------
Loss from operations (880,520) (1,338,676) (1,269,999) (2,077,100)
Gain from sale of owned
subscriber accounts 2,649,184 - 2,649,184 -
Interest expense net (914,404) (627,885) (1,797,024) (1,183,687)
------------ ------------ ------------ ------------
(Loss) income before taxes 854,260 (1,966,561) (417,839) (3,260,787)
PROVISION FOR INCOME TAXES - - - -
------------ ------------ ------------ ------------
Net (loss) income 854,260 (1,966,561) (417,839) (3,260,783)
DIVIDENDS ACCRUED ON PREFERRED STOCK (150,000) ( 118,833) (300,000) (222,082)
------------ ------------ ------------ ------------
Net (loss) income available to
common stockholders $ 704,260 $ (2,085,394) $ (717,839) $ (3,482,865)
============ ============ ============ ============
NET (LOSS) INCOME PER SHARE - Basic $.10 ($0.33) ($.11) ($0.55)
============ ============ ============ ============
NET INCOME PER SHARE-Diluted $.05
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - Basic 6,818,695 6,294,129 6,818,695 6,294,129
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - Diluted 14,118,522
============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SECURITY ASSOCIATE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($417,839) ($3,260,783)
Adjustments to reconcile net loss to net cash used
For operating activities-
Amortization and depreciation 3,680,562 2,880,266
Gain on sale of contract rights to monitor security systems (2,649,184) -
Deferred compensation expense - 720,000
Issuance of common stock for services 12,041 7,598
Warrants and stock issued under dealer stock incentive plan 114,072 -
Changes in assets and liabilities-
Accounts Receivables, net 1,239,979 (260,246)
Other current assets (107,005) 4,057
Other long - term assets 92,322 (21,248)
Accounts payable 22,098 19,766
Accrued expenses 1,204,630 42,760
Unearned revenue (1,398,145) (13,415)
------------ ------------
Net cash provided by
operating activities 1,793,531 118,755
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract rights to monitor security
systems, net (1,528,800) (1,227,557)
Proceeds from sale of contract
rights to monitor security systems 22,195,906 -
Purchase of fixed assets (822,060) (300,425)
Cash paid for acquisitions, net - (8,694,081)
------------ ------------
Net cash used for investing
activities 19,845,046 (10,222,063)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock 25,000 1,594,752
Dividends earned on preferred stock (300,000) (222,082)
Proceeds from notes receivable from stockholders - 50,000
Payment of notes payable (20,476,485) (227,791)
Proceeds from notes payable 1,500,000 4,406,169
------------ ------------
Net cash provided by (used for)
financing activities (19,251,485) 5,601,048
------------ ------------
INCREASE (DECREASE) IN CASH 2,387,092 (4,502,260)
CASH, beginning of the period 1,480,869 5,521,633
------------ ------------
CASH, end of period $3,867,961 $1,019,373
============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
SECURITY ASSOCIATES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1. BASIS OF PRESENTATION:
The accompanying financial statements have been prepared by Security
Associates International, Inc. (SAI) without an audit, in accordance with
generally accepted accounting principles for interim financial information and
in compliance with the rules and regulations of the Securities and Exchange
Commission. Accordingly they do not include all of the information and footnotes
required by generally accepted accounting principles for financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring matters) considered necessary for a fair presentation have been
included.
The results of operations for the six-month period ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the full
year. These financial statements should be read in conjunction with SAI's
financial statements and related notes in SAI's 1998 annual report on Form 10-K
filed with the Securities and Exchange Commission.
The presentation of the statement of operations has been changed to more
clearly depict SAI's activities. Therefore prior period results have been
reclassified to conform to the new presentation.
NOTE 2. STATEMENTS OF CASH FLOWS
The supplemental schedule of non-cash activities for the six months ended
June 30, 1999 and 1998, includes the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Supplemental schedule of cash flow information-
Cash paid during the period for interest $1,318,104 $883,687
Supplemental schedule of noncash activities-
Acquisitions paid for with stock 33,273 367,875
Purchase of contract rights with notes 211,374 314,643
Purchase of contract rights with deferred revenue 149,710 141,514
Note payable from sale of contract rights 1,800,000 -
Accrued expenses incurred in sale of contract rights 2,347,278 -
Deferred revenue sold in sale of contract rights 604,094 -
</TABLE>
6
<PAGE> 7
NOTE 3. EARNINGS PER SHARE
Basic earnings per share are calculated using the weighted average number
of shares outstanding during each period. Stock options, warrants and
convertible preferred stock have not been included in the calculation of net
loss per share as their effect would be antidilutive. Diluted earnings per share
has been calculated for the six months ended June 30, 1999. Diluted earnings per
share is calculated by dividing net income by the weighted average number of
shares assuming dilutive stock options, warrants and convertible preferred stock
outstanding were exercised or converted during the year.
NOTE 4. SEGMENT REPORTING
SAI has identified two operating segments, based upon the types of
customers served. SAI has agreements with and provides electronic alarm
monitoring to residences and businesses, and invoices these subscribers directly
at retail rates ("Owned Accounts"). SAI also provides electronic alarm
monitoring to residences and businesses for alarm dealers through agreements
with alarm dealers and invoices the dealers at wholesale rates ("Central
Stations"). SAI evaluates performance based upon operating income (or loss)
before interest and income taxes; and operating cash flow, defined as operating
income (or loss) plus depreciation and amortization. SAI does not separately
identify interest expense by operating segment, nor does it allocate corporate
general and administrative, selling and marketing expenses by operating segment.
Financial data by operating segment together with the items necessary to
reconcile these amounts to the consolidated financial statements are shown below
for the six months ended June 30, 1998 and 1999.
On June 30, 1999 SAI sold its Owned Accounts (See Note 6).
<TABLE>
<CAPTION>
OWNED CENTRAL CORPORATE AND
ACCOUNTS STATIONS INTERCOMPANY CONSOLIDATED
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1998
Revenues 3,469,977 5,852,304 (692,964) 8,629,317
Selling and marketing expense - - 688,271 688,271
Depreciation and amortization 2,176,446 703,820 - 2,880,266
Operating income (loss) (577,171) 809,954 (2,309,883) (2,077,100)
Six months ended June 30, 1999
Revenues 3,720,169 9,702,368 (791,969) 12,630,568
Selling and marketing expense - 556,369 442,297 1,035,285
Depreciation and amortization 2,319,183 1,361,379 - 3,680,562
Operating income(loss) (338,779) 706,681 (1,637,901) (1,269,999)
</TABLE>
NOTE 5. STOCK AND OPTIONS ISSUED
SAI issued a total of 432,835 shares of common stock during the first six
months of 1999, 64,768 of which were issued to dealers in connection with our
Dealer Stock Incentive Program. Other issuances of common stock include 12,931
shares issued as 1998 performance awards to eleven of our employees under SAI's
Management Incentive Plan; 10,275 shares issued in connection with acquisitions;
and 2,902 shares issued to an independent consultant as payment for services.
SAI did not receive any cash in exchange for these shares. Additionally, 25,000
shares were issued in connection with options exercised in the second quarter
for $25,000.
7
<PAGE> 8
On July 8, 1999 SAI issued 1,580,000 options to its officers and directors
under a stock option plan approved by its shareholders. 790,000 options have an
exercise price of $4.50 per share and 790,000 options have an exercise price of
$6.00 per share. All of the options expire 6 years from the date of grant and
vest over a three year period. These options are valued at $1.28 and $1.04,
respectively under the Black-Scholes option pricing model.
On April 1, 1999 SAI adopted an Employee Stock Purchase Plan to provide
employees an opportunity to purchase shares of its common stock through payroll
deductions. Under the Plan, eligible employees may purchase shares of SAI common
stock at 85% of its market value on April 1, 1999. Individual purchases of stock
may not exceed $25,000 fair market value annually (determined at the time of
grant). Employees in the plan as of April 1 will be entitled to receive their
shares on July 31, 2001. Total shares committed, based on employees currently in
the plan, are approximately 150,000.
NOTE 6. SALE OF OWNED SUBSCRIBER ACCOUNTS
On June 30, 1999 SAI sold its portfolio of approximately 27,000 owned
subscriber accounts to an unaffiliated third party. SAI will continue to monitor
these accounts for the third party that purchased the portfolio.
The total transaction value was $22,800,000 of which $1,800,000 was a loan
extended by the purchaser. The loan is due on June 30, 2000 and bears interest
at the rate of 8% per annum. The loan and interest will be considered paid in
full with no cash paid by SAI, if during the term of the loan SAI meets certain
minimum new business referral targets.
SAI also agreed to guarantee attrition between 8% and 13% on a substantial
majority of the portfolio sold for a one year period. The remaining small
portion of portfolio has a substantially higher attrition guarantee. An accrual
for $1,300,000 has been recorded to recognize this guarantee. Additionally, SAI
recorded an accrual of $400,000 for severance and related expenses and an
accrual for $500,000 to provide for moving the accounts sold to phone lines
owned by the purchaser.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Some of the information in this Quarterly Report may be forward-looking
statements under the federal securities laws. Such statements can be identified
by the use of words such as "anticipates," "intends," "seeks," "believes,"
"estimates," and "expects." These statements discuss expectations for the
future, contain projections concerning the results of our operations or our
future financial condition or state other forward-looking information. Such
statements are subject to a number of risks and uncertainties. Our actual
results, performance or achievements could differ substantially from the results
expressed in, or implied by, those statements. We assume no responsibility for
revising forward-looking statements in light of future events or circumstances.
8
<PAGE> 9
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
For the six months ended June 30, 1999, revenues were $12,630,568 compared
to $8,629,317 for the same period in the prior year, an increase of 46.37%. The
increase was from central station acquisitions in 1998.
General and administrative expenses for the six months ended June 30, 1999,
increased by $147,094 or 10.6% over the same period in the prior year. The
increase was primarily attributable to acquisitions of central stations.
Selling and marketing expenses increased by $347,014 or 50.42% as
salespeople and related expenses were added to focus on bringing new dealers
into our central stations. Included in the $347,014 increase were expenses
related to the dealer stock incentive program of $114,072.
The increase of $800,296 in amortization and depreciation expenses is
related to the increased amortization of goodwill due to acquisitions completed
over the previous twelve months.
As no deferred compensation award has been made in 1999, there is no
expense to record. Expenses related to this plan were $720,000 in the second
quarter of 1998.
The gain from the sale of the owned accounts of $2,649,184 is the result of
the sale of the owned account portfolio, which occurred on June 30, 1999. The
gain reflects the total cash proceeds of $22,800,000 less the net book value of
the account portfolio, and net book value of goodwill related to the purchase of
the owned accounts. Additionally, the note payable, attrition guarantees and the
accrued expenses were charged against the total consideration received from the
sale of the accounts.
Interest expense increased from $1,183,687 in the second quarter of 1998 to
$1,797,024 in the second quarter of 1999 as debt increased by approximately
$9,100,000 from the second quarter of 1998 to the second quarter of 1999. As a
result of the sale of SAI owned accounts, a debt repayment of $20,000,000 was
made on June 30, 1999.
BUSINESS SEGMENT OPERATING RESULTS
The following is a discussion of our industry segment operating results. We
define operating income as income or loss before interest and income taxes. We
do not allocate corporate general and administrative or corporate selling
expenses to our operating segments.
Central Station Operations. Operating income from wholesale monitoring decreased
from $890,954 to $706,681. This decrease reflects increased selling expenses for
new sales personnel and expenses related to marketing the Dealer Stock Incentive
Program
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of $556,369 and an increase of $657,559 in amortization expenses related to
acquisitions. Revenue increased by $3,850,064 or 65.8% and cash flow increased
by $554,286 or 36.6% compared to the second quarter of 1998.
Owned Accounts. Operating loss decreased by $238,392 primarily due to an
increase in revenue of $250,192. Cash flow related to this segment increased by
$381,129 or 23.8%. The assets related to this segment were sold on June 30,
1999.
Corporate Expenses. Corporate expenses overall decreased by $671,982 or 29.1%.
This decrease is related to reduced expenses related to payroll and deferred
compensation expense.
LIQUIDITY AND CAPITAL RESOURCES
Since 1994, we have financed our operations and growth from a combination
of internally generated cash flow, borrowings under our credit facilities and
sales of equity securities. Our principal uses of cash are for capital
expenditures to support internal growth, the acquisition of central monitoring
stations and operating expenses.
We are implementing a strategy to attract new dealers to our wholesale
central station monitoring facilities. We intend to continue issuing shares of
common stock and warrants throughout the remainder of the year consistent with
our Registration Statement on Form S-1, as amended from time to time, which was
declared effective on April 22, 1998. The number of shares of common stock and
warrants to be issued can not be estimated at this time, but may not exceed
2,000,000 shares, including those that may be issued upon exercise of the
warrants.
Of the proceeds from the sale of the owned account portfolio, $20 million
was used to pay down debt on the line of credit with FINOVA Capital Corporation.
As of June 30, 1999, we had approximately $23.4 million available for
acquisitions on our existing line of credit with FINOVA Capital Corporation. The
remaining cash will be used for the completion of capital projects, payment of
holdback notes and to pay for any transition obligations related to the sale of
the owned account portfolio. We are constantly evaluating alternative sources of
funding to accomplish our long-term business objectives.
INFLATION
Management does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
THE YEAR 2000 ISSUE
Overview
Many computer programs were not originally written to recognize the first
two digits of any given year, assuming instead, that such digits are always
"19". As a result, on January 1, 2000, some 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 may also effect
programs before January 1, 2000 if the
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program is processing calculations using dates after December 31, 1999. We are
continuing to address the effect of the Year 2000 issue on our information
systems and operations.
We have established a formal written Year 2000 compliance program to
investigate and correct problems that may exist in our primary computer systems.
All departments and subsidiaries are participating in this program as described
below.
Current Initiatives
We have installed a new financial system and are in the process of
upgrading our central station monitoring systems. These initiatives were
undertaken to allow for efficient financial management, to provide a standard
platform for all central stations and to 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
central monitoring 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, if a
suitable alternative vendor is available.
Progress To Date
We completed the installation of a new financial accounting system in
February, 1999, which we believe is Year 2000 compliant. We have also made
substantial progress in bringing our central monitoring stations into
compliance. Our approach has been to investigate the capability of each system,
identify systems and components that need to be upgraded, install the upgraded
equipment, and finally test the entire system for Year 2000 compliance.
Alarm signal processing systems. We have upgraded and completed Year 2000
testing for our computerized alarm signal processing systems in our Florida,
Texas, Illinois, and Oregon central monitoring stations. In our Ohio central
station we have two separate systems. We have completed the system upgrade, and
have successfully completed the Year 2000 testing on the system which handles
80% of the subscriber accounts monitored at this central station and we are 75%
complete with the system that handles the remaining 20% of the subscriber
accounts. The Utah central station has been assessed for a possible system
upgrade. We determined that the upgrade was necessary and we believe upgrade
will be completed and tested by the end of the third quarter of 1999.
Alarm signal receivers. We are evaluating the Year 2000 compliance of our
receiver systems by surveying the vendors to assess their progress in achieving
Year 2000 compliance and by replacing components whenever potential Year 2000
problems are identified. This review and replacement process is currently 75%
complete, and we expect it to be finished by the end of the third quarter of
1999.
These initiatives should ensure that all of our computer systems will be
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 financial and alarm signal processing systems and our alarm signal receivers
will be in full compliance by the
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<PAGE> 12
third quarter of 1999. We have sent surveys to all of our principal vendors and
have received responses from all of the principal vendors whose products or
services could potentially affect our operations.
Estimated Costs
The total cost of these initiatives is expected to be approximately
$2,000,000, of which approximately $1,434,000 has been expended through July,
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 the Year 2000 programs 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
exposure and the failure of management controls. Although we believe that our
financial and alarm signal processing systems and our alarm signal receivers
will be Year 2000 compliant, there can be no assurance that the Year 2000
problem will not have a material adverse affect on our business, financial
condition and results of operations.
Contingency Plans
We are implementing 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 that are Year 2000 compliant, which would enable us to
continue to monitor at each location for an extended period of time. As our
industry is heavily dependent on telecommunications providers, we would not be
able to operate if the telecommunications systems on which we depend fail. We
have entered into contracts with backup telecommunications providers to minimize
the impact of any failure by our primary carrier.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
We currently do not invest excess funds in derivative financial instruments
or other market rate sensitive instruments for the purpose of managing interest
rate or foreign currency exchange rate risk or for any other purpose.
We incur debt from three sources: dealers from whom we acquire subscriber
accounts, senior debt from FINOVA and fixed rate subordinated debt from
principal stockholder, TJS Partners, L.P. Debt owed to dealers is in the form of
a "holdback note" which is collateral to a guaranty of the aggregate revenue
produced by subscriber accounts purchased from the dealer for a period of time.
These notes are non-interest bearing and comprise less than 2.5% of our total
debt. At June 30, 1999 we had $10,000,000 in subordinated debt due to our
principal stockholder, which is at a fixed rate of 12% and matures in January,
2003, and $6,609,730 in senior debt due to FINOVA
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at an interest rate of prime plus 2%. The prime rate applicable to this debt was
7.75% at June 30, 1999. We do not have exposure to foreign currency fluctuations
and do not use derivatives for trading purposes.
Interest Rate Risk. The table below provides information about our debt
obligations that are sensitive to changes in interest rates. For these debt
obligations, the table presents principal cash flows and related average
interest rates by expected maturity dates.
<TABLE>
<CAPTION>
(dollars in millions) Maturity Date
--------------
1999 2000 2001 2002 2003 Total Fair Value
---- ---- ---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $1.8 $10.00 $10.00 $11.80
Average Interest Rate 8% 12.0% 12.0%
Variable Rate Debt $.330 $.859 $1.190 $4.231 $6.610 $6.610
Average Interest Rate 9.75% 9.75% 9.75% 9.75% 9.75%
</TABLE>
PART II - OTHER INFORMATION
Item 1. 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 2. Changes in Securities and Use of Proceeds.
We issued the following securities under our Registration Statement on Form
S-1 File No. 33-49879, declared effective April 22, 1998.
On June 25, 1999, we issued 1,343 shares of common stock to an alarm dealer
in partial payment for substantially all of its alarm monitoring assets.
On June 25, 1999, we issued 4,880 shares of common stock to an alarm
dealer, in partial payment for substantially all of its alarm monitoring assets.
No warrants were issued or exercised during the second quarter.
We do not receive cash from our Selling Stockholders when they sell their
shares of common stock, nor do we receive cash from dealers for common stock or
warrants issued to them in connection with our dealer incentive programs. We
receive cash only when the warrants are exercised. We expect to use any cash
proceeds received from the exercise of warrants for general corporate purposes,
including working capital. Pending such use, the net cash proceeds from the
exercise of warrants will be deposited into our company's bank accounts or
invested in short-term, investment grade, interest-bearing securities. We can
not be sure of the number of warrants that will be issued, or the number that
will be exercised when issued.
13
<PAGE> 14
In addition to the securities listed above, we issued the following
securities during the second quarter of 1999 that were not registered under the
federal Securities Act.
On June 30, 1999, we issued 1,497 shares of common stock to an independent
consultant in payment for services.
On June 30, 1999, we issued a warrant to purchase 15,000 shares of common
stock to an employee in consideration of the employee's agreement to terminate
his employment agreement and surrender his original warrant to purchase 50,000
shares of common stock on or before November 25, 2003 at an exercise price of
$6.00 per share, which vested (became exercisable) at a rate of one-third
(16,667 shares) per year. The 15,000 share warrant is immediately exercisable at
$6.00 per share and expires on November 25, 2000.
On June 21, 1999, we issued a total of 258,359 shares of common stock to a
total of seven (7) officers as terminating distributions under our Supplemental
Employees' Retirement Plan, which was terminated on June 21, 1999.
On May 20, 1999, we issued 23,440 shares of common stock to one of our
former officers as a distribution under our Supplemental Employees' Retirement
Plan.
In addition to the securities listed above, we are hereby reporting the
issuance of the following securities that were not registered under the federal
Securities Act and that were previously inadvertently omitted.
On December 21, 1993, we issued a warrant to purchase 7,723 shares of
common stock to an employee. The warrant is exercisable for ten years from the
issue date at an exercise price of $0.53 per share.
We did not receive any cash proceeds in exchange for these unregistered
securities. No underwriters were engaged in connection with these securities.
These sales were made in reliance upon the exemption from registration set forth
in Section 4(2) of the Securities Act. Securities were issued to a very limited
number of individuals.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the Company's security holders during the
second quarter of 1999.
Item 5. Other Information.
None.
14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K on June 1, 1999, dated May 19, 1999,
which reported that SAI and Security Alarm Financing Enterprises, Inc. (SAFE),
an unaffiliated third party, had entered into a binding letter of intent whereby
SAI would sell our portfolio of approximately 27,000 owned (retail) subscriber
accounts to SAFE. The purchase price was not finally determined as of that date
as it was subject to further due diligence. It was agreed between SAI and SAFE
that SAI would continue to monitor these subscriber accounts and would become
SAFE's preferred provider of central station monitoring. This sale would allow
SAI to fully concentrate on our primary business of providing wholesale
monitoring to independent alarm dealers. The sale was completed on June 30,
1999, and reported on a Current Report on Form 8-K filed on July 8, 1999.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements 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.
Date: August 10, 1999 By:/s/ James S. Brannen
James S. Brannen
President and Chief Executive Officer
Date: August 10, 1999 By:/s/ Daniel S. Zittnan
Daniel S. Zittnan
Chief Financial Officer
16
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