<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
September 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 November 11, 1999 the Registrant had outstanding 7,114,387 shares of its
$.001 par value Common Stock.
<PAGE> 2
Security Associates International, Inc.
Quarter Ended September 30, 1999
INDEX
Part I - FINANCIAL INFORMATION PAGE
----
Item 1 Financial Statements..................................................3
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.................................................3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and 1998.....................4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998.....................................5
Notes to Financial Statements.........................................6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................10
Item 3 Quantitative and Qualitative Disclosures About Market Risk...........15
Part II - OTHER INFORMATION
Item 1 Legal Proceedings....................................................15
Item 2 Changes in Securities and Use of Proceeds............................15
Item 3 Defaults Upon Senior Securities......................................16
Item 4 Submission of Matters to a Vote of Security Holders..................16
Item 5 Other Information....................................................17
Item 6 Exhibits and Reports on Form 8-K.....................................18
SIGNATURES...................................................................19
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998
<S> <C> <C>
Current Assets:
Cash $ 1,685,214 $ 1,480,869
Accounts receivable, net 2,152,476 3,633,352
Other current assets 575,920 286,033
--------------------------------
Total current assets 4,413,610 5,400,254
--------------------------------
FIXED ASSETS, net $ 3,608,286 2,974,346
Contract rights to monitor security systems, net - 15,252,814
Goodwill 21,208,185 23,123,820
Other assets, net 393,020 774,516
--------------------------------
Total other assets 25,209,491 42,125,496
--------------------------------
TOTAL ASSETS $ 29,623,101 $ 47,525,750
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 570,960 $ 514,877
Current maturities of long - term notes payable 2,069,744 2,174,038
Accrued expenses 3,396,425 3,452,199
Unearned revenue 826,403 3,709,328
--------------------------------
Total current liabilities 6,863,532 9,850,442
--------------------------------
NOTES PAYABLE, net of current maturities 7,052,084 25,306,462
Subordinated Debt - 8,500,000
--------------------------------
Total liabilities 13,915,616 43,656,904
--------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock, $10.00 par value;
0 and 66,660 shares outstanding on September 30, 1999
and December 31, 1998, respectively - 666,596
12% redeemable preferred stock, $10.00 par value;
0 and 500,000 shares outstanding on September 30,
1999 and December 31, 1998 - 5,000,000
Series A convertible preferred stock, $10 par value;
137,686 shares
authorized, 135,709 shares outstanding 1,357,090 -
Common stock, $.001 par value; 50,000,000 shares
authorized; 6,941,976 and 6,771,807 shares outstanding on
September 30, 1999 and December 31, 1998, respectively 6,942 6,771
Warrants, net 98,953 60,748
Additional paid-in capital 34,610,699 16,360,092
Retained deficit (20,366,199) (18,225,361)
--------------------------------
Total stockholders' equity (deficit) $ 15,707,485 $ 3,868,846
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 29,623,101 $ 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 NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
<S> <C> <C> <C> <C>
Net Revenue $ 4,788,591 $5,492,293 $17,419,158 $ 4,788,591
Operating Unit Expense 3,488,573 3,534,134 11,133,583 8,559,400
-----------------------------------------------------------------------
Operating Unit Margin 1,300,018 1,958,159 6,285,575 5,562,210
-----------------------------------------------------------------------
Amortization and depreciation 858,314 1,763,679 4,538,873 4,643,945
General and administrative 629,431 600,490 1,973,964 1,797,924
Business development 609,407 428,669 1,839,871 1,312,116
Deferred compensation expense - 290,000 - 1,010,000
-----------------------------------------------------------------------
Total expenses 2,097,152 3,082,838 8,352,708 8,763,985
-----------------------------------------------------------------------
Loss from operations (797,134) (1,124,679) (2,067,133) (3,201,775)
Gain from sale of owned
subscriber accounts - - 2,649,184 -
Interest expense net (475,870) (781,475) (2,272,895) (1,965,162)
-----------------------------------------------------------------------
(Loss) income
before taxes (1,273,004) (1,906,154) (1,690,844) (5,166,937)
PROVISION FOR INCOME TAXES - - - -
-----------------------------------------------------------------------
Net (loss) income (1,273,004) (1,906,154) (1,690,844) (5,166,937)
DIVIDENDS ACCRUED ON PREFERRED STOCK (150,000) (150,000) (450,000) (372,082)
------------------------------------------------------------------------
Net (loss) income available to
common stockholders $(1,423,004) $(2,056,154) $(2,140,844) $(5,539,019)
=======================================================================
NET (LOSS) INCOME PER SHARE - Basic ($ .21) ($ .33) ($ .31) ($ .88)
=======================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - Basic
6,850,255 6,323,891 6,850,255 6,323,891
=======================================================================
</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)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,690,844) $ (5,166,937)
Adjustments to reconcile net loss to net cash used
For operating activities-
Amortization and depreciation 4,538,873 4,643,945
Gain on sale of contract rights to monitor security systems (2,649,184) -
Deferred compensation expense - 1,010,000
Issuance of common stock for services 62,728 10,598
Warrants and stock issued under dealer stock incentive plan 153,111 -
Changes in assets and liabilities-
Accounts Receivables, net 1,480,876 (234,346)
Other current assets (289,887) 76,892
Other long-term assets 92,324 (15,048)
Accounts payable 56,083 (128,856)
Accrued expenses 404,964
1,126,418
Unearned revenue (2,486,541) (14,960)
-------------------------------
Net cash provided by
operating activities 393,957 586,252
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract rights to monitor security
systems, net (1,517,537) (1,449,862)
Proceeds from sale of contract rights to monitor
security systems 22,195,906 -
Purchase of fixed assets (1,204,915) (852,381)
Cash paid for acquisitions, net - (9,899,416)
-------------------------------
Net cash used for investing activities 19,473,454 (12,201,659)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock 50,000 1,949,754
Dividends earned on preferred stock (450,000) (372,082)
Payment of deferred financing costs (393,020) -
Proceeds from notes receivable from stockholders - 50,000
Payment of notes payable (20,760,046) (344,767)
Proceeds from notes payable 1,890,000 8,014,973
-------------------------------
Net cash provided by (used for)
financing activities (19,663,066) 9,297,878
-------------------------------
INCREASE (DECREASE) IN CASH 204,345 (2,317,529)
CASH, beginning of the period 1,480,869 5,521,633
-------------------------------
CASH, end of period $ 1,685,214 $ 3,204,104
===============================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
SECURITY ASSOCIATES INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine-month period ended September 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 nine months
ended September 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 $1,635,002 $1,470,162
Supplemental schedule of noncash activities-
Acquisitions paid for with stock 137,478 549,583
Purchase of contract rights with notes 211,374 383,653
Purchase of contract rights with deferred revenue 149,710 178,894
Note payable in 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 -
Accrued interest and dividends paid for with Series A
Convertible Preferred Stock 3,576,166 -
</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.
NOTE 4. SEGMENT REPORTING
SAI had identified two operating segments, based upon the types of
customers served. SAI had agreements with and provided electronic alarm
monitoring to residences and businesses, and invoiced those 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 nine months ended September 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>
- ------------------------------------ -------------- -------------- -------------- ---------------
Nine months ended September 30, 1998
- ------------------------------------ -------------- -------------- -------------- ---------------
Revenues 5,070,277 10,052,425 (1,001,092) 14,121,610
- ------------------------------------ -------------- -------------- -------------- ---------------
Business development expense - - 1,312,116 1,312,116
- ------------------------------------ -------------- -------------- -------------- ---------------
Depreciation and amortization 3,327,667 1,316,278 - 4,643,945
- ------------------------------------ -------------- -------------- -------------- ---------------
Operating income (loss) (938,690) 1,311,351 (3,574,436) (3,201,775)
- ------------------------------------ -------------- -------------- -------------- ---------------
Nine months ended September 30, 1999
- ------------------------------------ -------------- -------------- -------------- ---------------
Revenues 3,720,169 14,492,901 (793,911) 17,419,159
- ------------------------------------ -------------- -------------- -------------- ---------------
Business development expense - 809,388 1,029,983 1,839,371
- ------------------------------------ -------------- -------------- --------------- ---------------
Depreciation and amortization 2,319,183 2,188,352 31,340 4,538,875
- ------------------------------------ -------------- -------------- --------------- ---------------
Operating income(loss) (338,779) 833,660 (2,562,010) (2,067,129)
- ------------------------------------ -------------- -------------- --------------- ---------------
</TABLE>
NOTE 5. STOCK AND OPTIONS ISSUED
SAI issued a total of 659,538 shares of common stock during the first
nine months of 1999. Of these shares, SAI distributed 316,959 shares which were
outstanding under the Deferred Compensation Plan and 95,078 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; 40,016 shares
issued in connection with acquisitions; and 4,554 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 the third
quarter in connection with options exercised in the second quarter for an
aggregate exercise price of $25,000.
7
<PAGE> 8
On July 8, 1999 SAI issued options to purchase 1,580,000 shares of
common stock to its officers and directors under a stock option plan approved by
our stockholders. Options to purchase 790,000 of these shares have an exercise
price of $4.50 per share and the remaining 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. Had compensation
costs for the options been determined based on the fair value at their grant
date consistent with the method of FASB No. 123 ("SFAS 123"), SAI's net income
for the nine-month period would have been reduced by $1,832,800. As a result,
the loss per share would have increased by $.27 per share to $.58 per share.
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 this Plan, eligible employees may purchase shares of SAI
common stock at 85% of their market value on April 1, 1999. Individual purchases
of stock may not exceed $25,000 in fair market value annually (determined at the
time of grant). Employees in the plan as of April 1, 1999 will be entitled to
receive their shares on July 1, 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.
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.
NOTE 7. ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
On September 30, 1999, SAI entered into the Second Amendment to
Security Associates International, Inc. Common Stock Subscription and Purchase
Agreement with TJS Partners, L.P., SAI's principal stockholder. Pursuant to this
agreement: (i) $10,000,000 of subordinated debt and accrued interest owed by SAI
to TJS Partners, L.P.; (ii) 66,910 shares of Convertible Preferred Stock; and,
(iii) 500,000 shares of 12% Redeemable Preferred Stock, together with all
accrued dividends were exchanged for 135,709 shares of newly designated Series A
Convertible Preferred Stock.
8
<PAGE> 9
The Series A Convertible Preferred Stock has a $10 par value, a
liquidation preference of $350 per share and is convertible into 13,570,900
shares of SAI's common stock. The Series A Convertible Preferred Stock is also
entitled to receive dividends equal to those that would have been received if
the holder had converted into common stock.
The holder of Series A Convertible Preferred Stock is entitled to vote
on all matters on which holders of SAI's common stock are entitled to vote, on
an as-converted basis. However, the total voting power of all securities owned
by the holder of Series A Convertible Preferred Stock is limited to a maximum of
45% of the total number of votes eligible to vote on a matter submitted to our
stockholders.
In connection with the restructuring, SAI's By-laws were amended to
increase the percentage of votes required to approve matters presented to the
stockholders from a simple majority to requiring approval by greater than sixty
(60) percent. This super-majority provision will be in effect for as long as TJS
Partners, L.P. owns 30% of SAI's common stock on an as-converted basis.
Additionally, for so long as TJS Partners, L.P. owns at least fifteen percent
(15%) of SAI's common stock on an as-converted basis, SAI's Board of Directors
will consist of five directors.
NOTE 8. NOTES PAYABLE
On September 30, 1999, SAI refinanced its previous $30,000,000 line of
credit with FINOVA Capital Corporation. This previous line of credit had a
principal balance outstanding of approximately $6,600,000 on the closing date.
The refinancing with FINOVA and Citizens Bank of Massachusetts, a wholly owned
subsidiary of the Royal Bank of Scotland, consists of a term loan and an
acquisition line of credit. The term loan was in the principal amount of
$7,000,000, which covered SAI's existing indebtedness to FINOVA and working
capital. The acquisition line of credit of up to $38,000,000 is solely for
acquisitions of central monitoring stations. SAI may draw on this line of credit
for eighteen months. Both the term loan and the acquisition line of credit bear
initial interest at a variable rate of prime plus 0.75%. The interest rate is,
however subject to an upward adjustment depending on the loan to recurring
monthly revenue ratio. The loans mature in five years.
NOTE 9. SUBSEQUENT EVENT
Subsequent to September 30, 1999 SAI purchased central stations in
Seattle and California. The total purchase price for these acquisitions is
approximately $4,300,000 in cash, 100,000 shares of SAI common stock plus
assumed liabilities.
9
<PAGE> 10
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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the nine months ended September 30, 1999, revenues were $17,419,158
compared to $14,121,610 for the same period in the prior year, an increase of
23.35%. The change in revenue was due to an increase in revenues from central
station operations of $4,440,476 or 44.17% and a decrease in revenue from the
retail operation of $1,350,108 or 26.63%. The increase in central station
revenues is due to acquisitions in 1998. The decrease in revenue from the retail
operation is due to the sale of the owned accounts that occurred on June 30,
1999.
Operating unit expenses increased from $8,559,400 to $11,133,583 or
30.07% during the nine-month period ended September 30, 1999 primarily due to
the acquisition of central stations in 1998.
General and administrative expenses for the nine months ended September
30, 1999, increased by $176,040 or 9.79% over the same period in the prior year.
The increase was primarily attributable to acquisitions.
Business development expenses increased by $527,755 or 40.22% as
salespeople and related expenses were added to focus on bringing new dealers
into our central stations. Included in the $527,755 increase were expenses
related to the dealer stock incentive program of $153,111.
The decrease of $105,070 in amortization and depreciation expenses is
related to an increase in amortization of goodwill of $903,414 due to
acquisitions completed over the previous twelve months combined with a decrease
in amortization related to the retail operations of $1,008,484.
As no deferred compensation award has been made in 1999, there is no
expense to record. Expenses related to this plan were $1,010,000 for the nine
months ended September 30, 1998.
The gain from the sale of the owned accounts of $2,649,184 is the
result of the sale of the SAI 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 the net book value of goodwill related
to the purchase of the owned
10
<PAGE> 11
accounts. Additionally, the note payable, attrition guarantees and the
accrued expenses were charged against the total consideration received from the
sale of these accounts.
Interest expense increased from $1,965,162 in the third quarter of 1998
to $2,272,895 in the third quarter of 1999. 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. Additionally, subordinated debt and all then outstanding
preferred stock was exchanged for a new Series A Convertible Preferred Stock on
September 30, 1999. As of September 30, 1999 SAI has total debt of $9,121,828
compared to total debt of $35,980,500 as of September 30,1998.
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 $1,311,351 to $833,660. This decrease reflects increased selling expenses
for new sales personnel and expenses related to marketing the Dealer Stock
Incentive Program of $809,388 and an increase of $872,074 in amortization
expenses related to acquisitions. Revenue increased by $4,440,476 or 44.17% and
cash flow increased by $394,383 or 15.01% compared to the third quarter of 1998.
Owned Accounts. Operating loss decreased by $599,911 primarily due to
reduced attrition. The assets related to this segment were sold on June 30,
1999.
Corporate Expenses. Corporate expenses overall decreased by $1,012,426 or
28.3%. This decrease is attributable 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. We are constantly evaluating
alternative sources of funding to accomplish our long-term business objectives.
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 our strategy to attract new dealers to our
wholesale central station monitoring facilities. We intend to continue issuing
shares of common stock 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 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 warrants previously issued
to Dealers under this program.
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
11
<PAGE> 12
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. Additionally, SAI signed a note payable to the seller for
$1,800,000 payable within a year from the sale. This note is extinguished if SAI
refers to the seller contracts that total recurring monthly revenue of $230,000
that the seller subsequently purchases. SAI expects that it will meet this
requirement and has referred contracts with recurring monthly revenue totaling
$83,625 of recurring monthly revenue as of October 29, 1999 of which contracts
with $32,090 of recurring monthly revenue have been purchased. Additionally,
there are contracts with recurring monthly revenue totaling over $90,000 that
will be referred as soon as letters of intent are signed with the selling
dealers. There can be no assurance that the seller will purchase all or any of
the contracts referred.
On September 30, 1999, SAI entered into the Second Amendment to
Security Associates International, Inc. Common Stock Subscription and Purchase
Agreement with TJS Partners, L.P., SAI's principal stockholder. Pursuant to this
agreement: (i) $10,000,000 of subordinated debt and accrued interest owed by SAI
to TJS Partners, L.P.; (ii) 66,910 shares of Convertible Preferred Stock; and,
(iii) 500,000 shares of 12% Redeemable Preferred Stock, together with all
accrued dividends were exchanged for 135,709 shares of newly designated Series A
Convertible Preferred Stock.
The Series A Convertible Preferred Stock has a $10 par value, a
liquidation preference of $350 per share and is convertible into 13,570,900
shares of SAI's common stock. The Series A Convertible Preferred Stock is also
entitled to receive dividends equal to those that would have been received if
the holder had converted into common stock.
On September 30, 1999, SAI refinanced its previous $30,000,000 line of
credit with FINOVA Capital Corporation. This previous line of credit had a
principal balance outstanding of approximately $6,600,000 on the closing date.
The refinancing with FINOVA and Citizens Bank of Massachusetts, a wholly owned
subsidiary of the Royal Bank of Scotland, consists of a term loan and an
acquisition line of credit. The term loan was in the principal amount of
$7,000,000, which covered SAI's existing indebtedness to FINOVA and working
capital. The acquisition line of credit of up to $38,000,000 is solely for
acquisitions of central monitoring stations. SAI may draw on this line of credit
for eighteen months. Both the term loan and the acquisition line of credit bear
initial interest at a variable rate of prime plus 0.75%. The interest rate is,
however subject to an upward adjustment depending on the loan to recurring
monthly revenue ratio. The loans mature in five years.
Subsequent to September 30, 1999 SAI purchased a central station in
Seattle, Washington and Chino, California. The total purchase price for these
acquisitions is approximately $4,300,000 in cash, 100,000 shares of SAI common
stock plus assumed liabilities. SAI has also signed a letter of intent to
purchase two additional central stations in New Orleans and Denver. The total
purchase for these two acquisitions will be determined upon the completion of
due diligence, but will approximate $1,000,000 plus the assumption of
liabilities.
12
<PAGE> 13
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 affect programs before January 1, 2000 if the 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 have upgraded 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 formally surveyed 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. Based on the representations of
these vendors, there do not appear to be any material Year 2000 compliance
issues.
Progress To Date
We completed the installation of a new financial accounting system in
February, 1999, which we believe, based on our Year 2000 testing, is Year 2000
compliant. We believe our central monitoring stations are also Year 2000
compliant. 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. We have
upgraded and completed Year 2000 testing for our computerized alarm signal
processing systems in all of our central monitoring stations. We believe, after
testing these systems, that they are Year 2000 compliant.
13
<PAGE> 14
Alarm signal receivers. We have evaluated 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 were identified. After testing these receivers, we believe
that they are Year 2000 compliant.
These initiatives should ensure that all of our computer systems are
ready to process the Year 2000 date change without disruption. We believe that
all of our systems satisfy Year 2000 requirements at this time.
Estimated Costs
The total cost of these initiatives is expected to be approximately
$2,000,000, of which approximately $1,650,000 has been expended through October
13, 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 are Year 2000 compliant, there can be no assurance that the Year 2000
problem will not have a material adverse affect on our business, financial
condition and results of operations.
Additionally, we will continue to purchase central monitoring stations
up to and beyond January 1, 2000. While we will endeavor to test the Year 2000
compliance of these central stations and will obtain representations from the
sellers regarding Year 2000 compliance, there can be no assurance that a Year
2000 disruption will not occur in these central stations.
Contingency Plans
We have implemented a contingency plan to mitigate the Year 2000
problem. This plan includes full redundancy of all central station operating
systems except our Illinois and Oregon central stations, so that in the event
one central station cannot receive signals, 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.
14
<PAGE> 15
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 have acquired subscriber
accounts, a note payable to S.A.F.E. related to the sale of our owned account
portfolio and senior debt from FINOVA. 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 3.5% of our total
debt. At September 30, 1999 we had $7,000,000 in senior debt due to FINOVA at an
interest rate of prime (8.25%) plus .75% and a note due June 30, 2000 of
$1,800,000 at an 8% annual rate related to the sale of the owned account
portfolio. We do not have exposure to foreign currency fluctuations and do not
use derivatives for trading purposes. As of June 30, 1999 we no longer acquire
subscriber accounts.
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
- -------------------------- -- --------- ---------- --------- --------- --------- --------- -------------
2000 2001 2002 2003 2004 Total Fair Value
- -------------------------- -- --------- ---------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $1.8 $1.8 $1.8
- -------------------------- -- --------- ---------- --------- --------- --------- --------- -------------
Average Interest Rate 8% 8%
- -------------------------- -- --------- ---------- --------- --------- --------- --------- -------------
Variable Rate Debt $.385 $.8225 $1.1025 $4.690 $7.0 $7.0
- -------------------------- -- --------- ---------- --------- --------- --------- --------- -------------
Average Interest Rate 8.50% 8.50% 8.50% 8.50% 8.50%
- -------------------------- -- --------- ---------- --------- --------- --------- --------- -------------
</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 July 31, 1999, we issued 22,900 shares of common stock to alarm
dealers in partial payment for substantially all of their alarm monitoring
assets.
15
<PAGE> 16
On August 31, 1999, we issued 29,741 shares of common stock as a
deferred part of the purchase price in connection with the acquisition of our
central station located in Ogden, Utah.
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.
In addition to the securities listed above, we issued the following
securities during the third quarter of 1999 that were not registered under the
federal Securities Act.
On July 26, 1999, August 31, 1999 and September 30, 1999 we issued 480
shares, 572 shares and 600 shares of common stock respectively to an independent
consultant in payment for services.
On July 7, 1999, TJS Partners, L.P. exercised options to purchase 250
shares of convertible preferred stock pursuant to TJS Partners, L.P.'s mirror
options.
On September 30, 1999, SAI entered into the Second Amendment to
Security Associates International, Inc. Common Stock Subscription and Purchase
Agreement with TJS Partners, L.P., SAI's principal stockholder. Pursuant to this
agreement: (i) $10,000,000 of subordinated debt and accrued interest owed by SAI
to TJS Partners, L.P.; (ii) 66,910 shares of Convertible Preferred Stock; and,
(iii) 500,000 shares of 12% Redeemable Preferred Stock, together with all
accrued dividends were exchanged for 135,709 shares of newly designated Series A
Convertible Preferred Stock.
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.
At our Annual Meeting of Stockholders held on July 8, 1999, SAI
presented to the stockholders the re-election of James S. Brannen, Ronald
I. Davis, Douglas Oberlander, Thomas J. Salvatore and Michael B. Jones as
Directors, all of whom were re-elected with 11,038,169 shares voted for each and
5,380 shares withheld for each. SAI also presented to the stockholders the
following matters to be voted upon: 1) Ratification of the appointment of Arthur
Andersen LLP as the Company's independent public accountant for the 1999 fiscal
year; 2) Approve the Security Associates International, Inc. Employee Stock
Purchase Plan; and 3) Approve the Security Associates International, Inc. Stock
Option Plan. A total of 13,239,109 shares were eligible to vote on each matter
presented at the Annual Meeting all of which were approved by the following
votes of the stockholders:
16
<PAGE> 17
<TABLE>
<CAPTION>
NUMBER OF SHARES
Broker
1) Ratification of the appointment of For Against Abstain Non Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Arthur Andersen LLP as the
Company's independent public
accountant for the 1999 fiscal
year................................ 11,018,391 24,158 1,000 0
2) Approve the Security Associates
International, Inc. Employee
Stock Purchase Plan.............. 9,861,067 47,060 0 1,135,422
3) Approve the Security Associates
International, Inc. Stock Option
Plan................................. 9,828,293 49,834 0 1,135,422
</TABLE>
Item 5. Other Information.
NONE
17
<PAGE> 18
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 July 8, 1999, dated June 30,
1999, which reported that SAI had sold to Security Alarm Financing Enterprises,
Inc. (SAFE), an unaffiliated third party, its portfolio of approximately 27,000
owned (retail) subscriber accounts. The total transaction value was $22,800,000,
of which $1,800,000 was a loan extended by SAFE to SAI. The loan is due in one
year and bears interest at the rate of 8% per annum. The loan, with interest,
will be considered paid in full if during the term of the loan SAI refers to
SAFE $230,000 in recurring monthly revenue from alarm dealers for purchase or
for collateral for loans under SAFE's financing programs, which SAFE then
closes. 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 allows SAI to fully concentrate on our primary
business of providing wholesale monitoring to independent alarm dealers.
We filed a Current Report on Form 8-K on July 8, 1999, dated July 8,
1999, containing our Annual Review. The Annual Review contained a discussion of
our company's progress for the past year, as well as announcing SAI's future
plans for growth.
18
<PAGE> 19
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: November 11, 1999 By: /s/ James S. Brannen
James S. Brannen
President and Chief Executive Officer
Date: November 11, 1999 By: /s/ Daniel S. Zittnan
Daniel S. Zittnan
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> $1,685,214
<SECURITIES> 0
<RECEIVABLES> $2,605,710
<ALLOWANCES> ($453,234)
<INVENTORY> 0
<CURRENT-ASSETS> $4,413,610
<PP&E> $4,717,107
<DEPRECIATION> ($1,108,821)
<TOTAL-ASSETS> $29,623,101
<CURRENT-LIABILITIES> $13,915,616
<BONDS> 0
0
$1,351,090
<COMMON> $6,942
<OTHER-SE> $14,343,453
<TOTAL-LIABILITY-AND-EQUITY> $29,623,101
<SALES> 0
<TOTAL-REVENUES> $17,419,158
<CGS> 0
<TOTAL-COSTS> $19,486,291
<OTHER-EXPENSES> $2,649,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $2,272,895
<INCOME-PRETAX> ($1,690,844)
<INCOME-TAX> 0
<INCOME-CONTINUING> ($1,690,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ($1,690,844)
<EPS-BASIC> (.21)
<EPS-DILUTED> 0
</TABLE>
