<PAGE> 1
DATED APRIL 7, 2000
PROSPECTUS
7,696,688 SHARES
AND WARRANTS TO PURCHASE 2,000,000 SHARES
OF
[SECURITY ASSOCIATES LOGO]
SECURITY ASSOCIATES INTERNATIONAL, INC.
COMMON STOCK
Security Associates International, Inc. is offering 2,000,000 shares of its
common stock and warrants to purchase up to 2,000,000 of those shares. The
shares and warrants will not be issued for cash, but rather will be issued:
- On a continuing basis to independent security alarm dealers as an
inducement for them to enter into agreements to use the alarm
monitoring services we offer. See "Business - Dealer Partner Program"
and "Business -Dealer Financing Programs - The ValueBuilder Program."
- As all or part of the price we pay in purchasing other businesses.
The warrants have an exercise price of $6.00 per share of common stock
purchased. We will not receive any cash from the initial issuance of shares or
warrants. We will receive $6.00 for each share of common stock purchased on
exercise of the warrants.
The selling stockholders identified in this prospectus may also sell up to
5,696,688 shares of common stock. If any of the selling stockholders elect to
sell their shares they may do so from time to time privately at prices
individually negotiated with the purchasers, or publicly in transactions on the
American Stock Exchange.
Selling stockholders may pledge common stock to Bear Stearns Securities
Corp. or to another broker as collateral for margin loans. In the event of a
default by such a selling stockholder, Bear Stearns or such other broker may
offer and sell the pledged shares in the manner described above. Additionally,
the common stock may be sold from time to time by pledgees, donees, transferees
or other successors in interest, including but not limited to Bear Stearns.
Our common stock is traded on the American Stock Exchange under the symbol
"SAI." On April 6, 2000, the last reported sale price of the common stock was
$3.625.
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SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK AND WARRANTS
BEING OFFERED THROUGH THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise. Any representation to the contrary is a criminal offense.
This prospectus is dated April 7, 2000
<PAGE> 3
TABLE OF CONTENTS
PROSPECTUS SUMMARY........................................................... 1
SUMMARY FINANCIAL DATA....................................................... 4
RISK FACTORS................................................................. 5
THE SECURITIES THAT ARE BEING OFFERED THROUGH THIS PROSPECTUS................ 8
BUSINESS..................................................................... 9
USE OF PROCEEDS..............................................................29
PRICE RANGE OF COMMON STOCK..................................................31
STOCKHOLDER RETURN AND PERFORMANCE GRAPH.....................................31
DIVIDENDS ...................................................................32
SELECTED FINANCIAL DATA......................................................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................33
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................41
MANAGEMENT...................................................................42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................47
PRINCIPAL AND SELLING STOCKHOLDERS...........................................51
DESCRIPTION OF CAPITAL STOCK.................................................59
LEGAL MATTERS................................................................63
EXPERTS......................................................................63
ADDITIONAL INFORMATION.......................................................63
FINANCIAL STATEMENTS........................................................F-1
Certain statements in this prospectus 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
prospectus generally. In addition, when used in this prospectus the words
"anticipates," "intends," "seeks," "believes," "plan," "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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PROSPECTUS SUMMARY
This summary highlights information about our company, but does not contain
all the information that you should consider before investing in the common
stock or the warrants. You should read the entire prospectus carefully.
Security Associates International, Inc., which was founded by 30
independent alarm dealers and three members of our senior management, is the
largest wholesale alarm monitoring company in the United States. We have grown
rapidly in recent years, principally through the acquisition of central
monitoring station businesses. Over the last two years our company experienced
an approximate 76% net increase in the number of systems monitored. As of March
23, 2000 we provided security alarm monitoring to over 400,000 residential and
business consumers whose alarm systems were installed and are serviced by
members of our dealer network. We market our monitoring services to independent
alarm dealers and, as a result, do not compete directly with most of the large,
integrated alarm companies. Independent alarm dealers are those who generally
have less than 10,000 customers. We do not sell or install alarm systems, and
are committed to not compete with the independent alarm dealer community. Our
dealers represent a national group with a strong local presence. We believe we
can serve as a vehicle to aggregate these dealers into a nationwide marketing,
installation and servicing network.
We own and operate ten central monitoring stations which are strategically
located to provide services to most of the major geographic regions of the
country, including: the Southeast, Midwest, North Central, Mountain, Northwest,
West and Southwest regions. We also provide education and training in the areas
of marketing, finance and new products and services to alarm dealers through
one-on-one contact, periodic regional seminars and our annual convention. We
believe that the recruitment, training and motivation of dealers are key factors
in the success and growth of our company.
The electronic monitoring of alarm systems is characterized by high fixed
costs and incrementally lower variable costs, often referred to as economies of
scale. Since most independent alarm dealers are small, they outsource or
subcontract, the monitoring of their customer's alarm systems and focus on the
sale, installation and service aspects of their business. Despite the fact that
they subcontract the monitoring services, dealers retain the bulk of the
monitoring fees. Dealers, therefore, view monitoring as an important part of
their business and frequently look to their central monitoring company for
support and additional services.
Industry statistics suggest that substantial benefits, in the form of lower
burglary rates, accrue to consumers who protect their premises with
electronically monitored security systems. Approximately 15% of residences in
the United States have monitored alarm systems. The security alarm industry has
grown at a 6.7% average annual rate over the past three years, and we expect
that rate to continue in the foreseeable future. The industry has a relatively
small number of large, well-capitalized and integrated participants, but remains
dominated by many thousands of independent alarm dealers.
We are the largest wholesale monitoring company in the United States and
all of our central stations are Underwriters Laboratories (UL) listed. There are
approximately 250 UL listed and approximately 1,500 to 2,000 non-UL central
stations in the United States, although most are small, locally owned companies.
We anticipate that the alarm industry will gradually converge with other
industries and small central station owners will be increasingly pressured to
provide additional products and services to help dealers grow and compete. We
believe this is a significant factor creating the opportunity for us to acquire
and possibly consolidate these small central stations. There are approximately
27 million residential and commercial electronically monitored alarm systems in
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the United States, of which approximately half are represented by independent
alarm dealers.
Our senior management and marketing personnel have extensive relationships
with independent alarm dealers, which have been cultivated over a combined 100
years of experience in the security industry, serving or working with
independent alarm dealers. We have the largest dealer network in the United
States, with over 3,000 dealers who install and service approximately 600,000
residential and commercial security systems in nearly every major community in
the United States. Approximately 2,500 of those dealers purchase all or a
portion of their monitoring services from our regional monitoring stations and
have regular contact with us. Additionally, many of these dealers participate in
one or more of our educational or training programs.
We believe that our focused strategy of wholesale monitoring for
independent alarm dealers has advantages over an integrated sales, installation,
service and monitoring strategy. Our revenue base grows with the overall growth
in the industry, particularly with the growth of new sales and installations by
independent alarm dealers. We believe that independent alarm dealers as a group
enjoy better customer retention and relationships than the large, integrated
national companies by virtue of their local ownership and emphasis on quality
service. Additionally, independent alarm dealers install a large percentage of
"custom" alarm systems which we believe enjoy better retention rates than "low
cost" or "no money down" systems. As a result, as their customer base grows, we
anticipate an inherent growth in our wholesale monitoring business.
Historically, this growth has been accommodated with only modest, incremental
capital expenditures to increase capacity. We believe independent alarm dealers
will continue to be a dominant force in the alarm industry and we will continue
to invest in and provide programs specifically designed to assist our dealers in
achieving profitable growth.
We will continue to pursue our existing business strategy of aligning
ourselves closely with independent alarm dealers, as we believe this will
provide greater long-term value to customers, our dealers and our stockholders.
The key elements of our strategy to sustain and accelerate the growth in our
wholesale monitoring business and dealer network are as follows:
Alarm Dealer Network and Stock Incentive Plans. We believe that alarm
dealers are more productive, provide more revenue to us and remain associated
with us longer, if they are equity owners in our company. For this reason we
offer dealers common stock based incentive plans that allow them to become
owners of our company in return for agreeing to monitor their alarm systems in
one of our central stations.
Central Monitoring Stations. We will continue to pursue acquisitions of
central monitoring station businesses in order to complete a nationwide network
of strategically located regional monitoring stations. We believe that regional
wholesale monitoring services are more attractive to independent alarm dealers
and are consistent with the "local" marketing and service most independent alarm
dealers provide to their customers. We will continue, where appropriate, to
consolidate our monitoring businesses within the framework of our regional
operating structure. We expect that our acquisition and consolidation strategy
will significantly increase our operating margins, while maintaining the quality
of service our dealers and their customers expect.
Our dealer network has the technical capability to provide existing and
potential customers with a wide range of low-voltage products and services that
are security, communications, information, entertainment or recurring revenue
related. In fact, many of them already do provide some of these services. We
also believe that a nationwide network of secure, redundant central monitoring
facilities with substantial communication capability and capacity can facilitate
and support many additional products and services. As a result, we anticipate
that the combination of the collective customer base, market share,
installation, service and sales capability of our dealer
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network, and the technical and operational capabilities of our nationwide
network of electronic monitoring stations, will provide numerous opportunities
to profitably grow and diversify the recurring revenue of our dealers and our
company. We believe we are uniquely positioned to respond to these challenges
and opportunities.
Our Executive Offices are located at 2101 South Arlington Heights Road,
Suite 100, Arlington Heights, Illinois 60005. Our telephone number is (847)
956-8650.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary financial data for the fiscal years ended 1997
through 1999 is derived from our consolidated financial statements which have
been audited by Arthur Andersen LLP, independent public accountants. The
following summary financial data for the fiscal years ended 1995 and 1996 is
derived from audited financial statements. The summary financial data set forth
below should be read in conjunction with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
<TABLE>
<CAPTION>
Years Ended December 31,
Pro Forma Pro Forma
1995 1996 1997 1998 1998(1) 1999 1999(2)
---------- ----------- ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $2,733 $3,782 $10,814 $20,203 $17,146 $22,689 $18,969
Operating (loss) $(389) $(591) $(2,662) $(3,406) $(2,130) $(2,931) $(2,592)
Net (loss) available to
common stockholders $(947) $(1,718) $(4,938) $(6,798) $(3,904) $(4,047) $(4,631)
Net loss per share $(.26) $(.47) $(1.16) $(1.06) $(.61) $(.59) $(.66)
Shares used in computing net
loss per share 3,665,642 3,669,343 4,266,151 6,394,048 6,429,048 6,897,200 6,980,533
</TABLE>
(1) The pro forma data for the year ended December 31, 1998, gives effect to
all acquisitions made during fiscal year 1998 and the sale of our owned
subscriber accounts as if they had occurred January 1, 1998.
(2) The pro forma data for the year ended December 31, 1999, gives effect to
the sale of our owned subscriber accounts as if it had occurred on January
1, 1999.
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997 1998 1999
--------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $54 $632 $5,522 $1,481 $631
Working capital (deficit) $(2,699) $(4,518) $1,625 $(4,450) $(3,849)
Total assets $6,030 $16,533 $36,009 $47,526 $33,341
Total debt $6,862 $12,790 $22,919 $35,981 $14,287
Total stockholders' equity
(deficit) $(2,043) $1,269 $7,231 $3,869 $14,166
</TABLE>
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RISK FACTORS
You should carefully consider the following factors and the other
information contained in this prospectus before deciding to invest in shares of
our common stock or in the warrants.
Potential indebtedness. We have a $45 million credit facility which, if
drawn on in its entirety, would result in a large amount of indebtedness
relative to our equity. At March 22, 2000, our total indebtedness under our
credit facility with FINOVA Capital Corporation and Citizens Bank of
Massachusetts was approximately $12.8 million. This debt bears interest at a
floating rate, therefore, our financial results might be affected by changes in
prevailing interest rates. The terms of our credit facility limit, but do not
prohibit, the incurrence of additional indebtedness without their consent. We
expect to incur additional indebtedness in the future primarily to fund
acquisitions of central monitoring station businesses as part of our business
strategy.
A large amount of indebtedness could have negative consequences, including,
without limitation:
- our ability to obtain additional financing in the future for working
capital, acquisitions, capital expenditures, general corporate and
other purposes may be impaired,
- vulnerability of our company to a downturn in our business or the
economy generally, and
- our ability to compete against less leveraged companies may be
adversely affected.
Our credit facility contains restrictive covenants, including covenants
that require the lenders' consent to certain actions by us and which require us
to maintain certain financial ratios to undertake significant acquisitions, all
of which may impose limitations on our ability to execute our business strategy.
The failure to comply with these covenants could be an event of default and
could accelerate our payment obligations.
Our ability to satisfy our payment obligations will depend, in large part,
on our financial performance, which will ultimately be affected by general
economic and business factors, many of which will be outside management's
control. We believe that the cash flow from operations combined with
availability under our credit facility and other available sources of financing
will be enough to meet our expenses and interest obligations. However, if these
payment obligations can't be satisfied, it will be necessary to find alternative
sources of funds by selling assets, restructuring, refinancing debt or seeking
additional equity capital. There can be no assurance that any of these
alternative sources would be available on satisfactory terms or at all.
Uncertainties associated with acquisitions. Acquisitions of central
monitoring station businesses involve a number of uncertainties. Sellers
typically do not have audited historical financial information with respect to
the acquired business. Therefore, in making acquisition decisions, we have
generally relied on our management's knowledge of the industry, due diligence
procedures and representations and warranties of the sellers. There can be no
assurance that such representations and warranties are or will be true and
complete or, if such representations and warranties are inaccurate, that we will
be able to uncover such inaccuracies in the course of our due diligence or
recover damages from the seller in an amount sufficient to fully compensate us
for any resulting losses. Risks
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associated with these uncertainties include, but are not limited to, the
following:
- the possibility of unanticipated problems not discovered prior to the
acquisition,
- possible loss of customers or possible dealer cancellations, and
- for acquisitions that are structured as stock purchases of other
companies, the assumption of unexpected liabilities and the
disposition of unnecessary or undesirable assets of the acquired
companies.
History of net losses. We incurred net losses of $4.0 million for fiscal
1999, $ 6.8 million for fiscal 1998, $4.0 million for fiscal 1997 and $1.7
million for fiscal 1996. These losses reflect, among other factors, the
substantial non-cash charges for amortization of purchased subscriber accounts
and goodwill associated with acquired central monitoring station businesses and
the interest on our indebtedness.
We expect these charges to increase as we acquire additional central
monitoring station businesses, increase our indebtedness or if interest rates
increase.
Need for additional capital. Historically, our cash needs for acquisitions
and capital expenditures have exceeded the cash provided by our operations. We
intend to continue to pursue growth through the acquisition of central
monitoring station businesses and to make additional capital expenditures. This
will require us to seek additional funding under our existing credit facility,
through new loans or from the sale of additional securities. These fundraising
activities could result in higher levels of indebtedness or dilution to our
common stock. There can be no assurance that funding will be available to us on
attractive terms or at all.
Dealer cancellation. The dealers for which we provide monitoring services
may cancel or terminate their contracts with us for many reasons, including
adverse financial and economic conditions generally, competition from other
alarm monitoring companies or if we do not provide satisfactory monitoring and
customer service. As a result of our rapid growth through acquisitions, we must
successfully assimilate large numbers of subscriber accounts and develop good
working relationships with new dealers. If we fail in this endeavor it could
result in dealers canceling their contracts with us. A significant increase in
account cancellation could have a material adverse effect on our financial
performance.
Possible adverse effects of false alarm ordinances. Many municipalities
have expressed concerns about the perceived high incidence of false alarms and
the cost of responding to them. This may lead to reluctance on the part of
police to respond to alarm signals or slower police responses. If either of
these were to occur the demand for new alarm systems or monitoring services
could decline.
A number of local governments have adopted, or are considering, measures
aimed at reducing the cost of responding to false alarms and, if enacted, could
adversely affect our financial performance. Such measures include:
- subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms,
- licensing individual alarm systems and the revocation of licenses
following an excessive number of false alarms,
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- imposing fines on subscribers for false alarms,
- imposing limitations on the number of times the police will respond to
alarms after an excessive number of false alarms, and
- requiring further verification of an alarm signal before the police
will respond.
Risks of litigation. Providing fire and burglary alarm monitoring services
may expose us to risks of liability for employee acts or omissions or system
failure. Most of our alarm monitoring agreements contain provisions limiting our
potential liability in an attempt to reduce this risk. However, in the event of
litigation there can be no assurance that these limitations will be enforced,
and the costs and results of such litigation could have an adverse effect on us.
We carry insurance of various types, including general liability and errors
and omissions insurance. Our loss experience specifically, and the loss
experience of other security service companies generally, may affect the
availability and cost of our insurance. Certain of our insurance policies and
the laws of some states may limit or prohibit insurance coverage for punitive or
certain other types of damages, or liability arising from gross negligence.
Competition. The security alarm industry is highly competitive and highly
fragmented. While we do not compete directly with many of the large new entrants
or participants into the industry because we do not sell and install security
systems, we are nonetheless impacted by the competitive challenge these entrants
present to independent alarm dealers.
Our monitoring services compete with those offered by an estimated 1,800 to
2,300 companies. Of those companies an estimated 250 firms offer monitoring
services from Underwriters Laboratories listed facilities. Most of the companies
providing monitoring services are small, local operations.
Other companies have adopted a strategy similar to ours that includes the
acquisition of central monitoring station businesses. Some of these competitors
have greater financial resources than we do or may be willing to offer higher
prices than we are prepared to offer to acquire monitoring stations. The effect
of such competition may be to reduce our rate of growth or increase the price we
pay, which could have an adverse effect on our business. There can be no
assurance that we will be able to find acceptable acquisitions.
Dependence upon Senior Management. The success of our business is dependent
upon the collective efforts of our executive officers, several of whom have
decades of experience in the alarm industry. The loss of one or more of these
people could have an adverse effect on our business.
Stock ownership is very concentrated. Our largest stockholder owns
approximately 65.45% of our issued and outstanding voting stock, as well as the
right to designate two members of our board of directors. As a result, this
investor currently has the ability to significantly influence the outcome of
matters submitted for approval to our stockholders and directors (including the
election of directors and any merger, consolidation or sale of all or
substantially all of our assets) and our affairs generally. Additionally, our
directors and management own or control approximately 16,474,344 shares of
common stock on a fully diluted basis, the substantial majority of which are
currently subject to restrictions on transfer under Rule 144, but which may
become available for sale and could result in
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downward pressure on our stock price. See "Principal and Selling Stockholders."
Restrictions on transfer and possible forfeiture of common stock and
warrants. Alarm dealers receiving common stock or warrants under our Dealer
Partner Program or the ValueBuilder program will be assuming several risks
related to the securities they receive, including:
- entering into a multi-year agreement to monitor the subscriber
accounts covered by the program in one of our central monitoring
stations,
- granting us rights of first refusal to purchase the dealer's
subscriber accounts and make loans secured by subscriber accounts
during the term of the agreement,
- restrictions on the right to transfer, pledge or exercise the
securities, generally 25% of which will vest at closing, with the
balance vesting in three equal annual installments,
- if the alarm dealer defaults on its obligations to us, the dealer will
forfeit all of the securities as to which the rights to transfer or
pledge have not yet vested.
Registration of common shares underlying warrants. Warrantholders will
receive freely tradable shares of common stock when they exercise the warrants
if: (i) a registration statement under the Securities Act of 1933, as amended,
relating to the common stock is then in effect, or (ii) the common stock is
qualified for sale or exempt from qualification under the applicable securities
laws of the states in which the various holders of warrants reside. Although we
will use our best efforts to maintain the effectiveness of a current
registration statement covering the common stock underlying the warrants, there
can be no assurance that we will be able to do so. Because our common stock is
traded on the American Stock Exchange our common stock is exempt from any state
registration requirements. If, in the future, our common stock is not traded on
an exchange that exempts state registration requirements, there can be no
assurance that exemptions from the registration or qualification requirements
will be available at the time a warrantholder wishes to exercise his or her
warrant or that our shares will be registered or qualified.
THE SECURITIES THAT ARE BEING OFFERED THROUGH THIS PROSPECTUS
SAI is offering 2,000,000 shares of its common stock and warrants to
purchase up to 2,000,000 of those shares. The shares and warrants are intended
to be used primarily for the purpose of inducing security alarm dealers to enter
into agreements to purchase monitoring services from central monitoring stations
owned by our company or our subsidiaries and to align our company closely with
its alarm dealer/customer. See "Business - Dealer Partner Program and Business -
Dealer Financing Programs - The ValueBuilder Program." The securities to be
issued to alarm dealers under this program are part of our continuous effort to
increase our dealer network and the number of homes and businesses to which we
provide monitoring services. We believe that our dealer network is more
productive and will remain associated with us longer when they own our common
stock. We will continue to offer the shares and warrants for this until all the
available securities are exhausted.
We will not receive any cash payments for issuing either the shares or the
warrants to alarm dealers. What we will get in return for the securities is a
contractual commitment to purchase monitoring services from us at
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competitive prices. Any dealer that receives warrants and wishes to exercise
those warrants to purchase shares of common stock will be required to pay us
$6.00 for each share of common stock that it elects to purchase. See "Business -
Dealer Partner Program and Business- Dealer Financing Programs - The
ValueBuilder Program."
We may also issue shares as all or part of the purchase price of businesses
that we acquire. Those businesses may be acquired by our company or one of our
subsidiaries. The legal form that any such transaction takes will be determined
by negotiation and could take the form of a merger, a purchase of the stock of
the target company or a purchase of the assets that constitute the business we
are acquiring. We expect that the value ascribed to the securities we issue in
any transaction will be reasonably related to their market value at the time we
agree on the terms or at the time of delivery of the securities.
5,696,688 of the shares of common stock also covered by this prospectus are
owned by stockholders or may be issued to them if they exercise options and
warrants. Those shares have been registered for resale and the owners of those
shares are identified in this prospectus under the caption "Principal and
Selling Stockholders."
The selling stockholders may sell their shares from time to time privately
at prices negotiated with the purchasers, or publicly through transactions on
the American Stock Exchange.
BUSINESS
OVERVIEW
We provide security alarm monitoring services for both residences and
businesses through contracts with independent alarm dealers for subscribers who
have entered into monitoring contracts with them. Independent alarm dealers are
primarily owner-operated companies that have less than 10,000 customers. Our
ability to attract new monitoring business is enhanced and supported by a
network of over 3,000 independent alarm dealers, to whom we also 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, we 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 through central monitoring
stations we own and through three wholly owned operating subsidiaries which
operate central monitoring stations (which are the locations where the actual
monitoring of the subscriber's alarms is conducted).
[MAP OF USA WITH SAI OWNED CENTRAL STATIONS INDICATED]
- SAI directly owns and operates central monitoring stations located in
Pompano Beach, Florida (SAI Southeast Command Center); Des Plaines,
Illinois (SAI Midwest Command Center); Ogden, Utah (SAI Mountain
Command Center); Portland, Oregon (SAI Northwest Command Centers -
Portland); and Chino, California (SAI West Command Center).
- SAI Command Centers Northwest-Seattle, Inc., a wholly owned
subsidiary, owns and operates a central monitoring station located
in Seattle, Washington.
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- SAI Southwest Command Centers, Inc., a wholly owned subsidiary, owns
and operates central monitoring stations located in Dallas, Texas,
Houston, Texas and Metairie, Louisiana (Monark Central Dispatch).
- SAI North Central Command Center, Inc., a wholly owned subsidiary,
owns and operates a central monitoring station located in Euclid,
Ohio.
We intend to continue to merge our wholly owned subsidiaries into SAI in an
effort to reduce costs and realize economies of scale.
Prior to June 30, 1999, we also provided monitoring services directly to
residences and businesses. On June 30, 1999, we sold our portfolio of
approximately 27,000 owned (retail) subscriber accounts to Security Alarm
Financing Enterprises, Inc. (SAFE). SAI continues to monitor these accounts
under contract with SAFE and is SAFE's preferred provider of alarm monitoring
services.
The sale of our retail accounts to SAFE represented a major turning point
in our progress. As a result of that transaction we disposed of a non-core asset
and re-focused our efforts on our core wholesale monitoring business and on our
dealer network.
Most of the proceeds of the sale of the retail accounts went to pay down
our line of credit with FINOVA Capital Corporation. Following the retail account
sale, we entered into a new $45,000,000 line of credit with FINOVA and Citizens
Bank of Massachusetts, a wholly owned subsidiary of the Royal Bank of Scotland.
At the same time, our principal outside investor, TJS Partners, L.P., agreed to
restructure its investment in our company, further improving our balance sheet
and our ability to expand our core wholesale monitoring business.
Our revenues consist of recurring monthly revenue ("RMR") payments under
written contracts with independent alarm dealers to provide monitoring services
to their subscribers. Total revenues increased from $2,733,253 for the fiscal
year ended December 31, 1995 to $22,689,132 for the fiscal year ended December
31, 1999. Operating cash flow increased from $251,073 for the fiscal year ended
December 31, 1995 to $3,105,173 for the fiscal year ended December 31, 1999.
Operating cash flow is defined as earnings before depreciation, amortization,
interest expense, income taxes and certain other expenses that are paid for with
common stock or warrants. Our loss per share of common stock for the fiscal year
ended December 31, 1999, was $0.59 per share. As a result of the sale of our
retail account portfolio on June 30, 1999, and our new focus on the wholesale
monitoring business, our results for the current fiscal year are not completely
comparable to our results for prior periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As of December 31, 1999, we monitored over 400,000 residences and
businesses from our national network of regional central monitoring stations.
All of these locations were monitored under contracts with approximately 2,500
alarm dealers for subscriber accounts owned by them. From January 1, 1995
through December 31, 1999, the number of subscriber accounts we monitored
increased from approximately 51,471 to 401,000. On December 31, 1999, we
provided monitoring services to 84,768 more subscriber accounts than at year-end
1998.
We estimate that our central monitoring stations are currently capable of
monitoring at least 750,000 subscriber accounts. We gained additional capacity
when we acquired our Chino, California and Seattle, Washington facilities. We
expect to be able to monitor 1,000,000 subscriber accounts by the end of
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2000, before taking into account any future acquisitions.
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 our
competitors. 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 industry
experts make numerous presentations. This meeting is designed to keep the alarm
dealers abreast of new developments in technology, marketing and management as
well as new business opportunities.
We also distribute an "audio magazine" to our network of dealers on a
quarterly basis and conduct numerous smaller meetings throughout the year. Our
relationships with independent alarm dealers are important because dealers are
the 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 station businesses and adding additional
subscriber accounts as the businesses of our existing alarm dealers grow and
through new dealers that join our Dealer Partner Program. Through this program,
we offer selected alarm dealers the opportunity to own equity in our company as
part of their ongoing relationship with us. See "Business - Dealer Partner
Program."
In the future, we believe that we can develop future business opportunities
based on our network of over 3,000 independent alarm dealers representing over
15,000 trained installation and service personnel, expert in low voltage
technology. We have also created through our dealers a network of over 400,000
consumers electronically connected to our regional, secure, redundant, UL listed
central monitoring stations. We believe that these networks uniquely position us
to become key participants in the delivery of in-home services as technologies
converge.
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 five companies
account for approximately 45% of the market, with an estimated 10,000 to 12,000
dealers sharing the remainder of the market. Taken together, however, these
10,000 to 12,000 alarm dealers represent a nationwide presence with expertise in
the installation and servicing of low voltage electronic systems. It is the
needs of this nationwide market of alarm dealers and the opportunities that they
represent that we seek to address.
We believe that another characteristic of the security alarm industry is
its continuing growth. Industry statistics published by Security Sales in the
2000 Security Sales Fact Book, an industry publication, indicate that revenues
for the electronic security alarm segment of the security industry grew from
$9.7 billion in 1991 to $15.8 billion in 1999. The Central Station Alarm
Association, in the summer of 1998 issue of Dispatch, 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
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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%). Many
insurance companies also offer discounts to home and business owners that
install alarm systems.
Several large well-capitalized companies are active in the security alarm
industry directly or through subsidiaries, including Western Resources, Inc. and
Tyco International, Inc. We believe that these companies were attracted by the
fragmented nature of the industry and its growth potential. Additionally,
utility and telephone companies are attracted by the similarity between the
services provided in the security alarm industry and the services they already
perform, which also involve providing services via wire connections in return
for monthly fees.
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 plus general and administrative expenses. This recurring monthly
monitoring revenue is an important component of a dealer's total revenue stream.
According to SDM Magazine's Insider Report for 2000, approximately 33% of
dealers' revenues consist of monitoring and service fees.
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 difficult task competing with
the larger companies who have greater access to capital. This issue has become
more pronounced as the market has forced dealers to subsidize 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, both human and financial. In addition, independent dealers must be
able to choose effectively between competing new technologies. Dealers need the
tools that will allow them to identify and exploit new opportunities both within
the alarm industry and in related fields. 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. Many alarm dealers currently provide these services to their
subscribers. We believe that application of these same skills can generate other
new business opportunities. We are seeking new opportunities for ourselves and
our dealers through alliances with providers of services that are complementary
with the services that our dealers and we already provide. We believe that
potential partners that embrace this vision will desire to offer a broad range
of related services without incurring the expense or experiencing the
uncertainties of entering unfamiliar product markets or developing a nationwide
network of servicing and installing dealers. Independent dealers must be aware
of and learn how to respond to new market opportunities if they are to survive
and prosper in the future.
ALARM MONITORING
Our Relationships with Independent Alarm Dealers
Our response to the challenges and opportunities presented by the security
alarm industry has been significantly influenced by the personal and business
experience of two of our founders. Both Ron Davis, the Chairman of the Board of
Directors and Steve Rubin, a Senior Vice President, were principals of the Davis
Marketing Group, an organization formed in the mid-1970s to provide consulting
services to alarm dealers. Davis Marketing evolved into a franchiser of alarm
installation businesses, which later became a network of dealers, initially made
up of the former franchisees. The network provided its members with group
buying, training and education services. In 1990, our company was formed to
purchase subscriber accounts from independent alarm dealers for our own
portfolio and to acquire an interest in a central monitoring station located in
Grand Rapids, Michigan. The initial stockholders (other than the founders) were
almost all independent alarm dealers. The relationship with our dealer network
remains a key part of our growth strategy. It is this history that has made us
keenly aware of, and uniquely able to address the needs of independent alarm
dealers and of the opportunities that those needs represent.
One of the unique aspects of our position in the security alarm industry is
what we do not do - we do not sell and install security systems. As a result, we
are not viewed as a competitor in the alarm dealer community. Several of our
competitors in the monitoring business also sell and install security systems,
and some are even leading mass-marketers of low cost system installations.
Another service we provide our dealers who wish to sell subscriber
accounts, or obtain loans using subscriber accounts as collateral, is referral
to Security Alarm Financing Enterprises, Inc. (SAFE), with whom we
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have formed an alliance. This alliance involves SAFE using our central stations
to monitor accounts we refer to them which they purchase, paying us commissions
for the referrals on accounts they purchase over agreed upon thresholds and
making us their preferred provider of monitoring services. SAFE is an alarm
industry specialized financing company that does not sell or install security
systems. SAFE's policy is to contract with the selling alarm dealer to continue
servicing the underlying alarm system. SAFE also refers all inquiries relating
to system enhancements to the servicing alarm dealer. This allows dealers to
further enhance their businesses. By working with our company and SAFE, dealers
can purchase monitoring and obtain financing from companies they view as allies
rather than competitors.
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 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 to the alarm dealer
community. Ron Carr our Senior Vice President for Central Station Operations
leads this effort. Mr. Carr was formerly Director of Telecommunications and
Central Station Operations for SecurityLink and, prior to that, Director of
Telecommunications for ADT, Inc.
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Increase Monitoring Capacity on a Regional Basis
Our strategy is to complete a network of central stations, with at least
one central station 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 central monitoring stations located in Euclid, Ohio, a
suburb of Cleveland and Austin, Texas. The Austin central station
has been consolidated into our Houston central station.
- 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. The San
Antonio central station has been consolidated into our Houston
central station. In December 1999, we purchased the assets of Monark
Central Dispatch, Inc. which owned and operated a central station
located in Metairie, Louisiana (which is in the New Orleans area).
- 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 (which is in the
Salt Lake City area). In November 1999, we purchased the assets of
Total Electronic Alarm Monitoring, L.L.C. that owned and operated a
central station located in Chino, California (which is in the Los
Angeles area).
- 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. In November 1999, we
purchased Alarm Monitoring Service, Inc. which owned and operated a
central monitoring station located in Seattle, Washington.
In order to emphasize both our nationwide identity and our regional
presence, we have renamed our central stations: SAI Midwest Command Center (Des
Plaines, Illinois), SAI Mountain Command Center (Ogden, Utah), SAI North Central
Command Center, Inc. (Euclid, Ohio), SAI Northwest Command Centers - Portland
(Portland, Oregon), SAI Northwest Command Centers - Seattle, Inc. (Seattle,
Washington), SAI Southeast Command Center (Pompano Beach, Florida), SAI
Southwest Command Centers, Inc. (Dallas, Texas, Houston, Texas and Metairie,
Louisiana) and SAI West Command Center (Chino, California).
We have substantially completed our capital investment project that
expanded the capacity of our central monitoring stations to 750,000 monitored
alarm systems. We intend to continue our program of expansion. This expansion
will principally involve hiring additional personnel, purchasing additional
computers
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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. Under
this program:
- We have implemented a single centralized accounting system.
- We have created a centralized billing, customer service and
collections department to service all of our central monitoring
stations.
- We will continue the consolidation of monitoring operations into
regional 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 August 1998
of Reliance Protection Services, Ltd., a central monitoring station located in
Schaumburg, Illinois. In that transaction, the physical facility located in
Schaumburg was not purchased. Instead, all of the subscriber accounts monitored
there were transferred in bulk, along with certain equipment and software, to
our central station located in Des Plaines, Illinois. Only five additional
personnel were necessary to accommodate the additional 11,500 subscriber
accounts. By contrast, the old Reliance operation required twelve full-time
employees plus a leased facility and associated expenses.
We have also realized 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.
- Northern Central Station, Inc. (located in Little Falls, New Jersey)
into the Des Plaines, Illinois central monitoring station.
- Telecommunication Associates Group, Inc.'s central station in Austin,
Texas, and Alarm Central Monitoring, Inc. (located in Dallas, Texas)
into SAI Southwest Command Centers, Inc. central monitoring stations
located in Houston and Dallas, Texas, respectively. The San Antonio
facility of SAI Southwest Command Centers, Inc. was also
consolidated into the Houston central station.
Further consolidations will take place, as we deem appropriate.
Maintain and Enhance the Quality of Monitoring Services
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In the normal course of our business, we sometimes experience cancellation
of accounts for various reasons, some of which are beyond our control. Accounts
may be lost because, for example, dealers go out of business or subscribers
relocate. Accounts may also be lost because of problems with service. Among our
initiatives are the implementation of a statistical quality control system and a
formal training and advancement program. We also conduct continuous reviews of
the operations of each of our central monitoring stations to improve the
functionality and profitability of our monitoring services.
Previously, each of our central monitoring stations used slightly different
event monitoring software and hardware. However, we have recently conformed and
upgraded the computer systems used in all of our central stations, except for
our Louisiana central station, which we are in the process of changing. We
expect this process to be completed in the second quarter of 2000. The
system-wide upgrade is designed to:
- Standardize the central station information systems to allow better
information flow between the central stations.
- Allow more efficient information exchange between the central stations
and the home office.
- Create fully redundant systems in case of system failure in one or
more of the central stations.
- Increase 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 we can 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 station businesses and the "natural increase" in subscriber accounts
that occurs as alarm dealers who are already customers install additional alarm
systems for our growth. Additionally, our sales force was centrally located and
approached alarm dealers on a national basis. We have redirected our sales
effort by organizing a decentralized sales force based in our central monitoring
stations. The design of our marketing programs has remained a home
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 "Dealer Partner
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Program", formerly known as the Strategic Partner Program) that allows dealers
to become equity owners of our company. See "Business-Dealer Partner Program."
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 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.
Steve Rubin heads our dealer financing programs. Mr. Rubin has over
twenty-eight years of experience counseling alarm dealers as to their financing
options and assisting them with their financing needs.
Sale of Subscriber Accounts
One method of financing that has developed in the security alarm industry
is the sale of subscriber accounts to third parties. While we no longer purchase
subscriber accounts, we do offer a referral program for our dealers through
Security Alarm Financing Enterprises, Inc. (SAFE). In a typical transaction, the
alarm dealer will sell subscriber contracts for a price that is 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.
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 three sizable finance companies exist with active lending
programs in the industry and their lending capacity is relatively small compared
to what we believe is the potential demand for loans secured by accounts.
Because of our familiarity with the security industry, our strategic
alliance with SAFE and our knowledge of other potential lenders, we believe we
are well prepared to assist alarm dealers in obtaining loans.
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The SAFE Loan Program
In November of 1999, SAFE introduced its loan program. Under this program,
SAFE will lend to qualified dealers for periods of up to 60 months, secured by
dealer owned monitoring accounts. We refer qualified dealers to SAFE and attempt
to facilitate the loan approval process. Because the SAFE program is presently
only available for loan transactions in excess of $500,000 we also refer dealers
to other lenders under our ValueBuilder Program.
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 in the "low" or "no"
money down market.
Under this program, dealers are able to obtain financing for their
customers, which is repaid in 36 to 60 months. 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 secure 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.
As an additional incentive for participating in the ValueBuilder program,
we issue shares of common stock to participants based on the number of
ValueBuilder accounts monitored at our central monitoring stations.
Dealers participating in ValueBuilder build equity in two ways. They retain
the equity represented by their ownership of the subscriber monitoring accounts
and they gain an ownership interest in our company as well.
All dealers participating in the ValueBuilder program must agree that any
new subscriber account that uses the program must be monitored at one of our
central monitoring stations for a negotiated period, usually three to five
years.
DEALER PARTNER PROGRAM
Under the Dealer Partner Program, dealers enter into contractual
relationships with us whereby they agree to transfer or retain some or all of
their 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 competitor's central
monitoring station. In return, we issue the dealer a negotiated amount of common
stock. This stock is issued solely for entering into the contractual
relationship with us and without any cash payment by the dealer.
The stock may be issued alone, or together with other inducements that we
may offer from time to time. We believe that this program is 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.
Generally, 25% of the stock issued to a dealer under the Dealer
Partner Program will be freely tradable upon issuance. The remaining 75% will
have restrictions on transfer that will be removed in three
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equal annual increments. If the dealer defaults on its obligations under the
Dealer Partner Program, the dealer will forfeit all of the stock as to which the
restrictions have not yet been removed, but will retain the balance of the
stock.
A dealer will be deemed to be in default on its obligations under the
Dealer Partner Program if the dealer (or any party he sells his subscriber
accounts to) transfers the covered subscriber accounts to a competitor's central
station or fails to comply with our rights of first refusal, unless waived by
us, during the term of the contractual relationship. The right of first refusal
is the right we retain to meet or beat the terms of any offer by another company
to purchase, or make loans secured by, the dealer's subscriber accounts. Since
we no longer purchase subscriber accounts or make loans to dealers, we refer
purchase and loan opportunities to Security Alarm Financing Enterprises, Inc. or
other lenders.
The Dealer 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 presence 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-eight 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.
Our Audio Insight program supplements these activities. Audio Insight is an
audio magazine that is distributed quarterly. Each edition of Audio Insight,
hosted by Mr. Davis, is a cassette of about one-hour in length, which contains
ideas, interviews and insights relating to the alarm industry. 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
members of our dealer network.
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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 involves providing a
range of complementary or similar services, such as 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" much of the installation, service and monitoring functions. We
expect the technologies by which such services as telecommunications,
entertainment and security are delivered to converge with the Internet. Because
of the size and geographic diversity of our dealer network, we intend to present
our company to the bundlers and service providers as an easy and cost-effective
way of approaching independent installers and their customers. We believe that
the collective strength of our independent dealer network enables us to more
effectively exploit these and other emerging 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.
Meetings of central station based user groups and a national advisory council
supplement their efforts.
We implemented our user group and national council programs to gain dealer
insight into the quality of the services that we provide. Each of our central
stations has a user group of alarm dealer customers in its service area. These
user groups meet periodically and serve as a regular source of feedback for both
the central stations and for our company as a whole. We also 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.
In addition, we have formed a national advisory council made up of
representatives of our regional dealer user groups. We meet with the members of
our national council twice a year. One of these meetings occurs at our annual
conference.
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.
SALE OF RETAIL PORTFOLIO TO SAFE
Sale of Retail Portfolio
On June 30, 1999, we sold our portfolio of approximately 27,000 retail
subscriber accounts to Security Alarm Financing Enterprises, Inc. (SAFE), a
leading finance company serving independent alarm dealers. We will continue to
monitor these accounts and we are SAFE's preferred provider of alarm monitoring
services.
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 year. The loan will be considered paid in full if during the term
of the loan we refer to SAFE $230,000 in recurring monthly revenue ("RMR") from
alarm dealers
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for purchase or for collateral for loans, which SAFE then closes, under SAFE's
financing programs. There can be no assurance that we will be able to refer, or
that SAFE will purchase, $230,000 in RMR during the term of the loan. If we
refer $230,000 or more in RMR during the term of the loan, we will receive
commissions that are calculated from the first dollar of RMR referred and
purchased. We have the opportunity to earn additional commissions in the second
and third year of our referral agreement if we refer and SAFE closes on $460,000
and $690,000 in RMR, respectively. As of March 23, 2000, SAFE has closed on
transactions representing a total of $41,518 in RMR.
The sale of our retail accounts to SAFE allows us to fully concentrate our
resources on our primary business of providing wholesale monitoring services to
independent alarm dealers.
Financial Restructuring
New Line of Credit for Acquisitions and Capital Expenditures
On September 30, 1999, we refinanced our 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 is in the principal amount of
$7,000,000, which covered our existing indebtedness to FINOVA (approximately
$6,600,000) as well as transaction costs for the refinancing (approximately
$390,000) and working capital. The acquisition line of credit of up to
$38,000,000 is solely for acquisitions of central monitoring station businesses.
We may draw on this line of credit through March 31, 2001. On March 10, 2000, we
entered into a second amendment to loan instruments which created a $1,000,000
capital expenditure line and a line of credit up to $2,000,000 to cover
contingent obligations related to the SAFE attrition guarantee and referral
obligation. This combined $3,000,000 was taken out of, and thereby reduced, the
acquisition portion of the $45,000,000 facility discussed above.
Both the term loan and the acquisition line of credit bear initial interest
at a variable rate of prime plus 0.75% or the LIBOR rate plus 3.5%, at SAI's
discretion. The interest rate is, however subject to an upward adjustment
depending on the loan to recurring monthly revenue ratio. These obligations
mature in five years.
Restructuring of TJS Partners' Investment
On September 30, 1999, we entered into the Second Amendment to Security
Associates International, Inc. Common Stock Subscription and Purchase Agreement
with TJS Partners, L.P., our principal stockholder. Pursuant to this agreement:
(i) $10,000,000 of subordinated debt and accrued interest owed by us 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, which were held by TJS Partners, L.P., were exchanged for 135,709
shares of newly designated Series A Convertible Preferred Stock.
Each share of Series A Convertible Preferred Stock has a $10 par value, a
liquidation preference of $350 per share and is convertible into 100 shares of
our 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 our
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<PAGE> 26
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, our By-laws were amended to increase
the percentage of votes required to approve matters presented to the
stockholders from a simple majority to requiring greater than sixty percent
(60%). This super-majority provision will be in effect for as long as TJS
Partners, L.P. owns at least thirty percent (30%) of our common stock on an
as-converted basis. Additionally, for so long as TJS Partners, L.P. owns at
least fifteen percent (15%) of our common stock on an as-converted basis, our
board of directors will consist of five directors, two of which may be
designated by TJS.
RECENT CENTRAL STATION ACQUISITIONS
Acquisition of 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 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. The
Austin central station was subsequently consolidated into our Houston central
station.
Acquisition of 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.
$2,396,000 of the purchase price was financed from our general corporate funds
and the balance was 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. 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. The San Antonio central station was consolidated
with
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<PAGE> 27
the Houston central station in the third quarter of 1999.
Acquisition of Alarm Monitoring Services, Inc.
On November 5, 1999, we purchased all of the outstanding capital stock of
Alarm Monitoring Services, Inc., a Washington corporation ("AMS") from
unaffiliated parties.
The purchase price was $4,000,000, which was paid in cash at closing. The
purchase price was financed by drawing on our existing credit facility with
FINOVA Capital Corporation and Citizens Bank of Massachusetts. The acquisition
was accounted for under the purchase method for financial reporting purposes.
The acquisition was accounted for under the purchase method for financial
reporting purposes.
AMS was a third-party alarm monitoring company serving approximately 20,000
alarm monitoring subscribers and approximately 150 independent alarm dealers
from a central monitoring station located in Seattle, Washington.
OTHER CENTRAL STATION ACQUISITIONS
- Alert Answering Service
On March 2, 1998, we purchased all of the operating assets of Camak,
Inc., d/b/a Alert Communications d/b/a Alert Answering Service, an
Ohio corporation ("Alert") from an unaffiliated party.
Alert was a third-party alarm monitoring company that served
approximately 1,966 subscriber accounts and ten independent alarm
dealers and also is a telephone answering service business serving
approximately 250 subscribers. In March 1998 and June 1998, the
monitoring business and the answering service business, respectively,
were moved to our central monitoring station located in Euclid, Ohio.
This acquisition allows us to provide expanded telephone answering
services for our alarm dealers nationwide.
- Guardian Security Systems, Inc.
On March 8, 1998, we purchased all of the outstanding capital stock of
Guardian Security Systems, Inc., an Ohio corporation ("Guardian") from
an unaffiliated party.
Guardian was a third-party alarm monitoring company that served
approximately 3,270 subscriber accounts and 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.
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<PAGE> 28
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 Protection Services, Ltd.
On July 17, 1998, we purchased all of the outstanding capital stock of
Reliance Protection Services, Ltd., an Illinois corporation
("Reliance") from unaffiliated parties.
Reliance was a third-party alarm monitoring company that served
approximately 12,000 alarm monitoring subscribers and approximately
100 independent alarm dealers from a central monitoring station
located in Schaumburg, Illinois. All of the subscriber accounts
monitored by Reliance were moved into our Des Plaines central station.
- World Security Services Corp.
On October 13, 1998, we purchased all of the assets of World Security
Services Corp., an Oregon corporation ("World") from an unaffiliated
party.
World was a third-party alarm monitoring company that served
approximately 20,000 alarm monitoring subscribers and approximately
180 independent alarm dealers from a central monitoring station
located in Portland, Oregon.
- Alarm Central Monitoring, Inc.
On October 23, 1998, we purchased all of the outstanding capital stock
of Alarm Central Monitoring, Inc., a Texas corporation ("ACM") from
unaffiliated parties.
ACM was a third-party alarm monitoring company that served
approximately 13,000 alarm monitoring subscribers and approximately 50
independent alarm dealers from a central monitoring station located in
Dallas, Texas. All of the subscriber accounts monitored by ACM were
moved into the central station located in Dallas, Texas.
- Total Electronic Alarm Monitoring, L.L.C.
On November 5, 1999, we purchased all of the assets of Total
Electronic Alarm Monitoring, L.L.C., a California limited liability
company ("TEAM") from an unaffiliated third party.
TEAM is a third-party alarm monitoring company serving approximately
5,000 alarm monitoring subscribers and approximately ten independent
alarm dealers from a central monitoring station located in Chino,
California.
- Monark Central Dispatch, Inc.
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<PAGE> 29
On December 8, 1999, we purchased all of the assets of Monark Central
Dispatch, Inc., a Louisiana corporation ("Monark") from an
unaffiliated third party.
Monark is a third-party alarm monitoring company serving approximately
35,000 alarm monitoring subscribers and approximately 400 independent
alarm dealers from a central monitoring station located in Metairie,
Louisiana.
The aggregate purchase price for all of these smaller central station
acquisitions was approximately $6,656,960 plus 218,741 shares of our common
stock which was valued at $802,740 on the dates of the acquisitions.
RISK MANAGEMENT
The nature of the services we provide potentially exposes us to liability
for employee acts or omissions or system failures. 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 wholesale monitoring services from UL listed facilities.
Most of these companies are small, local operations, however, several are larger
and better financed than we are. In addition, we believe there are approximately
1,500 to 2,000 non-UL listed facilities.
Our competitive strategy has these basic components: provide the alarm
dealer community with high quality monitoring, provide access to financial
services at competitive prices and provide dealers with the support and access
to new business opportunities that will help them compete more effectively and
add recurring revenue. We plan to further develop our dealer network which, we
believe, will result in additional marketing opportunities for our dealers with
those companies that desire access to our dealers and their customers.
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
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<PAGE> 30
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 that may be utilized in telephone line transmissions are currently
regulated by both federal and state governments. The Federal Communications
Commission and state public utilities commissions regulate the operation and
utilization of radio frequencies.
EMPLOYEES
At March 17, 2000, we employed 412 individuals. Currently, none of our
employees are represented by a labor union or covered by a collective bargaining
agreement. We believe that relationships with our employees are good.
PROPERTIES
Our executive offices are located at 2101 South Arlington Heights Road,
Arlington Heights, Illinois and our central monitoring stations are located at:
- 2116 South Wolf Road, Des Plaines, Illinois;
- 1471 S.W. 12th Avenue, Pompano Beach, Florida;
- 1514 East 191 Street, Euclid, Ohio;
- 9750 Brockbank, Dallas, Texas;
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- 12610 Richmond Avenue, Houston, Texas;
- 3320 North Woodlawn Avenue, Metairie, LA;
- 4507 North Channel Avenue, Portland, Oregon;
- 1249 N.E. 145th , Seattle, WA;
- 2178 Washington Boulevard, Ogden, Utah; and
- 13937 Magnolia Ave., Chino, California.
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 December 31, 2000;
- The Pompano Beach lease expires December 31, 2003, but can be renewed
by us at our option for one additional five year term;
- The Euclid lease expires December 31, 2004, but can be renewed by us
at our option for one additional five year term;
- The Dallas lease expires June 16, 2003, but can be renewed by us at
our option for one additional five year term;
- The Houston lease expires June 16, 2003, but can be renewed by us at
our option for one additional five year term;
- The Metairie lease is a month-to-month lease;
- The Portland lease expires May 31, 2003, but can be renewed by us at
our option for one additional three year term;
- The Seattle lease expires May 31, 2002, but can be renewed by us at
our option for two additional five year terms;
- The Ogden lease expires May 8, 2003, with no option to renew; and
- The Chino lease expires November 30, 2003, with no option to renew.
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<PAGE> 32
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.
USE OF PROCEEDS
On October 20, 1997, our first Registration Statement on Form S-1
(Registration No. 333-31775 under the Securities Act was declared effective. A
subsequent Registration Statement on Form S-1 (Registration No. 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) 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 (iii) otherwise under Rule 415. The Registration Statements
also cover 1,778,088 shares of common stock that may be offered for sale by
certain selling stockholders under Rule 415(a)(1)(i) and 415(a)(1)(iii). This
prospectus also covers 3,918,600 shares of common stock that may be offered for
sale by certain selling stockholders under Rule 415(a)(1)(i) and 415(a)(1)(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 Dealer
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 which will be used for general corporate purposes.
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 $24,381,348. No separate
offering price was assigned to the warrants.
1999 sales of registered securities were as follows:
On March 5, 1999, we issued an aggregate of 22,048 shares of common stock
to alarm dealers in connection with our Dealer Partner Program.
On March 12, 1999, we issued 4,052 shares of common stock to an alarm
dealer as partial payment for substantially all of its alarm monitoring assets.
On March 31, 1999, we issued an aggregate of 42,720 shares of common stock
to alarm dealers in connection with our Dealer Partner Program.
On June 25, 1999, we issued 1,343 shares of common stock to an alarm dealer
as 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
as partial payment for substantially all of its alarm monitoring assets.
On July 21, 1999, we issued an aggregate of 22,900 shares of common stock
to alarm dealers in connection with our Dealer Partner Program.
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<PAGE> 33
On August 18, 1999, we issued 29,741 shares of common stock to an alarm
monitoring company as partial payment for substantially all of its alarm
monitoring assets.
On October 21, 1999, we issued 7,410 shares of common stock to an alarm
dealer in connection with our Dealer Partner Program.
On October 27, 1999, we issued 100,000 shares of common stock to an alarm
monitoring company as partial payment for substantially all of its alarm
monitoring assets.
On December 30, 1999, we issued an aggregate of 58,796 shares of common
stock to alarm dealers in connection with our Dealer 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 March 27, 2000, we incurred
a total of $290,425 in expenses in connection with the offering. Those expenses
are estimated to be as follows: legal $140,000; accounting $65,500; printing
$74,225 and registration fees $10,700. 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 members. To date we
have issued 427,698 shares of common stock and warrants to purchase 121,104
shares of common stock in connection with the offering.
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<PAGE> 34
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, 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.
HIGH BID LOW BID
-------- -------
1998
First Quarter (through March 3, 1998) $5.625 $4.50
LAST REPORTED SALES
-------------------
HIGH LOW
---- ---
1998
First Quarter (March 4, 1998 to March 31, $8.50 $5.25
1998)
Second Quarter $7.06 $5.25
Third Quarter $5.75 $4.44
Fourth Quarter $4.50 $3.94
1999
First Quarter $5.00 $2.50
Second Quarter $3.44 $2.50
Third Quarter $3.38 $2.50
Fourth Quarter $3.94 $1.50
2000
First Quarter (through March 24, 2000) $4.00 $2.00
On March 24, 2000, the last reported sale price of our common stock was
$4.00 per share. At March 24, we had approximately 237 stockholders of record,
not including beneficial owners whose stock is held in street name.
STOCKHOLDER RETURN AND PERFORMANCE GRAPH
Presented below is a line graph comparing the percent change in the
cumulative total stockholder return on our common stock against the Russell
2000 Index and the Mallon Global Security Index. The graph assumes that
$100 was invested on January 1, 1995, in our common stock and each of the
Russell 2000 Index and the Mallon Global Security Index, and that all dividends
were reinvested.
TOTAL STOCKHOLDER RETURNS
PERFORMANCE GRAPH FOR SECURITY ASSOCIATES INTERNATIONAL, INC.
Prepared by Buttonwood Advisory Group
Produced on February 17, 2000 including data to
December 31, 1999.
$100 invested January 1, 1995
(assumes all dividends reinvested)
FISCAL YEAR ENDED DECEMBER 31, 1999
[GRAPH OF INFORMATION IN THE FOLLOWING TABLE]
ASSUMES $100 INVESTED ON JANUARY 1, 1995
ASSUMES DIVIDENDS REINVESTED THROUGH DECEMBER 31, 1999
Mallon Global
Measurement Period Russell 2000 Index Security Index SAI
- ------------------ ------------------ -------------- ---
January 1, 1995(1) $ 100.00 $ 100.00 $ 100.00
FYE 1995 $ 127.79 $ 148.70 $ 160.00
FYE 1996 $ 145.04 $ 210.41 $1,125.00
FYE 1997 $ 178.80 $ 253.13 $2,125.00
FYE 1998 $ 168.78 $ 256.45 $1,575.00
FYE 1999 $ 201.90 $ 205.16 $1,550.00
1) The price of our common stock was $0.25 on this date.
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DIVIDENDS
We have not paid dividends on our common stock in the past. 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. Payment of dividends
is subject to satisfaction of covenants contained in our loan agreement with
FINOVA and Citizens Bank of Massachusetts.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for the fiscal years ended 1997
through 1999 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 years ended 1995 and 1996 are
derived from audited financial statements. The selected financial data set forth
below should be read in conjunction with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
<TABLE>
<CAPTION>
Years Ended December 31,
Pro Forma Pro Forma
1995 1996 1997 1998 1998(1) 1999 1999(2)
---------- ----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $ 2,733 $ 3,782 $ 10,814 $ 20,203 $ 17,146 $ 22,689 $ 18,969
Operating (loss).............. $ (389) $ (591) $ (2,662) $ (3,406) $ (2,130) $ (2,931) $ (2,592)
Net (loss) available to
common stockholders......... $ (947) $ (1,718) $ (4,938) $ (6,798) $ (3,904) $ (4,047) $ (4,631)
Net loss per share............ $ (.26) $ (.47) $ (1.16) $ (1.06) $ (.61) $ (.59) $ (.66)
Shares used in computing net
loss per share.............. 3,665,642 3,669,343 4,266,151 6,394,048 6,429,048 6,897,200 6,980,533
</TABLE>
(1) The pro forma data for the year ended December 31, 1998, gives effect to
all acquisitions made during fiscal year 1998 and the sale of our owned
subscriber accounts as if they had occurred January 1, 1998.
(2) The pro forma data for the year ended December 31, 1999, gives effect to
the sale of our owned subscriber accounts as if it had occurred on January
1, 1999.
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997 1998 1999
--------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 54 $ 632 $ 5,522 $ 1,481 $ 631
Working capital (deficit)..... $(2,699) $(4,518) $ 1,625 $(4,450) $(3,849)
Total assets.................. $ 6,030 $16,533 $36,009 $47,526 $33,341
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total debt.................... $ 6,862 $12,790 $22,919 $35,981 $14,287
Total stockholders' equity
(deficit)................... $(2,043) $ 1,269 $ 7,231 $ 3,869 $14,166
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our revenues are derived from recurring payments for monitoring services
provided to subscribers and alarm dealers pursuant to agreements. Monitoring
contracts have initial terms typically ranging from one to five years usually
with provisions for automatic renewal for periods of one year. Monitoring
contracts entered into with alarm dealers generally permit cancellation with
notice of 30-60 days before the end of the original or any renewal term.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data:
<TABLE>
<CAPTION>
Years Ending December 31,
(In thousands, except per share data)
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Net Revenue $10,814 $20,203 $22,689
Operating Unit Expense 7,018 12,610 14,900
--------- --------- ---------
Operating Unit Margin 3,796 7,593 7,789
Operating Expenses:
Amortization & depreciation 3,704 6,288 5,714
General & administrative 1,595 2,488 2,546
Selling, marketing & business development 297 1,614 2,460
Deferred compensation expense 862 609 --
--------- --------- ---------
Loss From Operations (2,662) (3,406) (2,931)
Gain On Sale Of Owned Subscriber Accounts -- -- 1,899
Interest Expense (1,863) (2,870) (2,565)
--------- --------- ---------
Net Loss (4,525) (6,276) (3,597)
Dividends Accrued On Preferred Stock 413 522 450
--------- --------- ---------
Net Loss To Common Stockholders $(4,938) $(6,798) $(4,047)
Net Loss Per Share $(1.16) $(1.06) $(.59)
Total Weighted Average Number Of Common Shares
Outstanding 4,266,151 6,394,048 6,897,200
</TABLE>
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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,
1997 1998 1999
------------------------------------------
<S> <C> <C> <C>
Net Revenue 100% 100% 100%
Operating Unit Expense 65% 63% 66%
Operating Unit Margin 35% 37% 34%
Operating Expenses:
Amortization & depreciation 34% 31% 25%
General & administrative 14% 12% 11%
Selling, marketing & business development 3% 8% 11%
Deferred compensation expense 8% 3% --
Loss From Operations (24%) (17%) (13%)
Gain On Sale Of Owned Subscriber Accounts -- -- 8%
Interest Expense (17%) (14%) (11%)
Net Loss (41%) (31%) (16%)
</TABLE>
1999 COMPARED TO 1998
REVENUE. Revenue for fiscal 1999 increased by $2,485,282, or 12.3%, to
$22,689,132 from $20,203,850 for fiscal 1998. The change in revenue is
attributable to an increase in revenue in our central station operations of
$5,707,149 and a decrease in revenue from our owned account portfolio of
$3,221,867. The increase in revenue related to central station operations is due
to acquisitions completed during 1998 and 1999, from revenue related to the
monitoring of the accounts sold to SAFE and from an increase of approximately
33,000 monitored accounts in our existing central stations. The increase in
revenue consists of the following approximate amounts: acquisitions, $4,423,150;
monitoring of our previously owned accounts, $477,000; monitored accounts added
to our existing central stations, $807,000. The decrease in revenue related to
our owned account portfolio is attributable to the sale of the owned accounts on
June 30, 1999.
OPERATING UNIT EXPENSE AND MARGIN. Operating Unit Expense includes all
costs directly attributable to each operating unit rendering monitoring
services. During 1998 and until June 30, 1999, these expenses also include the
customer service function related to our owned account portfolio. These expenses
increased from $12,610,489 in 1998 to $14,899,687 in 1999 or 18.2%. Expenses
related to the central station operation increased
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<PAGE> 38
from $10,291,901 in 1998 to $13,952,037 in 1999 or 35.6%. This increase is
primarily attributable to acquisitions of central stations in 1998 and 1999 and
additional personnel devoted to quality assurance and training. The margin
attributable to the central station operations decreased from 29.8% in 1998 to
29.4% in 1999. Expenses related to our owned account portfolio decreased from
$3,723,986 in 1998 to $1,746,967 in 1999 due to the sale of our owned account
portfolio on June 30,1999. The margin attributable to our owned account
portfolio was 46.4% in 1998 and 53.2% in 1999. The increase is due to the
greater number of owned accounts in 1999, which allowed us to increase
efficiency. Intercompany revenue and costs decreased from $1,405,398 in 1998 to
$799,318 in 1999 due to the sale of our owned accounts on June 30, 1999.
OPERATING EXPENSES. Amortization and depreciation decreased by $574,599, or
9.1%, from $6,288,489 to $5,713,890. The change in amortization and depreciation
is due to a decrease in amortization related to our owned account portfolio of
$1,972,988 offset by an increase in the amortization of goodwill of $1,398,389.
The decrease is related to the sale of the owned accounts, the increase is
related to central station acquisitions in 1998 and 1999.
General and administrative expenses increased by $58,877 or 2.4% from
$2,488,058 to $2,546,935 due to central station acquisitions.
Selling, marketing and business development expenses increased by $845,838
or 52.4% from $1,614,007 to $2,459,845. We decentralized our sales efforts in
1999 to better serve our customers. We added six salespeople to cover our
regional sales areas. We also increased our marketing initiatives to focus on
growth in existing central stations. Included in these expenses are $255,282 of
non-cash expense related to our stock based dealer incentive plan. Dealer
incentive expenses increased by $184,880 in 1999.
Our deferred compensation plan was terminated in 1999. As a result, there
is no expense to record. Deferred compensation expense in 1998 was $609,103
GAIN ON SALE OF OWNED SUBSCRIBER ACCOUNTS. As a result of the sale of our
owned account portfolio to SAFE, which occurred on June 30, 1999, we recorded a
gain of $1,899,155. 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 acquisitions made in connection with the owned accounts.
Additionally, the note payable to SAFE of $1,800,000 and accrued expenses
related to the attrition guarantee, account reprogramming and severance expenses
of $3,097,278 were charged against the gain on the sale. Included in the
$3,097,278 are additional accruals of approximately $750,000 which were recorded
in the fourth quarter based on our projected obligations under the attrition
guarantee and additional expenses we expect to incur to reprogram a portion of
the accounts sold to phone lines owned by SAFE.
INTEREST EXPENSE. Interest expense decreased by $305,028 or 10.6% from
$2,869,593 in 1998 to $2,564,565 in 1999. Total debt decreased from $35,980,500
at the end of 1998 to $14,287,812 at the end of 1999. The decrease in debt was
attributable to a payment of $20,000,000 made to FINOVA on June 30, 1999 and the
exchange of $10,000,000 of subordinated debt, plus accrued interest, for Series
A Convertible Preferred Stock on September 30, 1999. The interest rate on the
subordinated debt was 12%. The interest rate on the FINOVA debt decreased from
9.75% to 9.25% on September 30, 1999 and subsequently increased to 9.5% in
November when the prime rate was raised.
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<PAGE> 39
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 decreased from $1,684,500 to $1,063,340 or a decrease of 36.9%. Revenue
related to this segment increased from $14,667,212 to $19,768,281 or an increase
of 34.8%. The decrease in operating income was caused by an increase in sales
and marketing expenses of $851,125 related to the decentralization of our sales
force, new marketing initiatives including an increase in non-cash expenses
related to our stock based dealer incentive plan of $184,880. Amortization and
depreciation increased by $1,334,935 or 66.9% related to acquisitions. Cash
flow, defined as operating income plus depreciation and amortization and stock
based dealer incentive expense, related to central station operations increased
from $3,680,818 to $4,649,875 or 26.3%
OWNED SUBSCRIBER ACCOUNTS. Operating loss related to our owned subscriber
accounts segment decreased from ($1,074,121) to ($338,779) or a decrease of
68.5%. Revenue decreased from $6,942,036 to $3,720,169 or 46.4%. Cash flow,
defined as operating income plus depreciation and amortization, decreased from
$3,218,050 to $1,980,404 or 38.5%. The changes in the results from this segment
are primarily related to the sale of the owned accounts on June 30, 1999.
CORPORATE EXPENSES. Corporate expenses decreased from $4,016,675 to
$3,655,786 or 9.0%. The decrease is due primarily to the elimination of $609,103
of deferred compensation expense offset by an increase in depreciation expense
and non-salary related general and administrative expense associated with the
overall growth of the business in 1999.
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
Protection 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 UNIT EXPENSE AND MARGIN. Operating Unit Expense includes all
costs directly attributable to each operating unit rendering monitoring
services. In 1998 and 1997 these expenses include direct expenses related to the
central station operations and the customer service function related to the
owned account portfolio. These expenses increased from $7,018,392 in 1997 to
$12,610,489 in 1998 or 79.7%. Expenses related to the central station operation
increased from $5,102,119 in 1997 to $10,291,901 in 1998 or 101.72%. This
increase is primarily attributable to acquisitions of central stations in 1997
and 1998. The margin attributable to the central
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<PAGE> 40
station operations increased from 23.6% in 1997 to 29.8% in 1998. The increase
in margin is related to an increase in the number of accounts monitored and the
consolidation of the Michigan central station to Ohio. Expenses related to the
owned account portfolio increased from $2,801,302 in 1997 to $3,723,986 in 1998.
The margin attributable to the owned account portfolio was 44.2% in 1997 and
46.4% in 1998. The increase is due to the larger number of accounts owned in
1998. Intercompany revenue and costs increased from $885,029 in 1997 to
$1,405,398 in 1998 due an increase in the number owned accounts monitored in
1998.
OPERATING EXPENSES. 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.
General and administrative expenses increased from $1,595,181 in 1997 to
$2,488,058 in 1998 or 56.0% due to increased payroll costs related to hiring
four additional management personnel in the fourth quarter of 1997 and an
increase in support staff to manage the growth in the business. Non payroll
expenses including state franchise taxes and professional fees also increased
significantly in 1998.
Selling, marketing and business development expenses increased from
$296,977 in 1997 to $1,614,007 or 443.48% in 1998. The increase in these
expenses is related to the addition of two employees devoted to marketing
initiatives, three employees devoted to a national sales effort and two
employees devoted to business development efforts primarily related to central
station acquisitions. The total increase in payroll and related costs is
approximately $525,000. Approximately $575,000 in additional costs related to
marketing the dealer incentive program and overall advertising and marketing
efforts, including $70,400 of expense related to the stock based dealer
incentive program were incurred in 1998. There was also an increase in travel
expenses and professional fees related to acquisitions and sales efforts of
approximately $200,000.
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
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<PAGE> 41
acquiring seven central station operations in 1998 and internal revenue growth
from various programs of approximately 10%.
OWNED SUBSCRIBER ACCOUNTS. Operating loss related to the owned subscriber
accounts segment increased from ($724,526) to ($1,074,121) or an increase of
48.3%. Revenue increased from $5,018,234 to $6,942,036 or 38.3%. Cash flow,
defined as operating income plus depreciation and amortization, increased from
$2,216,932 to $3,218,050 or 45.2%. The increase in the operating loss in this
segment was caused by an increase in amortization and depreciation. The increase
in revenue and cash flow is directly related to accounts acquired during the
year.
CORPORATE EXPENSES. Corporate expenses increased from $2,754,192 to
$4,016,675 or 145.8%. The increase is due primarily to increased payroll costs
related to additional executive and supervisory level personnel added in 1998.
The addition of these people was required to enable us to effectively manage the
growth that occurred during 1998 and that is anticipated in the future.
CAPITAL EXPENDITURES
We made capital expenditures during 1999 and 1998 totaling $1,629,484 and
$1,752,860, respectively. Of these capital expenditures in 1999 and 1998,
approximately $1,000,000 and $1,130,000, respectively 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 equity securities. Our principal uses of cash are
for capital expenditures to support internal growth, the acquisition of central
monitoring station businesses and operating expenses. We intend to continue to
pursue growth through the acquisition of additional central monitoring station
businesses.
We are continuing to implement 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 under our Dealer
Partner and ValueBuilder programs. 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 alarm dealers under these programs.
1999 COMPARED TO 1998
During the year ended December 31, 1999, contract rights to monitor
security systems were purchased for $1,517,537 in cash. During the same period
goodwill, net of accumulated amortization, increased from $23,123,820 to
$25,911,332 due to the acquisition of central stations during the year. Cash
expenditures for acquisitions were $5,232,197 in 1999.
Our owned account portfolio was sold to SAFE on June 30, 1999 for
$22,800,000 in cash. We signed a note for $1,800,000, which was part of the
$22,800,000 purchase price, payable within a year from the sale. This note is
extinguished if SAFE purchases contracts from alarm dealers referred by SAI with
total recurring monthly
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<PAGE> 42
revenue of $230,000 during the term of the loan. Management cannot predict
whether we will be able to meet this requirement. As of December 31, 1999, SAFE
has purchased contracts with $34,263 of recurring monthly revenue. Additionally,
as of December 31, 1999, dealers we have referred have signed letters of intent
with SAFE for the sale of contracts with $53,024 of recurring monthly revenue
and there are dealers with contracts with recurring monthly revenue totaling
over $71,858 that have not yet responded to the letters of intent sent to them.
There can be no assurance that the SAFE will purchase all or any of the
contracts referred even if letters of intent are signed.
Of the proceeds from the sale of our owned account portfolio, $20 million
was used to pay down debt on our previous line of credit with FINOVA Capital
Corporation which left a principal balance outstanding of approximately
$6,600,000. The remaining cash from the sale was used for the completion of
capital projects, payment of holdback notes and to pay for transition
obligations related to the sale of the owned account portfolio.
On September 30, 1999, we refinanced our previous $30 million line of
credit with FINOVA Capital Corporation. 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 million, which covered our 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 station businesses. We may draw
on this line of credit through March 31, 2001. On March 10, 2000, we entered
into a second amendment to loan instruments which created a $1 million capital
expenditure line and a line of credit up to $2 million to cover contingent
obligations related to the SAFE attrition guarantee and referral obligation.
This combined $3 million was taken out of, and thereby reduced, the acquisition
portion of the $45 million facility discussed above. 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. These obligations
mature in five years.
As of December 31, 1999, we had approximately $32,686,000 available for
acquisitions on our existing line of credit with FINOVA Capital Corporation and
Citizens National Bank of Massachusetts.
On September 30, 1999, we entered into the Second Amendment to Security
Associates International, Inc. Common Stock Subscription and Purchase Agreement
with TJS Partners, L.P., our principal stockholder. Pursuant to this agreement:
(i) $10,000,000 of subordinated debt and accrued interest we owed 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 each share is convertible into 100 shares of
our 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.
In November 1999, we purchased central stations in Seattle, Washington and
Chino, California. The total purchase price for these acquisitions was
approximately $4,300,000 in cash, 100,000 shares of our common stock and certain
assumed liabilities. We also purchased an additional central station in
Metairie, Louisiana and a central station monitoring business in Idaho in
December 1999. The total purchase for these two acquisitions approximated
$1,000,000 plus the assumption of liabilities.
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Current liabilities decreased during the year ended December 31, 1999
compared to 1998 from $9,850,442 to $6,859,791. Unearned revenue decreased by
$3,209,921 due to the sale of our owned account portfolio and a concerted effort
to convert our customers from quarterly, semi-annual and annual billing cycles
to monthly. This was done to smooth cash flow and expedite the collection of
receivables. Accrued expenses increased by $471,523 due to the exchange of
$3,576,166 of accrued interest and dividends by TJS Partners for Series A
Convertible Preferred Stock, offset by additional accruals related to the sale
of the owned accounts of $3,097,278. Additional increases in accruals in 1999
are approximately $950,000. Accruals of approximately $460,000 are related to
acquisitions in the fourth quarter of 1999 including an accrual of $250,000 for
expenses related to moving the Metairie, Louisiana facility. Additionally,
accrued payroll increased approximately $400,000 in 1999 and an accrual of
$90,000 related to the Employee Stock Purchase Plan is recorded in 1999. Current
maturities decreased by $200,956 during the year. In 1998, current maturities
were comprised of the short-term portion of the FINOVA debt ($1,330,000) and
other short-term debt of $844,038. In 1999, current maturities are comprised of
a short-term note of $1,800,000 due to SAFE and other short-term debt of
$173,352. Senior debt borrowings decreased by approximately $14,322,002 and
subordinated borrowing decreased by $8,500,000. Net capital of $192,500 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, the purchase of fixed assets and for general corporate purposes.
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 purchased was $3,897,659 in 1998.
Current liabilities increased during the year ended December 31, 1998
compared to 1997 from $6,756,199 to $9,850,442. Unearned revenue increased by
$662,402 due to acquisitions and our overall growth. Accrued liabilities
increased by $1,316,541 primarily due to an increase in accrued interest and
dividends due to TJS Partners, L.P. and our overall growth. Current maturities
increased by $1,276,585 during the year. Senior debt borrowings increased by
approximately $10,088,000 and subordinated borrowing increased by $3,000,000.
Net capital of $2,048,351 was raised during the year through warrant and option
exercises for the purchase of common and preferred stock. These proceeds were
used to fund central station acquisitions and the acquisition of subscriber
accounts from alarm dealers, the purchase of fixed assets and for general
corporate purposes.
TJS PARTNERS L.P.'S INVESTMENT.
During the first three quarters of 1999, TJS exercised options to purchase
250 shares of Convertible Preferred Stock for an aggregate purchase price of
$25,000. On September 30, 1999 TJS exchanged its subordinated debt, Convertible
Preferred Stock and Redeemable Preferred Stock for Series A Convertible
Preferred Stock on the terms discussed above. Subsequently, TJS purchased 650
shares of Series A Convertible Preferred Stock for an aggregate purchase price
of $71,250. On February 9, 2000 and February 25, 2000, TJS advanced to us
$125,000 in anticipation of the exercise of standby options to purchase 500
shares of Series A Convertible Preferred Stock and $79,093 in anticipation of
the exercise of standby options to purchase 827 shares of Series A Convertible
Preferred Stock, respectively.
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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. On
September 30, 1999, the loan agreement was renegotiated to increase the facility
to $45 million. Certain financial covenants were changed and Citizens Bank now
participates in the facility with FINOVA. Our new loan agreement allows us to
draw on the acquisition portion through March 31, 2001 and matures on December
31, 2004, subject to earlier termination. On March 10, 2000, we entered into a
second amendment to loan instruments which created a $1 million capital
expenditure line and a line of credit up to $2 million to cover contingent
obligations related to the SAFE attrition guarantee and referral obligation.
This combined $3 million was taken out of, and thereby reduced, the acquisition
portion of the $45 million facility discussed above.
The interest rate on borrowings under the new loan agreement is the base
rate in effect from time to time plus the applicable margin. At December 31,
1999, the applicable margin was .75% and the interest rate was 9.50%. 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. We paid a loan
fee of $337,500 on the new loan agreement on September 30, 1999. We are
obligated to pay a commitment fee of .5% on the unused portion of the facility
during the period we are able to draw on the facility.
The loan agreement with FINOVA and Citizens Bank of Massachusetts 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 members; (xv) permit the
occurrence of any violations of ERISA; or (xvi) pay management compensation in
excess of permitted amounts; (xvii) the ratio of total debt to operating cash
flow (as defined) may not exceed 3.50; (xviii) the total debt may not exceed 15
times RMR for subscriber accounts we monitor for alarm dealers; (xix) the ratio
of operating cash flow (as defined) to interest expense must be at least 1 to 1;
(xx) the fixed charge coverage ratio (as defined) must be at least 1.05 to 1;
and (xxi) mandatory prepayments from excess cash flow as defined in the loan
agreement. We are in compliance with the covenants stated above.
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 a note payable to SAFE related to the sale
of our owned account portfolio. 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 1.5% of our total debt. As of March
22, 2000 we had approximately $12.8 million in senior debt due to FINOVA and
Citizens Bank Of Massachusetts at an interest rate of prime plus .75% and a note
due June 30, 2000 at an 8% annual rate related to the owned account portfolio.
The prime rate applicable to this debt was 8.50% at December 31, 1999. We do not
have exposure to foreign currency fluctuations and do not use derivatives for
trading purposes.
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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.
- --------------------------------------------------------------------------------
(dollars in millions) Maturity Date
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Total Fair Value
- --------------------------------------------------------------------------------
Fixed Rate Debt $1.800 $1.800 $1.800
- --------------------------------------------------------------------------------
Average Interest Rate 8.0% 8.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Variable Rate Debt $.677 $1.447 1.939 8.251 $12.314 $12.314
- --------------------------------------------------------------------------------
Average Interest Rate 9.50% 9.50% 9.50% 9.50% 9.50%
- --------------------------------------------------------------------------------
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C>
NAME AGE POSITION
Ronald I. Davis 61 Chairman of the Board and Director
James S. Brannen 61 President, Chief Executive Officer and Director
Thomas J. Salvatore 32 Director
Michael B. Jones 48 Director
Douglas Oberlander 50 Director
Ronald J. Carr 48 Senior Vice President
Stephen Rubin 53 Senior Vice President
Howard Schickler 52 General Counsel, Senior Vice President, Secretary
Daniel S. Zittnan 45 Senior Vice President, Treasurer, Chief Financial
Officer
Karen Daniels 44 Vice President
James N. Jennings 32 Vice President, Corporate Counsel and Assistant
Secretary
Glenn D. Seaburg 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 earned a
B.A. from Roosevelt University.
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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 workout lending activity. Mr. Brannen
earned a A.B. degree from Dartmouth College and a 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 other
director has not been designated as of the date of this prospectus. Mr.
Salvatore earned 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 earned a Bachelors Degree
in Liberal Arts from the University of Arizona and a Masters Degree in
International Relations from the Johns Hopkins University School of Advanced
International Studies.
DOUGLAS OBERLANDER was elected 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 earned a Bachelors Degree in Business Administration from
Brookdale College.
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 earned 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
43
<PAGE> 47
appointed Secretary on October 7, 1997, Vice President on April 13,
1998 and Senior Vice President on July 8, 1999. 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 earned a B.A. degree from Brooklyn
College, M.A., 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 earned a BA in accounting from
DePaul University and is a member of the AICPA and ICPA societies.
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 earned a Bachelor's Degree in Industrial
Administration-Finance from Iowa State University. Ms. Daniels is also a
Certified Public Accountant.
JAMES N. JENNINGS has served as Corporate Counsel of our company since
January 1998, was appointed Assistant Secretary in February 1998 and Vice
President in February 2000. Prior to joining us, Mr. Jennings spent a combined
three years with Shefsky & Froelich, Ltd. and McCarthy Duffy Neidhart & Snakard,
both Chicago law firms. Prior to entering private practice, Mr. Jennings was an
independent investment banker for three years. Mr. Jennings earned a Bachelors
Degree from the University of Texas at Austin and a J.D. from California Western
School of Law.
GLENN D. SEABURG has served as Director of Information Technology since
September of 1998 and was appointed Vice President in February 2000. Prior to
joining us, Mr. Seaburg was the Director of I.S./Telecommunications for the
Signature Security Group from October 1998 to October 1999. From November 1987
to September 1998, Mr. Seaburg was employed by SecurityLink by Ameritech as its
Manager System Development Project Manager. Prior to Ameritech's purchase of
SecurityLink, Mr. Seaburg was Director of Information Systems for SecurityLink
for three years.
Our executive officers are appointed annually by, and serve at the
discretion of, the board of directors. Each executive officer is a full-time
employee. All directors hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified. The board
of directors currently consists of five members. Ronald I. Davis and Stephen
Rubin are brothers-in-law. There are no other family relationships between any
of our directors or executive officers.
DIRECTOR COMPENSATION
All directors, other than Mr. Salvatore, are reimbursed for travel expenses
incurred in connection with attending board and committee meetings. Directors
are not entitled to additional fees for serving on committees of the board. On
January 6, 1998, when he joined the board of directors, Mr. Jones was awarded
options to purchase 10,000 shares of our common stock, at an exercise price of
$6.00 per share, which expire on December 31, 2002.
44
<PAGE> 48
On July 8, 1999, the board extended the expiration date of Mr. Jones' options to
July 8, 2005. On March 10, 1999, directors Jones and Oberlander were awarded
options to purchase 25,000 shares of common stock each under our Stock Option
Plan. These options are exercisable for a period of six years. Half of these
options are exercisable at $4.50 per share, and the other half at $6.00 per
share. On January 11, 2000, directors Salvatore, Jones and Oberlander were
awarded options to purchase 25,000 shares of common stock each under our Stock
Option Plan, subject to stockholder approval. These options are exercisable for
a period of six years at $2.75 per share.
EXECUTIVE COMPENSATION
General
The following table is a summary of the compensation awarded or earned by
our president and chief executive officer and the other most highly paid
executive officers (the "Named Executive Officers") during the last three fiscal
years:
Summary Compensation Table
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS PAYOUTS
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTIONS/ LTIP COMPENSA-
POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS(#) PAYOUTS(4) TION(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James S. Brannen 1999 $175,000 $72,417 210,000 -- $3,433
President and Chief 1998 $175,000 $55,000 $29,100(1) -- -- $108,888 $2,019
Executive Officer 1997 $125,000 $11,635 -- -- $154,103 $ 837
$32,215(1)
$23,835(1)
Ronald I. Davis 1999 $175,000 $78,500 210,000 -- $3,433
Chairman of the 1998 $175,000 $55,000 $28,050(2) -- -- $108,888 $ 676
Board(6) 1997 $125,858 $11,635 $31,889(2) -- -- $154,103 $ 843
$22,949(2)
Stephen Rubin 1999 $140,000 $43,156 210,000 -- $2,746
Senior Vice President 1998 $127,400 $40,000 $15,350(3) -- -- $ 67,568 $ 697
1997 $104,999 $ 8,462 $16,456(3) -- -- $ 95,625 $ 694
$11,586(3)
Ronald J. Carr 1999 $140,000 -- $12,000(7) 300,000 -- $1,703
Senior Vice 1998 $126,538 -- $10,750(7) -- -- $ 67,568 $ 646
President(6)
Daniel S. Zittnan(8) 1999 $140,000 -- $12,000(9) 300,000 -- $1,696
Senior Vice President 1998 $139,615 -- $ 4,000(9) -- -- $ 67,568 --
</TABLE>
- ------------------------------
1) Includes $22,871, $24,965 and $24,000 for automobile allowances for 1997,
1998 and 1999, respectively.
2) Includes $22,319, $25,439 and $24,000 for automobile allowances for 1997,
1998 and 1999, respectively.
3) Includes $10,750, $11,856 and $12,000 for automobile allowances for 1997,
1998 and 1999, respectively.
4) Earned awards under our Supplemental Employees' Retirement Plan.
5) Amount is matching funds pursuant to our 401(k) Plan.
6) Annual salary and bonus did not exceed $100,000 in 1997.
7) Includes $10,750 and $12,000 for automobile allowance in 1998 and 1999,
respectively.
8) Annual salary and bonus did not exceed $100,000 in 1997.
9) Includes $4,000 and $12,000 for automobile allowance in 1998 and 1999,
respectively.
45
<PAGE> 49
Option Grants Table
The following table contains information concerning options granted to the
Named Executive Officers in 1999.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION TERM
NAME NUMBER OF PERCENT OF EXERCISE OR EXPIRATION 5% 10%
SECURITIES TOTAL BASE PRICE DATE
UNDERLYING OPTIONS ($/SH) (1)
OPTIONS GRANTED TO
GRANTED EMPLOYEES
IN FISCAL
YEAR
<S> <C> <C> <C> <C> <C> <C>
James S. Brannen 210,000 13% 50% @ $4.50 March 10, 2005 $0 $85,542
50% @ $6.00
Ronald I. Davis 210,000 13% 50% @ $4.50 March 10, 2005 $0 $85,542
50% @ $6.00
Stephen Rubin 210,000 13% 50% @ $4.50 March 10, 2005 $0 $85,542
50% @ $6.00
Ronald J. Carr 300,000 19% 50% @ $4.50 March 10, 2005 $0 $122,203
50% @ $6.00
Daniel S. Zittnan 300,000 19% 50% @ $4.50 March 10, 2005 $0 $122,203
50% @ $6.00
</TABLE>
1) The options become exercisable over a three-year period beginning
March 10, 1999 (one third per year with the $4.50 options vesting
first).
Fiscal Year-End Option Value Table
The following table contains information concerning the value of stock
options held by the Named Executive Officers at fiscal year-end 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SARS AT MONEY OPTIONS/SARS AT FISCAL
FISCAL YEAR-END YEAR-END
SHARES ACQUIRED
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C>
James S. Brannen -- -- 0 / 210,000 --/--
Ronald I. Davis --- -- 0 / 210,000 --/--
Stephen Rubin -- -- 0 / 210,000 --/--
Ronald J. Carr -- -- 0 / 300,000 --/--
Daniel S. Zittnan -- -- 0 / 300,000 --/--
</TABLE>
46
<PAGE> 50
STOCK OPTION PLAN
EMPLOYMENT AGREEMENTS
In August, 1996, we entered into three year employment agreements with
James S. Brannen, Ronald I. Davis and Stephen Rubin to serve as our President
and Chief Executive Officer, Chairman of the Board of Directors, and Senior Vice
President, respectively. These employment agreements were amended in July 1999.
Pursuant thereto, Mr. Brannen and Mr. Davis currently receive an annual salary
of $175,000, and Mr. Rubin receives an annual salary of $145,000. These amounts
may be increased following annual salary reviews. The employment agreements
provide that these executives will be entitled to severance pay equal to 2.99
times their annual salary upon: (i) expiration of the term of the employment
agreement (including any renewals) unless terminated for cause, as defined in
the employment agreement; (ii) death or disability; or (iii) if they terminate
their employment because of: (a) a diminution of responsibilities or authority
or being assigned duties inconsistent with their current position; (b) a
requirement that they serve from a location other than the greater Chicago
metropolitan area; (c) breach of the employment agreement by SAI; or (d) a
change of control of SAI. In addition, Messrs. Brannen, Davis and Rubin will
participate in such other benefits as are offered to other executive employees
of our company. These agreements automatically renew for successive one-year
periods.
We have entered into Confidentiality Agreements with all of our other
executive officers. These agreements contain non-compete, non-solicitation, and
confidentiality provisions, and also provide that in the event of termination of
the executive officer as a result of a change of control, as defined in the
Confidentiality Agreements, the executive officer will be paid a one-time cash
payment equal to 2.99 times his or her salary, plus an additional payment to
compensate the employee for any federal excise tax imposed as a result of this
payment.
STOCK OPTION PLAN
Under our Stock Option Plan, certain executive officers were granted
options to purchase shares of our common stock. Under the terms of each
executive officer's stock option agreement, which describes the terms of his or
her options, half of the options are exercisable at $4.50 per share and half are
exercisable at $6.00 per share. The options will expire in six (6) years and
will vest over three (3) years. If our company undergoes certain change of
control transactions, however, the options will vest immediately.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 30, 1999, we entered into the Second Amendment to Security
Associates International, Inc. Common Stock Subscription and Purchase Agreement
with TJS Partners, L.P., our principal stockholder. Pursuant to this agreement:
(i) $10,000,000 of subordinated debt and accrued interest owed by us 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, which were held by TJS Partners, L.P., 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 our
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 our common stock are entitled to vote, on an
as-converted basis. However, the total voting power of all securities
47
<PAGE> 51
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 Second Amendment, our By-laws were amended to
increase the percentage of votes required to approve matters presented to the
stockholders from a simple majority to greater than sixty (60) percent. This
super-majority provision will be in effect for as long as TJS Partners, L.P.
owns 30% of our common stock on an as-converted basis. Additionally, for so long
as TJS Partners, L.P. owns at least fifteen percent (15%) of our common stock on
an as-converted basis, our Board of Directors will consist of five Directors.
TJS has the right to nominate two directors.
During 1999, TJS exercised options to purchase 250 shares of Convertible
Preferred Stock for an aggregate purchase price of $25,000.
During 1999, TJS exercised options to purchase 650 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $71,250.
On February 9, 2000, TJS advanced to us $125,000 in anticipation of the
exercise of standby options to purchase 500 shares of Series A Convertible
Preferred Stock.
On February 25, 2000, TJS advanced to us $79,093 in anticipation of the
exercise of standby options to purchase 827 shares of Series A Convertible
Preferred Stock.
On January 6, 1998, when he joined the Board of Directors, Mr. Jones was
awarded options to purchase 10,000 shares of our common stock, at an exercise
price of $6.00 per share. These options were to expire on December 31, 2002. On
July 8, 1999, the Board extended the expiration date of Mr. Jones' options to
July 8, 2005.
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 were to expire on 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 July 8,
1999, the Board extended the expiration date of these options to July 8, 2005.
These options were subsequently transferred into a family trust.
On March 10, 1999, Directors Jones and Oberlander were awarded options to
purchase 25,000 shares of commons stock each under our Stock Option Plan. These
options are exercisable for a period of six years. Half of these options are
exercisable at $4.50 per share, and the other half at $6.00 per share.
On March 31, 1999, we issued 35,160 shares of common stock to a former
employee as a distribution from our Supplemental Employees' Retirement Plan upon
his termination as an employee. These shares were registered on Form S-8 on May
6, 1999.
On May 24, 1999, we issued 23,440 shares of common stock to a former
employee as a distribution from our Supplemental Employees' Retirement Plan upon
his termination as an employee. These shares were registered on Form S-8 on May
6, 1999.
On June 21, 1999, we issued the following shares of common stock to the
following employees, as terminating distributions from our Supplemental
Employees' Retirement Plan:
48
<PAGE> 52
James S. Brannen 56,662 shares
Ronald I. Davis 56,662 shares
Stephen Rubin 35,160 shares
Daniel S. Zittnan 35,160 shares
Ronald J. Carr 35,160 shares
Howard Schickler 17,580 shares
Karen B. Daniels 25,975 shares
These shares were registered on Form S-8 on May 6, 1999.
On July 8, 1999, we issued stock options to the following individuals to
purchase the following numbers of shares of common stock, as awards under our
Stock Option Plan:
Options to Purchase
--------------------------
Michael B. Jones 25,000 shares
Douglas J. Oberlander 25,000 shares
James S. Brannen 210,000 shares
Ronald I. Davis 210,000 shares
Stephen Rubin 210,000 shares
Daniel S. Zittnan 300,000 shares
Ronald J. Carr 300,000 shares
Howard Schickler 150,000 shares
Karen B. Daniels 150,000 shares
One-half of each of the foregoing persons' options are exercisable at $4.50
per share with the other one-half being exercisable at $6.00 per share. The
options of the officers vest over three years and expire six years from the date
of grant. The directors' options vest immediately and expire six years from the
date of grant.
On June 21, 1999, Beverly Davis, wife of Ronald I. Davis, exercised options
to purchase 5,000 shares of common stock for an aggregate exercise price of
$5,000.
49
<PAGE> 53
On January 11, 2000, the board of directors approved the issuance of stock
options to the following individuals to purchase the following numbers of shares
of common stock, as awards under our Stock Option Plan, subject to stockholder
approval:
Options to Purchase
--------------------------
Thomas J. Salvatore 25,000 shares
Michael B. Jones 25,000 shares
Douglas J. Oberlander 25,000 shares
James S. Brannen 105,000 shares
Ronald I. Davis 105,000 shares
Stephen Rubin 105,000 shares
Daniel S. Zittnan 150,000 shares
Ronald J. Carr 150,000 shares
Howard Schickler 75,000 shares
Karen B. Daniels 75,000 shares
The options are exercisable at $2.75 per share. The options of the officers
vest over two years (50% each year) and expire six years from the date of grant.
The directors' options vest immediately and expire six years from the date of
grant.
On February 14, 2000, the Board of Directors approved the issuance of stock
options to the following individuals to purchase the following numbers of shares
of common stock, as awards under our Stock Option Plan, subject to stockholder
approval:
Options to Purchase
--------------------------
James N. Jennings 50,000 shares
Glenn D. Seaburg 50,000 shares
The options are exercisable at $2.875 per share. The options of these
officers vest over three years (one third each year) and expire six years from
the date of grant.
50
<PAGE> 54
PRINCIPAL AND SELLING STOCKHOLDERS
The following table lists certain information regarding the beneficial
owners of our common stock as of March 23, 2000, which includes: (i) each person
known to us to beneficially own more than five percent of the outstanding shares
of our common stock; (ii) each of our company's directors; (iii) the Named
Executive Officers; (iv) each selling stockholder; and (v) all of our company's
directors and executive officers as a group. We believe that except as noted
each person or entity named below has sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by each
holder, subject to community property laws where applicable. Some of the listed
holders of common stock who hold their shares in street name may have already
sold their shares as of the effective date of this prospectus.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering Number After Offering
------------------ of Shares --------------
Number Being Number
Name of Shares Percent(1) Offered of Shares Percent(2)
---- --------- ---------- ------- --------- ----------
Number
<S> <C> <C> <C> <C> <C>
TJS Partners, L.P.(3)
115 East Putnam Avenue
Greenwich, CT 06830 13,635,900 65.45% 3,768,600(4) 10,000,000 44.12%
Ronald I. Davis(5)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 1,014,695 4.85% 0 1,014,695 4.46%
James S. Brannen(6)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 643,278 3.08% 0 643,278 2.83%
Stephen Rubin(7)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 501,198 2.40% 0 501,198 2.20%
Daniel S. Zittnan(8)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 138,349 * 0 138,349 *
Ronald J. Carr(9)
c/o Security Associates
International, Inc.
2101 S. Arlington Heights Road
Arlington Heights, Illinois 60005 135,160 * 0 135,160 *
</TABLE>
51
<PAGE> 55
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering Number After Offering
------------------ of Shares --------------
Number Being Number
Name of Shares Percent(1) Offered of Shares Percent(2)
---- --------- ---------- ------- --------- ----------
Number
<S> <C> <C> <C> <C> <C>
Thomas J. Salvatore(10)
c/o TJS Partners, L.P.
155 E. Putnam Avenue
Greenwich, CT 06830 13,660,900 65.49% 3,768,600(4) 10,025,000 44.18%
Douglas Oberlander(11)
10225 N. Knoxville Avenue
Peoria, Illinois 61615 144,474 * 0 144,474 *
Michael B. Jones(12)
c/o ProFinance Associates, Inc.
6540 Lusk Boulevard, Suite C-240
San Diego, CA 92121 91,000 * 0 91,000 *
Allen Investments II, LLC
711 Fifth Ave 9th FL
New York, New York 10019 80,000 * 80,000 0 0
Alternative Strategies
880 Third Ave. 3rd FL
New York, New York 10022 60,000 * 60,000 0 0
Ask Company
David Broser
1700 Broadway 14th FL
New York, New York 10000 50,000 * 50,000 0 0
Douglas A. Brown
1 Dogwood Ln.
Tenafly, New Jersey 07670 4,000 * 4,000 0 0
Robert Brown
IRA Account
3605 N. Robinwood Drive
Muncie, Indiana 47304 25,000 * 25,000 0 0
Bohemond Corp.
Holding Capital
104 Crandon Blvd #419
Biscayne, Florida 33149 25,000 * 25,000 0 0
Bohemond Corp.
Holding Capital
104 Crandon Blvd #419
Biscayne, Florida 33149 4,000 * 4,000 0 0
Buttonwood Advisory Group, Inc.(13)
15705 Framingham Lane
Huntersville, NC 28078 75,000 * 75,000 0 0
</TABLE>
52
<PAGE> 56
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering Number After Offering
------------------ of Shares --------------
Number Being Number
Name of Shares Percent(1) Offered of Shares Percent(2)
---- --------- ---------- ------- --------- ----------
Number
<S> <C> <C> <C> <C> <C>
John S. Coates
28638 11th Ave South
Federal Way, Washington 98003 52,000 * 52,000 0 0
William R. Colaianni
Holding Capital
685 Fifth Ave.
New York, New York 10019 4,000 * 4,000 0 0
Bobbie Conrad
383 Adams Street
Glencoe, Illinois 60022 20,000 * 20,000 0 0
Sidney Dechter
7406 Princeton Drive
Hanover Park, Illinois 60103 25,000 * 25,000 0 0
Anita M. Dalmar
2324 North East Regents Drive
Portland, Oregon 97212 20,000 * 20,000 0 0
Karl D. Dillon
1325 Fifth Ave.
Seattle, Washington 98101 10,000 * 10,000 0 0
Robert H. Dilworth
Baker & McKenzie
815 Connecticut Avenue, N.W.
Washington, D.C. 20006-4078 50,000 * 50,000 0 0
Fred Figge
221 S. Blackstone
LaGrange, Illinois 60525 98,500 * 98,500 0 0
Dianne G. Freeman
P.O. Box 143
Sand Lake, New York 12153 25,000 * 25,000 0 0
Gamelam Capital Fund
Hauptman
1661 Highway One
Fairfield, Iowa 52556 10,000 * 10,000 0 0
GEM Management, Ltd.
P.O. Box 860
11 Bath Street
St. Helier Jersey, Channel Islands 10,000 * 10,000 0 0
</TABLE>
53
<PAGE> 57
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
------------------ Number --------------
of Shares
Number Being Number
Name of Shares Percent(1) Offered of Shares Percent(2)
---- --------- ---------- ------- --------- ----------
Number
<S> <C> <C> <C> <C> <C>
Phyllis Greinwald
14238 N. 2nd Street
Phoenix, Arizona 85023 77,000 * 77,000 0 0
Cheryl L. Grolle
W 564 Pell Lake Drive
Genoa City, Wisconsin 53128 250 * 250 0 0
Holding Capital Management, LLC
7 Ridgewood Drive
Bridgewater, CT 06752 100,000 * 100,000 0 0
Raymond C. Hoven(14)
3251 Midlane Drivet
Wadsworth, Illinois 60083 225,539 1.08% 40,000 185,539 *
Infinity Partnership II
4075 N. Victoria Drive
Hoffman Estates, Illinois 60195 10,000 * 10,000 0 0
Inversiones Alanje, C.A.
c/o Carlos Delgado
Apartado Postal 1286
Caracas, Venezuela 1010-A 62,500 * 62,500 0 0
Inversiones Aparicio, C.A.
c/o Modesto Aparicio
Jet Cargo (M-571)
P.O. Box 020010
Miami, Florida 33102-0010 120,000 * 120,000 0 0
Inversiones Erlanger, C.A.
c/o Malcolm Caplan
M-287 Jet Cargo International
P.O. Box 020010
Miami, Florida 33102-0010 100,000 * 100,000 0 0
Irwin Jacobson(15)
1035 Carlyle Terrace
Highland Park, Illinois 60035 123,000 * 12,500 110,500 *
Jessand Corp Profit Sharing Plan
and Trust
7 Ridgewood Drive
Bridgewater, CT 06752 5,000 * 5,000 0 0
</TABLE>
54
<PAGE> 58
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
------------------ Number --------------
of Shares
Number Being Number
Name of Shares Percent(1) Offered of Shares Percent(2)
---- --------- ---------- ------- --------- ----------
Number
<S> <C> <C> <C> <C> <C>
Lee Jones
c/o Support Services Group
63 Calle de Industrias
Suite 550
San Clemente, California 92672 22,088 * 22,088 0 0
Martin & Associates Management
Consultants, Inc.
8056 Steeplechase Dr
Palm Beach Gardens, Florida 33418 4,000 * 4,000 0 0
Metronet Protection Services(16)
67 East Madison Street, Suite 265
Chicago, IL 60603 25,000 * 25,000 0 0
John M. McMahon
West Lake Road
Tuxedo Park, New York 10987 20,000 * 20,000 0 0
Peter T. Joeseph
Rosecliff, Inc.
712 Fifth Ave. 34th FL
New York, New York 10019 80,000 * 80,000 0 0
Jack Schultz(17)
c/o Metronet Protection Services
67 East Madison Street, Suite 265
Chicago, IL 60603 25,000 * 25,000 0 0
Kaplan Choate Special Situations
880 Third Ave. 3rd FL
New York, New York 10022 40,000 * 40,000 0 0
Mark Scharmann(18)
1661 Lakeview Circle
Ogden, Utah 84403 144,800 * 32,500 112,300 *
Bernard and Samuel Sered(19)
4023 Suffield Court
Skokie, Illinois 60076 30,301 * 25,000 5,301 *
Lorraine R. Small
453 Raintree Drive
Glen Ellyn, Illinois 60137 250 * 250 0 0
Star Security Systems, Inc.(20)
2324 S. Elmhurst Road
Mt. Prospect, IL 60005 25,000 * 25,000 0 0
Jan Sussman
9 Sterling Ln.
Sands Point, New York 11050 30,000 * 30,000 0 0
</TABLE>
55
<PAGE> 59
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
------------------ Number --------------
of Shares
Number Being Number
Name of Shares Percent(1) Offered of Shares Percent(2)
---- --------- ---------- ------- --------- ----------
Number
<S> <C> <C> <C> <C> <C>
Tall Oaks Group, LP
L. Hite
40 Beckman Terrace
Summit, New Jersey 07901 20,000 * 20,000 0 0
Alfred Robert Taylor Tustee
387 Spring Cove Road
Waynesville, North Carolina 28786 10,000 * 10,000 0 0
TPR Investment Associates, Inc.
9 West 57th Street #3900
New York, New York 10019 52,000 * 52,000 0 0
Brady E. Turner(21)
P.O. Box 840
Brunswick, Georgia 31521 56,676 * 12,500 44,176 *
UMB Bank, NA
Evergreen National, LP
200 East Highway 32 Box 129
Lebanon, Missouri 65536 300,000 1.44% 300,000 0 0
Harold Wit
Allen & Company
711 Fifth Ave 9th Fl
New York, New York 10019 30,000 * 30,000 0 0
All Executive Officers and Directors
as a group (12 persons)(22) 16,474,344 79.07% 3,768,600 12,838,444 56.65%
</TABLE>
(1) Applicable percentage of ownership as of March 23, 2000, is based upon
20,833,942 shares of common stock outstanding (including 13,635,900
shares issuable upon conversion of outstanding shares of convertible
preferred stock). Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, and unless
otherwise noted includes voting and investment power with respect to
the shares shown as beneficially owned.
(2) Applicable percentages of ownership are based on 22,663,967 shares of
common stock outstanding. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission,
and unless otherwise noted includes voting and investment power with
respect to the shares shown as beneficially owned. Assumes all shares
being registered for resale are sold.
(3) Consists of 136,359 shares of Series A Convertible Preferred Stock.
Each share of Series A convertible preferred stock is convertible into
and has the voting rights of 100 shares of common stock. TJS is the
only holder of convertible preferred stock.
56
<PAGE> 60
(4) Includes 132,700 shares of common stock which may be acquired upon the
exercise of contingent options. These shares are not beneficially
owned as the options are not currently exercisable within sixty days.
However, the shares are included in this table because they are being
registered for resale.
(5) Includes 944,695 shares owned by Mr. Davis and J, S & R Ltd., L.P.
Also includes 70,000 shares that may be acquired within sixty days
upon exercise of options. Excludes 5,337 shares owned by Beverly
Davis, Mr. Davis' wife, 5,200 shares owned by Scott Davis, Mr. Davis'
son, 5,000 shares owned by Deborah Davis, Scott's wife, 10,000 shares
owned by Ethan Davis, Mr. Davis' grandson, 10,000 shares owned by
Benjamin Davis, Mr. Davis' grandson, 2,500 shares owned by Emma Davis,
Mr. Davis' granddaughter, and 16,801 shares owned by Ann Davis, Mr.
Davis' sister, as to which Mr. Davis disclaims beneficial ownership.
(6) Includes 573,278 shares owned by Mr. Brannen and a family limited
partnership, and 70,000 shares that may be acquired within sixty days
upon exercise of options Excludes 7,580 shares owned by Martha A.
Brannen, Mr. Brannen's wife, 10,000 shares owned by Craig Brannen,
10,000 shares owned by Sarah B. Ozee and 10,000 shares owned by Peter
Brannen, Mr. Brannen's children, as to which Mr. Brannen disclaims
beneficial ownership.
(7) Includes 431,198 shares owned by Mr. Rubin, and 70,000 shares that may
be acquired within sixty days upon exercise of options. Excludes 5,600
shares owned by Jamie Rubin, Mr. Rubin's son, as to which Mr. Rubin
disclaims beneficial ownership.
(8) Includes 38,349 shares owned by Mr. Zittnan, and 100,000 shares that
may be acquired within sixty days upon exercise of options.
(9) Includes 35,160 shares owned by Mr. Carr, and 100,000 shares that may
be acquired within sixty days upon exercise of options.
(10) Consists of 136,359 shares of convertible preferred stock owned by
TJS. Mr. Salvatore controls voting and disposition of these shares as
the Managing Partner of TJS. Also includes 25,000 shares that may be
purchased personally by Mr. Salvatore within sixty days upon exercise
of options. This option is subject to stockholder approval at our
Annual Meeting.
(11) Includes 94,474 shares owned by Mr. Oberlander, and 50,000 shares that
may be acquired within sixty days upon exercise of options. Of these
options, options to purchase 25,000 shares are subject to stockholder
approval at our Annual Meeting.
(12) Includes 6,000 shares owned by Mr. Jones; and 85,000 shares of common
stock that may be acquired within sixty days upon exercise of options.
Of these options, options to purchase 25,000 shares are held by a
family trust and options to purchase 25,000 shares are subject to
stockholder approval at our Annual Meeting.
57
<PAGE> 61
(13) Includes 25,000 shares of common stock, and 50,000 shares that may be
acquired within sixty days upon the exercise of options.
(14) Includes 225,539 shares owned by Mr. Hoven of which 40,000 shares are
being registered for resale hereby.
(15) Includes 123,500 shares owned by pension plans controlled by Mr.
Jacobson of which 12,500 shares are being registered for resale
hereby.
(16) Includes 25,000 shares which may be acquired within sixty days upon
the exercise of options.
(17) Includes 25,000 shares which may be acquired within sixty days upon
the exercise of options.
(18) Includes 144,800 shares owned by Mr. Scharmann of which 32,500 are
being registered for resale hereby.
(19) Includes 30,301 shares owned by Messrs. Sered of which 25,000 shares
are being registered for resale hereby.
(20) Includes 25,000 shares which may be acquired within sixty days upon
the exercise of options.
(21) Includes 56,676 shares owned by Mr. Turner of which 12,500 shares are
being registered for resale hereby.
(22) Includes 670,000 shares which may be acquired within sixty days upon
the exercise of options.
The following table presents certain information regarding the beneficial
ownership of Series A Convertible Preferred Stock as of March 23, 2000 by: (a)
each person known by us to beneficially own more than five percent of the
outstanding shares of Series A Convertible Preferred Stock; (b) each of our
Directors; (c) each of the Named Executive Officers; and (d) all Directors and
officers as a group. We believe that each person named below has sole voting and
investment power with respect to all shares of Series A Convertible Preferred
Stock shown as beneficially owned by them, subject to community property laws
where applicable. TJS Partners, L.P. and Thomas J. Salvatore are the only
beneficial owners of Series A Convertible Preferred Stock.
BENEFICIAL OWNERSHIP
------------------------------------
NAME NUMBER OF SHARES PERCENT(1)
---- ---------------- ----------
TJS Partners, L.P.(2)
115 East Putnam Avenue
Greenwich, CT 06830 136,359 100%
Thomas J. Salvatore(3)
c/o TJS Partners, L.P.
115 East Putnam Avenue
Greenwich, CT 06830 136,359 100%
All Executive Officers and
Directors as a group (10 persons)
136,359 100%
58
<PAGE> 62
1) Applicable percentage of ownership as of March 23, 2000 is based upon
136,359 shares of Series A Convertible Preferred Stock outstanding.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and unless otherwise noted includes
voting and investment power with respect to the shares shown as
beneficially owned.
2) Consists of 136,359 shares of Series A Convertible Preferred Stock. Each
share of convertible preferred stock is convertible into and has the voting
rights of 100 shares of common stock. The total voting power of all
securities owned by a 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. TJS is the only holder of Series
A Convertible Preferred Stock.
3) Consists of 136,359 shares of Series A Convertible Preferred Stock owned by
TJS, Mr. Salvatore controls voting and disposition of these shares as the
Managing General Partner of TJS.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our company is authorized to issue up to 50,000,000 shares of common stock
and 1,000,000 shares of preferred stock. As of March 24, 2000, there were
7,198,242 shares of common stock and 136,359 shares of convertible preferred
stock actually issued and outstanding. As of March 24, 2000, there were
approximately 237 holders of our common stock and one holder of record for the
convertible preferred stock appearing on our stock ledger.
COMMON STOCK
Each share of our common stock is entitled to one vote in elections for
directors and all other matters submitted for stockholder vote. Our company does
not have cumulative voting. Therefore, holders of shares representing a majority
of the votes can elect all of the directors if they choose to do so. The holders
of common stock are only entitled to dividends if our board of directors
declares dividends. We have never paid dividends on our common stock and do not
anticipate paying any in the foreseeable future. See "Dividend Policy." If our
company were to be liquidated or dissolved, the holders of common stock would
share any assets that remain after payments to creditors are made and after
priority payments to the holders of our preferred stock have been made. The
priority payments that would be to the holders of our preferred stock are
described below.
Our common stock is traded on the American Stock Exchange under the
symbol "SAI."
PREFERRED STOCK
Our Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock without stockholder approval. The terms of any preferred stock,
such as dividend rights, conversion prices, voting rights, redemption prices and
terms can also be set by the board of directors. Because of the broad discretion
that the board has,
59
<PAGE> 63
future issuances of preferred stock could have voting, dividend, liquidation and
other rights superior to those of our common stock or other classes of preferred
stock.
Series A Convertible Preferred Stock
The Series A Convertible Preferred Stock has a $10 par value, a liquidation
preference of $350 per share and each share is convertible into 100 shares of
our 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 our 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.
The convertible preferred stock is convertible into common stock at the
option of the holder at any time. The shares automatically convert if SAI makes
an initial public offering of its common stock.
WARRANTS
Under this prospectus, we may issue warrants to purchase up to a maximum of
2,000,000 shares of common stock. Because we can only issue a total of 2,000,000
shares of common stock under this prospectus, including those that would be
issued upon exercise of warrants, the total number of warrants we can actually
issue will be reduced to the extent that we issue common stock under this
prospectus. Each warrant entitles the holder to purchase shares of common stock
by paying $6.00 per share. The right to exercise the warrants is subject to
certain restrictions described elsewhere in this prospectus. See "Business -
Dealer Partner Program."
Under certain circumstance we have the right to redeem those warrants that
are no longer subject to restrictions on exercise. Those warrants are redeemable
at our option after no less than two years from the date they were originally
issued at a redemption price of $.10 per share. This redemption may only take
place if the market price of the common stock at that time equals or exceeds
150% of the exercise price for 15 out of 20 consecutive trading days ending
within 30 days of the date on which the notice of redemption is given.
The exercise price of the warrants will be adjusted in the event of share
splits, share consolidations and certain rights offerings and share dividends
involving common stock. Warrants not exercised within four years of their
issuance will expire. The warrants do not give the holder any rights as a
stockholder of our company.
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION,
BY-LAWS AND DELAWARE LAW
Certificate of Incorporation and By-Laws. Our certificate of incorporation
provides that the Board of Directors may issue preferred stock with such voting
rights, preferences and designations as the Board of Directors determines in its
sole discretion without stockholder approval. Our certificate of incorporation
also provides that the Board of Directors has the power to make, adopt, amend or
repeal our By-Laws. The By-Laws provide that our
60
<PAGE> 64
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 25% of our capital stock.
Our By-laws were amended to increase the percentage of votes required to
approve matters presented to the stockholders from a simple majority to
requiring greater than sixty percent (60%). This super-majority provision will
be in effect for as long as TJS Partners, L.P. owns at least 30% of our common
stock on an as-converted basis. Additionally, for so long as TJS owns at least
fifteen percent (15%) of our common stock on an as-converted basis, our board of
directors will consist of five directors.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control of our company. While these provisions may
increase the likelihood of continuity and stability in the policies formulated
by the serving Board of Directors they could also discourage certain types of
transactions that may involve an actual or threatened change of control.
Delaware Takeover Statute. We are a Delaware corporation and subject to
Section 203 of the Delaware General Corporation Law ("DGCL"). Generally, Section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with any "interested stockholder" for a period of three years after
the time such stockholder became an interested stockholder, unless:
- Prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; or
- Upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced; or
- At or subsequent to such time, the business combination is approved by
the board of directors and authorized by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Under Section 203 of the DGCL, a "business combination" includes:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, lease, exchange or other disposition, except proportionately
as a stockholder of such corporation, to or with the interested
stockholder of assets of the corporation having an aggregate market
value equal to 10% or more of either the aggregate market value of all
the assets of the corporation or the aggregate market value of all the
outstanding stock of the corporation;
- certain transactions resulting in the issuance or transfer by the
corporation of stock of the corporation to the interested stockholder;
- certain transactions involving the corporation which have the effect
of increasing the proportionate share of the stock of any class or
series of the corporation which is owned by the interested
stockholder; or
61
<PAGE> 65
- certain transactions in which the interested stockholder receives
financial benefits provided by the corporation.
Under Section 203 of the DGCL, an "interested stockholder" generally is:
- any person that owns 15% or more of the outstanding voting stock of
the corporation; or
- any person that is an affiliate or associate of the corporation and
was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period prior to the date
on which it is sought to be determined whether such person is an
interested stockholder; and
- the members or associates of any such persons.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability. As permitted by the Delaware General Corporation
Law, our certificate of incorporation provides that our directors will not be
personally liable for monetary damages to our company for certain breaches of
their fiduciary duty as directors, unless they violate their duty of loyalty to
our company, act in bad faith, knowingly or intentionally violate the law,
authorize illegal dividends or redemptions, or derive improper personal benefits
from their actions as directors. This provision has no effect on the
availability of remedies such as an injunction or rescission of improper
transactions. This provision applies only to claims against a director arising
out of his or her role as a director and not in any other capacity (such as an
officer or employee). Liability of a director for violations of the federal
securities laws is not limited by this provision. Directors, however, will not
be liable for monetary damages arising from decisions involving violations of
the duty of care even if the decisions are grossly negligent.
Indemnification. Under our Certificate of Incorporation, our directors and
officers are to be indemnified by our company to the fullest extent allowed by
Delaware law, against all expenses and liabilities reasonably incurred in
connection with their service for or on behalf of our company. Our company is
also authorized to enter into indemnification agreements that provide for
indemnification greater or different from that provided in the certificate of
incorporation.
We have been advised that in the opinion of the Securities and Commission
indemnification for liabilities arising under the Securities Act of 1933 is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is LaSalle National
Bank, located at 135 South LaSalle Street, Chicago, Illinois 60628.
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<PAGE> 66
LEGAL MATTERS
Sachnoff & Weaver, Chicago, Illinois has reviewed and will issue an opinion
about the legality of the shares of common stock and the warrants we are
offering by virtue of this prospectus.
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 under the Securities Act
with the Security and Exchange Commission. The registration statement covers the
common stock and warrants being offered by our company and the selling
stockholders. This prospectus is a part of that registration statement. This
prospectus does not contain all of the information included in the registration
statement and its exhibits and schedules. If you would like further information
concerning our company and the common stock and warrants we are offering, please
review the complete registration statement. This prospectus contains statements
concerning contracts or other documents which are not necessarily complete.
Copies of those contracts or documents have been filed as exhibits to our
registration statement.
Our registration statement, including the exhibits and schedules, as well
as other reports, proxy statements and other information we file with the
Securities and Exchange Commission; may be viewed without charge at the
Securities and Exchange Commission's offices located at 450 Fifth Street, N.W.,
Washington, D.C. 20549 in the Public Reference Room and at the regional offices
of the Securities and Exchange Commission located at 500 West Madison Street,
Fourteenth Floor, Chicago, Illinois 60661 or 75 Park Place, Suite 1400, New
York, New York 10007. Copies of all or any part of the registration statement
may be obtained from these offices after payment of fees set by the Securities
and Exchange Commission. The Securities and Exchange Commission also maintains a
site on the World Wide Web at http://www.sec.gov that contains reports,
prospectus statements and other information regarding registrants.
63
<PAGE> 67
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1998 and
1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-1
<PAGE> 68
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, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1997, 1998 and 1999. 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, 1998 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 1997, 1998 and 1999, 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
February 2, 2000
F-2
<PAGE> 69
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
ASSETS 1998 1999
- -------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,480,869 $ 631,521
Accounts receivable, net 3,633,352 1,828,895
Other current assets 286,033 550,009
----------- ----------
Total current assets 5,400,254 3,010,425
----------- ----------
FURNITURE AND EQUIPMENT, net 2,974,346 4,045,524
----------- ----------
OTHER ASSETS:
Contract rights to monitor security systems, net 15,252,814 -
Goodwill, net 23,123,820 25,911,332
Other assets, net 774,516 373,369
----------- ----------
Total other assets 39,151,150 26,284,701
----------- ----------
Total assets $47,525,750 33,340,650
=========== ==========
</TABLE>
F-3
<PAGE> 70
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999
- -------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 514,877 $ 463,310
Current maturities of long-term notes payable 2,174,038 1,973,352
Accrued expenses 3,452,199 3,923,722
Unearned revenues 3,709,328 499,407
----------- ------------
Total current liabilities 9,850,442 6,859,791
NOTES PAYABLE, net of current maturities 25,306,462 12,314,460
NOTES PAYABLE, related party 8,500,000 -
----------- ------------
Total liabilities 43,656,904 19,174,251
----------- ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $10 par value; 66,660
shares outstanding on December 31, 1998
(liquidation value of $16,665,000 at December
1998 666,596 -
12% redeemable/convertible preferred stock, $10
par value; 500,000 shares outstanding on
December 31, 1998 5,000,000 -
Series A convertible preferred stock, $10 par value,
137,686 shares authorized, 136,359 shares
outstanding on December 31, 1999, liquidation
preference $350 per share - 1,363,590
Common stock, $.001 par value; 50,000,000 shares
authorized; 6,771,807 and 7,145,287 shares
outstanding on December 31, 1998 and 1999,
respectively 6,771 7,145
Warrants, net 60,748 111,689
Additional paid-in capital 16,360,092 34,955,971
Accumulated deficit (18,225,361) (22,271,996)
----------- ------------
Total stockholders' equity 3,868,846 14,166,399
----------- ------------
Total liabilities and stockholders' equity $47,525,750 33,340,650
=========== ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
F-4
<PAGE> 71
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------
1997 1998 1999
------------- --------------- --------------
<S> <C> <C> <C>
NET REVENUE $10,814,087 $20,203,850 $22,689,132
OPERATING UNIT EXPENSE 7,018,392 12,610,489 14,899,687
----------- ----------- -----------
OPERATING UNIT MARGIN 3,795,695 7,593,361 7,789,445
OPERATING EXPENSES:
Amortization and depreciation 3,703,543 6,288,489 5,713,890
General and administrative 1,595,181 2,488,058 2,546,935
Selling, marketing and business development 296,977 1,614,007 2,459,845
Deferred compensation expense 862,034 609,103 -
----------- ----------- -----------
Total operating expenses 6,457,735 10,999,657 10,720,670
----------- ----------- -----------
Loss from operations (2,662,040) (3,406,296) (2,931,225)
GAIN ON SALE OF OWNED SUBSCRIBER
ACCOUNTS - - 1,899,155
INTEREST EXPENSE (1,862,606) (2,869,593) (2,564,565)
----------- ----------- -----------
Loss before income taxes (4,524,646) (6,275,889) (3,596,635)
PROVISION FOR INCOME TAXES - - -
----------- ----------- -----------
Net loss (4,524,646) (6,275,889) (3,596,635)
DIVIDENDS ACCRUED ON PREFERRED
STOCK (412,997) (522,084) (450,000)
----------- ----------- -----------
Net loss available to
common stockholders $(4,937,643) $(6,797,973) (4,046,635)
=========== =========== ===========
NET LOSS PER SHARE $ (1.16) $ (1.06) $ (.59)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,266,151 6,394,048 6,897,200
=========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-5
<PAGE> 72
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, 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 compensation plan 162,265 162 -- -- -- --
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 compensation plan 154,693 154 -- -- -- --
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
Issuance of Series A Convertible preferred
stock -- -- (66,660) (666,596) (500,000) (5,000,000)
Issuance of common stock 373,480 374 -- -- -- --
Warrants -- -- -- -- -- --
Accrued dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ---------- ------- --------- --------- ----------
BALANCE, December 31, 1999 7,145,287 7,145 -- -- -- --
=========== ========== ======= ========= ========= ==========
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK ADDITIONAL TOTAL
----------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL DEFICIT EQUITY
-------------------- ---------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 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 compensation plan -- -- -- 608,949 -- 609,103
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
Issuance of Series A Convertible preferred
stock 136,359 1,363,590 -- 17,972,922 -- 13,669,916
Issuance of common stock -- -- -- 622,957 -- 623,331
Warrants -- -- 50,941 -- -- 50,941
Accrued dividends -- -- -- -- (450,000) (450,000)
Net loss -- -- -- -- (3,596,635) (3,596,635)
-------- --------- -------- ----------- ------------ ------------
BALANCE, December 31, 1999 136,359 1,363,590 111,689 34,955,971 (22,271,996) 14,166,399
======== ========= ======== =========== ============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
F-6
<PAGE> 73
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------
1997 1998 1999
-------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,524,646) $ (6,275,889) $ (3,596,635)
Adjustments to reconcile net loss to net cash (used for)
provided by operating activities-
Gain on sale of owned subscriber accounts -- -- (1,899,155)
Issuance of common stock for services -- 16,502 67,226
Amortization and depreciation 3,703,543 6,288,489 5,713,890
Deferred compensation expense 862,034 609,103 --
Warrants and stock issued under dealer stock incentive
plan -- 70,402 255,282
Changes in assets and liabilities-
Accounts receivable, net (1,047,691) (304,071) 2,156,519
Other current assets 46,147 97,990 (209,187)
Other long-term assets (63,598) (22,952) 92,322
Accounts payable (36,503) (235,706) (176,567)
Accrued expenses 1,481,086 174,850 424,136
Unearned revenue 279,937 (55,703) (3,139,285)
------------- ------------ -------------
Net cash provided by (used for) operating
activities 700,309 363,015 (311,454)
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract rights to monitor security systems, net (8,056,738) (3,897,659) (1,517,537)
Proceeds from sale of owned subscriber accounts -- -- 22,195,906
Purchase of fixed assets (311,612) (1,752,860) (1,629,484)
Cash paid for acquisition, net (5,818,484) (12,431,112) (5,232,197)
------------- ------------ -------------
Net cash provided by (used for) investing
activities (14,186,834) (18,081,631) 13,816,688
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock 9,987,836 2,048,351 192,500
Dividends accrued on preferred stock (412,997) (522,084) (450,000)
Deferred financing costs (385,400) -- (393,020)
Proceeds from stockholders receivable 25,180 50,000 --
Repayment of notes payable to related parties (136,000) -- --
Proceeds from notes payable to related parties 5,000,000 3,000,000 1,500,000
Repayment of notes payable (4,358,280) (578,588) (20,856,438)
Proceeds from notes payable 8,655,464 9,680,173 5,652,376
------------- ------------ -------------
Net cash provided by (used for) financing
activities 18,375,803 13,677,852 (14,354,582)
------------- ------------ -------------
INCREASE (DECREASE) IN CASH 4,889,278 (4,040,764) (849,348)
CASH AND CASH EQUIVALENTS, beginning of year 632,355 5,521,633 1,480,869
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of year $ 5,521,633 $ 1,480,869 631,521
============= ============ =============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-7
<PAGE> 74
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. DESCRIPTION OF THE BUSINESS
COMPANY BACKGROUND
Security Associates International, Inc. ("SAI" or "the Company") provides
monitoring services to independent alarm dealers on a subcontract basis.
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 SAI, and its wholly
owned subsidiaries. All intercompany items and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Monitoring fee revenue is recognized as earned over the related contract
period. Services may be billed in advance on a monthly, quarterly or
annual basis and amounts not earned are included as unearned revenues.
ACCOUNTS RECEIVABLE
The Company grants unsecured trade credit to customers in the normal
course of business. Receivables in the accompanying consolidated balance
sheets are net of reserves for doubtful accounts of approximately $737,000
and $499,000 as of December 31, 1998 and 1999, 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
F-8
<PAGE> 75
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 $2,724,000 and $4,861,000 as
of December 31, 1998 and 1999, 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 $301,000 and
$20,000 as of December 31, 1998 and 1999, 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.
Depreciation expense for 1999 was $1,028,000.
The following is a summary of furniture and equipment by major class of
assets:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1999
---------- ---------
<S> <C> <C>
Equipment $3,388,570 5,310,710
Automobiles/trucks 20,188 20,188
Leasehold improvements 121,054 282,365
Work in process 113,202 -
---------- ---------
3,643,014 5,613,263
Less- Accumulated depreciation 668,668 1,567,739
---------- ---------
$2,974,346 4,045,524
========== =========
</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 $511,000, $830,000 and $920,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
F-9
<PAGE> 76
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
As of December 31-
<S> <C>
2000 974,225
2001 827,000
2002 789,000
2003 497,000
2004 and thereafter 374,400
========
</TABLE>
ACCRUED EXPENSES
Accrued expenses are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued interest $1,569,920 188,741
Accrued dividends 935,081 -
Accrued payroll and vacation 377,840 775,558
Accruals related to sale of owned
subscriber accounts - 2,260,289
Accrued telephone 104,900 148,675
Other 464,458 550,459
---------- ----------
$3,452,199 $3,923,722
========== ==========
</TABLE>
INCOME TAXES
SAI accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement
109"). As of December 31, 1998 and 1999, SAI had net operating loss
carryforwards of approximately $16.0 million and $16.9 million,
respectively. The tax net operating losses begin to expire in 2005. As of
December 31, 1998 and 1999, no tax benefit has been recognized for these
loss carryforwards.
F-10
<PAGE> 77
The components of the Company's deferred tax assets at December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $6,181,000 6,491,000
Temporary timing differences 606,000 1,324,000
---------- ----------
Total deferred tax assets 6,787,000 7,815,000
Valuation allowance (6,787,000) (7,815,000)
---------- ----------
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 Series
A Convertible Preferred Stock have not been included in the calculation of
net loss per share as their effect would be antidilutive.
F-11
<PAGE> 78
STATEMENT OF CASH FLOWS
SAI 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
-------------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental schedule of cash flow information-
Cash paid during the year for interest $1,141,493 $2,177,909 $1,861,887
Supplemental schedule of noncash activities-
Issuance of stock for subscription receivable 50,000 - -
Issuance of stock for central station and
contract rights acquisitions - 691,770 337,478
Accrued expenses incurred in the sale of owned
subscriber accounts - - 3,097,278
Purchase of contract rights reduced by
unearned revenue acquired 580,616 397,544 149,710
Note payable from sale of owned subscriber
accounts - - 1,800,000
Subordinated debt paid for with Series A
Convertible Preferred Stock - - 10,000,000
Accrued interest and dividends paid for with
Series A Convertible Preferred Stock - - 3,576,166
Holdback notes reduced due to account attrition 476,492 505,518 279,629
---------- ---------- ----------
Purchase of contract rights with notes 1,021,813 863,921 245,850
========== ========== ==========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the SAI's long-term debt, which approximates the
carrying value, is estimated based on the current rates offered to SAI for
debt of the same remaining maturities.
F-12
<PAGE> 79
RECLASSIFICATIONS
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.
3. ACQUISITIONS
In November and December 1999, SAI acquired four central monitoring
stations located in the U.S. All of these acquisitions were accounted for
under the purchase method of accounting. SAI acquired these central
monitoring stations with $5,232,197 in cash plus 100,000 shares of the
SAI's common stock with a fair market value of $200,000 at the time of
acquisition. Total goodwill of $5,401,181 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.
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.
On November 24, 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.
F-13
<PAGE> 80
The following pro forma consolidated results of operations have been
prepared as if the acquisitions of central monitoring stations occurred at
the beginning of the year of acquisition and in the year immediately
preceding the acquisition. The sale of the owned subscriber accounts
discussed in note 5 is shown as if the transaction occurred at the
beginning of 1998 and 1999. The pro forma results of operations includes
adjustments for amortization of intangible assets and changes in interest
expense corresponding to changes in debt (in 000's):
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
1997 1998 1999
<S> <C> <C> <C>
Monitoring fees and other revenues $ 21,130 $ 17,146 $ 18,969
Selling and administrative expenses 18,017 15,589 18,166
Payroll expense paid to terminated employees 578 1,219 -
Amortization and depreciation 5,419 2,468 3,395
----------- ---------- ----------
Loss from operations (2,884) (2,130) (2,592)
Interest expense 2,955 1,252 1,589
----------- ---------- ----------
Loss before income taxes (5,839) (3,382) (4,181)
Income tax expense - - -
----------- ---------- -----------
Net loss (5,839) (3,382) (4,181)
Dividends accrued on preferred stock 413 522 450
----------- ---------- ----------
Net loss available to common stockholders $ (6,252) $ (3,904) (4,631)
----------- ---------- ----------
Net loss per share $ (1.45) $ (.61) $ (.66)
Weighted average shares outstanding 4,301,151 6,429,048 6,980,533
=========== ========== ==========
</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 or disposition been effected for the periods presented, or to
predict the Company's results of operations for any future period.
4. 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.
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
F-14
<PAGE> 81
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.
5. 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 the portfolio has a substantially higher attrition guarantee
percentage. An accrual for $1,700,000 was recorded to recognize this
guarantee. Additionally, SAI recorded an accrual of $547,000 for severance
and related expenses and an accrual for $850,000 to provide for moving the
accounts sold to phone lines owned by the purchaser.
6. LONG-TERM 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 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 through March 31, 2001. The Company is currently
negotiating with its financing sources to modify its financing
arrangements.
F-15
<PAGE> 82
Management believes that these arrangements will provide adequate
resources to fund current needs. Both the term loan and the acquisition
line of credit bear initial interest at a variable rate of prime plus
0.75% (9.25% at year end). The interest rate is, however subject to an
upward adjustment depending on the loan to recurring monthly revenue
ratio. The loans mature as follows:
2.75% per quarter, beginning July,
2001
3.0% per quarter, beginning April,
2002
4.25% per quarter, beginning April,
2003
5.75% per quarter, beginning April,
2004, balance due December 31,
2004
Long-term debt consists of the following notes payable:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Note payable to Finova $26,609,730 $12,314,460
Note payable in connection with sale of owned
subscriber accounts - 1,800,000
Notes payable to Alarm Dealers 786,806 162,998
Other 83,964 10,354
----------- -----------
Total long-term debt 27,480,500 14,287,812
Current maturities (2,174,038) (1,973,352)
----------- -----------
$25,306,462 $12,314,460
=========== ===========
Notes payable to stockholder $ 8,500,000 -
=========== ===========
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
As of December 31-
<S> <C>
2001 677,285
2002 1,446,949
2003 1,939,528
2004 8,250,688
----------
12,314,460
==========
</TABLE>
F-16
<PAGE> 83
7. 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 50% of the first
4% of each participant's compensation that is contributed to the plan.
Company contributions to the plan in 1999, 1998 and 1997 were
approximately $85,000, $24,200 and $$6,000, respectively.
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 100,000.
8. LEGAL PROCEEDINGS
From time to time SAI experiences routine litigation in the normal course
of its business. As these claims fall primarily under available insurance
coverage, management does not believe that any pending litigation will
have a material adverse effect on the Company's financial condition or
results of operations.
9. 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.
On July 8,1999 the Company issued options to purchase 1,580,000 shares of
common stock to its officers and directors under a stock option plan
approved by the shareholders. 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 options expire 6 years from the
date of grant and vest over a three year period. 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,
F-17
<PAGE> 84
the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss-
As reported $(4,524,646) $(6,275,889) $(4,046,635)
Pro forma (4,670,146) (6,363,889) (5,887,335)
Primary loss per share-
As reported (1.16) (1.06) (.59)
Pro forma (1.19) (1.07) (.85)
=========== =========== ===========
</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 at December 31, 1998 and 1999 were 254,912 and 548,802
respectively. The amount charged to expense related to stock and warrants
issued under this program was $255,282 and $70,402 during 1999 and 1998,
respectively. 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%.
The following summarizes the stock options and warrants for common stock
as of December 31, 1997, 1998 and 1999, and the changes during the years
then ending:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ---------------------- ------------------------
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 1,840,878 $ .74 480,223 $1.76 418,827 $3.53
Granted 50,000 6.00 181,104 6.00 1,580,000 5.25
Exercised 1,410,655 .55 207,500 1.18 90,000 1.07
Canceled - - 35,000 6.00
--------- ------ -------- -------- --------- --------
End of year 480,223 $ 1.76 418,827 $3.53 1,908,827 $5.18
========= ====== ======== ======== ========= ========
Exercisable as of end of
year 405,223 252,999 268,275
========= ======== =========
</TABLE>
F-18
<PAGE> 85
The future expiration of the common stock options is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ ----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- -------- --------
As of December 31-
<S> <C> <C> <C> <C>
2000 125,000 $1.60 125,000 $1.60
2002 156,104 6.00 95,552 6.00
2003 22,723 4.14 22,723 4.14
2004 25,000 6.00 25,000 6.00
2005 1,580,000 5.25 - -
--------- ------- ------- --------
1,908,827 $5.18 268,275 $3.79
========= ======= ======= ========
</TABLE>
The Company has granted stock options and warrants to purchase shares of
convertible preferred stock which mirror certain 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, 1997, 1998 and 1999, and the changes
during the years then ended:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------- ----------------------- -----------------------
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 33,409 $153.65 4,302 $130.46 2,227 $137.79
Granted - - - -
Exercised 29,107 156.62 2,075 118.07 900 106.94
Canceled - - - -
------- -------- ------- -------- ------ --------
End of year/period 4,302 $130.46 2,227 $137.79 1,327 $153.80
======= ======== ======= ======== ====== ========
</TABLE>
10. 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.
F-19
<PAGE> 86
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.
On June 30, 1999 SAI sold its owned accounts. See Note 5.
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, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
CORPORATE
OWNED CENTRAL AND
ACCOUNTS STATION INTERCOMPANY CONSOLIDATED
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997-
Revenues $5,018,234 $ 6,680,882 $ (885,029) $10,814,087
Selling, marketing and business
development expenses - - 296,977 296,977
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
Selling, marketing and business
development expenses - - 1,614,007 1,614,007
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-20
<PAGE> 87
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year ended December 31, 1999-
Revenues 3,720,169 $19,768,281 $(799,318) $22,689,132
Selling, marketing and business
development expenses - 851,125 1,608,720 2,459,845
Depreciation and amortization 2,319,183 3,331,253 63,454 5,713,890
Operating income (loss) (338,779) 1,063,340 (3,655,786) (2,931,225)
Total assets - 31,688,384 1,652,266 33,340,650
Capital expenditures - 1,527,455 102,029 1,629,484
========= =========== ========== ==========
</TABLE>
The Company is currently providing services to customers only within the
United States and all long-lived assets are located in the United States.
No single customer accounted for more than 10% of the Company's revenues.
F-21
<PAGE> 88
No Dealer, sales person or other person has been, authorized to give, any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by us. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy the securities
by anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus nor any sale made in
connection with this prospectus shall create any implication that the
information contained in this prospectus is correct as of any time subsequent to
its date.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.......................................................... 1
SUMMARY FINANCIAL DATA...................................................... 4
RISK FACTORS................................................................ 5
THE SECURITIES THAT ARE BEING OFFERED THROUGH THIS PROSPECTUS............... 8
BUSINESS.................................................................... 9
USE OF PROCEEDS............................................................. 29
PRICE RANGE OF COMMON STOCK................................................. 31
STOCKHOLDER RETURN AND PERFORMANCE GRAPH.................................... 31
DIVIDENDS................................................................... 32
SELECTED FINANCIAL DATA..................................................... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................. 33
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................. 41
MANAGEMENT.................................................................. 42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 47
PRINCIPAL AND SELLING STOCKHOLDERS.......................................... 51
DESCRIPTION OF CAPITAL STOCK................................................ 59
LEGAL MATTERS............................................................... 63
EXPERTS..................................................................... 63
ADDITIONAL INFORMATION...................................................... 63
FINANCIAL STATEMENTS........................................................F-1
7,696,688 SHARES AND
2,000,000 WARRANTS
SECURITY ASSOCIATES
INTERNATIONAL, INC.
COMMON STOCK
AND
WARRANTS
PROSPECTUS
APRIL 7, 2000
