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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20870
SECURITY ASSOCIATES INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
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<S> <C>
DELAWARE 87-0467198
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2101 SOUTH ARLINGTON HEIGHTS ROAD, 60005-4142
SUITE 100 (Zip Code)
ARLINGTON HEIGHTS, ILLINOIS
(Address of Principal Executive Offices)
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Issuer's telephone number including area code: (847) 956-8650
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Warrants to purchase Common Stock, par value $0.001 per share
(Title of Class)
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Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter
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period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Issuer's revenues for the most recent fiscal year: $22,689,132
The aggregate market value of voting and non-voting common equity held
by non-affiliates of the registrant based upon the closing sale price of the
stock as reported on the American Stock Exchange on March 8, 2000 was $3.125.
As of March 8, 2000 the registrant had outstanding 7,198,042 shares of
our $.001 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Our definitive proxy statement which is expected to be filed with the
Commission not later than April 28, 2000, for our annual meeting of
stockholders, expected to be held on or about May 23, 2000, is incorporated by
reference into Part III of this Form 10-KSB.
Certain statements in this Annual Report that are not historical facts
constitute "forward-looking statements" within the meaning of the Federal
securities laws. Discussions containing such forward-looking statements may be
found in the sections entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well in this
Annual Report generally. In addition, when used in this Annual Report the words
"anticipates," "intends," "seeks," "believes," "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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PART I
ITEM 1. BUSINESS
OVERVIEW
Security Associates International, Inc. ("SAI") provides security alarm
monitoring services for both residences and businesses. These services are
provided to residences and businesses through contracts with independent alarm
dealers for subscriber accounts owned by them. Independent alarm dealers are
primarily owner-operated companies. Our ability to attract new monitoring
business is enhanced and supported by a network of over 2,500 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 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.
-- 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.
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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 the progress of our company. 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 which
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 additional subscriber accounts as
compared to 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. As a result we expect
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to be able to monitor 1,000,000 subscriber accounts by the end of 2000, before
taking into account any future acquisitions.
Our network of independent alarm dealers consists of over 2,500 dealers
nationwide that are estimated to own approximately 530,000 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 numerous
presentations are made by industry experts. 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
our primary customers and the principal source of our revenues. We intend to
continue to increase the number of subscriber accounts we monitor. In pursuing
this goal, we anticipate acquiring additional central monitoring stations and
adding additional subscriber accounts as the businesses of our existing alarm
dealers grow and through 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 2,500 independent alarm dealers
representing over 10,000 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 5 companies
account for approximately 45% of the market, with an estimated 10,000-12,000
smaller independent dealers sharing the remainder of the market. While the
largest companies in the alarm industry have revenues in the hundreds of million
dollars, approximately only 20% of all alarm dealers earned more than $100,000
in gross revenues during 1999. Taken together, however, these independent alarm
dealers represent a nationwide presence with expertise in the installation
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and servicing of low voltage electronic systems. It is the needs of this
nationwide market of small independent alarm dealers and the opportunities that
it represents 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
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
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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.
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
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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.
BUSINESS
ALARM MONITORING
Our Relationships with Independent Alarm Dealers
Our response to the challenges and opportunities presented by the
security alarm industry has been significantly influenced by the personal and
business experience of 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 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 and making SAI 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 selling
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.
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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.
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
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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 was 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 was 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.
which 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., 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).
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We have substantially completed our capital investment project which
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 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 New Jersey) into the
Des Plaines, Illinois central monitoring station.
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-- Telecommunication Associates Group, Inc. (formerly monitored out
of Austin, Texas), and Alarm Central Monitoring, Inc. (located in
Dallas, Texas) into the Texas Security Central, Inc. central
monitoring stations located in Houston and Dallas, Texas,
respectively. The San Antonio facility of Texas Security Central,
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
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 the initiatives undertaken by us 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 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.
-- Increasing the efficiency of our customer service department.
We believe that these improvements will allow us to conduct our
operations in a more efficient and cost effective manner. Furthermore, we
anticipate that the new systems will provide a platform from which to offer a
wider selection of value-added services to our alarm dealers. These services
include providing dealers with after-hours answering services, Internet or
direct access to end-user information for a dealer's subscriber accounts and
automated interactive alarm system testing services.
Implement Central Station Based Regional Marketing Program
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We have reorganized and changed the focus of our sales force. In the
past, for our growth we relied on the existing subscriber account base of the
acquired central monitoring stations and the "natural increase" in subscriber
accounts that occurs as alarm dealers who are already customers install
additional alarm systems. Additionally, our sales force was centrally located
and approached alarm dealers on a national basis. We have redirected our sales
effort by 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 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
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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.
The SAFE Loan Program
In November of 1999, SAFE introduced its loan program, under which it
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
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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.
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.
Twenty-five percent 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 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 the dealer's subscriber accounts. Since we no longer purchase
subscriber accounts, we refer purchase opportunities to Security Alarm Financing
Enterprises, Inc.
The Dealer Partner Program is a central component of our business plan.
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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 is a cassette of about one hour in length, which contains ideas,
interviews and insights relating to the alarm industry, hosted by Mr. Davis. We
also distribute camera-ready consumer newsletters that can be customized by
alarm dealers for mailing to their own customer base as a marketing tool. The
Audio Insight cassette and the consumer newsletter program are only available to
affiliates of our dealer network.
Assist Dealers in Exploiting Future Opportunities
We anticipate that new business opportunities for alarm dealers will
continue to develop as a result of "bundling". Bundling 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 emerging market opportunities.
Build a Deeper Relationship with Independent Dealers
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We view our overall marketing strategy as an attempt to build a broad
range of relationships with independent alarm dealers through which we can
develop and market a range of services designed to address alarm dealer needs
and build recurring revenue for our dealers and us. Our strategy is built around
the premise that dealers are best served when our regional central monitoring
station personnel develop a personal relationship with them. To implement this
strategy we have developed a force of regional dealer liaison personnel based in
each of our central stations. These dealer liaisons provide personalized one
stop service to alarm dealers to address their individual needs as they arise.
Their efforts are supplemented by meetings of central station based user groups
and a national advisory council.
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 plan to
utilize the user groups as forums at which we can test the attractiveness and
demand for proposed new services before making major commitments of time and
money to new programs. 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). SAFE
is 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 for purchase or for collateral for loans, which SAFE then
closes, under SAFE's financing programs. If we refer $230,000 or more in RMR the
first year which SAFE purchases, 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
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$690,000 in RMR, respectively. As of March 8, 2000, SAFE has closed on
transactions representing a total of $37,663 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
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 stations. We may
draw on this line of credit through March 31, 2001. On March 6, 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. The loans 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.
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
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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.
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 (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.
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.
$4,450,000 of the purchase price was financed by drawing on our existing credit
facility
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with FINOVA and the remainder of the purchase price was financed from our
general corporate funds. The acquisition was accounted for under the purchase
method for financial reporting purposes. TSC was a third-party alarm monitoring
company that served approximately 65,000 alarm monitoring subscribers and
approximately 300 independent alarm dealers from central monitoring stations
located in Dallas, Texas; Houston, Texas and San Antonio, Texas. The San Antonio
central station was consolidated with 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
Herbert Warrick, Ramona Warrick and Russell VanDevanter, who are unaffiliated
with SAI and were the sole stockholders of AMS.
The purchase price, which was based on the fair market value of the
assets of AMS and its underlying customer base and arrived at by arm's length
negotiations between the parties, was $4,000,000, which was paid in cash at
closing. The purchase price was financed by drawing on SAI's existing credit
facility with FINOVA Capital Corporation and Citizens Bank of Massachusetts. The
acquisition will be accounted for under the purchase method for financial
reporting purposes.
AMS is 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.
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Guardian was a third-party alarm monitoring company that served
approximately 3,270 subscriber accounts owned by fifteen alarm
dealers and 1,349 subscriber accounts owned by Guardian from a
central monitoring station located in Columbus, Ohio. In the first
quarter of 1998, all of the assets and operations of Guardian were
transferred to our central station located in Euclid, Ohio.
-- Monitoring Business of Fire Protection Services Corporation D/B/A
Mountain Alarm
On May 8, 1998, we purchased the monitoring business of Fire
Protection Service Corporation, a Utah corporation, D/B/A Mountain
Alarm ("Mountain") from an unaffiliated party.
Mountain was a third-party alarm monitoring company that served
approximately 7,800 alarm monitoring subscribers and approximately
eight independent alarm dealers from a central monitoring station
located in Ogden, Utah.
-- Reliance 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.
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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.
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 greater
risks of liability for employee acts or omissions or system failures than may be
the case with other businesses. Generally, our monitoring agreements contain
provisions limiting our liability to subscribers in an attempt to reduce this
risk.
We carry insurance of various types, including general liability and
errors and omissions insurance. We believe the amount of our insurance coverage
is adequate for a company of our type and size. Our loss experience, and that of
other companies in the security industry, may affect the cost and availability
of such insurance. Certain of our insurance policies, and the laws of some
states, may limit or prohibit insurance coverage for punitive or other types of
damages, or for liability arising from gross negligence or wanton behavior.
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COMPETITION
The security alarm industry is highly competitive and highly
fragmented. While we do not compete directly with many of the large new entrants
into the industry, because we do not sell and install security systems, we are
nonetheless impacted by the competitive challenge these entrants present to
independent alarm dealers.
Our monitoring services compete with those offered by an estimated 250
companies which offer contract monitoring services from UL listed facilities.
Most of these companies are small, local operations, 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 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.
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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.
LEGAL PROCEEDINGS
See Item 3- Legal Proceedings.
EMPLOYEES
At December 31, 1999, we employed 407 individuals. Currently, none of
our employees are represented by a labor union or covered by a collective
bargaining agreement. We believe that relationships with our employees are good.
ITEM 2. PROPERTIES
Our executive offices are located at 2101 South Arlington Heights Road,
Arlington Heights, Illinois and our central monitoring stations are located at:
-- 2116 South Wolf Road, Des Plaines, Illinois;
-- 1471 S.W. 12th Avenue, Pompano Beach, Florida;
-- 1514 East 191 Street, Euclid, Ohio;
-- 9750 Brockbank, Dallas, Texas;
-- 12610 Richmond Avenue, Houston, Texas;
-- 3320 North Woodlawn Avenue, Metairie, LA;
-- 4507 North Channel Avenue, Portland, Oregon;
-- 1249 N.E. 145th, Seattle, WA;
-- 2178 Washington Boulevard, Ogden, Utah; and
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-- 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. We do not have an option to
renew this lease; and
-- The Chino lease expires November 30, 2003. We do not have an
option to renew this lease.
ITEM 3. LEGAL PROCEEDINGS
From time to time we experience routine litigation in the normal course
of our business. We do not believe that any pending litigation will have a
material adverse affect on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote to our security holders during the
fourth quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION
Price Range of Common Stock
Our common stock has been traded on the American Stock Exchange under
the symbol "SAI" since January 25, 1999. Our common stock was previously traded
on the American Stock Exchange under the symbol "IDL" beginning on March 4,
1998. Prior to that, until March 4, 1998, the common stock was traded on the OTC
Bulletin Board. The following table sets forth, for the periods indicated, the
range of high and low bid quotations for our common stock as reported on the OTC
Bulletin Board and the high and low sales prices as reported on the American
Stock Exchange. The OTC Bulletin Board quotations reflect inter-dealer
quotations, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C>
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, 1998) $8.50 $5.25
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 8, 2000) $3.375 $2.00
</TABLE>
On March 8, 2000, the last reported sale price of our common stock
was $3.125 per share. At March 8, we had approximately 240 stockholders of
record, not including beneficial owners whose stock is held in street name.
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Dividend Policy
We currently anticipate that we will retain all of our earnings for
development of our business, and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Future cash dividends, if any, on
our common stock will be at the discretion of the Board of Directors and will
depend upon, among other things, our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions,
loan covenants and such other factors as the Board of Directors may deem
relevant. Payment of dividends is subject to satisfaction of covenants contained
in our loan agreement with FINOVA and Citizens Bank of Massachusetts.
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, we have issued the following securities that
were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
Issuances for Services
On November 25, 1997, James W. Osborne was issued options to purchase
50,000 shares of common stock at a price of $6.00 per share. These options
expire November 25, 2003, and were issued in consideration of his employment
agreement with us. This option vests at a rate of 20% (10,000 shares) per year,
and terminates upon any material breach of his employment agreement. Mr. Osborne
left our employment before the expiration of the term of his employment
agreement with us. As a result, options to purchase only 15,000 shares vested,
and the options to purchase the other 35,000 shares were cancelled.
On January 6, 1998, 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 in to a family trust.
On January 15, 1998, Timothy Newman was awarded 800 shares of common
stock as a bonus for his performance as an employee.
On June 2, 1998, Gregory A. Hunigan was awarded 1,000 shares of common
stock as a bonus for his performance as an employee.
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On November 4, 1998, we issued 623 shares of common stock to Kismet
Group, Ltd. in payment for services.
On December 31, 1998, we issued 1,088 shares of common stock to Kismet
Group, Ltd. in payment for services.
On March 31, 1999, we issued 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 March 31, 1999, we issued 1,088 shares of common stock to Kismet
Group, Ltd. in payment for services.
On March 31, 1999, we issued the following shares of common stock to
the following employees, as stock bonuses for their performance as employees.
These shares were later registered on Form S-8 on May 6, 1999:
Gregory A. Hunigan, 1,264 shares
Timothy J. Newman, 1,113 shares
James N. Jennings, 1,937 shares
John Mailander, 1,170 shares
Donald M. Young, 1,682 shares
Rodney L. Hooker, 1,134 shares
David K. Brown,1,426 shares
Mark Burnett, 600 shares
David S. Smith, 1,248 shares
Henry Scheibe, 249 shares
Glenn Seaburg, 1,108 shares
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:
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
Karen B. Daniels, 21,975 shares
Howard Schickler, 17,580 shares
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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:
Michael B. Jones, options to purchase 25,000 shares
Douglas J. Oberlander, options to purchase 25,000 shares
James S. Brannen, options to purchase 210,000 shares
Ronald I. Davis, options to purchase 210,000 shares
Stephen Rubin, options to purchase 210,000 shares
Daniel S. Zittnan, options to purchase 300,000 shares
Ronald J. Carr, options to purchase 300,000 shares
Howard Schickler, options to purchase 150,000 shares
Karen B. Daniels, options to purchase 150,000 shares
The underlying shares of common stock are registered on Form S-8; the
options to purchase the shares are not registered.
On June 30, 1999, we issued 1,343 shares of common stock to Kismet
Group, Ltd. in payment for services.
On September 30, 1999, we issued 1,653 shares of common stock to Kismet
Group, Ltd. in payment for services.
On December 30, 1999, we issued 1,846 shares of common stock to Kismet
Group, Ltd. in payment for services.
No underwriters were engaged in connection with the foregoing sales of
securities. These sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Sales were made to
a very limited number of purchasers. We received no cash consideration.
TJS Partners, L.P.'s Investments
During 1997, TJS, our principal stockholder, exercised options to
purchase 14,106.55 shares of Convertible Preferred Stock, each of which was
convertible into 100 shares of our common stock, for an aggregate purchase price
of $821,290, and a warrant to purchase 15,000 shares of Convertible Preferred
Stock for an aggregate purchase price of $3,750,000. Each option and warrant
exercise is detailed below under "Exercise of Options."
During 1998, TJS exercised options to purchase 2,075 shares of
Convertible Preferred Stock for an aggregate purchase price of $245,000. Each
option exercise is detailed below under "Exercise of Options." TJS also
purchased 155,835 shares of
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<PAGE> 30
Redeemable Preferred Stock, which accrued dividends at the rate of 12% a year,
on June 1, 1998, for a purchase price of $1,558,350.
During 1999, TJS exercised options to purchase 250 shares of
Convertible Preferred Stock for an aggregate purchase price of $25,000.
On September 30, 1999, we entered into the Second Amendment to Security
Associates International, Inc. Common Stock Subscription and Purchase Agreement
with TJS. Pursuant to this agreement: (i) $10,000,000 of subordinated debt and
accrued interest owed by us to TJS, (ii) 66,910 shares of Convertible Preferred
Stock; and, (iii) 500,000 shares of 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 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.
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 (60)
percent. This super-majority provision will be in effect for as long as TJS owns
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.
During 1999, TJS exercised options to purchase 650 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $71,250.
No underwriters were engaged in connection with the foregoing sales of
securities. These sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Sales were made to
a very limited number of purchasers.
Exercise of Options and Warrants
On March 18, 1997, Robert Brown exercised options to purchase 25,000
shares of common stock for a total consideration of $11,050.
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<PAGE> 31
On March 18, 1997, Bobbie Conrad exercised options to purchase 20,000
shares of common stock for a total consideration of $8,840.
On March 18, 1997, Anita M. Delmar exercised options to purchase 20,000
shares of common stock for a total consideration of $8,840.
On March 18, 1997, Robert H. Dilworth exercised options to purchase
50,000 shares of common stock for a total consideration of $22,100.
On March 18, 1997, Dianne G. Freeman exercised options to purchase
25,000 shares of common stock for a total consideration of $11,050.
On March 31, 1997, Phyllis Greinwald exercised options to purchase
77,000 shares of common stock for a total consideration of $34,034.
On March 31, 1997, Inversiones Alanje, C.A. exercised options to
purchase 62,500 shares of common stock for a total consideration of $27,625.
On March 31, 1997, Inversiones Aparicio, C.A. exercised options to
purchase 120,000 shares of common stock for a total consideration of $53,040.
On March 31, 1997, Inversiones Erlanger, C.A. exercised options to
purchase 100,000 shares of common stock for a total consideration of $44,200.
On April 22, 1997, TJS exercised options to purchase 5,215.88 shares of
Convertible Preferred Stock for a total consideration of $233,369.
On August 21, 1997, Cheryl L. Grolle exercised options to purchase 250
shares of common stock for a total consideration of $110.
On August 25, 1997, Lorraine Small exercised options to purchase 250
shares of common stock for a total consideration of $110.
On October 22, 1997, the Sidney Dechter I.R.A. exercised options to
purchase 25,000 shares of common stock for a total consideration of $50,000.
On October 27, 1997, Fred Figge exercised options to purchase 86,000
shares of common stock for a total consideration of $45,580.
On October 27, 1997, Brady E. Turner exercised options to purchase
12,500 shares of common stock for a total consideration of $25,000.
On October 30, 1997, Infinity Partnership II, by its General Partner
James Greco, exercised options to purchase 10,000 shares of common stock for a
total consideration of $20,000.
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<PAGE> 32
On October 30, 1997, Ronald I. Davis exercised options to purchase
278,308 shares of common stock for a total consideration of $158,635.
On October 30, 1997, James S. Brannen exercised options to purchase
278,308 shares of common stock for a total consideration of $158,635.
On October 30, 1997, Stephen Rubin exercised options to purchase
185,539 shares of common stock for a total consideration of $105,757.
On November 5, 1997, TJS exercised a warrant to purchase 15,000 shares
of Convertible Preferred Stock (which is convertible to common stock, at a ratio
of 1 to 100), for a total consideration of $3,750,000.
On November 6, 1997, Irwin Jacobson exercised options to purchase
12,500 shares of common stock for a total consideration of $7,125.
On November 6, 1997, Mark Scharmann exercised options to purchase
12,500 shares of common stock for a total consideration of $7,125.
On November 12, 1997, TJS exercised options to purchase 8,761.55 shares
of Convertible Preferred Stock for a total consideration of $563,671.
On December 6, 1997, TJS exercised options to purchase 250 shares of
Convertible Preferred Stock for a total consideration of $14,250.
On December 7, 1997, Mark Scharmann exercised options to purchase
10,000 shares of common stock for a total consideration of $10,000.
On December 23, 1997, TJS exercised options to purchase 100 shares of
Convertible Preferred Stock for a total consideration of $10,000.
On May 5, 1998, Mark Scharmann exercised options to purchase 10,000
shares of common stock for a total consideration of $10,000.
On June 1, 1998, Fred Figge exercised options to purchase 12,500 shares
of common stock for a total consideration of $25,000.
On June 5, 1998. TJS exercised options to purchase 225 shares of
Convertible Preferred Stock for a total consideration of $35,000
On August 12, 1998, Stephen Rubin exercised options to purchase 40,000
shares of common stock for a total consideration of $40,000.
On August 14, 1998, J, S & R Ltd., L.P., an Illinois limited
partnership, exercised options to purchase 120,000 shares of common stock for a
total consideration of $120,000. The sole general partner of J, S & R Ltd., L.P.
is SAI Partners, Inc., an Illinois
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<PAGE> 33
corporation, of which our Chairman, Ronald I. Davis, is the sole officer,
director, and shareholder. James Brannen and Stephen Rubin are the limited
partners of J, S & R Ltd., L.P. SAI Partners, Inc. transferred the options to J,
S & R Ltd., L.P. on June 1, 1998, as a capital contribution pursuant to an
Agreement of Limited Partnership.
On August 18, 1998, TJS Partners, L.P. exercised options to purchase
1,600 shares of Convertible Preferred Stock for a total consideration of
$160,000.
On November 18, 1998, Bernard R. Sered exercised options of Metro
Suburban Pediatrics, S.C. to purchase 12,500 shares of common stock for a total
consideration of $25,000. The stock was issued to Bernard R. Sered as successor
in interest to Metro Suburban Pediatrics, S.C.
On November 18, 1998, Samuel S. Sered exercised options to purchase
12,500 shares of common stock for a total consideration of $25,000.
On November 23, 1998, TJS Partners, L.P. exercised options to purchase
250 shares of Convertible Preferred Stock for a total consideration of $50,000.
On June 21, 1999, Tom Hagedal exercised options to purchase 10,000
shares of common stock for an aggregate exercise price of $10,000.
On June 21, 1999, Harold Burgwald exercised options to purchase 10,000
shares of common stock for an aggregate exercise price of $10,000.
On June 21, 1999, Beverly Davis exercised options to purchase 5,000
shares of common stock for an aggregate exercise price of $5,000.
On October 10, 1999, Raymond Hoven exercised options to purchase 40,000
shares of common stock for an aggregate exercise price of $40,000.
On October 10, 1999, Buttonwood Advisory Group, Inc. exercised options
to purchase 25,000 shares of common stock for an aggregate exercise price of
$31,250.
No underwriters or placement agents were engaged in connection with the
foregoing sales of securities, except as disclosed under the section entitled
"TJS Partners' Investments." Such sales were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act. Sales were
made to a very limited number of purchasers.
Private Placement
On December 31, 1997, we completed the sale of one million shares of
our common stock. The shares were privately placed with a group of accredited
investors. No underwriter or placement agent was used. We received $5,000,000 in
consideration for the shares, of which we realized approximately $4,980,000
after estimated offering expenses of
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<PAGE> 34
$20,000. A registration statement to register the shares for resale was declared
effective on April 22, 1998.
USE OF PROCEEDS OF SECURITIES SOLD PURSUANT TO OUR REGISTRATION STATEMENT
On October 20, 1997, our first Registration Statement on Form S-1 under
the Securities Act was declared effective. A subsequent Registration Statement
on Form S-1 (Registration # 33-49897) pursuant to Rule 429 of the Securities Act
was declared effective on April 22, 1998. The Registration Statements cover
2,000,000 shares of our common stock and warrants to Purchase up to 2,000,000
shares of such common stock, to be issued by us: (i) in connection with
offerings to alarm dealers under Rule 415(a)(1)(ix) of Regulation C promulgated
under the Securities Act; (ii) in connection with the acquisition of other
business, real or personal properties, or securities in business combination
transactions in accordance with Rule 415(a)(1)(viii); and otherwise under Rule
415. The Registration Statements also cover 1,778,088 shares of common stock
which may be offered for sale by certain selling stockholders ("Selling
Stockholders") under Rule 415(a)(1)(i) and 415(a)(iii). The offering by us
commenced on October 20, 1997 and is continuing. We will not receive any
proceeds from the securities issued by us pursuant to the 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.
No underwriter has been engaged in connection with the offering. The
aggregate offering price of the common stock and warrants registered on our
behalf was $12,000,000 and the aggregate offering price of the common stock
registered on behalf of the Selling Stockholders was $10,666,248. No separate
offering price was assigned to the warrants.
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
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alarm dealers in connection with our Dealer Partner Program.
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 December 31, 1999, we
incurred a total of $262,679 in expenses in connection with the offering. Those
expenses are estimated to be as follows: legal $127,500; accounting $63,500;
printing $64,225 and registration fees $7,454. All of these expenses represent
payments to unrelated third parties and there were no direct or indirect
payments to our directors or officers or their associates, or to any party
owning ten percent or more of any class of our equity securities or any of our
affiliates. To date we have issued 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> 36
SELECTED FINANCIAL 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 year ended 1995 and 1996 is
derived from audited financial statements. The selected financial data set forth
below should be read in conjunction with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere.
(in thousands, except per share data)
<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: (unaudited) (unaudited)
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
income 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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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Annual Report that are not historical facts
constitute "forward-looking statements" within the meaning of the Federal
securities laws. Discussions containing such forward-looking statements may be
found in the sections entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business", as well in this
Annual Report generally. In addition, when used in this Annual Report the words
"anticipates," "intends," "seeks," "believes," "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.
OVERVIEW
Our revenues are derived from recurring payments for monitoring
services provided to subscribers and alarm dealers pursuant to agreements.
Monitoring contracts have initial terms typically ranging from one to five years
usually with provisions for automatic renewal for periods of one year.
Monitoring contracts entered into with alarm dealers generally permit
cancellation with notice of 30-60 days before the end of the original or any
renewal term.
(REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)
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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
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<PAGE> 40
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 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.
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<PAGE> 41
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.
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
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<PAGE> 42
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 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 to devote all of their
efforts to marketing initiatives, three employees devoted to a national sales
effort and two employees devoted to business
42
<PAGE> 43
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
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
43
<PAGE> 44
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 stations and operating expenses. We intend to continue to pursue
growth through the acquisition of additional central monitoring stations.
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 consistent
with our Registration Statement on Form S-1, as amended from time to time, which
was declared effective on April 22, 1998. The number of shares of common stock
to be issued can not be estimated at this time, but may not exceed 2,000,000
shares, including those that may be issued upon exercise of warrants previously
issued to alarm dealers under this program.
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. SAI signed a note for $1,800,000, which comprised 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 revenue of $230,000. 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
44
<PAGE> 45
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 $30,000,000 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 $7,000,000, 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 stations. We may draw on this
line of credit through March 31, 2001. On March 6, 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%. The interest rate is, however subject to an upward adjustment
depending on the loan to recurring monthly revenue ratio. The loans mature in
five years.
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 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.
45
<PAGE> 46
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 two additional central stations in
Metairie, Louisiana and Idaho in December 1999. The total purchase for these two
acquisitions approximated $1,000,000 plus the assumption of liabilities
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 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.
46
<PAGE> 47
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.
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 $45,000,000. 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 6, 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.
The interest rate on borrowings under the new loan agreement are 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 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
47
<PAGE> 48
liabilities; (v) make distributions on or redeem equity securities; (vi) prepay
debt; (vii) enter into operating leases (in excess of scheduled amounts); (viii)
make investments in or loans to other companies; (ix) make fundamental changes
in our businesses; (x) change the locations of our facilities; (xi) dispose of
assets; (xii) amend our organizational documents; (xiii) issue additional
membership interests in certain subsidiaries; (xiv) enter into contracts with
affiliates; (xv) permit the occurrence of any violations of ERISA; or (xvi) pay
management compensation in excess of permitted amounts; (xvii) 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; (ix) the ratio of operating cash flow (as defined) to interest
expense must be at least 1 to 1; (x) the fixed charge coverage ratio (as
defined) must be at least 1.05 to 1 and (xi) mandatory prepayments from excess
cash flow as defined in the loan agreement with FINOVA. We are in compliance
with the covenants stated above.
YEAR 2000 ISSUE
The Year 2000 date change had no adverse effect on our business or
operations.
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. We have
$12,314,460 in senior debt due to FINOVA 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.
Interest Rate Risk - The table below provides information about our
debt obligations that are sensitive to changes in interest rates. For these debt
obligations, the table presents principal cash flows and related average
interest rates by expected maturity dates.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------- -- ---------- ----------- ---------- ---------- ---------- ---------- --------------
(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%
- -------------------------- -- ---------- ----------- ---------- ---------- ---------- ---------- --------------
</TABLE>
48
<PAGE> 49
ITEM 7. 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> 50
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> 51
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> 52
<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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
<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> 70
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
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 49 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
49
<PAGE> 71
Corporation, a franchise company in the alarm industry and a joint venture with
Pittway Corporation. Prior to 1982, Mr. Davis was a full time consultant to many
of the alarm companies that now make up our dealer network. Mr. Davis attended
Roosevelt University where he received a B.A.
JAMES S. BRANNEN, is one of our founders and has been a director and
our President since October 1990, and our Chief Executive Officer since 1993. He
was a self-employed consultant in the alarm industry from February 1988 to
October 1990. From 1962 until 1987, Mr. Brannen was employed by the First
National Bank of Chicago where he served as a senior vice president in the
commercial banking department. In that capacity, he managed, among others, the
commercial areas of the bank responsible for lending to the cable television and
paging industries. In addition, he managed the secured lending activity and was
responsible for organizing and managing the bank's first work-out lending
activity. Mr. Brannen has an A.B. degree from Dartmouth College and received an
MBA degree from Northwestern University.
THOMAS J. SALVATORE, was elected as one of our directors in December
1996. Since 1991, Mr. Salvatore has been the Managing General Partner of TJS
Management, L.P. which is the General Partner of TJS Partners, L.P. ("TJS"), our
principal stockholder. TJS has a contractual right to designate two directors to
our Board of Directors and Mr. Salvatore is one of the designees. The remaining
director has not been designated as of the date of this Proxy Statement. Mr.
Salvatore holds a Bachelors Degree in Business Administration from Fordham
University.
MICHAEL B. JONES, was elected as one of our directors in January 1998.
He has been president of ProFinance Associates, Inc. since he co-founded it in
1985. ProFinance has been a Broker-Dealer firm since 1990. Mr. Jones was with
Marine Midland Bank from 1977 until 1985. He was responsible for starting a
communications/electronics lending group in 1991 and, in his last position as
group executive, for leading that group. That group was one of the first
institutional lenders to the alarm industry. Mr. Jones has a Bachelors Degree in
Liberal Arts from the University of Arizona and a Masters Degree in
International Relations from the Johns Hopkins University School of Advanced
International Studies.
DOUGLAS OBERLANDER, was elected as one of our directors in January
1994. Since 1989, Mr. Oberlander has been president of Lease I, Inc. a
commercial lease and finance company. From 1965 to 1988, Mr. Oberlander was
employed by Oberlander Security, a security alarm dealer. Since 1991, Mr.
Oberlander has served as a director of
Oberlander Alarms, a security alarm dealer.
RONALD J. CARR, has been one of our Vice Presidents since March 1997,
and a Senior Vice President and Chief Operating Officer for the Central Station
Division since August 12, 1998. Mr. Carr is also the President of
Telecommunications Associates Group, Inc., Texas Security Central, Inc., Alarm
Central Monitoring, Inc., Guardian Protection Services, Ltd., and AMJ Central
Station Corporation, Inc., all wholly owned subsidiaries of Security Associates
International, Inc., and he is a member of the board of directors of the Central
Station Alarm Association. From March 1996 to March 1997, Mr. Carr was director
50
<PAGE> 72
of Telecommunications and Central Station Operations for Ameritech's
SecurityLink subsidiary. From 1991 to 1996 he was director of Telecommunications
for ADT, Inc. Mr. Carr holds a Bachelors Degree in Business Administration from
Brookdale College.
STEPHEN RUBIN, is one of our founders, has been a Senior Vice
President since October 1990. From 1987 to 1990, he was a senior vice president
of SAI Partners, Inc. From 1978 to 1986, Mr. Rubin was an officer of Davis
Marketing Group and Security Alliance Corporation. Mr. Rubin has a B.S. degree
from Northern Michigan University and MBA degree from Loyola University. Mr.
Rubin has the principal responsibility for the design and implementation of our
marketing program.
HOWARD SCHICKLER, has served as General Counsel of our company since
January 3, 1997, was appointed Secretary on October 7, 1997, 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 has a
B.A. degree from Brooklyn College, M.A. and M.B.A. degrees from The University
of Wisconsin at Milwaukee and a J.D. degree from Northwestern University.
DANIEL S. ZITTNAN, was named our Senior Vice President for Finance on
August 12, 1998, and has served as our Chief Financial Officer and Treasurer
since October 7, 1997. Mr. Zittnan spent over thirteen years with Arthur
Andersen LLP, most recently as a senior manager. Mr. Zittnan holds a BA in
accounting from DePaul University and is a member of the AICPA and ICPA
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 has a bachelors 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 JD from California Western
School of Law.
GLENN D. SEABURG has served as Director of Information Technology since
September of 98 and was appointed Vice President in February 2000. Prior to
joining us, Mr.
51
<PAGE> 73
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.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from our definitive proxy statement, expected to be filed with the Commission
prior to April 28, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from our definitive proxy statement, expected to be filed with the Commission
prior to April 28, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from our definitive proxy statement, expected to be filed with the Commission
prior to April 28, 2000.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statements and Schedules
(1) Financial Statements. Our financial statements, together with the
Report of Independent Accountants, are set forth in Part II, Item 7 on
pages F-1 through F-18 of this report.
(2) Financial Statement Schedules. The Schedule II - Valuation and
Qualifying Accounts is set forth on page A-1 of this report. All other
schedules are not submitted because they are not applicable or because
the required information is included in the financial statements or
notes to the financial statements.
(3) Exhibits. The exhibits filed as part of this report are listed in the
accompanying Index to Exhibits. We will furnish a copy of any exhibit
listed to requesting stockholders upon the payment of our reasonable
expenses in furnishing those materials.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.
52
<PAGE> 74
We filed a Current Report on Form 8-K on October 15, 1999, dated
September 30, 1999, which reported that TJS had restructured its investment in
our company. The restructuring involved the redemption of all of TJS' Preferred
Stock, subordinated debt and accrued dividends and interest in exchange for a
new Series A Convertible Preferred Stock. This Convertible Preferred Stock
limits TJS' voting rights to 45%. Our bylaws were also amended to reflect
certain supermajority provisions.
We filed a Current Report on Form 8-K on November 18, 1999, dated
November 5, 1999, which reported the acquisition of Alarm Monitoring Services,
Inc. AMS is a third party alarm monitoring company serving 20,000 alarm
subscribers.
53
<PAGE> 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SECURITY ASSOCIATES INTERNATIONAL, INC.
March 9, 2000 By: /s/ James S. Brannen
----------------------------------
James S. Brannen,
President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ James S. Brannen
- --------------------------------------- President (Principal Executive Officer) and
James S. Brannen Director March 9, 2000
/s/ Ronald I. Davis Director March 9, 2000
- ---------------------------------------
Ronald I. Davis
/s/ Thomas J. Salvatore Director March 9, 2000
- ---------------------------------------
Thomas J. Salvatore
/s/ Douglas Oberlander Director March 9, 2000
- ---------------------------------------
Douglas Oberlander
/s/ Michael B. Jones Director March 9, 2000
- ---------------------------------------
Michael B. Jones
/s/ Daniel S. Zittnan Senior Vice President, Treasurer and
- --------------------------------------- Chief Financial Officer (Principal March 9, 2000
Daniel S. Zittnan Financial and Accounting Officer)
</TABLE>
54
<PAGE> 76
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of the Company(1)
3.1a Certificate of Amendment of Certificate of Incorporation, As
Amended.(8)
3.2 By-Laws of the Company.(1)
3.2b Amended and Restated By-laws of Security Associates International,
Inc. as of 9/27/99.10
3.3 Certificate of Designations, Rights, Preferences and Limitations of
12% Redeemable Preferred Stock, $10.00 par value per share, of
Security Associates International, Inc.(1)
3.4 Certificate of Designations, Rights, Preferences and Limitations of
Convertible Preferred Stock, $10.00 par value per share, of Security
Associates International, Inc.(1)
3.5 Amendment to Certificate of Designations, Rights, Preferences and
Limitations of 12% Redeemable Preferred Stock, $10.00 par value per
share, of Security Associates International, Inc.(6)
3.6 Certificate of Designations, Rights, Preferences and Limitations of
Series A Convertible Preferred Stock, $10.00 par value per share,
of Security Associates International, Inc.(9)
4.1 Specimen Common Stock certificate.(1)
10.1 Employment Agreement between Registrant and James S. Brannen dated
August 29, 1996.(1)
10.2 Employment Agreement between Registrant and Ronald I. Davis dated
August 29, 1996.(1)
10.3 Employment Agreement between Registrant and Stephen Rubin dated
August 30, 1996.(1)
10.4 Adoption Agreement for the Datair Mass-Submitter Prototype
Standardized Cash or Deferred Profit Sharing Plan & Trust.(1)
10.5 Supplemental Employees' Retirement Plan.(1)
10.6 Purchase of Stock of Winnetka Investors, Inc. by Registrant dated
September 5, 1996.(1)
10.7 Purchase of Stock of MCAP Investors, Inc. by Registrant dated
September 5, 1996.(1)
10.8 Common Stock Subscription and Purchase Agreement between Registrant
and TJS Partners, L.P., dated September 5, 1996.(1)
10.9 Amendment to Common Stock Subscription and Purchase Agreement
between Registrant and TJS Partners, L.P., dated December 31,
1996.(1)
10.10 Purchase of Membership Interests of Limited Liability Agreements
between Registrant and Intec Company, Inc. dated September 5,
1996.(1)
10.11 Asset Purchase Agreement between Registrant and AMJ Central Station
Corporation dated December 19, 1996.(1)
10.12 Asset Purchase Agreement between All-Security Monitoring Services,
L.L.C. and Northern Central Station, Inc. dated February 25,
1997.(1)
10.13 Loan Agreement among Registrant, Security Associates Command Center
II, L.L.C., Monitor Service Group, L.L.C., All-Security Monitoring
Services, L.L.C. and FINOVA Capital Corporation dated December 31,
1996.(1)
10.14 Amendment to Loan Instruments among Registrant, Security Associates
Command Center II, L.L.C., Monitor Service Group, L.L.C.,
All-Security Monitoring Services, L.L.C. and FINOVA Capital
Corporation dated February 28, 1997.(1)
10.15 Lease Agreement between American National Bank and Trust Company of
Chicago as Trustee under Trust No. 59948 and Registrant dated
November 21, 1995.(1)
10.16 Amendment to Lease Agreement between American National Bank and Trust
Company of Chicago as Trustee under Trust No. 59948 and Registrant
dated December 9, 1996.(1)
10.17 Lease between Intec Company, Inc. and Security Associates Command
Center II, L.L.C. dated September 4, 1996.(1)
10.18 Sublease Agreement between William Jackson and Elizabeth Jackson and
Registrant dated December 29, 1996.(1)
10.19 First Amendment to Lease between William Jackson and Elizabeth
Jackson and Registrant dated February 7, 1997.(1)
10.20 Subordinated Loan Agreement between Registrant and TJS Partners,
L.P.(1)
10.21 Standby Option and Warrant Agreement between Registrant and TJS
Partners, Ltd. dated September 5, 1996.(1)
55
<PAGE> 77
10.22 Amended Standby Option and Warrant Agreement between Registrant and
TJS Partners, Ltd. dated December 31, 1996.(1)
10.23 Warrant dated December 31, 1996 issued to TJS Partners, Ltd.(1)
10.24 Form of Warrant.(1)
10.25 Echo Star Joint Venture Agreement.(2)
10.26 Amended and Restated Loan Agreement among Security Associates
International, Inc., Security Associates Command Center II, L.L.C.,
Monitor Service Group, L.L.C., All-Security Monitoring Services,
L.L.C., AMJ Central Station Corporation, Inc., Telecommunications
Associates Group, Inc. and FINOVA Capital Corporation dated December
2, 1997.(4)
10.27 Second Amendment to Lease between American National Bank and Trust
Company of Chicago as Trustee under Trust No. 59948 and Registrant
dated December 10, 1997.(4)
10.28 Koll Business Center Lease dated May 16, 1996 between
Telecommunications Associates Group, Inc. and TR Brell Austin
Corp.(4)
10.29 Lease between Indian Hill Properties, Inc. and Telecommunications
Associates Group, Inc. dated November 24, 1997.(4)
10.30 Stock Purchase Agreement between Security Associates International,
Inc. as purchaser and Robert Ambros as seller dated November 21,
1997.(3)
10.31 $500,000 Promissory Note dated December 8, 1997 from Alarm Funding
Corporation to TJS Partners, L.P.(4)
10.32 Subordinated Loan Agreement dated November 14, 1997 between Alarm
Funding Corporation and TJS Partners, L.P.(4)
10.33 Amended Subordinated Loan Agreement dated January 30, 1998 between
Security Associates International, Inc. and TJS Partners, L.P.(4)
10.34 $5,000,000 Promissory Note dated December 31, 1996 from Security
Associates International, Inc. to TJS Partners, L.P.(4)
10.35 Standard Hardware Purchase and Software License Agreement, between
Monitoring Automation Systems and Security Associates International,
Inc. dated September 21, 1998.(6)
10.36 Form of Association Agreement.(6)
10.37 Security Associates International, Inc. Stock Option Plan.(6)
10.38 Security Associates International, Inc. Employee Stock Purchase
Plan.(6)
10.39 Allonge.(6)
10.40 Third amendment to Loan Instruments between Security Associates
International, Inc., All-Security Monitoring Services, L.L.C., AMJ
Central Station Corporation, Telecommunications Associates Group,
Inc., Texas Security Central, Inc. and Reliance Protection Services,
Ltd. And FINOVA Capital Corporation.(6)
10.41 Stock Purchase Agreement between Security Associates International,
Inc. and the Willis Tate, Jr. Charitable Remainder Unitrust for
Southern Methodist University, Ray Hooker and Willis Tate, Jr.
dated June 17, 1998.(5)
10.42 Asset Purchase Agreement between Security Associates International,
Inc., as Seller and Security Alarm Financing Enterprises, Inc, as
Purchaser, dated June 30, 1999.(9)
10.43 Second Amendment to Security Associates International, Inc. Common
Stock Subscription and Purchase Agreement Dated as of September 5,
1996 between TJS Partners, L.P. and Security Associates
International, Inc. dated September 30, 1999.(10)
10.44 Second Amended and Restated Loan Agreement among Security Associates
International, Inc., FINOVA Capital Corporation and State Street Bank
and Trust Company dated September 30, 1999.(10)
10.45 Stock Purchase Agreement among Security Associates International,
Inc. and Herbert Warrick, Ramona Warrick and Russell VanDevanter
dated November 5, 1999.(11)
10.46 Second Amendment to Loan Instruments among Security Associates
International, Inc., FINOVA Capital Corporation and Citizens' Bank of
Massachusetts dated March 10, 2000.
21.1 Subsidiaries of Registrant.
24.1 Power of Attorney(7)
27.1 Financial Data Schedule
56
<PAGE> 78
(1) Previously filed with the Registrant's Registration Statement on Form S-1
filed July 22, 1997.
(2) Previously filed September 8, 1997 in pre-effective Amendment No. 1 to
the Registrant's Registration Statement on Form S-1.
(3) Previously filed with the Registrant's Current Report on Form 8-K filed
December 10, 1997 and dated November 25, 1997.
(4) Previously filed with the Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1997.
(5) Previously filed with the Registrant's Current Report on Form 8-K filed
July 2, 1998, dated May 8, 1998.
(6) Previously filed with the Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1998.
(7) Previously filed with the Registrant's Registration Statement on Form S-1
filed April 9, 1998.
(8) Previously filed with the registrants Definitive Proxy Statement filed
May 19, 1998.
(9) Previously filed with the Registrant's Current Report on Form 8-K filed
July 8, 1999, dated June 30, 1999.
(10) Previously filed with the Registrant's Current Report on Form 8-K filed
October 15, 1999, dated September 30, 1999.
(11) Previously filed with the Registrant's Current Report on Form 8-K filed
November 18, 1999, dated November 5, 1999.
57
<PAGE> 79
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)
<TABLE>
<CAPTION>
Additions
------------------------------------------------------------
Balance at Charged to
Beginning of Charged to Other Balance at
Description Period Expense Accounts Deductions End of
- ---------------------------------- ------------- ------------- ---------------- ------------ Period
----------
<S> <C> <C> <C> <C> <C>
Allowances deducted from related
accounts receivable balance sheet
accounts of Security Associates
International, Inc.
Year ended December 31, 1997 206,000 687,000 100,000 (498,000) 495,000
Year ended December 31, 1998 495,000 248,000 340,000 (346,000) 737,000
Year ended December 31, 1999 737,000 190,000 220,000 (648,000) 499,000
------------- ------------- ---------------- ------------ ----------
</TABLE>
58
<PAGE> 1
EXHIBIT 10.46
SECOND AMENDMENT TO LOAN INSTRUMENTS
This SECOND AMENDMENT TO LOAN INSTRUMENTS (this "SECOND AMENDMENT"),
dated as of March 10, 2000, is among SECURITY ASSOCIATES INTERNATIONAL, INC., a
Delaware corporation ("BORROWER"), CITIZENS BANK OF MASSACHUSETTS ("CITIZENS
BANK"), and FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), in
its individual capacity and as agent for all the financial institutions from
time to time parties to the Loan Agreement defined below. Capitalized terms not
otherwise defined herein shall have the meanings ascribed thereto in the Loan
Agreement.
R E C I T A L S
A. Borrower, State Street Bank and Trust Company ("STATE STREET"), and
FINOVA entered into a Second Amended and Restated Loan Agreement dated as of
September 30, 1999 (the "ORIGINAL LOAN AGREEMENT"), which was amended by a First
Amendment to Loan Instruments dated as of February 11, 2000 (the "FIRST
AMENDMENT") among Borrower, Citizens Bank, as successor in interest to State
Street, and FINOVA. The Original Loan Agreement, as amended by the First
Amendment and as the same may be further amended, restated, supplemented or
modified from time to time hereafter, is referred to herein as the "LOAN
AGREEMENT." Pursuant to the Loan Agreement, Citizens Bank and FINOVA have agreed
to make the Loan and other financial accommodations to Borrower.
B. Borrower has requested that the Loan Agreement be further amended in
certain respects.
C. Subject to the terms and conditions of this Second Amendment,
Lenders are willing to agree to the requests of Borrower.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and subject to the terms and conditions hereof, Borrower and Lenders
agree as follows:
1. INCORPORATION OF RECITALS. The Recitals set forth above are
incorporated herein, are acknowledged by Borrower to be true and correct and are
made a part hereof.
2. DEFINITIONS. All capitalized terms used but not defined herein shall
have the respective meanings ascribed to such terms in the Loan Agreement, as
amended by this Second Amendment.
3. AMENDMENTS TO LOAN AGREEMENT. The Loan Instruments are amended as
set forth below:
(a) SECTION 1.1 - ADDITIONAL DEFINITIONS. Section 1.1 of the
Loan Agreement is amended by adding the following definitions in the
appropriate alphabetical order:
<PAGE> 2
Additional Portion Advance: a disbursement of any
portion of the Capital Expenditure Portion, SAFE Attrition
Guaranty Portion or SAFE Debt Portion.
Capital Expenditure Portion: a portion of the Loan in
the amount of $1,000,000.
Capital Expenditure Portion Advance: a disbursement
of any portion of the Capital Expenditure Portion.
SAFE Attrition Guaranty Portion: a portion of the
Loan in the amount of $2,000,000.
SAFE Attrition Guaranty Portion Advance: a
disbursement of any portion of the SAFE Attrition Guaranty
Portion Advance.
SAFE Debt Portion: a portion of the Loan in an amount
not to exceed the amount of the SAFE Debt as of the Funding
Date of the SAFE Debt Portion Portion.
SAFE Debt Portion Advance: a disbursement of the SAFE
Debt Portion.
(B) SECTION 1.1 - AMENDED DEFINITION. Section 1.1 of the Loan
Agreement is amended by deleting the current versions of the following
definitions contained therein and substituting therefor the following
versions of such definitions in the appropriate alphabetical order:
Acquisition Portion: a portion of the Loan equal to
$35,000,000 minus the SAFE Debt Portion.
Adjusted Total Debt: as of any Funding Date, the
Total Debt as of such date plus the requested Advance or
Additional Portion Advance, as applicable.
Funding Date: the date of the disbursement of an
Advance or Additional Portion Advance.
(C) SUBSECTION 2.1.4 - USE OF PROCEEDS. Subsection 2.1.4 of
the Loan Agreement is deleted in its entirety and the following is
substituted therefor:
"2.1.4 USE OF PROCEEDS. The proceeds of the Initial
Portion were used (i) to pay transaction costs and (ii) for
working capital. The proceeds of the Acquisition Portion shall
be used to (i) consummate Acquisitions and (ii) to pay
transaction costs in connection therewith. The proceeds of the
Capital Expenditure Portion shall be used to reimburse
Borrower for certain Capital Expenditures permitted hereunder.
The proceeds of the SAFE Attrition Guaranty Portion shall be
used to repay certain
2
<PAGE> 3
obligations to SAFE (i) in connection with the reprogramming
of account telephone lines and (ii) arising under the SAFE
Attrition Guaranty. The proceeds of the SAFE Debt Portion
shall be used to repay the SAFE Debt."
(D) SUBSECTION 2.1.7 - FUNDING PROCEDURES. Section 2.1.7 of
the Loan Agreement is deleted in its entirety and the following is
substituted therefor:
"2.1.7 FUNDING PROCEDURES. Agent shall give each
Lender prompt notice by telephone or facsimile transmission of
a Notice of Borrowing that is received by it. Each applicable
Lender shall make available to Agent, no later than 1:00 p.m.
Eastern Time on the applicable Funding Date set forth in the
Notice of Borrowing, for deposit into such account as Borrower
may direct, its Pro Rata Share of such Advance or Additional
Portion Advance in immediately available funds in Dollars,
provided that (i) all of the conditions set forth in Sections
4.1 and 4.3 have been satisfied with respect to an Advance
requested in such Notice of Borrowing and (ii) all of the
conditions set forth in Sections 4.1 and 4.4 have been
satisfied with respect to a Additional Portion Advance
requested in such Notice of Borrowing.
"Unless Agent receives contrary written notice prior
to any such Advance or Additional Portion Advance, it is
entitled to assume that each applicable Lender will make
available its Pro Rata Share of the Advance or Additional
Portion Advance and in reliance upon that assumption, but
without any obligation to do so, may advance such Pro Rata
Share on behalf of the applicable Lender, without the
necessity of giving daily notice to such Lender of the receipt
of a Notice of Borrowing. If the applicable amount is not in
fact made available to Agent by such Lender, Agent shall be
entitled to recover such amount on demand from such Lender
together with interest thereon, for each day from such Funding
Date until the date such amount is paid to Agent, at the Base
Rate. If such Lender pays such amount to Agent, then such
amount shall constitute such Lender's Pro Rata Share of the
applicable Advance or Additional Portion Advance. If such
Lender does not pay such corresponding amount forthwith upon
Agent's demand therefor, Agent shall promptly notify the
Borrower and the Borrower shall immediately pay such
corresponding amount to Agent together with interest thereon,
for each day from such Funding Date until the date such amount
is paid to Agent, at the rate payable under this Loan
Agreement for the Base Rate Portion.
"Nothing in this subsection 2.1.7 shall be deemed to
relieve any Lender from its obligation to fulfill its
Commitments hereunder or to prejudice any rights that Borrower
may have against any Lender as a result of any default by such
Lender hereunder. It is understood and agreed that no Lender
shall be responsible for any default by any other Lender in
that other Lender's obligation to make an Advance or
Additional Portion Advance requested hereunder
3
<PAGE> 4
nor shall the Commitment of any Lender to make the particular
type of Advance or Additional Portion Advance requested be
increased or decreased as a result of a default by any other
Lender in that other Lender's obligation to make an Advance or
Additional Portion Advance requested hereunder."
(E) SUBSECTION 2.1.8 - ADDITIONAL PORTION ADVANCES. Section
2.1 of the Loan Agreement is amended by adding the following subsection
2.1.8 immediately following subsection 2.1.7:
"2.1.8 ADDITIONAL PORTION ADVANCES. Each Lender
severally agrees to disburse its Pro Rata Share of Additional
Portion Advances to or as directed by Borrower from time to
time prior to December 31, 2000 provided all of the terms and
conditions set forth in Sections 4.1 and 4.4, to the extent
applicable, have been satisfied."
(F) SUBSECTION 2.2.5 - INTEREST HEDGE CONTRACTS. Section 2.2.5
of the Loan Agreement is deleted in its entirety and the following is
substituted therefor:
"2.2.5 INTEREST HEDGE CONTRACTS. Borrower shall enter
into an Interest Hedge Contract reasonably acceptable to the
Required Lenders, to provide protection to Borrower against
fluctuations in interest rates, and deliver to Agent the
Assignment of Interest Hedge Contract, (i) in a face amount
equal to 75% of the aggregate Principal Balance within 15 days
after any disbursement of the Loan which would result in an
aggregate outstanding Principal Balance equal to or greater
than $20,000,000 (the "Threshold Amount") and (ii) in a face
amount equal to 75% of any increase in the aggregate
outstanding Principal Balance over the Threshold Amount within
15 days after a disbursement of the Loan which would result in
an increase in the aggregate outstanding Principal Balance
equal to or greater than $5,000,000 since the delivery of the
most recent previous Assignment of Interest Hedge Contract."
(G) SUBSECTION 2.6.2 - NON-UTILIZATION FEE. Section 2.6.2 of
the Loan Agreement is deleted in its entirety and the following is
substituted therefor:
"2.6.2 NON-UTILIZATION FEE. Borrower shall pay to
Agent, for the benefit of Lenders, for each month through
March, 2001, a fee in the amount of one-half of one percent
(.50%) per annum (the "NON-UTILIZATION FEE") on the remainder
of (i) $38,000,000 minus (ii) the aggregate amount of all
prior Advances of the Acquisition Portion as of the last day
of such month minus (iii) the aggregate amount of all prior
Additional Portion Advances as of the last day of such month.
The Non-Utilization Fee shall be payable monthly in arrears on
the first Business Day of each month."
4
<PAGE> 5
(H) SECTION 4.4 - CONDITIONS FOR ADDITIONAL PORTION ADVANCES.
Article IV of the Loan Agreement is amended by adding the following
Section 4.4 immediately following Section 4.3:
"4.4 CONDITIONS FOR ADDITIONAL PORTION ADVANCES. The
obligation of Lenders to disburse Additional Portion Advances
shall be subject to the satisfaction or waiver of all of the
following conditions on or before the Funding Date with
respect to any requested Additional Portion Advance, in a
manner, form and substance satisfactory to the Required
Lenders:
"4.4.1 MAXIMUM FACILITY CASH FLOW LEVERAGE
RATIO. Borrower shall demonstrate to the satisfaction
of Agent that, assuming the requested Additional
Portion Advance had been disbursed on the last day of
the second month prior to the month in which the
applicable Funding Date is to occur, the Facility
Cash Flow Leverage Ratio as of such last day would
not exceed 3.5.
"4.4.2 AMOUNT AND FREQUENCY OF ADDITIONAL
PORTION ADVANCES. Any requested SAFE Attrition
Guaranty Portion Advance or Capital Expenditure
Portion Advance shall be in a minimum amount of
$75,000 or integral multiples of $25,000 in excess
thereof. Any requested SAFE Debt Portion Advance
shall be in a single disbursement in an amount not to
exceed the amount of the SAFE Debt outstanding as of
the Funding Date of the SAFE Debt Portion Advance.
The amount of the requested SAFE Attrition Guaranty
Portion Advance shall not exceed $2,000,000 when
added to the aggregate amount of all prior SAFE
Attrition Guaranty Portion Advances and the amount of
the requested Capital Expenditure Portion Advance
shall not exceed $1,000,000 when added to the
aggregate amount of all prior Capital Expenditure
Portion Advances. No more than two (2) Additional
Portion Advances shall be made in any month.
"4.4.3 NOTICE OF BORROWING. Agent shall have
received a Notice of Borrowing from Borrower respect
to each Additional Portion Advance no later than
12:00 p.m., Chicago time, at least three (3) Business
Days prior to the proposed Funding Date with respect
to such Additional Portion Advance, which shall be on
a Business Day.
"4.4.4 EVIDENCE OF PAYMENT OF SAFE DEBT.
With respect to a SAFE Debt Portion Advance, Agent
shall have received (i) a pay-off letter from SAFE in
form and substance satisfactory to Agent setting
forth a pay-off amount of the SAFE Debt as of the
proposed Funding Date with respect to such Additional
Portion Advance, (ii) such UCC-3 termination
statements and other Lien releases as Agent may
require, and (iii) evidence that the SAFE
5
<PAGE> 6
Debt shall be paid in full concurrently with the
disbursement of the SAFE Debt Portion.
"4.4.5 EVIDENCE OF PAYMENT OF INDEBTEDNESS
FOR BORROWED MONEY OWING UNDER THE SAFE ATTRITION
GUARANTY. With respect to a SAFE Attrition Guaranty
Portion Advance, Agent shall have received evidence
satisfactory to Agent that the disbursement made in
connection with such SAFE Attrition Guaranty Portion
Advance shall be used to satisfy Indebtedness for
Borrowed Money due and payable by Borrower to SAFE
pursuant to the SAFE Asset Purchase Agreement."
(I) SECTION 6.16 - TRIAL BALANCE REPORTS. Article VI of the
Loan Agreement is amended by adding the following Section 6.16
immediately following Section 6.15:
"6.16 TRIAL BALANCE REPORTS. Within 30 days of each
Funding Date with respect to a Capital Expenditure Portion
Advance, furnish each Lender with a trial balance report in
sufficient detail to demonstrate to the reasonable
satisfaction of Agent the amount of each payment and the
vendor paid with respect to each Capital Expenditure which is
the subject of each such Capital Expenditure Portion Advance."
(J) EXHIBITS TO LOAN AGREEMENT. Exhibits 1.1(G) and 7.6 to the
Loan Agreement are deleted in their entirety and Amended Exhibit 1.1(G)
and Amended Exhibit 7.6, each attached to this Second Amendment, are
substituted therefor.
4. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Second
Amendment shall be subject to the satisfaction of all of the following
conditions in a manner, form and substance satisfactory to FINOVA:
(A) DELIVERY OF DOCUMENTS. The following shall have been
delivered to FINOVA, each duly authorized and executed and each in form
and substance satisfactory to FINOVA:
(1) this Second Amendment;
(2) a copy, certified by the corporate secretary of
Borrower, of resolutions adopted by the Board of Directors of
Borrower authorizing the execution of this Second Amendment;
(3) such other instruments, documents, certificates,
consents, waivers and opinions as FINOVA reasonably may
request.
(B) PERFORMANCE; NO DEFAULT. Borrower shall have performed and
complied with all agreements and conditions contained in the Loan
Instruments to be performed by or complied with by it, and no Event of
Default or Incipient Default shall exist.
6
<PAGE> 7
(C) MATERIAL ADVERSE CHANGE. No event shall have occurred
since December 31, 1999 which has had or could have a Material Adverse
Effect.
The date on which all of the conditions set forth in this Paragraph 4
have been satisfied is referred to herein as the "Effective Date."
5. REFERENCES. From and after the Effective Date, all terms used in the
Loan Instruments which are defined in the Loan Agreement shall be deemed to
refer to such terms as amended by this Second Amendment.
6. REPRESENTATIONS AND WARRANTIES. Borrower hereby confirms to Agent
and Lenders that the representations and warranties set forth in the Loan
Instruments, as amended by this Second Amendment, are true and correct in all
material respects as of the date hereof, and shall be deemed to be remade as of
the date hereof. Borrower represents and warrants to Agent and Lenders that (i)
Borrower has full power and authority to execute and deliver this Second
Amendment and to perform its obligations hereunder, (ii) upon the execution and
delivery hereof, this Second Amendment will be valid, binding and enforceable
upon Borrower in accordance with its terms, (iii) the execution and delivery of
this Second Amendment does not and will not contravene, conflict with, violate
or constitute a default under (A) the articles of incorporation or by-laws of
Borrower or (B) any applicable law, rule, regulation, judgment, decree or order
or any agreement, indenture or instrument to which Borrower is a party or is
bound or which is binding upon or applicable to all or any portion of Borrower's
Property and (iv) as of the date hereof no Incipient Default or Event of Default
exists.
7. COSTS AND EXPENSES. Borrower agrees to reimburse Agent for all fees
and expenses incurred in the preparation, negotiation and execution of this
Second Amendment and the consummation of the transactions contemplated hereby,
including, without limitation, the fees and expenses of counsel for Agent.
8. NO FURTHER AMENDMENTS; RATIFICATION OF LIABILITY. Except as amended
hereby, the Loan Agreement and each of the other Loan Instruments shall remain
in full force and effect in accordance with its respective terms. Borrower
hereby ratifies and confirms its liabilities, obligations and agreements under
the Loan Agreement and the other Loan Instruments, all as amended by this Second
Amendment, and the Liens created thereby, and acknowledges that (i) it has no
defenses, claims or set-offs to the enforcement by Agent and Lenders of such
liabilities, obligations and agreements, (ii) Agent and Lenders have fully
performed all obligations to Borrower which any such Person may have had or has
on and as of the date hereof and (iii) other than as specifically set forth
herein, neither Agent nor any Lender waives, diminishes or limits any term or
condition contained in the Loan Agreement or the other Loan Instruments. Agent
and Lenders' agreement to the terms of this Second Amendment or any other
amendment of the Loan Agreement shall not be deemed to establish or create a
custom or course of dealing among Agent, Lenders and Borrower. The Loan
Instruments, as amended by this Second Amendment, contain the entire agreement
among Agent, Lenders and Borrower with respect to the transactions contemplated
hereby.
7
<PAGE> 8
9. COUNTERPARTS. This Second Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which, when
taken together, shall constitute one and the same instrument.
10. FURTHER ASSURANCES. Borrower covenants and agrees that it will at
any time and from time to time do, execute, acknowledge and deliver, or will
cause to be done, executed, acknowledged and delivered, all such further acts,
documents and instruments as reasonably may be required by Agent and Lenders in
order to effectuate fully the intent of this Second Amendment.
11. SEVERABILITY. If any term or provision of this Second Amendment or
the application thereof to any party or circumstance shall be held to be
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, the validity, legality and enforceability of the remaining terms
and provisions of this Second Amendment shall not in any way be affected or
impaired thereby, and the affected term or provision shall be modified to the
minimum extent permitted by law so as most fully to achieve the intention of
this Second Amendment.
12. CAPTIONS. The captions in this Second Amendment are inserted for
convenience of reference only and in no way define, describe or limit the scope
or intent of this Second Amendment or any of the provisions hereof.
[remainder of this page intentionally left blank]
8
<PAGE> 9
IN WITNESS WHEREOF, this Second Amendment has been executed and
delivered by each of the parties hereto by a duly authorized officer of each
such party on the date first set forth above.
SECURITY ASSOCIATES INTERNATIONAL,
INC., a Delaware corporation
By:
-------------------------------
James S. Brannen
President
FINOVA CAPITAL CORPORATION, a
Delaware corporation, in its
individual capacity as a Lender
and as Agent for all Lenders
By:
-------------------------------
Andrew J. Pluta
Vice President
CITIZENS BANK OF MASSACHUSETTS, as
Lender
By:
-------------------------------
Wendy M. Andrus
Vice President
9
<PAGE> 10
AMENDED EXHIBIT 1.1(G)
to
LOAN AGREEMENT, as Amended by the Second Amendment
Form of Notice of Borrowing
See attached.
Second Amendment to Loan Instruments
10
<PAGE> 11
NOTICE OF BORROWING/DISBURSEMENT REQUEST
---------- --, -----
FINOVA Capital Corporation, as Agent
1850 North Central Avenue
Phoenix, Arizona 85004
Attn: Vice President
Operations Management
Ladies and Gentlemen:
Reference is made to that certain Second Amended and Restated Loan
Agreement, dated as of September 30, 1999 (the "Original Loan Agreement"), among
SECURITY ASSOCIATES INTERNATIONAL, INC., a Delaware corporation ("Borrower"),
FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"), in its individual
capacity and as agent for the financial institutions from time to time parties
hereto, STATE STREET BANK AND TRUST COMPANY ("State Street"), and the other
financial institutions from time to time parties hereto, as amended by that
certain First Amendment to Loan Instruments, dated as of February 11, 2000 (the
"First Amendment") among Borrower, FINOVA and CITIZENS BANK OF MASSACHUSETTS
("Citizens Bank"), as successor in interest to State Street, and that certain
Second Amendment to Loan Instruments, dated as of March __, 2000 (the "Second
Amendment") among Borrower, FINOVA and Citizens Bank. The Original Loan
Agreement, as amended by the First Amendment and the Second Amendment, is
referred to herein as the "Loan Agreement"). All capitalized terms used but not
elsewhere defined herein shall have the respective meanings ascribed to such
terms in the Loan Agreement.
Borrower hereby notifies Agent that on the date hereof, Borrower
desires to borrow [$_________ of the Acquisition Portion] [$____________ of the
Capital Expenditure Portion] [$_________________ of the SAFE Attrition Guaranty
Portion] [$____________ of the SAFE Debt Portion] and Borrower hereby directs
Agent to disburse such principal amount in accordance with the payment
instructions attached hereto as EXHIBIT A. Borrower acknowledges and agrees that
even though a portion of the disbursements described on EXHIBIT A are directed
to entities other than Borrower, receipt of such disbursements by the applicable
payees shall constitute receipt of such disbursements by Borrower.
Borrower acknowledges that this Notice of Borrowing/Disbursement
Request and acceptance by Borrower of the proceeds of the disbursements
contemplated hereby constitute a representation and warranty that the conditions
contained in SECTIONS 4.1 AND [4.3] [4.4] of the Loan Agreement have been
satisfied in all material respects.
Second Amendment to Loan Instruments
<PAGE> 12
Very truly yours,
SECURITY ASSOCIATES INTERNATIONAL,
INC., a Delaware corporation
By:
------------------------------
Name:
-----------------------------
Title:
----------------------------
12
Second Amendment to Loan Instruments
<PAGE> 13
EXHIBIT A
ENTITY, PAYMENT INSTRUCTIONS AMOUNT
1.
------------------------- $
-----------------
By Wire Transfer to:
Bank Name:
----------------------------------
Bank Address:
-------------------------------
ABA No.:
------------------------------------
Acct. No.:
----------------------------------
Acct. Name:
---------------------------------
Attention:
----------------------------------
Telephone:
----------------------------------
2.------------------------- $
-----------------
By Wire Transfer to:
Bank Name:
----------------------------------
Bank Address:
-------------------------------
ABA No.:
------------------------------------
Acct. No.:
----------------------------------
Acct. Name:
---------------------------------
Attention:
----------------------------------
Telephone:
----------------------------------
TOTAL DISBURSEMENTS $
-----------------
Second Amendment to Loan Instruments
<PAGE> 14
AMENDED EXHIBIT 7.6
to
LOAN AGREEMENT, as Amended by the Second Amendment
Capital Expenditures
Year Amount
---- ------
2000 $ 1,250,000
Each year thereafter $ 500,000
Second Amendment to Loan Instruments
14
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Registrant
- - SAI North Central Command Center, Inc. (Euclid, Ohio)
- - SAI Northwest Command Centers - Seattle, Inc.
- - SAI Southwest Command Centers, Inc. (Dallas, Texas; Houston, Texas)
- - Guardian Security, Inc. (Columbus, Ohio)
- - Alarm Central Monitoring, Inc. (Dallas, Texas)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 631,521
<SECURITIES> 0
<RECEIVABLES> 2,327,895
<ALLOWANCES> (499,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,010,425
<PP&E> 5,613,263
<DEPRECIATION> (1,567,739)
<TOTAL-ASSETS> 33,340,650
<CURRENT-LIABILITIES> 6,859,791
<BONDS> 0
0
1,363,590
<COMMON> 7,145
<OTHER-SE> 12,795,664
<TOTAL-LIABILITY-AND-EQUITY> 33,340,650
<SALES> 0
<TOTAL-REVENUES> 22,689,132
<CGS> 0
<TOTAL-COSTS> 25,620,357
<OTHER-EXPENSES> 1,899,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,564,565
<INCOME-PRETAX> (3,596,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,596,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,596,635)
<EPS-BASIC> (.59)
<EPS-DILUTED> 0
</TABLE>
