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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 33-43870
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NYLIFE Structured Asset Management Company Ltd.
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(Exact name of registrant as specified in its charter)
Texas 13-3641944
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
51 Madison Avenue - Suite 1710, New York, NY 10010
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 576-6456
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable; see Item 5. - Market for Registrant's Common
Equity and Related Stockholder Matters.
The Exhibit Index begins on page 26.
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TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business 3-14
Item 2. Properties 14
Item 3. Legal Proceedings 14-15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 16-17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 24-25
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports 27-29
on Form 8-K
Signatures 30
Appendix A to Annual Report on Form 10-K F-1 - F-17
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DEFINITIONS - All capitalized terms not defined herein shall have the meanings
given to them herein and in the Financial Statements attached hereto as Appendix
A.
PART I
ITEM 1. BUSINESS
GENERAL
NYLIFE Structured Asset Management Company Ltd. (the "Company" or "SAMCO") is a
limited liability company formed under the laws of the State of Texas on October
18, 1991. A limited liability company offers its equity investors limited
liability protection while providing them with flow through tax treatment.
SAMCO has two members. The principal member is NYLIFE SFD Holding Inc. ("SFD
Holding"), formerly NAFCO Inc. The other member is NYLIFE Depositary
Corporation ("NDC"). Both members are Delaware corporations and indirect
wholly-owned subsidiaries of New York Life Insurance Company ("New York Life").
Certain directors and officers of SFD Holding have been designated as managers
of SAMCO. A manager of a limited liability company is similar to a director of
a corporation, and the managers may designate one or more persons as officers of
the limited liability company.
SFD Holding and NDC (collectively, the "Members") have purchased membership
interests of 83.33% and 16.67%, respectively. In 1992, SFD Holding made an
initial capital contribution to SAMCO of 500 shares of $1 par value, nonvoting,
non-convertible, 24.39% cumulative preferred stock of NYLIFE Bridge Investor
Inc. ("NBII"), like SAMCO a subsidiary of SFD Holding. The preferred stock was
originally valued by SAMCO at $5,000,000 which represented SFD Holding's
recorded carrying value for the preferred stock. NBII was liquidated and the
original investment in preferred stock and accumulated dividends were paid to
SAMCO during 1993. On January 15, 1992, NDC made an initial capital
contribution of $1,000,000 in cash. SAMCO had no operations prior to that date.
SAMCO has issued three series of secured five-year notes (the "Notes"), at both
floating (Series A and Series B) and fixed (Series C) rates, the net proceeds of
which were used to finance the acquisition of security alarm monitoring
contracts (the "Contracts"). The Contracts acquired consist of the obligations
and payment rights with respect to monitoring services, and in certain instances
repair and maintenance services, for security alarm systems in homes and light
commercial businesses.
SALE OF SERIES A CONTRACTS
In February 1998, SAMCO sold to WestSec for $15,107,145, the Contracts and
related assets which constituted the collateral securing SAMCO's Series A
Notes (see "Sale of the Security Alarm Business by Westinghouse" on page 6).
The transaction was consummated pursuant to the Operational Services
Agreement dated November 15, 1991 between SAMCO and Westinghouse Electric
Corporation ("Westinghouse"), as amended (the "OSA"). A portion of the
proceeds of the sale were used to pay
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all outstanding principal and accrued interest on the Series A Notes on
February 17, 1998, the maturity date of such Notes.
THE SECURITY ALARM INDUSTRY
Security alarm monitoring is the process of notifying designated parties (either
individuals or public authorities) if an unauthorized entry, fire, medical or
other emergency signal from a customer alarm system is received at a central
monitoring station. The Company is engaged in the residential and light
commercial security alarm monitoring segment of the security alarm industry.
The security alarm industry can be classified in four segments, each of which
serves both residential and commercial markets: (i) manufacturers of alarm
system components; (ii) wholesalers who distribute such components; (iii)
parties that sell or lease, install and maintain security alarm systems; and
(iv) parties that monitor security alarm signals. Sales, leasing, installation,
maintenance and monitoring overlap significantly. Within each geographic
market, many companies sell or lease, install, maintain and monitor systems.
Many of these companies are independent entities that primarily install and
maintain systems. Larger local and regional full service firms and national
companies with branch offices such as ADT, Protection One and Security Link, as
well as numerous regional and local security companies, also may be present in
each geographic market.
Recent studies estimate that approximately 20% of the nation's homes are
protected by security alarms connected to central station monitoring facilities.
Most alarm dealers serve both commercial and residential markets. Larger
companies have historically dominated the commercial market, while smaller
companies typically concentrated on the residential market, where there has been
a low economic barrier to entry and where low overhead and administrative costs
of the smaller companies allow them to charge prices competitive with those
charged by their larger competitors.
Dealers in the security alarm industry generally sell or lease, maintain,
monitor and service alarm equipment (directly through their own facilities or
indirectly through a contractual relationship with a third party) installed with
their customers.
Generally, the dealer and customer enter into a monitoring agreement with
respect to the security alarm system when the equipment is installed. The
typical monitoring agreement provides that the dealer will monitor the system
for a specified fee, payable monthly, quarterly or annually in advance, subject
to change in rates at the end of the contract term. These agreements generally
provide for a three-year term renewable automatically for successive one-year
terms unless terminated by either party by written notice within 60 days prior
to the annual anniversary date.
Further, alarm equipment may be sold or leased by a dealer to its customers. A
typical leasing agreement provides that title to the alarm equipment remains
with the dealer and that the dealer is required to maintain the system in good
working order, subject to the limitations contained in such agreement,
throughout the term of the lease. The dealer generally receives a fixed leasing
and maintenance fee, payable monthly, quarterly or annually in advance. The
initial term of the lease is generally three to five years, automatically
renewing from year to year thereafter. The dealer may increase the fee during
the process of renewing the lease.
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Monitoring agreements and lease agreements typically provide that the dealer is
not responsible for interruption of monitoring services due to conditions or
circumstances beyond its control, and include a limitation of liability
provision which specifies that the dealer is not to be considered an insurer of
the system and that the system or service supplied will not avert or prevent
occurrences or the consequences therefrom which the system or service is
designed to detect. Generally, these clauses typically specify that the
dealer's liability is limited to an amount equal to a percentage of the annual
service charge or a fixed dollar amount, whichever is greater, in the event of a
failure of the system or service.
A customer monitoring agreement in the security alarm industry may include
obligations for the sale or lease of equipment, monitoring, maintenance and/or
service, with a single periodic fee payable in respect of all such services.
The fee for residential and light commercial monitoring varies depending upon
geographic location, sophistication of the security alarm system, the monitoring
equipment used and type of customer monitoring agreements .
THE COMPANY'S CONTRACT ACQUISITIONS
During 1992, 1993, and 1994, SAMCO utilized the proceeds of short-term
borrowings from SFD Holding, its primary Member, to acquire Contracts pending
the sale to investors of its Notes. Each Contract acquired (i) includes the
obligation to provide central station monitoring for the customer in
consideration for the customer's payment of a periodic monitoring fee, (ii) may
include, and convey title to the Company of, ownership of the monitoring
equipment installed at the customer's residence or place of business, and (iii)
may also include an obligation to provide, and the right to receive revenues
for, servicing of equipment.
The Company has not acquired equity interests in security alarm monitoring or
installation companies; rather, SAMCO has acquired Contracts owned or generated
by such companies. The Company does not engage in unrelated businesses.
Contracts were purchased at a price multiple of the periodic cash flow they
generate. The Company believes that current industry acquisition prices may
vary widely because such prices are a function of (among other things): (i)
supply and demand at the time of the acquisition; (ii) the particular
circumstances of each seller, including its attrition history; (iii) various
factors relating to the Contracts, including whether or not monitoring can
easily be converted to the acquirer's central monitoring station facilities and
whether a large or small group of homogeneous Contracts is involved; (iv) the
number of Contracts to be acquired; (v) the specific terms of the acquisition,
including the levels of seller guarantees and cash hold-backs; and (vi) the
results of arm's length negotiations. Generally, a seller of Contracts will
agree for a predetermined period of time to replace Contracts as to which
attrition has occurred with performing Contracts and/or agree to reimburse the
buyer for Contracts as to which attrition has occurred.
Westinghouse, in performing Contract acquisition services for the Company,
pursuant to the OSA, identified for acquisition Contracts owned by
Westinghouse, whether internally generated or acquired from unaffiliated
third parties. In evaluating its acquisitions,
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the Company, with the assistance of Coopers & Lybrand L.L.P. and other of its
industry consultants, reviewed each proposed acquisition in light of the factors
summarized in the preceding paragraph and other information available to it at
such time.
Westinghouse was reimbursed at the time of acquisition of Contracts for its
direct costs incurred in performing Contract acquisition services (including any
necessary conversion activities), including the regular salaries and reasonable
benefit costs of Westinghouse employees who performed such acquisition services.
Pursuant to the OSA, Westinghouse and the Company agreed to an Exclusivity
Period (the "Exclusivity Period") during which (i) Westinghouse would not
acquire Contracts for any entity other than the Company, and (ii) the Company
had a right of first refusal to acquire Contracts offered for sale by third
parties. Such Exclusivity Period ended on April 10, 1994.
The Company does not intend to purchase additional Contracts in the future.
SALE OF SECURITY ALARM BUSINESS BY WESTINGHOUSE
On December 31, 1996, Westinghouse sold its security alarm business to WestSec,
Inc. ("WestSec"), a subsidiary of Western Resources, Inc. In connection with
the sale, Westinghouse assigned all of its rights, title and interest under the
OSA to WestSec, and WestSec assumed all of Westinghouse's liabilities and
obligations under the OSA. In conjunction with Westinghouse's sale and
assignment and WestSec's assumption of obligations, the Company, Westinghouse,
WestSec and Westar Capital, Inc., an affiliate of WestSec ("Westar"), entered
into a Consent, Assignment, Assumption, and Modification Agreement (the "Consent
Agreement").
Pursuant to the Consent Agreement, Westar guaranteed all obligations and
liabilities of WestSec under the OSA and various related agreements
(collectively the "OSA Agreements"), Westinghouse has agreed to remain liable
under certain specified obligations in the OSA Agreements, and Westar was
required to furnish to the Company, no later than March 31, 1997, an irrevocable
letter of credit to secure certain obligations of Westar, WestSec and
Westinghouse under the OSA Agreements.
On May 22, 1997, SAMCO received an irrevocable letter of credit ("LC") in the
aggregate amount of $85,000,000 from The Chase Manhattan Bank. The LC was
provided to SAMCO in accordance with the provisions of the Consent Agreement.
In addition, SAMCO and WestSec entered into a letter agreement dated May 21,
1997 memorializing certain collateral agreements and understandings related to
the LC. During 1997, the LC was reduced to $75,994,000 in accordance with its
terms.
WestSec has agreed to purchase the Contracts securing each series of Notes at a
price intended to provide for sufficient funds to repay in full the principal of
and accrued and unpaid interest on the Notes upon the stated maturity of the
Notes. To the extent that such purchase price is less than the amount of the
required funds, Westinghouse has agreed, subject to certain conditions, to pay
the difference to the Company. In addition, Westinghouse has agreed to provide
certain other indemnities to the Company (see Item 7 - Management's Discussion
and Analysis - Contract Repurchase - Series A, Series B, and Series C Notes).
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Due to such sale, all references in this Form 10-K to "Servicer" shall mean
Westinghouse with regard to all time periods through December 31, 1996 and
WestSec with regard to the period January 1, 1997 through November 24, 1997.
ACQUISITION OF PROTECTION ONE, INC. BY WESTERN RESOURCES, INC.
On November 24, 1997, Western and Protection One, Inc. ("Protection One")
combined their security service businesses to form the second largest U.S.
burglar and fire alarm company. Western owns 80.1% of the combined company,
which is known as Protection One. Subsequent to November 24, 1997, "Servicer"
shall mean Protection One.
CONTRACT MONITORING SERVICES
Pursuant to the OSA, the Servicer's alarm monitoring responsibilities with
respect to Contracts include (i) operating and maintaining in good working
condition all equipment owned by it and associated with its Central Monitoring
Station facilities; (ii) performing such tests as are necessary to ensure that
all such equipment is capable and properly configured to receive accurately all
signals emitted from customers' alarm systems; (iii) undertaking to ensure that
all customers' alarm systems remain properly connected to the Servicer's Central
Monitoring Station facilities; (iv) maintaining or causing to be maintained
adequate skilled staff at its Central Monitoring Station facilities 24 hours per
day, 7 days per week, without interruption; (v) monitoring all incoming signals
24 hours per day, 7 days per week, without interruption (other than
interruptions, in the case of the activities referred to in clause (iv) above
and this clause (v), caused by any event outside of the direct control of the
Servicer and which could not have been avoided or mitigated by the exercise of
due care by the Servicer); (vi) verifying and responding to all incoming
security alarm system signals promptly, diligently and appropriately at all
times, reasonably ensuring that the parties designated by the subject customer
(either individuals or public authorities) are notified; (vii) conducting
follow-up investigations where appropriate of all security alarm signals
received at the Servicer's Central Monitoring Station facilities from customer's
alarm systems; (viii) cooperating with customers to reduce the incidence of
false alarms; and (ix) taking any other appropriate action required or
contemplated in customers' Contracts in response to all signals received at the
Servicer's Central Monitoring Station facilities.
In June 1995, Westinghouse's Central Monitoring Station facility was relocated
from Las Colinas to Irving, both suburbs of Dallas, Texas (the "Irving Central
Monitoring Station"). The Irving Central Monitoring Station, constructed for
Westinghouse Security Systems ("WSS"), is one of the largest 24-hour central
monitoring station facilities in the industry and has the capacity to monitor up
to 550,000 security alarm system customers. The Irving Central Monitoring
Station monitors over 400,000 customer accounts in 44 states in the continental
United States. The Irving Central Monitoring Station was acquired by WestSec as
part of the purchase of the security alarm business from Westinghouse and is now
owned by Protection One.
The Irving Central Monitoring Station is a specialized center, which is staffed
by trained professional operators, 24 hours a day, 7 days a week. The operators
use computers, controlled by specially written computer programs, to assist them
in identifying and reporting alarm signals. If a customer's alarm system is
activated and an individual zone, such as an alarmed door or window or a heat
sensor, senses an intrusion or a fire, the alarm system automatically signals
the Irving Central Monitoring Station. The nature of the occurrence and a
summary of the customer's account data, including the
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phone numbers of the customer's designated contact parties, which includes local
police, fire and emergency units, are indicated on a computer screen. The
operator will normally use his/her computer to phone the customer for a pass
code in order to detect false alarms. If no one is home, the operator promptly
contacts the parties designated in the customer's service file. If an incorrect
pass code is received, the operator promptly dispatches the appropriate
emergency service unit such as the police or fire department. A report of the
date and time of the signal, a description of the nature of the occurrence and
of the actions taken by the operators (including phone numbers called) is
recorded and retained at the Irving Central Monitoring Station for a period of
time.
In addition to the Irving Central Monitoring Station, WSS had developed and
brought on line a physically remote backup monitoring station.
Underwriters Laboratories Inc. ("UL"), an independent, not-for-profit testing
organization, has established a certification program for central monitoring
station facilities (the "Certification Program"). Central monitoring station
facilities, which are certified under such Certification Program, are
periodically checked by UL inspection personnel to provide an on-going
confirmation of the facilities' certification. The inspection procedures
include a review of the facility and its operating practices. The Irving
Central Monitoring Station received approval for UL Listing on June 8, 1992. In
addition, on March 7, 1994, the Irving Central Monitoring Station received
certification from UL for the monitoring of residential fire systems.
The Servicer also provides general and administrative services pursuant to the
OSA. These services include: (i) billing each customer in accordance with the
terms of such customer's Contract, instructing that payment by the customer be
delivered to an address which is a lock box account controlled by the Company;
(ii) collecting past due amounts from customers in accordance with procedures
established by the Company and the Servicer; (iii) responding promptly to
customers' inquiries pertaining to services provided to them pursuant to their
Contracts or otherwise provided to them by the Servicer under the OSA; (iv)
obtaining and maintaining all licenses, permits and other governmental
authorizations and approvals required for the performance by the Servicer of its
activities under the OSA; (v) processing new Contracts and endeavoring to renew
existing Contracts; (vi) maintaining current records for each customer; and
(vii) performing general office and clerical services in connection with the
foregoing activities.
If the Servicer decides to discontinue its residential and commercial security
monitoring business, the Servicer may terminate the OSA at any time upon twelve-
months prior written notice to the Company. At any time subsequent to the
notice, the Company may terminate the OSA and enter into arrangements for the
monitoring of the customers' alarm systems with other companies selected by the
Company. The Servicer is obligated to cooperate fully with the orderly transfer
of responsibilities (including the transfer of all information relating to
customers of, and Contracts owned by, the Company) from the Servicer to such
third parties and to pay all costs and expenses incurred by the Company in
connection with such transfer. There can be no assurance that any such third
parties will be available or, even if available, that such agreements can be
reached for comparable services and at comparable cost.
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OPERATIONAL SERVICES AGREEMENT
The OSA, unless sooner terminated pursuant to the provisions thereof, expires
April 10, 1999, with SAMCO having the right to extend the OSA for a period no
longer than six months. SAMCO intends to exercise this right.
The Company pays to the Servicer a fee equal in amount to 35% of the aggregate
fees payable under the Contracts and received in good funds in the subject month
from customers for the monitoring services performed by the Servicer (aggregate
monitoring revenues or "AMR"). Of the monitoring fee payable to the Servicer,
25% of the AMR for the subject month (whether the particular customer pays
monthly, quarterly or, in some instances, annually) is immediately due and
payable to the Servicer on the 14th day of the following month (the "Servicer
Basic Monitoring Fee") and 10% of the AMR for such month is subordinate in right
of payment to all quarterly payments of scheduled principal and interest on the
Notes due in the calendar quarter during which such subordinated monitoring fee
is due, and to all payments of principal and interest on the Notes which are
past due, if any ("Servicer Subordinated Monitoring Fee"). Subject to the
preceding sentence, the Servicer Subordinated Monitoring Fee is payable on the
16th day of the first month after the quarter in which such fee was collected
and will accrue without interest.
The OSA provides that the Servicer shall perform all of its obligations
thereunder at the same high professional standard which it brings to all of its
business endeavors and completely and totally in keeping with the highest moral
and ethical standards, and will deal with the Company fairly, honestly, and in
good faith. The OSA also provides that the Servicer will indemnify and hold
harmless the Company and any of its Managers, officers, Members, employees or
Affiliates from and against any losses or expenses resulting from the failure of
the Servicer to perform or otherwise fulfill or comply with any of its
agreements or undertakings thereunder.
In the event that the Debt Service Coverage Ratio with respect to any series of
Notes for any year commencing on December 31 of the year in which such series of
Notes was issued, or any anniversary of such December 31 with respect to such
series of Notes (i) is less than 1.60 to 1.00, and (ii) with respect to each
year commencing after December 31 of the year in which such series of Notes was
issued, has decreased by 5% or more compared to the initial year's Debt Service
Coverage Ratio, and as a result thereof, the Company elects to prepay the Notes
of such series, and, in connection therewith, the Contracts which are the
Collateral for such series of Notes are sold, then, with respect to such
Contracts, the obligations of each of the Company and the Servicer under the OSA
will cease. If the Debt Service Coverage Ratio for all series of Notes for any
year ending December 31 fails to meet the tests described in clauses (i) and
(ii) above, then the Company may, at its option, terminate the OSA and arrange
for monitoring services by someone other than the then current Servicer.
COMPETITION
The security alarm business is highly competitive and includes large national
and regional companies, as well as smaller local dealers/installers.
Competition is based on the cost of providing a given service and the quality of
the service. During recent years, consolidation continues to occur in the
industry, partially as a result of companies realizing that monitoring costs are
relatively fixed and profits can be increased directly by increasing the number
of Contracts monitored. The Company
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anticipates that this industry consolidation will continue. The Company's
competitors include national companies that are currently, or may become,
vertically integrated to the point of generating their own Contracts by selling
the installation of security alarm systems. In many instances, these larger
companies install alarm systems at a loss in order to obtain multi-year
monitoring Contracts that permit such companies to recover this installation
investment through the monitoring revenues received.
REGULATION
Various state and local authorities regulate the performance of monitoring
services. Certain localities in which Contract customers may be located may
have laws or ordinances imposing penalties for false alarms with respect to
which police or fire personnel are summoned to such customer's home or business.
Some of these local ordinances may impose fines on the monitoring company rather
than on the customer. Similarly, many localities have ordinances requiring
licensing of security alarm monitoring companies. These ordinances may impose
licensing fees. Under the OSA, the Servicer is required to obtain and maintain
all licenses and permits required in connection with its performance thereunder
of the monitoring services and customer servicing obligations, except where the
failure to obtain and maintain any such licenses and permits does not have a
material adverse effect on the business of the Company.
CUSTOMER SERVICING
Under the OSA, The Servicer is required to provide or cause to be provided, to
the extent requested by any customer or required by any such customer's
Contract, all activities necessary or, in the good faith judgment of The
Servicer, desirable to repair and/or maintain in good working order the security
alarm system located on such customer's premises. The Servicer's servicing
obligations include, among other things, promptly responding to requests by, and
scheduling service calls for, any customer for repair and maintenance of such
customer's security alarm system, and establishing repair and maintenance
capabilities necessary to service each customer's security alarm system.
Certain Contracts acquired by the Company include only an obligation to monitor,
while other Contracts include both monitoring and servicing obligations. With
respect to any Contract that does not include a servicing obligation, the
Servicer is required, pursuant to the OSA, to provide, for a fee payable
directly to the Servicer and at the customer's request, servicing of such
customer's security alarm system. Contracts which include a servicing
obligation either (a) distinguish that portion of the aggregate periodic fee
attributable to monitoring from that portion attributable to servicing or (b) do
not distinguish any portion of the aggregate periodic fee as attributable to a
particular service.
Under the OSA (a) to the extent that any Contracts distinguish a portion of the
aggregate periodic payments by the customers as attributable to servicing and
the Company paid a purchase price for such Contracts based on a multiple of the
aggregate periodic payments thereunder, or (b) to the extent that any Contracts
do not distinguish any portion of the aggregate periodic payments as
attributable to a particular service, the Servicer is not entitled to receive
any payment for performing servicing obligations under such Contracts, and the
entire periodic payments thereunder are deemed attributable to monitoring. To
the extent that any Contracts distinguish a portion of the aggregate periodic
payments as attributable to servicing and the Company paid a purchase price for
such Contracts based on a multiple of only that portion of the aggregate
periodic payment attributable to monitoring, the
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Servicer is entitled, under the OSA, to receive the full amount of the portion
of the aggregate periodic payment attributable to servicing.
The OSA provides that the Services shall not target any Customers under any
Contracts, based directly or indirectly on any information concerning any such
Customers which was obtained by the Servicer as a result of its performance of
any of the Account Management Services, for the purpose of soliciting any such
Customer to enter into a contract or agreement with the Servicer, or an
Affiliate for the provision of monitoring services to such Customer.
EMPLOYEES
The Company does not have any full-time employees.
CONTRACTS OWNED BY THE COMPANY
During the years ended December 31, 1994, 1993, and 1992, the Company had
acquired an aggregate of 101,672 Contracts for an aggregate purchase price of
$76,947,795 with recurring annual revenue of $30,550,214. There have been no
additional Contract purchases since 1994. The majority of the Contracts are
located in California, Florida, Georgia, Tennessee, Texas and Washington. The
functional breakdown of the Contracts is approximately 93% residential and 7%
light commercial.
At December 31, 1997, SAMCO owned 7,236 active accounts with recurring monthly
revenue ("RMR") of $174,396 collateralizing the Series B Notes and 38,996 active
accounts with RMR of $971,204 collateralizing the Series C Notes. The majority
of the Series B and C Contracts are located in California, Florida, Georgia,
Tennessee, Texas and Washington.
ATTRITION EXPERIENCE
Attrition of Contracts is the loss of customers, which results in decreased cash
flow. There are two major components resulting in attrition: (i) customers who
fail to make payments within a reasonable time for monitoring services billed;
and (ii) customers who elect to terminate their monitoring services for various
reasons (e.g., relocation, poor service, or contract expiration).
The tables below set forth information with respect to the experience of the
Servicer for the periods indicated relating to attrition of its portfolio of
alarm monitoring agreements. Servicer has advised the Company that during the
ordinary course of business the customer collection and cancellation experience
fluctuates within a range from fiscal quarter to fiscal quarter. The Servicer
believes that the percentage stated for delinquencies is within this expected
fluctuation experience. However, the high cancellation rate is primarily the
result of West Sec's implementation in early 1997 of a failed customer
service policy that resulted in the loss of customer accounts.
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CUSTOMER COLLECTION EXPERIENCE
Billings for monitoring services
for the period April 1, 1997 to September 30, 1997: * $11,599,191
Collection status as of December 31, 1997:
Outstanding balance for delinquent agreements
(more than or equal to 90 days past due) $310,461
Delinquencies as a percentage of billings: ** 2.68%
CUSTOMER CANCELLATION EXPERIENCE
Period: January 1, 1997 to December 31, 1997
Customer cancellations: *** 23,308
Weighted average number of agreements
in seller's portfolio during the period: 154,931
Customer cancellation rate: 15.04%
* Delinquent accounts for the period prior to April 1, 1997 are included in
customer cancellations in the "Customer Cancellation Experience" table, and
billings from October 1 through December 31, 1997, if not paid, were not
delinquent as of December 31, 1997.
** Typically, some, but not all, delinquencies become canceled accounts. See
note *** below.
*** Customer cancellations include (i) cancellations due to nonpayment; and
(ii) cancellations for reasons other than nonpayment.
A summary of Contracts which attrited during 1997, 1996, and 1995 and the
related replacement activity is as follows:
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<CAPTION>
1997 1996 1995
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<S> <C> <C> <C>
Number of attrited Contracts 13,335 10,705 8,815
Number of attrited Contracts replaced with Contracts (*) 4,648 1,655 225
Number of replacement Contracts (*) 4,408 1,509 299
Number of Contracts replaced with purchase price refunds 1,221 69 1,172
</TABLE>
(*) The guarantees provide that attrited Contracts are to be replaced with
Contracts of an equal RMR value. Therefore, the difference in the number of
replacement Contracts is the result of different RMR amounts between the
attrited Contracts and the replacement Contracts.
12
<PAGE>
Gross attrition is calculated as a percent of Contracts originally securing the
Notes. Gross attrition percentages for the Contracts collateralizing the
Company's Notes are as follows:
<TABLE>
<CAPTION>
1997 (**) 1996 1995
--------- ---- ----
<S> <C> <C> <C>
Series A 9.7% 6.6% 9.9%
Series B 13.9% 10.3% 11.5%
Series C (*) 16.4% 12.9% 7.3%
</TABLE>
(*) Includes 5,035 Contracts which are not collateral for the Series C Notes.
(**) High gross attrition in 1997 is primarily the result of WestSec's
implementation in early 1997 of a failed customer service policy that resulted
in the loss of many WestSec and SAMCO customer accounts.
ATTRITION GUARANTEES - SERIES A, SERIES B AND SERIES C NOTES
Westinghouse, as seller of Contracts to the Company, had the obligation to
provide guarantees that capped the Company's exposure to attrition. Such
guarantees generally capped attrition at 0% for a period of time after
acquisition followed by a period of time during which attrition is capped
annually at certain percentages. During the period when a 0% attrition
guarantee was in effect, Westinghouse generally had the option to replace
attrited accounts either with cash (in an amount equal to the original purchase
price paid to Westinghouse for the attrited account) or with replacement
Contracts. Among other things, a replacement Contract must be current in all
payments due from the customer and must have a RMR not less than the attrited
account being replaced. A 0% attrition guarantee provides that SAMCO may lose
no more than three months of revenue for each attrited Contract. Approximately
78% of the Contracts originally purchased by the Company were covered by
attrition guarantees at December 31, 1996. Pursuant to the Consent Agreement,
beginning in 1997, all Contracts originally purchased by the Company will be
covered by attrition guarantees provided by WestSec.
Attrition guarantees for Contracts owned by the Company are as follows:
SERIES A - During 1993, 1994, 1995, and 1996, approximately one-half of the
Series A Contracts had guarantees capping attrition while the balance were no
longer under guarantee. The guaranteed Contracts had attrition caps of 7%, 7%,
8%, 8% in 1993, 1994, 1995, and 1996, respectively. Pursuant to the Consent
Agreement, all Series A Contracts will be guaranteed for 1997 and for the period
January 1, 1998 to February 15, 1998, with attrition caps of 9% and 1.125%,
respectively.
As mentioned earlier, the Contracts which constituted the collateral securing
SAMCO's Series A Notes were sold to WestSec on February 17, 1998.
SERIES B - For the Series B Contracts, Servicer has guaranteed (i) that during
the seven-month period ending October 31, 1993, attrited accounts would not
exceed 0%; and (ii) during each of the four 12 month periods commencing on
November 1, 1993 and ending on October 31, 1997, attrited accounts will not
exceed 9.25%. Westinghouse had the option during the period when its 0%
attrition guarantee was in effect to replace attrited accounts either with cash
in an amount equal to the original purchase price paid to Westinghouse for the
attrited account) or with replacement Contracts. When the 9.25% attrition
guarantee is in effect, Servicer must replace attrited accounts with Contracts.
13
<PAGE>
SERIES C - For the Series C Contracts acquired on June 30, 1993, Servicer has
guaranteed (i) that during the 12 month period ending June 30, 1994, attrited
accounts would not exceed 0%; and (ii) during each of the four 12 month periods,
commencing on July 1, 1994 and ending on June 30, 1998, attrited accounts will
not exceed 10%; and (iii) during one final three month period commencing on July
1, 1998 and ending on October 31, 1998, attrited accounts will not exceed 2.5%.
For the Series C Contracts acquired on November 30, 1993 and February 28, 1994,
the respective 0%, 12 month guarantee periods expired on November 30, 1994 and
February 28, 1995; the respective 10%, 12 month guarantee periods are from
December 1, 1994 to November 30, 1998 and from March 1, 1995 to February 28,
1999.
For the Series C Contracts, Westinghouse had the option during the period when
its 0% attrition guarantee was in effect to replace attrited accounts either
with cash (in an amount equal to the original purchase price paid to
Westinghouse for the attrited account) or with replacement Contracts; provided,
however, that Westinghouse could not have replaced more than half of the
Contracts which became attrited accounts in any calendar month with cash.
Pursuant to the Consent Agreement, WestSec must replace all Series C accounts
above an attrition cap of 10% with Contracts. When the 10% attrition guarantee
is in effect, Servicer must replace attrited accounts with Contracts.
INVESTMENT CONTRACTS - 5,035 of the Contracts acquired on June 30, 1993,
November 30, 1993 and February 28, 1994 were not utilized as collateral for the
Company's Series C Notes. The attrition guarantees for these Contracts are
identical to those of the Series C Contracts described above.
ITEM 2. PROPERTIES
The Company does not own any material properties and is not a party to any
material leases.
ITEM 3. LEGAL PROCEEDINGS
On March 2, 1998, WestSec filed a state court action against SAMCO in Dallas
County, Texas seeking a determination that it does not have to purchase from
SAMCO what WestSec calls "person reassignment accounts," and that it is
entitled to costs and reasonable attorneys fees. These accounts, WestSec
argues, are "accounts that are with a customer who (1) had an account owned
by SAMCO which was terminated due to the relocation of the customer and (2)
entered into a new security alarm contract with WEC or WestSec at the
customer's new location within 120 days after terminating his or her account
at the prior location." WestSec contends that such accounts are not included
within the collateral securing SAMCO's Notes.
SAMCO contends that it owns these disputed accounts and that either WestSec
is obligated to purchase them under Section 9.1 of the OSA or SAMCO is
entitled to sell them to any party. The dispute is currently confined to
approximately 2,323 accounts relating to the Series A Notes that matured on
February 15, 1998. Unless resolved, however, the dispute is likely to extend
to other similar accounts related to the Series B and C Notes.
14
<PAGE>
SAMCO has answered WestSec's complaint and filed appropriate counter-claims
asserting that (i) SAMCO owns and WestSec is obligated to purchase the
accounts in dispute, and/or (ii) WestSec acquired those accounts in material
breach of its contractual obligations to SAMCO, which has been damaged by the
lost value of those accounts. In addition, SAMCO also seeks lost revenue
for those accounts, as well as costs and reasonable attorneys fees.
Nothwithstanding the foregoing, all payments required to have been made to
date to the holders of the SAMCO Notes have been paid on a timely basis in
accordance with the terms thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no organized trading market for the Noteholders or members of the
Company.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information regarding the
Company's financial position as of December 31, 1997, 1996, 1995, 1994 and 1993
and the results of operations for the periods then ended. This information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
Supplementary Data, which are included in Items 7 and 8 of this Report,
respectively.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue $20,270,016 $23,230,617 $25,979,002 $26,752,768 $16,619,820
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 2,860,543 ($2,459,963) ($2,123,749) $ 133,235 $ 273,107
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cash flow from operations $ 6,884,186 $ 8,613,984 $ 9,683,149 $ 9,064,373 $ 6,952,895
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Notes payable (current and non-current):
Series A $11,695,361 $13,506,863 $15,928,365 $18,263,116 $21,009,544
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Series B $ 4,520,521 $ 5,359,744 $ 6,422,734 $ 7,335,227 $ 8,273,196
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Series C $24,547,924 $28,845,893 $34,506,447 $40,798,349 $27,068,694
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total assets at December 31 $49,079,278 $53,601,399 $65,894,252 $77,883,745 $67,045,755
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SERIES A
Debt Service Coverage (at 9%) (**) 1.66 1.73 1.83 1.85
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Interest Coverage (at 9%) (**) 3.42 3.32 3.26 3.12
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Debt Service Coverage (at 11%) N/A 1.50 1.55 1.62 1.63
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Interest Coverage (at 11%) N/A 2.80 2.71 2.66 2.55
---- ---- ---- ---- ----
---- ---- ---- ---- ----
SERIES B
Debt Service Coverage (at 9%) 3.08 1.86 1.89 1.95 1.94
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Interest Coverage (at 9%) 5.71 3.76 3.50 3.38 3.19
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Debt Service Coverage (at 11%) N/A 1.68 1.68 1.73 1.71
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Interest Coverage (at 11%) N/A 3.08 2.86 2.77 2.61
---- ---- ---- ---- ----
---- ---- ---- ---- ----
16
<PAGE>
SERIES C
Debt Service Coverage (at 9%) (*) 1.83 1.89 2.04 1.97 2.28
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Interest Coverage (at 9%) 3.79 3.59 3.60 3.24 2.91
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
(*) The first required principal payment on the Series C Notes was August 15,
1994.
(**) Not meaningful.
Net income for the year ended December 31, 1993 includes a non-recurring
dividend of $1,389,306.
Financial data for the year ended 1994 reflects the acquisition of Contracts on
February 28, 1994 and the ownership of the Contracts acquired June 30 and
November 30, 1993 for a full year.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - 1997
The Company's net cash from operating activities decreased as attrition reduced
monitoring revenue from customers. During 1997, the Company paid scheduled and
additional principal of $1,811,501, $839,222 and $4,297,952 to the Series A,
Series B, and Series C Noteholders, respectively.
Attrition, which is the loss of customers, results in decreased cash flow. In
order to control the Company's exposure to attrition and the resulting loss of
revenue, the Company has received from the Servicer certain attrition guarantees
(see Item-1 Business - Attrition Guarantees). These guarantees generally
provide for the replacement of Contracts, with either cash or Contracts, by the
Servicer if attrition exceeds certain levels. As of December 31, 1997, the
Series A and Series C Contracts owned by the Company are covered by attrition
guarantees by the Servicer (see Item 1. - Business - Attrition Guarantees -
Series A, Series B and Series C Notes).
The Company's revenues from Contracts have been sufficient to pay the Servicer
Basic Monitoring Fee, scheduled principal and interest on the Notes, third party
operating expenses, taxes of the Company's Members (but only Member's taxes in
respect of any allocations of taxable income from the Company), subordinated
fees, to establish necessary reserves, if any, and to continue to make
additional principal payments. The Company expects this trend to continue in
1998.
Series A and Series B Notes bear interest on the outstanding principal at a per
annum floating rate of 2.50 percentage points above the minimum denomination
five-year certificate of deposit average rate (the "Benchmark CD Rate"), as
reported by the Bank Rate Monitor in its last report of the immediately
preceding calendar quarter, but in no event less than 9% per annum or more than
11% per annum. At December 31, 1997, the Benchmark CD Rate was 5.42%.
Accordingly, the outstanding principal on the Series B Notes will earn interest
at 9% per annum through May 15, 1997.
Debt Service and Interest Coverage ratios are calculated based on the number of
"active" accounts at the end of the period. An active account is one where the
customer's alarm system is being monitored. Generally, accounts are monitored
until they become 70 days delinquent. As indicated in Item 6 - Selected
Financial Data, the Debt Service and Interest Coverage ratios for the Series C
Notes at December 31, 1997 continues to be consistent with prior years. The
Debt Service and Interest Coverage ratios for the Series B Notes were materially
higher at December 31, 1997 than in prior years. Since the Series B Notes
mature on August 15, 1998, only six months of required principal and interest
payments are used in calculating the respective ratios.
CONTRACT REPURCHASE - SERIES A, SERIES B, AND SERIES C NOTES
At maturity, the Company is obligated to repay the then outstanding principal
balance of the Notes. Pursuant to the Consent Agreement, as each series of
Notes mature, WestSec shall purchase all of the Contracts securing such series
of Notes for an amount equal to the greater of (i) the fair market value of such
Contracts as determined by an nationally recognized independent valuation firm
jointly selected by WestSec and SAMCO; or (ii) thirty (30) times the recurring
monthly fees and charges payable by customers pursuant to such Contracts.
Westinghouse has agreed that if the purchase price
18
<PAGE>
payable by WestSec for a particular Series of Notes is less than the amount of
all principal and accrued and unpaid interest on such series of Notes, upon
notice from SAMCO to Westinghouse, Westinghouse will remit to SAMCO, at the same
time the WestSec price is required to be paid, in immediately available funds,
the amount in excess of the WestSec price so that the total paid to SAMCO will
equal the amount of all principal and accrued and unpaid interest on such Series
of Notes. Such notice shall be given by SAMCO to Westinghouse at least five
business days prior to the stated maturity date of each Series of Notes.
On May 22, 1997, WestSec furnished to SAMCO an irrevocable and unconditional
letter of credit issued by The Chase Manhattan Bank in favor of SAMCO in the
amount of $85 million (the "LC") in accordance with the Consent Agreement. The
LC secures certain obligations owed to SAMCO under the OSA Agreements and the
Consent Agreement. During 1997, the LC was reduced to $75,994,000 in accordance
with its terms.
In addition, SAMCO and WestSec entered into a letter agreement dated May 21,
1997 memorializing certain collateral agreements and understandings related to
the LC.
DISPOSITION OF ASSETS AND MATURITY OF SERIES A NOTES
In February 1998, SAMCO sold to WestSec for $15,107,145, the Contracts and
related assets which constituted the collateral securing SAMCO's Series A Notes.
The transaction was consummated pursuant to the OSA and the Consent Agreement.
A portion of the proceeds of the sale were used to pay all outstanding principal
and accrued interest on the Series A Notes on February 17, 1998, the maturity
date of such Notes.
Concurrent with the sale, SAMCO and WestSec instructed The Chase Manhattan Bank
to reduce the LC to $54,338,000 in accordance with its terms.
The Company does not anticipate the purchase of additional Contracts. As of
December 31, 1997, the Company had no material capital commitments.
On May 14, 1997 SAMCO received an unsolicited offer from Western to purchase all
of SAMCO's outstanding limited liability interests. The offer was insufficient
in its terms and was unable to be evaluated by SAMCO.
Should WestSec become unable to perform any of its contractual obligations with
respect to the Company in the future, there can be no assurance that any third
parties will be available or, even if available, that agreements could be
reached with such third parties for comparable services and at comparable cost.
Such a situation could have a materially adverse impact on the Company.
RESULTS OF OPERATIONS - 1997
For the year ended December 31, 1997, SAMCO derived 98% of its income from
monitoring revenues and the balance from interest income on short term
investments.
The decrease in the Company's monitoring revenues for the year ending
December 31, 1997 compared to the corresponding period in 1996 is a result of
the attrition of Contracts in 1997.
19
<PAGE>
Accordingly, the related monitoring fee expense decreased in 1997. An increase
in attrition expense was offset by a decrease in amortization expense as
attrition decreases the amortizable base of Contracts. Interest expense
decreased in 1997 as the Company continues to pay down scheduled and additional
principal. The bad debt expense of $834,691 on the Company's Statement of
Operations in 1997 represents actual revenue loss on attrited Contracts and the
potential revenue loss on Contracts with balances greater than 90 days past due
as of December 31, 1997.
The Company's operating expenses include monitoring fees, general and
administrative expenses, including (i) lockbox bank fees, (ii) audit and tax
fees, (iii) printing and mailing of quarterly and annual reports to investors,
(iv) trustee fees, (v) legal and consulting fees, and (vi) subordinated fees and
expenses. The Company's other expenses include bad debt expense, interest
expense and amortization of (i) Contracts and (ii) debt issuance costs.
Most of the Contracts owned by the Company have a three year term, provide for
automatic renewal and allow the Company to increase the customers' monitoring
fee at certain times after the initial term. The Company has no intention of
increasing monitoring fees in the immediate future.
LIQUIDITY AND CAPITAL RESOURCES - 1996
The Company's net loss for the year ending December 31, 1996 is due primarily to
amortization expense, a non-cash charge against earnings, which resulted
primarily from attrition of certain contracts in 1996. The Company's net cash
from operating activities decreased as attrition reduced monitoring revenue from
customers. During 1996, the Company paid scheduled and additional principal of
$2,421,502, $1,062,990 and $5,660,554 to the Series A, Series B, and Series C
Noteholders, respectively.
Attrition, which is the loss of customers, results in decreased cash flow. In
order to control the Company's exposure to attrition and the resulting loss of
revenue, the Company has received from Servicer certain attrition guarantees
(see Item-1 Business - Attrition Guarantees). These guarantees generally
provide for the replacement of Contracts, with either cash or Contracts, by the
Servicer if attrition exceeds certain levels. At December 31, 1996, the Series
A, Series B and Series C Contracts owned by the Company were covered by
attrition guarantees by the Servicer (see Item 1. - Business - Attrition
Guarantees - Series A, Series B and Series C Notes).
The Company's revenues from Contracts have been sufficient to pay the Servicer
Basic Monitoring Fee, scheduled principal and interest on the Notes, third party
operating expenses, taxes of the Company's Members (but only Member's taxes in
respect of any allocations of taxable income from the Company), subordinated
fees, to establish necessary reserves, if any, and to continue to make
additional principal payments. The Company expects this trend to continue in
1997.
Series A and Series B Notes bear interest on the outstanding principal at a per
annum floating rate of 2.50 percentage points above the minimum denomination
five-year certificate of deposit average rate (the "Benchmark CD Rate"), as
reported by the Bank Rate Monitor in its last report of the immediately
preceding calendar quarter, but in no event less than 9% per annum or more than
11% per annum. At December 31, 1996, the Benchmark CD Rate was 5.4%.
Accordingly, the
20
<PAGE>
outstanding principal on the Series A and Series B Notes will earn interest at
9% per annum through May 15, 1997.
Debt Service and Interest Coverage ratios are calculated based on the number of
"active" accounts at the end of the period. An active account is one where the
customer's alarm system is being monitored. Generally, accounts are monitored
until they become 70 days delinquent. As indicated in Item 6 - Selected
Financial Data, the Debt Service and Interest Coverage ratios for each Series of
Notes at December 31, 1996 continue to be consistent with prior years.
CONTRACT REPURCHASE - SERIES A, SERIES B, AND SERIES C NOTES
At maturity, the Company is obligated to repay the then outstanding principal
balance of the Notes. Pursuant to the Consent Agreement, as each series of
Notes mature, WestSec shall purchase all of the Contracts securing such series
of Notes for an amount equal to the greater of (i) the fair market value of such
Contracts as determined by an nationally recognized independent valuation firm
jointly selected by WestSec and SAMCO; or (ii) thirty (30) times the recurring
monthly fees and charges payable by customers pursuant to such Contracts.
Westinghouse has agreed that if the purchase price payable by WestSec for a
particular Series of Notes is less than the amount of all principal and accrued
and unpaid interest on such series of Notes, upon notice from SAMCO to
Westinghouse, Westinghouse will remit to SAMCO, at the same time the WestSec
price is required to be paid, in immediately available funds, the amount in
excess of the WestSec price so that the total paid to SAMCO will equal the
amount of all principal and accrued and unpaid interest on such Series of Notes.
Such notice shall be given by SAMCO to Westinghouse at least five business days
prior to the stated maturity date of each Series of Notes.
The Consent Agreement requires WestSec to furnish to SAMCO, no later than
March 31, 1997, an irrevocable and unconditional letter of credit issued by and
drawn upon a "AA" rated bank, in form and substance reasonably satisfactory to
SAMCO and Westinghouse, in favor of SAMCO in the amount of $85 million (the
"LC"). The LC will secure obligations of Westar, WestSec and Westinghouse under
the OSA Agreements and the Consent Agreement.
The Company does not anticipate the purchase of additional Contracts. As of
December 31, 1996, the Company had no material capital commitments.
Should WestSec become unable to perform any of its contractual obligations with
respect to the Company in the future, there can be no assurance that any third
parties will be available or, even if available, that agreements could be
reached with such third parties for comparable services and at comparable cost.
Such a situation could have a materially adverse impact on the Company.
RESULTS OF OPERATIONS - 1996
For the year ended December 31, 1996, SAMCO derived 98% of its income from
monitoring revenues and the balance from interest income on short term
investments.
The decrease in the Company's monitoring revenues for the year ending
December 31, 1996 compared to the corresponding period in 1995 is a result of
the attrition of Contracts in 1996. Accordingly, the related monitoring fee
expense decreased in 1996. An increase in attrition expense
21
<PAGE>
was offset by a decrease in amortization expense as attrition decreases the
amortizable base of Contracts. Interest expense decreased in 1996 as the
Company continues to pay down scheduled and additional principal. The bad debt
expense of $751,164 on the Company's Statement of Operations in 1996 represents
actual revenue loss on attrited Contracts and the potential revenue loss on
Contracts with balances greater than 90 days past due as of December 31, 1996.
The Company's operating expenses include monitoring fees, general and
administrative expenses, including (i) lockbox bank fees, (ii) audit and tax
fees, (iii) printing and mailing of quarterly and annual reports to investors,
(iv) trustee fees, (v) legal and consulting fees, and (vi) subordinated fees and
expenses. The Company's other expenses include bad debt expense, interest
expense and amortization of (i) Contracts and (ii) debt issuance costs.
Most of the Contracts owned by the Company have a three year term, provide for
automatic renewal and allow the Company to increase the customers' monitoring
fee at certain times after the initial term. The Company has no intention of
increasing monitoring fees in the immediate future.
LIQUIDITY AND CAPITAL RESOURCES - 1995
The Company's net loss for the year ending December 31, 1995 was due primarily
to higher amortization expense, a non-cash charge against earnings, as a result
of the attrition of certain contracts in 1995. Although the Company experienced
higher attrition for the year ending December 31, 1995 than in the year ending
December 31, 1994, its net cash from operating activities increased as a result
of lower interest expense on the Secured Five Year Notes. During 1995, the
Company paid scheduled and additional principal of $2,334,751, $912,493 and
$6,291,902 to the Series A, Series B, and Series C Noteholders, respectively.
Attrition resulted in decreased cash flow. As of December 31, 1995,
approximately 50% of the Series A Contracts and 100% of the Series B and Series
C Contracts owned by the Company were covered by attrition guarantees by the
Servicer.
The Company's revenues from Contracts were sufficient to pay the Servicer Basic
Monitoring Fee, scheduled principal and interest on the Notes, third party
operating expenses, taxes of the Company's Members (but only Member's taxes in
respect of any allocations of taxable income from the Company), subordinated
fees, to establish necessary reserves, if any, and to continue to make
additional principal payments.
At December 31, 1995, the Benchmark CD Rate was 5.19%. Accordingly, the
outstanding principal on the Series A and Series B Notes earned interest at 9%
per annum through May 15, 1996.
Debt Service and Interest Coverage ratios are calculated based on the number of
"active" accounts at the end of the period. An active account is one where the
customer's alarm system is being monitored. Generally, accounts are monitored
until they become 70 days delinquent. Previous to the fourth quarter of 1994,
accounts were active until they became 100 days delinquent. Westinghouse made
this change to a more aggressive service termination policy because they
believed it would have a positive effect on the collection of delinquent
balances. As indicated in Item 6 - Selected Financial
22
<PAGE>
Data, the Debt Service and Interest Coverage ratios for each Series of Notes at
December 31, 1995 were strong.
The Company did not purchase any additional Contracts in 1995. As of
December 31, 1995, the Company had no material capital commitments.
RESULTS OF OPERATIONS - 1995
For the year ended December 31, 1995, SAMCO derived 98% of its income from
monitoring revenues and the balance from interest income on short term
investments.
The decrease in the Company's monitoring revenues for the year ending
December 31, 1995 compared to the corresponding period in 1994 was due to the
expiration, in 1995, of the Westinghouse guarantees of 0% attrition on the
Series C contracts. As a result, amortization of the Contracts increased as the
0% attrition on the Series C contracts expired. Accordingly, the related
monitoring fee expense has decreased. Interest expense decreased as the Company
continued to pay down scheduled and additional principal. The bad debt expense
of $748,309 on the Company's Statement of Operations represents actual revenue
loss on attrited Contracts and the potential revenue loss on Contracts with
balances greater than 90 days past due as of December 31, 1995.
The Company's operating expenses included monitoring fees, general and
administrative expenses, including (i) lockbox bank fees, (ii) audit and tax
fees, (iii) printing and mailing of quarterly and annual reports to investors,
(iv) trustee fees, (v) legal and consulting fees, and (vi) subordinated fees and
expenses. The Company's other expenses include bad debt expense, interest
expense and amortization of (i) Contracts and (ii) debt issuance costs.
The Company did not increase monitoring fees during 1995, although it was
permitted to do so under certain renewed Contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain directors and officers of SFD Holding have been designated as Managers
of SAMCO. A manager is similar to a director of a corporation, and may
designate one or more persons as officers of the limited liability company. The
principal business occupations during the past five years for the Managers and
officers of SAMCO are set forth below.
Name Age Title
- ---- --- -----
Kevin M. Micucci 39 Manager and President
Jean E. Hoysradt 47 Manager and Vice President of Investment
Jay S. Calhoun 42 Vice President and Treasurer
Scott J. Drath 34 Manager, Vice President, Controller and Secretary
Richard W. Zuccaro 48 Tax Vice President
Jefferson C. Boyce 40 Manager
Kevin M. Micucci became a manager and the President of the Company in February
1996. Previously, he was Vice President of Finance from June 1994 and Vice
President and Controller from October 1991. Mr. Micucci has been a Vice
President of New York Life Insurance Company in the Structured Finance
Department since March 1996; prior thereto, he was Corporate Vice President from
March 1991 to March 1996, an Assistant Vice President from July 1989 to March
1991, and Director of Financial Reporting from August 1987 to July 1989. He was
a Senior Accountant in the Direct Investments Department of E.F. Hutton &
Company Inc., a securities broker-dealer, from 1984 to 1987 and was a Senior
Accountant in the Audit Department of Alexander Grant & Company from 1981 to
1984. Mr. Micucci received a B.S. degree from St. John's University and is a
Certified Public Accountant.
Jean E. Hoysradt has been a Manager and Vice President of Investment of the
Company since January 1992. Ms. Hoysradt has been a Senior Vice President of
New York Life Insurance Company in charge of the Investment Department since
March 1992. She was a Vice President in the Investment Department in charge of
private placements from 1990 to 1992. Before joining New York Life Insurance
Company, Ms. Hoysradt was a Managing Director with Manufacturers Hanover Trust
Company from 1988 to 1990. She began her career in 1974 at The Equitable Life
Assurance Society of the U.S. as a private placement analyst, and was Vice
President in portfolio management upon her departure in 1984. From 1984 to
1988, she was a Vice President in structured real estate finance with The First
Boston Corporation. A 1972 graduate of Duke University, Ms. Hoysradt received
her M.B.A. from Columbia University in 1974.
24
<PAGE>
Jay S. Calhoun has been Vice President and Treasurer of the Company since March
1993. Mr. Calhoun is Treasurer and was named Senior Vice President of New York
Life Insurance Company in March 1997. He was named Vice President and Associate
Treasurer of New York Life Insurance Company in March 1992 and, prior to that
time, served as a Corporate Vice President in the Treasury Department. Mr.
Calhoun received a B.A. degree from Princeton University and an M.S. degree in
Business Policy from Columbia University.
Scott J. Drath has been a Manager, Vice President and Controller of the Company
since October 1996. Mr. Drath has been a Corporate Vice President in the
Structured Finance Department of New York Life Insurance Company since May 1996.
Mr. Drath was Director of Accounting for Prins Recycling Corp. from May 1995 to
April 1996. Prior thereto, he was an Assistant Vice President in the Structured
Finance Department of New York Life Insurance Company from April 1994 to May
1995 and a Director of Accounting from September 1991 to April 1994. Mr. Drath
received a Bachelor of Accountancy Degree from George Washington University and
an M.B.A. degree in Finance from New York University.
Richard W. Zuccaro has been Tax Vice President of the Company since January
1992. Mr. Zuccaro has been a Vice President of New York Life Insurance Company
since April 1995, and prior thereto, was a Corporate Vice President from May
1986 to April 1995 and was an Assistant Vice President of New York Life
Insurance Company from November 1981 to May 1986. Mr. Zuccaro received a B.B.A.
degree in Accounting from the University of Oklahoma.
Jefferson C. Boyce has been a Manager of the Company since June 1993. Mr. Boyce
is Chairman and Chief Executive Officer of Monitor Capital Advisors, Inc., a
subsidiary of New York Life Insurance Company. Prior to assuming this role he
was a Senior Vice President of New York Life Insurance Company in charge of the
MainStay Family of mutual funds and President of NYLIFE Securities Inc. and
NYLIFE Distributors Inc., broker dealers. Mr. Boyce received a B.B.S. degree in
Finance from Baruch College and has completed the Advanced Management Program at
the Harvard Business School.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Separate compensation is not paid by the Company to its Managers or to its
officers for serving in such positions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Amount and Nature
Title of Name and Address of Beneficial Percent of
class Beneficial Owner Ownership Class
----- ---------------- --------- -----
- - NYLIFE SFD Holding Inc. Voting interest of the 83.33%
51 Madison Avenue Company
New York, NY 10010
- - NYLIFE Depositary Corp. Voting interest of the 16.67%
51 Madison Avenue Company
New York, NY 10010
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain payments to Members of the Company and their
affiliates and certain contractual arrangements and related transactions are
contained in Note 7 to the Financial Statements on pages F-8 through F-16 of
this Form 10-K.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - see Index of Financial Statements included
under Item 8, Appendix A, on page F-2 of this report.
2. All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted
since either: (1) the information required is disclosed in the financial
statements and the notes thereto; (2) the schedules are not required under
the related instructions; or (3) the schedules are inapplicable.
3. Exhibits:
Number and Description
Under Regulation S-K
--------------------
The following reflects all applicable Exhibits required under Item 601 of
Regulation S-K:
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Articles of Organization of Company. *
3.2 Amended Regulations of Company. *
3.3 Amendment to Articles of Organization of Company. *
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
4.1 Indenture. *
4.2 Form of Global Note, included as Exhibit A to Exhibit 4.1. *
4.3 Form of Definitive Note, included as Exhibit B to Exhibit 4.1. *
4.4 Form of Security Agreement, included as Exhibit C to Exhibit 4.1. *
4.5 Form of First Supplemental Indenture. *
4.6 Form of Second Supplemental Indenture. *
(10) MATERIAL CONTRACTS
10.1 Revised Form of Escrow Agreement. *
10.2 Operational Services Agreement. *
27
<PAGE>
10.3 Form of Lock-Box Agreement, included as Exhibit D to
Exhibit 4.1. *
10.4 Agreement of Limited Partnership of Westinghouse Security Systems,
L.P. *
10.5 Indemnification Agreement. *
10.6 Consulting Agreement with Coopers & Lybrand. *
10.7 Consulting Agreement with BK Financial, Inc. *
10.8 Consulting Agreement with Capital Recovery, Inc. *
10.9 Letter Agreement among Westinghouse Electric Corporation,
Westinghouse Security Systems, L.P., the Company and NYLIFE Bridge
Investor Inc., dated as of November 15, 1991. *
10.10 Accounts Purchase Agreement dated as of July 15, 1992 among the
Company, Westinghouse Security Systems, L.P. and Westinghouse
ElectricCorporation. *
10.11 Accounts Purchase Agreement dated as of September 16, 1992 among
the Company, Westinghouse Security Systems, L.P. and Westinghouse
Electric Corporation. *
10.12 Accounts Purchase Agreement dated as of November 19, 1992 among the
Company, Westinghouse Security Systems, L.P. and Westinghouse
Electric Corporation. *
10.13 Accounts Purchase Agreement dated as of December 14, 1992 among the
Company, Westinghouse Security Systems, L.P. and Westinghouse
Electric Corporation. *
10.14 Demand Subordinated Note from Company to NYLIFE Asset Finance
Corporation dated December 14, 1992. *
10.15 Amendment No. 1, dated as of March 18, 1993 to Accounts Purchase
Agreement dated December 14, 1992 among Westinghouse Security
Systems, L.P., Westinghouse Electric Corporation and NYLIFE
Structured Asset Management Company Ltd. *
10.16 Letter Agreement dated March 18, 1993 amending certain sections of
the Accounts Purchase Agreements dated July 15, 1992, September 16,
1992 and November 19, 1992 among Westinghouse Security Systems,
L.P. and NYLIFE Structured Asset Management Company Ltd. *
28
<PAGE>
10.17 Accounts Purchase Agreement dated as of June 18, 1993 among the
Company and Westinghouse Electric Corporation. *
10.18 Demand Subordinated Note from Company to NAFCO Inc., formerly
NYLIFE Asset Finance Corporation dated June 30, 1993. *
10.19 Demand Subordinated Note from Company to NAFCO Inc., formerly
NYLIFE Asset Finance Corporation dated November 30, 1993. *
10.20 Demand Subordinated Note from Company to NAFCO Inc., formerly
NYLIFE Asset Finance Corporation dated February 28, 1994. *
10.21 Consent, Assignment, Assumption, Amendment and Modification
Agreement dated December 30, 1996 between NYLIFE Structured Asset
Management Company Ltd.; Westinghouse Electric Corporation,
WestSec, Inc. and Westar Capital, Inc. *
10.22 Letter of Credit No. P-271117 dated May 22, 1997 issued by The
Chase Manhattan Bank (NYLIFE Structured Asset Management Company
Ltd. as Beneficiary and WestSec, Inc. as Applicant). *
10.23 Letter agreement dated May 21, 1997 between NYLIFE Structured Asset
Management Company Ltd. and WestSec, Inc. relating to Letter of
Credit No. P-271117 dated May 22, 1997. *
10.24 Accounts Purchase Agreement dated February 17, 1998 between
WestSec, Inc. and NYLIFE Structured Asset Management Company
Ltd. *
(27) FINANCIAL DATA SCHEDULE
(b) REPORTS ON FORM 8-K:
NONE.
- ---------------
* Previously filed.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NYLIFE Structured Asset Management
Company Ltd.
March 31, 1998 By: /s/ Kevin M. Micucci
--------------------
Kevin M. Micucci
Manager and President (Principal
Executive Officer and Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities of and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Kevin M. Micucci Manager and President March 31, 1998
- --------------------- (Principal Executive Officer and
Kevin M. Micucci Principal Financial and Accounting
Officer)
/s/ Jean E. Hoysradt Manager and Vice President March 31, 1998
- -------------------- of Investment
Jean E. Hoysradt
/s/ Jay S. Calhoun Vice President and Treasurer March 31, 1998
- -------------------
Jay S. Calhoun
/s/ Scott J. Drath Manager, Vice President and March 31, 1998
- ------------------- Controller
Scott J. Drath
Tax Vice President March 31, 1998
- -------------------
Richard W. Zuccaro
Manager March 31, 1998
- -------------------
Jefferson C. Boyce
30
<PAGE>
APPENDIX A TO
ANNUAL REPORT ON FORM 10-K
ITEM 8 AND ITEM 14(A)(1) AND (2)
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AS OF
DECEMBER 31, 1997, 1996 AND 1995
NYLIFE STRUCTURED ASSET MANAGEMENT COMPANY LTD.
F-1
<PAGE>
Form 10-K -- Item 8 and Item 14(a)(1) and (2)
NYLIFE Structured Asset Management Company Ltd.
INDEX OF FINANCIAL STATEMENTS
Report of Independent Accountants F-3
Statement of Financial Position as of December 31, 1997 and 1996 F-4
Statement of Operations and (Accumulated Deficit) and Retained
Earnings for the Years Ended December 31, 1997, 1996 and 1995 F-5
Statement of Changes in Members' Capital for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Statement of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 F-7
Notes to the Financial Statements F-8 to F-17
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted since
either (1) the information required is disclosed in the financial statements and
the notes thereto; (2) the schedules are not required under the related
instructions; or (3) the schedules are inapplicable.
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Managers and Members of
NYLIFE Structured Asset Management Company Ltd.
In our opinion, the accompanying statement of financial position and the
related statements of operations and accumulated deficit, changes in members'
capital and cash flows present fairly, in all material respects, the
financial position of NYLIFE Structured Asset Management Company Ltd. at
December 31, 1997, and 1996, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally
accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Ave. of the Americas
New York, New York
March 30, 1998
F-3
<PAGE>
NYLIFE STRUCTURED ASSET MANAGEMENT COMPANY LTD.
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
ASSETS
December 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,633,845 $ 7,162,877
Segregated cash and cash equivalents 4,577,980 4,279,050
Monitoring revenue and interest receivables
(net of allowance of $1,143,444 and $1,066,458, respectively) 1,715,726 2,058,034
Security alarm monitoring contracts held for sale - current portion (Notes 3 and 6) 11,195,005 --
Due from WestSec 141,709 24,775
Other receivables 234,638 --
----------- -----------
Total current assets 25,498,903 13,524,736
----------- -----------
Security alarm monitoring contracts held for sale (Notes 3 and 6) 22,984,661 38,454,921
Debt issuance costs paid to affiliates
(net of accumulated amortization of $5,757,712 and $4,731,684, respectively) 595,714 1,621,742
----------- -----------
Total assets $49,079,278 $53,601,399
----------- -----------
----------- -----------
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES
Monitoring fees payable $ 639,503 $ 752,722
Accounts payable and accrued liabilities 319,919 332,369
Due to affiliates (Note 7) 260,552 187,460
Unearned revenue 2,471,743 2,772,608
Interest payable (Note 6) 472,414 552,942
Notes payable - current portion (Note 6) 18,465,882 3,970,891
----------- -----------
Total current liabilities 22,630,013 8,568,992
----------- -----------
Notes payable (Note 6) 22,297,924 43,741,609
----------- -----------
Total liabilities 44,927,937 52,310,601
----------- -----------
MEMBERS' CAPITAL
Contributed capital 6,000,000 6,000,000
Distributions to members (632,753) (632,753)
Accumulated deficit (1,215,906) (4,076,449)
----------- -----------
Total members' capital 4,151,341 1,290,798
----------- -----------
Total liabilities and members' capital $49,079,278 $53,601,399
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
NYLIFE STRUCTURED ASSET MANAGEMENT COMPANY LTD.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Monitoring revenue $19,899,321 $22,844,144 $25,554,085
Interest 370,695 386,473 424,917
----------- ----------- -----------
Total income 20,270,016 23,230,617 25,979,002
----------- ----------- -----------
EXPENSES
Monitoring fees 6,672,621 7,732,543 8,682,022
Interest expense 3,963,054 4,684,855 5,509,539
General and administrative 479,278 379,276 373,985
Consulting fees 285,416 285,416 285,416
Asset management fee to affiliate 490,151 555,971 625,765
Equity return fee to affiliate 217,385 217,385 217,385
Bad debt expense 834,691 751,164 748,309
Valuation adjustment of security alarm monitoring contracts 3,440,849 9,924,570 10,291,906
Amortization of debt issuance costs paid to affiliates 1,026,028 1,159,400 1,368,424
----------- ----------- -----------
Total expenses 17,409,473 25,690,580 28,102,751
----------- ----------- -----------
Net income (loss) 2,860,543 (2,459,963) (2,123,749)
(Accumulated deficit) retained earnings
at beginning of year (4,076,449) (1,616,486) 507,263
----------- ----------- -----------
Accumulated deficit at end of year $(1,215,906) $(4,076,449) $(1,616,486)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
NYLIFE STRUCTURED ASSET MANAGEMENT COMPANY LTD.
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997 , 1996 AND 1995
<TABLE>
<CAPTION>
NYLIFE Total
NYLIFE SFD Depositary Members'
Holding Inc. Corp. Capital
------------ ---------- --------
<S> <C> <C> <C>
Balance at January 1, 1995 $ 4,895,429 $ 979,081 $ 5,874,510
Net loss (1,769,720) (354,029) (2,123,749)
----------- --------- -----------
Balance at December 31, 1995 3,125,709 625,052 3,750,761
Net loss (2,049,887) (410,076) (2,459,963)
----------- --------- -----------
Balance at December 31, 1996 1,075,822 214,976 1,290,798
Net income 2,383,690 476,853 2,860,543
----------- --------- -----------
Balance at December 31, 1997 $ 3,459,512 $ 691,829 $ 4,151,341
----------- --------- -----------
----------- --------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
NYLIFE STRUCTURED ASSET MANAGEMENT COMPANY LTD.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,860,543 $(2,459,963) $(2,123,749)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization of security alarm monitoring contracts 3,440,849 9,924,570 10,291,906
Amortization of debt issuance costs 1,026,028 1,159,400 1,368,424
Bad debt expense 834,691 751,164 748,309
Changes in assets and liabilities:
Increase in monitoring revenue and interest receivables (492,383) (48,568) (275,143)
Increase in due from WestSec (116,934) (24,775) --
Increase in other receivables (234,638) -- --
(Decrease) in monitoring fees payable (113,219) (191,147) (4,844)
(Decrease) increase in accounts payable and accrued liabilities (12,450) (2,124) 64,551
Increase (decrease) in due to affiliates 73,092 (17,230) (17,473)
(Decrease) in due toWestSec - (14,351) (120,230)
(Decrease) in unearned revenue (300,865) (357,010) (138,052)
(Decrease) in interest payable (80,528) (105,982) (110,550)
----------- ----------- -----------
Net cash provided by operating activities 6,884,186 8,613,984 9,683,149
----------- ----------- -----------
Cash flows from investing activities:
Purchase price refunds - investment in security alarm monitoring contracts 834,406 45,403 902,897
----------- ----------- -----------
Net cash provided by investing activities 834,406 45,403 902,897
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on Notes (6,948,694) (9,145,046) (9,539,146)
----------- ----------- -----------
Net cash used in financing activities (6,948,694) (9,145,046) (9,539,146)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 769,898 (485,659) 1,046,900
Cash and cash equivalents (including segregated cash and
cash equivalents) at beginning of year 11,441,927 11,927,586 10,880,686
Cash and cash equivalents (including segregated cash and
cash equivalents) at end of year $12,211,825 $11,441,927 $11,927,586
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 4,043,582 $ 4,790,832 $ 5,620,089
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to the financial statements.
F-7
<PAGE>
NYLIFE STRUCTURED ASSET MANAGEMENT COMPANY LTD.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION
NYLIFE Structured Asset Management Company Ltd. (the "Company" or "SAMCO") is a
limited liability company formed under the laws of the State of Texas on October
18, 1991. A limited liability company offers its equity investors limited
liability protection while providing them with flow through tax treatment.
SAMCO has two members. The principal member is NYLIFE SFD Holding Inc. ("SFD
Holding"), formerly NAFCO Inc. The other member is NYLIFE Depositary
Corporation ("NDC"). Both members are Delaware corporations and wholly owned
subsidiaries of NYLIFE Inc. (a direct wholly owned subsidiary of New York Life
Insurance Company, "New York Life"). Certain directors and officers of SFD
Holding have been designated as managers of SAMCO. A manager of a limited
liability company is similar to a director of a corporation, and may designate
one or more persons as officers of the limited liability company.
On January 15, 1992, SFD Holding and NDC (collectively, the "Members") purchased
membership interests in SAMCO of 83.33% and 16.67%, respectively. SFD Holding
made an initial capital contribution to SAMCO of 500 shares of $1 par value,
non-voting, non-convertible, 24.39% cumulative preferred stock of NYLIFE Bridge
Investor Inc. ("NBII"), a subsidiary of SFD Holding prior to its liquidation on
June 30, 1993. The preferred stock was originally valued by SAMCO at $5,000,000
which represents SFD Holding's recorded carrying value for the preferred stock.
NDC made an initial capital contribution of $1,000,000 in cash. SAMCO had no
operations prior to January 15, 1992.
SAMCO has issued secured five year floating rate notes and secured five year
fixed rate notes (the "Notes"), in order to finance the acquisition of security
alarm monitoring contracts (the "Contracts"). Such Contracts consist of the
obligations and payment rights with respect to monitoring services, and in
certain instances repair and maintenance services, for security alarm systems in
residential homes and light commercial businesses. Security alarm monitoring is
the process of notifying designated parties (either individuals or public
authorities) if an unauthorized entry, fire, medical or other emergency signal
from a customer alarm system is received at a central monitoring station.
All references in these Notes to the Financial Statements to "Servicer" shall
mean Westinghouse Electric Corporation ("Westinghouse") with regard to all
periods prior to December 31, 1996, and WestSec, Inc. ("WestSec"), a subsidiary
of Western Resources, Inc. ("Western") with regard to the period from January 1,
1997 to November 24, 1997 (see Note 3 regarding the Consent Agreement).
On November 24, 1997, Western (the parent of WestSec and Westar) and
Protection One, Inc. ("Protection One") combined their security service
businesses to form the
F-8
<PAGE>
second largest U.S. burglar and fire alarm company. Western owns 80.1% of the
combined company. Subsequent to the combination, Servicer shall mean Protection
One.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in highly liquid money market
funds. Such funds invest in short-term obligations of the United States
government. The carrying value of cash and cash equivalents approximates fair
value.
SEGREGATED CASH AND CASH EQUIVALENTS
Under the terms of the Indenture dated July 15, 1992 between the Company and
U.S. Trust Company of New York (the "Trustee"), cash receipts for each series of
Notes are maintained in a segregated account and used to pay obligations to
Noteholders and fees and expenses related to such series. Such receipts are
invested by the Trustee in highly liquid money market funds. Such funds invest
in short-term obligations of the United States government. The carrying value
of segregated cash and cash equivalents approximates fair value.
DEBT ISSUANCE COSTS PAID TO AFFILIATES
Costs incurred in the issuance of Notes, including underwriting discounts,
offering and organization costs and financial advisory fees, are capitalized and
amortized using the interest method over the life of the Notes.
MONITORING REVENUE RECOGNITION
The Company derives its revenues almost exclusively from the receipt of customer
payments for alarm monitoring services. The Company recognizes revenue as the
monitoring services are provided (accrual basis). The allowance for
uncollectible monitoring revenue represents receivables greater than 90 days
past due.
MONITORING FEES
Servicer is entitled to payment of 25% of aggregate monthly revenue ("AMR") for
the performance of monitoring services under the Contracts (the "Servicer Basic
Monitor Fee"), the effect of which is that Servicer will receive the Servicer
Basic Monitoring Fee before the Noteholders receive their quarterly payments.
Servicer is also entitled to an additional 10% of AMR for the performance of
such services (the "Servicer Subordinated Monitoring Fee") which is subordinate
to the payment of (i) the Servicer Basic Monitoring Fee, (ii) principal and
interest on the Notes, (iii) taxes on operating income and (iv) administrative
expenses.
F-9
<PAGE>
VALUATION ADJUSTMENT OF SECURITY ALARM MONITORING CONTRACTS
From inception through December 31, 1996, the Company's investment in
Contracts was amortized over the estimated lives of the Contracts of
approximately 12 years, as adjusted for attrited (terminated) Contracts.
Upon Contract attrition, the remaining book value of the Contract is written
off. On December 31, 1996, the Company, under Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121),
reclassified its Investment in Security Alarm Monitoring Contracts as held
for sale. In accordance with SFAS 121, the Company has reported such
Contracts at the lower of carrying amount or fair value less cost to sell and
has discontinued amortization of the Contracts effective December 31, 1996.
The Company applies SFAS 121 on a contract-by-contract basis.
INCOME TAXES
No provision for federal income taxes is recorded in the financial statements
because the Company is not subject to federal income taxes. The tax effect of
its activities accrues to the Members.
NOTE 3 - SALE OF THE SECURITY BUSINESS BY WESTINGHOUSE IN 1996
CONSENT AGREEMENT
On December 30, 1996, Westinghouse sold its security alarm business to WestSec.
In connection with the sale, Westinghouse assigned all of its rights, title and
interest under the Operational Services Agreement (the "OSA") to WestSec, and
WestSec assumed all of Westinghouse's liabilities and obligations under the OSA.
In conjunction with Westinghouse's sale and assignment and WestSec's assumption,
the Company, Westinghouse, WestSec and Westar Capital, Inc. an affiliate of
WestSec ("Westar"), entered into a Consent, Assignment, Assumption, and
Modification Agreement ("the Consent Agreement").
Pursuant to the Consent Agreement, Westar has guaranteed all obligations and
liabilities of WestSec under the OSA and various related agreements
(collectively the "OSA Agreements"), Westinghouse has agreed to remain liable
under certain specified obligations in the OSA Agreements, and Westar has agreed
to furnish to the Company an irrevocable letter of credit to secure certain
obligations of Westar, WestSec and Westinghouse under the OSA Agreements.
CONTRACT PURCHASE
In connection with the Consent Agreement, WestSec has committed to purchase, and
the Company has committed to sell, the Contracts securing each Series of Notes
at fixed dates in the future for a determinable price; such price is supported
by a letter of credit from WestSec and, subject to certain conditions,
guarantees by Westinghouse. The Company expects to realize a gain on each of
these future sales. As a result of entering into the Consent Agreement, the
Company has under Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS No. 121), reclassified its Investment in Security Alarm
Monitoring Contracts as held for sale. In accordance with SFAS 121, the Company
has reported such Contracts at the lower of carrying amount or fair value less
cost to sell and has discontinued amortization of the Contracts effective
December 31, 1996 (see "Contract Repurchase - Series A, Series B, and Series C
Notes" in the
F-10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further information regarding the Consent Agreement affecting
these consolidated financial statements).
NOTE 4 - LETTER OF CREDIT
The Consent Agreement required WestSec to furnish to SAMCO a clean, irrevocable
and unconditional letter of credit issued by and drawn upon a "AA" rated bank,
in form and substance reasonably satisfactory to SAMCO and Westinghouse, in
favor of SAMCO in the amount of $85 million (the "LC"). The LC secures
obligations of Westar, WestSec and Westinghouse under the OSA Agreements and the
Consent Agreement.
On May 22, 1997, SAMCO received a letter of credit ("LC") in the aggregate
amount of $85,000,000 from The Chase Manhattan Bank. The LC was provided to
SAMCO in accordance with the provisions of the Consent Agreement. The LC
secures certain obligations owed to SAMCO under the Consent Agreement and the
OSA Agreements.
In addition, SAMCO and WestSec entered into a letter agreement dated May 21,
1997 memorializing certain collateral agreements and understandings related to
the LC.
During 1997, the LC was reduced to $75,994,000 in accordance with its terms.
NOTE 5 - ISSUANCE OF NOTES AND ACQUISITION OF CONTRACTS
SERIES A, SERIES B, AND SERIES C NOTES
During the year ended December 31, 1992, SAMCO issued three traunches of its
Secured Five Year Notes: Series A, Floating Rate (the "Series A Notes") in the
amount of $25,000,000. At issuance, the Series A Notes were collateralized by
33,029 Contracts.
During the year ended December 31, 1993, SAMCO issued its Secured Five Year
Notes: Series B, Floating Rate (the "Series B Notes") in the amount of
$9,417,821. At issuance, the Series B Notes were collateralized by 10,768
Contracts.
During the years ended December 31, 1994 and December 31, 1993, SAMCO issued
three traunches of its Secured Five Year Notes: Series C, Fixed Rate (the
"Series C Notes") in the amount of $45,000,000. At issuance, the Series C Notes
were collateralized by 52,840 Contracts.
Interest is payable quarterly on each February 15, May 15, August 15 and
November 15 prior to maturity and on the maturity date. Scheduled principal
payments are calculated to retire 5% of the original principal amount of the
Series A Notes, Series B Notes, and Series C Notes each year. Principal is
payable quarterly on February 15, May 15, August 15 and November 15. In
addition, after payment of all subordinated amounts and the establishment of
necessary reserves, if any, excess cash, if any, is required to be distributed
to Noteholders quarterly as additional
F-11
<PAGE>
principal. The first principal payments on the Series A, Series B, and Series C
Notes were made on February 15, 1993, August 15, 1993, and August 15, 1994,
respectively.
The Series A and Series B Notes bear interest on the outstanding principal at a
per annum floating rate of 2.50 percentage points above the minimum denomination
five-year certificate of deposit average rate, as reported by Bank Rate Monitor
in its last report of the immediately preceding calendar quarter, but in no
event less than 9% per annum or more than 11% per annum. Accordingly, at
December 31, 1997, the rate on the Series A and Series B Notes was 9%.
The Series C Notes bear interest on the outstanding principal at a per annum
rate of 9%.
ATTRITION GUARANTEES- SERIES A, SERIES B, AND SERIES C NOTES
Westinghouse, as seller of Contracts to the Company, had the obligation to
provide guarantees that capped the Company's exposure to attrition. Such
guarantees generally capped attrition at 0% for a period of time after
acquisition followed by a period of time during which attrition is capped
annually at certain percentages. During the period when a 0% attrition
guarantee was in effect, Westinghouse generally had the option to replace
attrited accounts either with cash (in an amount equal to the original purchase
price paid to Westinghouse for the attrited account) or with replacement
Contracts. Among other things, a replacement Contract must be current in all
payments due from the customer and must have a RMR not less than the attrited
account being replaced. A 0% attrition guarantee provides that SAMCO may lose
no more than three months of revenue for each attrited Contract. Pursuant to
the Consent Agreement, all Contracts originally purchased by the Company will be
covered by attrition guarantees provided by the Servicer.
Attrition guarantees for Contracts owned by the Company are as follows:
SERIES A - During 1993, 1994, 1995, and 1996, approximately one-half of the
Series A Contracts had guarantees capping attrition while the balance were no
longer under guarantee. The guaranteed Contracts had attrition caps of 7%, 7%,
8%, 8% in 1993, 1994, 1995, and 1996, respectively. Pursuant to the Consent
Agreement, all Series A Contracts will be guaranteed for 1997 and for the period
January 1, 1998 to February 15, 1998, with attrition caps of 9% and 1.125%,
respectively.
SERIES B - For the Series B Contracts, Servicer has guaranteed (i) that during
the seven-month period ending October 31, 1993, attrited accounts would not
exceed 0%; and (ii) during each of the four 12 month periods commencing on
November 1, 1993 and ending on October 31, 1997, attrited accounts will not
exceed 9.25%. Westinghouse had the option during the period when its 0%
attrition guarantee was in effect to replace attrited accounts either with cash
(in an amount equal to the original purchase price paid to Westinghouse for the
attrited account) or with replacement Contracts. When the 9.25% attrition
guarantee is in effect, Servicer must replace attrited accounts with Contracts.
F-12
<PAGE>
SERIES C - For the Series C Contracts acquired on June 30, 1993, Servicer has
guaranteed (i) that during the 12 month period ending June 30, 1994, attrited
accounts would not exceed 0%; and (ii) during each of the four 12 month periods,
commencing on July 1, 1994 and ending on June 30, 1998, attrited accounts will
not exceed 10%; and (iii) during one final three month period commencing on July
1, 1998 and ending on October 31, 1998, attrited accounts will not exceed 2.5%.
For the Series C Contracts acquired on November 30, 1993 and February 28, 1994,
the respective 0%, 12 month guarantee periods expired on November 30, 1994 and
February 28, 1995; the respective 10%, 12 month guarantee periods are from
December 1, 1994 to November 30, 1998 and from March 1, 1995 to February 28,
1999.
For the Series C Contracts, Westinghouse had the option during the period when
its 0% attrition guarantee was in effect to replace attrited accounts either
with cash (in an amount equal to the original purchase price paid to
Westinghouse for the attrited account) or with replacement Contracts; provided,
however, that Westinghouse could not have replaced more than half of the
Contracts which became attrited accounts in any calendar month with cash.
Pursuant to the Consent Agreement, WestSec must replace all Series C accounts
above an attrition cap of 10% with Contracts. When the 10% attrition guarantee
is in effect, the Servicer must replace attrited accounts with Contracts.
During 1997, gross attrition for each series exceeded the respective attrition
guarantee caps. Attrited accounts in excess of the caps were replaced by the
Servicers in accordance with the applicable attrition guarantees.
INVESTMENT CONTRACTS - 5,035 of the Contracts acquired on June 30, 1993,
November 30, 1993 and February 28, 1994 were not utilized as collateral for the
Company's Series C Notes. The attrition guarantees for these Contracts are
identical to those of the Series C Contracts described above.
F-13
<PAGE>
NOTE 6 - SECURITY ALARM MONITORING CONTRACTS AND NOTES PAYABLE
The carrying amount of SECURITY ALARM MONITORING CONTRACTS HELD FOR SALE in the
Statement of Financial Position at December 31, 1997 and 1996 includes Contracts
collateralizing Series A, B and C Notes as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Series A $ 7,821,211 $ 9,111,822
Series B 3,373,794 3,710,713
Series C 21,121,879 23,558,603
----------- -----------
Total (*) $32,316,884 $36,381,138
</TABLE>
(*) Excludes 5,035 Contracts acquired from the June 30, 1993, November 30, 1993,
and February 28, 1994 acquisitions which are NOT collateral for any series of
Notes and therefore are not subject to the Indenture. The carrying amount of
these contracts at December 31, 1997 is $1,862,782. The amortization expense on
these Contracts for the period January 1, 1996 to December 31, 1996 was
$551,919.
Prior to the reclassification of the Contracts as held for sale effective
December 31, 1996, the Contracts were being amortized over an estimated life of
12 years, as adjusted for attrited Contracts. Amortization expense for the
period January 1, 1996 to December 30, 1996 for Series A, B and C Contracts was
$2,286,671, $877,422 and $6,208,558, respectively.
INTEREST PAYABLE and NOTES PAYABLE in the Statement of Financial Position at
December 31 ,1997 and December 31, 1996 include amounts relating to Series A, B
and C Notes as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
Series A Series B Series C Total
-------- -------- -------- -----
<S> <C> <C> <C> <C>
Interest payable $ 135,538 $ 52,389 $ 284,487 $ 472,414
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Notes payable - current $11,695,361 $4,520,521 $ 2,250,000 $18,465,882
Notes payable - non-current -- -- 22,297,924 22,297,924
----------- ---------- ----------- -----------
Total $11,695,361 $4,520,521 $24,547,924 $40,763,806
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
<CAPTION>
AT DECEMBER 31, 1996
Series A Series B Series C Total
-------- -------- -------- -----
<S> <C> <C> <C> <C>
Interest payable $ 156,532 $ 62,114 $ 334,296 $ 552,942
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Notes payable - current $ 1,250,000 $ 470,891 $ 2,250,000 $ 3,970,891
Notes payable - non-current 12,256,863 4,888,853 26,595,893 43,741,609
----------- ---------- ----------- -----------
Total $13,506,863 $5,359,744 $28,845,893 $47,712,500
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
F-14
<PAGE>
NOTE 7 - RELATED PARTIES
DUE TO AFFILIATES in the Statement of Financial Position at December 31, 1997
and December 31, 1996, includes (i) the asset management fee payable to SFD
Holding of $115,567 and $133,114, respectively (ii) the equity return fee
payable to SFD Holding of $54,346 and $54,346, respectively, and $90,639 of
professional fees paid by SFD Holding on SAMCO's behalf.
UNDERWRITING DISCOUNTS
NYLIFE Securities Inc. (a wholly owned subsidiary of NYLIFE Inc.), the sales
agent, received Underwriting Discounts equal to 4% of the gross proceeds of the
Notes.
FINANCIAL ADVISORY FEE
SFD Holding received a Financial Advisory Fee equal to 2% of gross proceeds of
the Notes for its assistance in structuring the issuance of Notes and the
acquisition of Contracts.
OFFERING AND ORGANIZATION REIMBURSEMENT
SFD Holding received an Offering and Organizational Expense allowance of 2% of
the gross proceeds of the Notes. Any Offering and Organizational Expenses
which, when aggregated with Underwriting Discounts and the Financial Advisory
Fee, exceeded 8% of the gross proceeds of the Notes, were paid by SFD Holding.
EQUITY RETURN FEE
For providing equity (through an affiliate) to Westinghouse Security Systems,
L.P., a partnership formed in 1991 to acquire Contracts, SFD Holding is entitled
to receive annually (but paid quarterly), an amount equal to .75% of the first
12 full months of AMR. This payment is subordinate to the payment of (i) the
Servicer Basic Monitoring Fee, (ii) principal and interest on the Notes, (iii)
taxes on operating income and (iv) administrative expenses.
ASSET MANAGEMENT FEE
SFD Holding is entitled to receive an annual asset management fee equal to 1% of
the product of (A) the purchase price multiple of the Contracts then securing
the Notes, and (B) the average monthly monitoring revenues for the Contracts
then securing the Notes, with the product multiplied by (C) the aggregate number
of Contracts then securing the Notes. Such fee is subordinate to the payment of
(i) the Servicer Basic Monitoring Fee, (ii) principal and interest on the Notes,
(iii) the Servicer Subordinated Monitoring Fee, (iv) taxes on operating income,
(v) administrative expenses and (vi) the equity return fee.
F-15
<PAGE>
NOTE 8 - SUBSEQUENT EVENTS
DISPOSITION OF ASSETS AND MATURITY OF SERIES A NOTES
In February 1998, SAMCO sold to WestSec for $15,107,145, the Contracts and
related assets which constituted the collateral securing SAMCO's Series A Notes.
The transaction was consummated pursuant to the OSA and the Consent Agreement.
A portion of the proceeds of the sale were used to pay all outstanding principal
and accrued interest on the Series A Notes on February 17, 1998, the maturity
date of such Notes.
Concurrent with the sale, SAMCO and WestSec instructed The Chase Manhattan Bank
to reduce the letter of credit to $54,338,000 in accordance with its terms.
DISTRIBUTION TO SERIES B NOTEHOLDERS
On February 17, 1998, SAMCO distributed $314,324 to the Series B Noteholders
which included (i) interest at an annualized rate of 9.00%; (ii) the required
quarterly principal repayment of 1.25% and (iii) an additional principal
repayment of 0.98%. Subsequent to this distribution, the outstanding principal
amount of the Series B Notes is $4,310,976
DISTRIBUTION TO SERIES C NOTEHOLDERS
On February 17, 1998, SAMCO distributed $1,639,974 to the Series C Noteholders
which included (i) interest at an annualized rate of 9.00%, (ii) the required
quarterly principal repayment of 1.25%, and (iii) additional principal repayment
of 1.13%. Subsequent to this distribution, the outstanding principal amount of
the Series C Notes is $23,476,943.
LEGAL PROCEEDINGS
On March 2, 1998, WestSec filed a state court action against SAMCO in Dallas
County, Texas seeking a determination that it does not have to purchase from
SAMCO what WestSec calls "person reassignment accounts," and that it is
entitled to costs and reasonable attorneys fees. These accounts, WestSec
argues, are "accounts that are with a customer who (1) had an account owned
by SAMCO which was terminated due to the relocation of the customer and (2)
entered into a new security alarm contract with WEC or WestSec at the
customer's new location within 120 days after terminating his or her account
at the prior location." WestSec contends that such accounts are not included
within the collateral securing SAMCO'S Notes.
SAMCO contends that it owns the disputed accounts and that either WestSec is
obligated to purchase them under Section 9.1 of the OSA or SAMCO is entitled
to sell them to any party. The dispute is currently confined to
approximately 2,323 accounts relating to the Series A Notes that matured on
February 15, 1998. Unless resolved, however, the dispute is likely to extend
to other similar accounts related to the Series B and C Notes.
F-16
<PAGE>
SAMCO has answered WestSec's complaint and filed appropriate counter-claims
asserting that (i) SAMCO owns and WestSec is obligated to purchase the
accounts in dispute, and/or (ii) WestSec acquired those accounts in material
breach of its contractual obligations to SAMCO, which has been damaged by the
lost value of those accounts. In addition, SAMCO also seeks lost revenue
for those accounts, as well as costs and reasonable attorneys fees.
Notwithstanding the foregoing, all payments required to have been made to
date to the holders of the SAMCO Notes have been paid on a timely basis in
accordance with the terms thereof.
F-17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,211,825
<SECURITIES> 0
<RECEIVABLES> 2,092,073
<ALLOWANCES> 0
<INVENTORY> 11,195,005
<CURRENT-ASSETS> 25,498,903
<PP&E> 23,580,375
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,079,278
<CURRENT-LIABILITIES> 22,630,013
<BONDS> 22,297,924
0
0
<COMMON> 0
<OTHER-SE> 4,151,341
<TOTAL-LIABILITY-AND-EQUITY> 49,079,278
<SALES> 0
<TOTAL-REVENUES> 20,270,016
<CGS> 0
<TOTAL-COSTS> 6,672,621
<OTHER-EXPENSES> 6,773,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,963,054
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,860,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,860,543
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
