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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 September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
0-24780 33-73002-01
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(Commission File Number) (Commission File Number)
Protection One Alarm
Protection One, Inc. Monitoring, Inc.
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(Exact Name of Registrant as (Exact Name of Registrant as
Specified in its Charter) Specified in its Charter)
Delaware Delaware
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(State or Other Jurisdiction (State or Other Jurisdiction of
of Incorporation or Organization) Incorporation or Organization)
93-1063818 93-1065479
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(I.R.S. Employee Identification No.) (I.R.S. Employee Identification No.)
6011 Bristol Parkway, 6011 Bristol Parkway,
Culver City, California 90230 Culver City, California 90230
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(Address of Principal Executive (Address of Principal Executive
Offices, Including Zip Code) Offices, Including Zip Code)
(310) 338-6930 (310) 338-6930
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(Registrant's Telephone Number, (Registrant's Telephone Number,
Including Area Code) Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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6 3/4% Convertible Senior New York Stock Exchange
Subordinated Notes Due 2003
of Protection One Alarm
Monitoring, Inc. Guaranteed by
Protection One, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share of Protection One, Inc.
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(Title of Class)
Indicate by check mark whether each 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 such shorter period as that such
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 each 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]
The aggregate market value of the common stock of Protection One, Inc.
held by nonaffiliates on December 27, 1996 (based on the last sale price of such
shares) on the Nasdaq National Market was $100,293,182.
As of December 27, 1996, Protection One, Inc. had outstanding
13,466,671 shares of Common Stock, par value $0.01 per share. As of such date,
Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common
Stock, par value $0.10 per share, all of which shares were owned by Protection
One, Inc. Protection One Alarm Monitoring, Inc. meets the conditions set forth
in General Instructions J(1)(a) and (b) for Form 10-K and is therefore filing
this form with the reduced disclosure format set forth therein.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Protection One, Inc.'s Proxy Statement for the Annual Meeting of the
Shareholders to be held on January 29, 1997 are incorporated by reference in
Part III.
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INTRODUCTORY NOTE
COMPANY STRUCTURE. Unless the context otherwise indicates, all
references in this Annual Report on Form 10-K to "the Company" or "Protection
One" are to Protection One, Inc.("POI"), and its direct wholly owned subsidiary,
Protection One Alarm Monitoring, Inc.("Monitoring"). Each of POI and Monitoring
is sometimes referred to herein as "Registrant." POI's sole asset is, and POI
operates solely through, its investment in Monitoring. Each of POI and
Monitoring is a Delaware corporation organized in September 1991.
MRR AND EBITDA. As used in this Annual Report on Form 10-K, "MRR"
means monthly recurring revenue (excluding revenues from patrol services) that
the Company is entitled to receive under contracts in effect at the end of the
period and "EBITDA" means earnings before interest, taxes, depreciation and
amortization (excluding adjustments of purchase accounting accruals, losses or
gains on disposition of fixed assets, loss on assets held for sale, loss on
abandoned acquisitions and extraordinary items). MRR is a term commonly used in
the security alarm industry as a measure of the size of a company, but not as a
measure of profitability or performance, and does not include any allowance for
future attrition or allowance for doubtful accounts. EBITDA is derived by adding
to loss before income taxes, extraordinary items and cumulative effect of change
in accounting method--net of taxes, the sum of (i) loss on sales of assets, (ii)
loss on assets held for sale, (iii) amortization of debt issuance costs and
original issue discount ("OID"), (iv) interest expense, net, (v) amortization of
subscriber accounts and goodwill, (vi) depreciation expense, (vii) performance
warrants compensation expense, (viii) adjustment of purchase accounting
accruals, net and (ix) loss on acquisition terminations. EBITDA does not
represent cash flow from operations as defined by generally accepted accounting
principles, should not be construed as an alternative to net income and is
indicative neither of the Company's operating performance nor of cash flows
available to fund the Company's cash needs. Items excluded from EBITDA are
significant components in understanding and assessing the Company's financial
performance. Management believes presentation of EBITDA enhances an
understanding of the Company's financial condition, results of operations and
cash flows because EBITDA is used by the Company to satisfy its debt service
obligations and its capital expenditure and other operational needs as well as
to provide funds for growth. In addition, EBITDA has been used by senior
lenders and subordinated creditors and the investment community to determine the
current borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses.
FORWARD-LOOKING STATEMENT. Certain matters discussed in Item 1,
Business and Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, included in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbor from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements generally can be identified as such because the
context of the statement includes words such as the Company or its management
"believes," "expects," "anticipates" or other words of similar import.
Similarly, statements herein that describe the Company's objectives, plans or
goals also are forward-looking statements. All such forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those in the forward-looking statements. Information
with respect to these risks and uncertainties is contained in Item 5(d) of the
Current Report on Form 8-K filed by POI and Monitoring dated September 20, 1996,
which information is incorporated herein by reference. Stockholders, potential
investors and other readers are urged to consider these factors carefully in
evaluating the forward-looking statements. The forward-looking statements
included herein are made only as of the date of this Annual Report on Form 10-K
and the Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
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PART I
ITEM 1. BUSINESS
The information contained below includes statements of the Company's or
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a description of such risks and uncertainties,
see the information set forth and incorporated by reference in the Introductory
Note to this Annual Report on Form 10-K under the caption "Forward-Looking
Statements," which information is incorporated in this Item by reference.
Protection One provides security alarm monitoring services for
residential and small business subscribers. Based on its 196,531 subscribers as
of September 30, 1996 (approximately 80% of which are residential), Protection
One believes it is the fourth largest residential security alarm monitoring
company in the United States and the largest in the seven western states of
Arizona, California, Nevada, New Mexico, Oregon, Utah and Washington.
The Company's revenues consist primarily of recurring payments under
written contracts for the monitoring and servicing of security systems and the
provision of additional enhanced security services. For the year ended September
30, 1996 ("fiscal 1996"), monitoring and service revenues represented 89.7% of
total revenues. The Company monitors digital signals arising from burglaries,
fires and other events through security systems installed at subscribers'
premises. Most of these signals are received and processed at the Company's
state-of-the-art central monitoring station located in Portland, Oregon, which,
as currently configured, has the capacity to support up to 250,000 subscribers.
The Company also sells enhanced security services, patrol and alarm response
services and alarm systems and provides local field repair services through 13
branch offices. Enhanced security services provided by the Company include,
among others, two-way voice communication, supervised monitoring services, pager
service, medical identification card, wireless backup service and extended
service protection.
From the Company's inception, the Company's growth has come primarily
through the acquisition of portfolios of subscriber accounts. Between September
30, 1991 and September 30, 1996, the Company acquired 117 subscriber portfolios,
representing an aggregate of approximately 168,000 subscribers. Management
believes that numerous acquisition opportunities continue to be available, and
the Company is pursuing, and intends to continue to pursue, acquisitions of
portfolios of subscriber accounts, some of which may be significant. Since the
beginning of fiscal 1995, the Company has increased its emphasis on the Dealer
Program, which has become a more significant source of growth than in prior
years. In fiscal 1996, for instance, subscribers generated by the Dealer
Program comprised 38% of the Company's total subscriber additions, compared to
17% in fiscal 1995. The Company plans to continue its emphasis on the Dealer
Program because of the greater predictability, expected lower attrition and
relatively lower cost of adding subscribers through its dealers as compared with
acquisitions of larger portfolios of subscriber accounts. In addition, the
Dealer Program generates a comparatively steady flow of new subscribers spread
more evenly over the Company's branch offices, making it easier for the
Company's branch operations to successfully assimilate these accounts. See
"--The Dealer Program."
MARKET OVERVIEW AND TRENDS
The Company's target market consists of owners of single family
residences and small businesses. According to the most recent U.S. Census Bureau
data, there are over 10 million single-family residences and over 800,000
businesses with 100 or fewer employees in the seven states in which the Company
operates.
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The security alarm industry is characterized by the following attributes:
- HIGH DEGREE OF FRAGMENTATION. The security alarm industry is currently
comprised mostly of a large number of small providers of alarm systems
and services. According to certain data concerning the residential
security alarm market prepared in December 1995 by the J. P. Freeman
Co. (the "Freeman Data"), there are approximately 12,700 security
alarm companies nationally, and the Company estimates that
approximately 3,000 operate in the seven states the Company currently
serves. A survey published by SDM Magazine (formerly Security
Distributing and Marketing) in May 1996 reported that in 1995, based
upon information provided by the respondents, the 100 largest
companies in the industry accounted for approximately 23% of alarm
industry revenues. Based on its acquisition experience, the Company
believes that many smaller alarm service companies, because of their
size, have higher overhead expenses as a percentage of revenues than
the Company and lack access to capital on terms as attractive as those
available to the Company. Due to a decline in security system
installation prices over the last two years, security alarm companies
participating in market growth are required today to make a
substantial investment in each new subscriber. As a result, access to
capital has become an increasingly important factor in a security
alarm company's success.
- RAPID GROWTH AND LOW PENETRATION. The residential security alarm
market is growing rapidly but is still characterized by a low level of
market penetration. The Freeman Data indicate that residential
security alarm monitoring revenues grew at a compounded annual rate of
9.9% between 1989 and 1995. The Company believes that several factors,
including increased concern about crime and favorable demographic
trends, have contributed to the increased demand for residential
security alarm services. In addition, based on the Freeman Data, the
Company estimates that at November 1995, the percentage of total
households in the United States with monitored security alarm systems
was approximately 10.9%.
- ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. Prior to the
development of digital communications technology, alarm monitoring
required a dedicated telephone line, which made long-distance
monitoring uneconomic. Consequently, in order to achieve a national or
regional presence, alarm monitoring companies were required to
maintain a large number of geographically dispersed monitoring
stations. The development of digital communications technology
eliminated the need for dedicated telephone lines, reducing the cost
of monitoring services to the subscriber and permitting the monitoring
of subscriber accounts over a wide geographic area from a central
monitoring station. The elimination of local monitoring stations has
decreased the cost of providing alarm monitoring services and has
substantially increased the economies of scale for larger alarm
service companies. In addition, the concurrent development of
microprocessor-based control panels has substantially reduced the cost
of the equipment available to subscribers in the residential and small
business markets. Digital technology has also enabled equipment
manufacturers to build more features into security systems (i.e.,
remote user interface, lighting and heating controls, user programming
features.)
- INCREASING FALSE ALARMS. According to American City & County
Magazine, police officers respond to more than 13.7 million alarm
activations annually, 94% to 98% of which are false. The magazine
reports that while alarm ownership is increasing by 11% annually,
police department budgets are rising by 3% annually. Municipalities
have responded to increasing false alarms by implementing alarm permit
and fine systems and by limiting police response to private alarms
until further verified by another response entity. The Company
believes this trend will continue in the future.
- ENTRANCE OF TELECOMMUNICATIONS COMPANIES AND UTILITIES. Large,
consumer oriented companies in industries facing deregulation,
including long distance and local telephone companies and electric and
gas utilities, have demonstrated an increased interest in the security
alarm industry over the last several years. For instance, in October
1995, the Ameritech Corporation, a regional bell operating
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company, completed the acquisition of National Guardian Corp., and in
December 1996, Western Resources, an electric utility, announced an
agreement to acquire Westinghouse Security Systems. These two
acquisitions are the largest in the security industry as of the date
of this Annual Report on Form 10-K. The Company believes
telecommunication and utility companies are interested in offering
their customers additional services, including security services, as a
means of enhancing customer loyalty and reducing future risk of losing
customers in a fully competitive environment.
The Company believes that several factors contribute to a favorable
market for security alarm services both generally in the United States and
specifically in the western portion of the country:
- INCREASE IN CRIME RATES. According to the Uniform Crime Report
published by the Federal Bureau of Investigation in 1996 (the "UCR"),
between 1986 and 1995 the number of violent crimes reported in the
United States increased by 20.8% and the total number of
reported criminal offenses increased by 5.0%. The UCR also reported
that although the number of reported criminal offenses decreased on a
nationwide basis from 1994 to 1995 by 0.9%, a property crime was
committed in the United States in 1995 once every three seconds. In
the states in which the Company operates, the property crime rate in
1995 was 28.1% higher than the nation as a whole, averaging
approximately 5,885 property crimes per 100,000 residents. In
California, Protection One's largest market, the 1995 property crime
and overall crimes rates were 5.9% and 10.5%, respectively, above the
national averages.
- HIGH LEVEL OF CONCERN ABOUT CRIME. As violent crime and the reporting
of crime by the news media has increased, the perception by Americans
that crime is a significant problem has also grown. In a December 1996
poll conducted by the Wall Street Journal, survey participants ranked
reducing crime as one of the two highest priorities for Congress.
- PER CAPITA POLICE PROTECTION. The UCR reported that urban areas in the
western region of the United States had the lowest ratio of law
enforcement employees per capita of the four reporting regions in 1995,
the most recent period for which a UCR has been published. According to
population and law enforcement employee data presented in the UCR, in
1995 Los Angeles had 3.2 law enforcement employees per 1,000 citizens,
while New York had 6.4 and Chicago had 5.7. The number of law
enforcement employees per 1,000 citizens was 3.0 for Las Vegas, 2.8 for
Phoenix, 2.8 for Portland, 3.0 for Salt Lake City, 2.3 for San Diego,
3.3 for San Francisco, 3.3 for Seattle and 2.4 for Tucson.
- DEMOGRAPHIC TRENDS. According to the United States Census Bureau, from
1989 to 1994 the rate of population growth in the states in which the
Company operates was approximately twice the national average.
According to the United States Department of Commerce, median income
in California has been above the national average since 1989. Other
recent trends that are favorable to the residential security alarm
business include: the increase in women in the workforce resulting in
more children being left at home alone and creating increased demand
for security alarm services; the aging of the population in general,
as older people tend to be more concerned about security; and the
increase in people working at home, resulting in increasing demand for
security services to protect home office equipment.
- INSURANCE DISCOUNTS. The increase in demand for security systems may
also be attributable in part to the granting by insurance companies of
discounts to homeowners who purchase alarm systems, and such discounts
are typically greater when systems are monitored by a central station.
In addition, insurance companies may require that businesses install
an alarm system as a condition of insurance coverage.
BUSINESS STRATEGY
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The Company's strategy is to enhance its position as the largest
residential security alarm monitoring company in the seven western states in
which it operates by pursuing a balanced growth plan incorporating the Dealer
Program, acquisitions of portfolios of subscribers, joint ventures and other
strategic alliances and the sale of enhanced services and new alarm systems.
The Company's historical growth has enabled it to realize economies of
scale in its central monitoring station, branch operations and corporate
offices. As the number of subscribers monitored by the Company has increased,
the fixed costs of the central monitoring station have been spread over a
larger base, improving monitoring gross margins. Additionally, subscribers have
been added in areas surrounding the Company's branch offices (i.e., increasing
the density of the Company's subscriber base), allowing the Company to spread
the branch office fixed costs over a larger base and increasing the
productivity of field service technicians through more efficient scheduling and
dispatching. Based on the Company's subscriber base at September 30, 1996, the
Company services an average of over 15,000 subscribers per branch, which it
believes to be among the highest averages in the security industry. Finally,
the Company's revenue growth has exceeded the growth of its selling, general
and administrative expenses, as the Company has realized management
efficiencies and has spread additional revenue over its fixed corporate
expenses. Such economies of scale have allowed the Company to add subscriber
accounts at attractive purchase prices.
The principal components of the Company's business strategy are as
follows:
- THE DEALER PROGRAM. The Company participates in the growth of the
residential security alarm market by providing monitoring and field
repair services to subscriber accounts generated on a monthly basis
through exclusive purchase agreements with independent alarm companies
specializing in the sale and installation of new alarm systems. The
Company added approximately 36,000 subscriber accounts through its
Dealer Program in fiscal 1996, an increase of approximately 220% over
the approximately 11,000 subscribers added through the Dealer Program
in fiscal 1995. As of September 30, 1996, the Company had 45 active
participants in the Dealer Program. The Company believes that
participation in the Dealer Program will expand due to: (i) the
Company's concentrated presence in areas surrounding its branch
offices, which enhances the Company's name recognition and therefore
the marketability of the Company's services; (ii) the Company's
ability to obtain volume purchase discounts on security system
equipment on behalf of its dealers; (iii) the Company's support
services provided to dealers in the areas of administration, marketing
and employee training; and (iv) the Company's ability to generate new
customer leads through affinity programs and strategic alliances.
- ACQUISITIONS OF PORTFOLIOS OF SUBSCRIBER ACCOUNTS. The Company also
grows by acquiring subscriber accounts from smaller alarm companies.
These acquisitions represented approximately 51,000, 53,000 and 55,000
subscribers in fiscal 1994, 1995 and 1996, respectively. The Company
typically acquires only the subscriber accounts, and not the
facilities or liabilities, of such companies. As a result, the
Company is able to obtain gross margins on the monitoring of acquired
subscriber accounts that are similar to those the Company currently
generates on the monitoring of its existing subscriber base. In
addition, the Company institutes price increases over time for
acquired subscriber accounts where the Company determines that the
charges previously paid by those subscribers do not appropriately
reflect the higher quality of services to be provided by the Company.
- JOINT VENTURES AND OTHER STRATEGIC ALLIANCES. To evaluate other
potential sources of subscriber growth, the Company analyzes companies
in other industries that may have an interest in entering the
residential security alarm market. In addition, as mentioned above,
certain companies in industries facing deregulation (such as the
telecommunications and electric utility industries) have expressed to
the Company an interest in offering security alarm services to develop
more comprehensive relationships with their customers. The Company
has entered into a co-branding arrangement with PacifiCorp, a
Portland, Oregon-based utility holding company, and an affinity
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marketing relationship with Kaufman & Broad Home Corporation, the
largest homebuilder in the Company's markets. In addition, the
Company is discussing with certain other companies, and intends to
continue to explore, additional joint ventures, co-marketing
arrangements and other strategic alliances as a method of enhancing
its subscriber growth and reducing its costs of generating new
subscribers. As of the filing of this Annual Report on Form 10-K, the
Company does not believe that any such joint venture or other
strategic alliance is probable.
- SALE OF ENHANCED SERVICES; PATROL AND ALARM RESPONSE SERVICES. The
Company seeks to increase revenues from current and newly added
subscribers by actively marketing enhanced services to such
subscribers. Such services include extended service protection,
two-way voice communication, supervised monitoring services, pager
service, medical identification card and wireless back-up. The
Company also offers patrol and alarm response services, principally in
southern California and Las Vegas.
- CONVERSIONS, NEW OWNERS AND NEW ALARM SYSTEMS. The Company seeks to
convert subscribers from competitors' services to the Company's
services, particularly in areas in which the Company's patrol and
alarm response services enhance the Company's presence and name
recognition. The Company also generates new subscriber accounts by
signing monitoring contracts with new owners of residences previously
occupied by Protection One subscribers and through sales of alarm
systems by its own personnel.
The Company believes the successful execution of its growth strategy
will lead to increases in subscribers and high margin monitoring revenues in
excess of the growth in selling, general and administrative expenses. For
instance, in fiscal 1996, monitoring and service revenues increased by 42.2%
while selling, general and administrative expenses increased by 19.3%. (See
"Selected Consolidated Financial Data" in Item 6.) In addition, the Company
intends to continue to grow primarily in the areas surrounding its branch
offices. As the density of its subscriber account base in such areas increases,
the Company expects to achieve further economies of scale in the scheduling and
dispatching of field service technicians and alarm response officers.
THE DEALER PROGRAM
The dealers the Company selects for the Dealer Program are small alarm
companies that specialize in selling and installing alarm systems for
residential or small business subscribers, as well as specialized direct sales
companies. Such companies often cannot profitably provide monitoring and repair
services because they lack a sufficient number of subscribers to support the
fixed operating expenses associated with such services. Also, many dealers do
not have access to capital on attractive terms, a key factor that the Company
believes is necessary to finance the investment required to grow rapidly. The
Company enters into exclusive contracts with such dealers that provide for the
purchase by the Company of the dealers' subscriber accounts on an ongoing
basis. The dealers install alarm systems (which have a Protection One logo on
the keypad), arrange for subscribers to enter into Protection One alarm
monitoring agreements, and install Protection One yard signs and window decals.
All of these subscribers are contacted individually by Company personnel, at
the time of the purchase of the accounts from the dealers, to facilitate
subscriber satisfaction and quality control. In addition, the Company requires
dealers to evaluate the credit history of prospective new subscribers. The
Company strives to provide quality, responsive field service to accounts
purchased from dealers; the Company's principal competitors often subcontract
the field service of subscriber accounts they purchase, which the Company
believes increases attrition rates and may dissuade dealers from selling their
subscriber accounts to such competitors.
The Company believes that its increased market share in the areas
surrounding its branch offices has enhanced both the Company's ability to
attract dealers and the ability of such dealers to attract new subscribers. To
further attract high quality dealers, the Company enables them to obtain volume
purchase
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discounts on security systems, coordinates cooperative dealer advertising, and
provides administrative, marketing and employee training support services.
The Company's dealers employ a variety of marketing methods to
identify and create sales leads, including telemarketing, direct mail and
door-to-door solicitation. In addition, in certain markets, the Company has
organized a cooperative television advertising effort through which dealers
make voluntary contributions to an advertising fund in exchange for sales leads
generated by such advertising. The majority of the Company's dealers sell and
install a hard-wired, low-cost security system manufactured by Ademco, a
subsidiary of Pittway Corporation. The typical system includes protection of
the front and back doors of a home, one interior motion detection device, a
central processing unit with the ability to communicate signals to the
Company's central monitoring station, a siren, window decals and a lawn sign.
This basic system often will be offered for little or no up-front price, but
will be sold to a subscriber with additional equipment customized to a
subscriber's specific needs. Such equipment add-ons encompass additional
perimeter protection, fire protection devices (heat and smoke detectors),
environmental protection devices (freeze sensors and water detectors), panic
buttons and home automation devices (lighting or appliance controls).
Typically, dealers sign subscribers to alarm monitoring contracts that include
a bundled monthly charge for monitoring and extended service protection.
Extended service protection covers the normal costs of repair of the security
system by the Company's service technicians at the subscriber's premises during
normal business hours after the expiration of the security system's initial
warranty period. Although a customer may elect to sign an alarm monitoring
contract that excludes extended service protection, few customers choose to do
so, and the Company believes the bundling of monitoring and extended service
protection provides additional value to subscribers and allows the Company to
more efficiently provide field repair services. Dealers also sell the Company's
enhanced services.
THE ACQUISITION PROGRAM
The Company also seeks to grow by acquiring portfolios of subscriber
accounts from other alarm companies. The Company focuses on acquisitions that
allow it to "infill" areas surrounding branch operations, which in turn leads
to greater field maintenance, repair and patrol efficiencies. The Company
estimates there are approximately 3,000 alarm companies in its markets,
substantially all of which are independently owned and may, from time to time,
become acquisition targets. The Company believes that it is an effective
competitor in the acquisition market because of the substantial experience of
its management in acquiring alarm companies and subscriber accounts, both as a
result of the 117 acquisitions made by the Company between September 30, 1991
and September 30, 1996 and acquisitions made by members of management when they
were employed by other alarm service companies. The Company also believes that,
through its acquisition activities, it has developed a reputation in the alarm
service industry as an active purchaser of subscriber accounts. Although most
acquisitions add subscribers in the Company's existing market areas to achieve
greater account density, the Company may also make acquisitions outside these
areas.
Because the Company's primary consideration in making an acquisition
is the amount of cash flow that can be derived from the MRR associated with the
purchased accounts, the price paid by the Company is customarily based upon
such MRR. To protect the Company against the loss of acquired accounts and to
encourage the seller of such accounts to facilitate the transfer of
subscribers, management typically requires the seller to provide guarantees
against account cancellations for a period following the acquisition. The
Company usually holds back from the seller a portion of the acquisition price,
and has the contractual right to utilize such holdback to recapture a portion
of the purchase price based on the lost MRR arising from the cancellation of
acquired accounts.
In evaluating the quality of the accounts acquired, the Company relies
primarily on management's knowledge of the industry, its due diligence
procedures, its experience integrating accounts into the Company's operations,
its assumptions as to attrition rates for the acquired accounts, and the
representations and warranties of the sellers.
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THE ACQUISITION MANAGEMENT SYSTEM
The Company employs a comprehensive acquisition management system to
identify, evaluate, and assimilate acquisitions of new subscriber accounts that
includes three components: (i) the identification and negotiation stage; (ii)
the due diligence stage; and (iii) the assimilation stage.
The Company actively seeks to identify prospective companies and
dealers with targeted direct mail, trade magazine advertising, trade show
participation, membership in key alarm industry trade organizations, and
contacts through various prominent vendors and other industry participants.
Management's extensive experience in identifying and negotiating previous
acquisitions, and the Company's use of standard form agreements, help to
facilitate the successful negotiation and execution of acquisitions in a timely
manner.
The Company conducts an extensive pre-closing review and analysis of
all facets of the seller's operations. The process includes a combination of
selective field equipment inspections, individual review of substantially all
of the subscriber contracts, an analysis of the rights and obligations under
such contracts and other types of verification of the seller's operations.
The Company develops a specific assimilation program, in conjunction
with the seller, for each acquisition. Assimilation efforts typically include a
letter, approved by the Company, from the seller to its subscribers, explaining
the sale and transition, followed by one or more letters and packages that
include the Company's subscriber service brochures, field service and
monitoring phone number stickers, yard signs and window decals. Thereafter,
each new subscriber is contacted individually by telephone by a member of the
Company's customer service group for the purpose of soliciting certain
information and addressing the subscriber's questions or concerns. Finally, the
subscriber receives a follow-up telephone call after six months and
periodically thereafter. The acquisition management system's goal is to enhance
new subscriber identification with Protection One as the service provider and
to maintain subscriber satisfaction, and thus realize a higher portion of the
potential value of the MRR generated by purchased subscriber accounts.
DESCRIPTION OF OPERATIONS
The Company's operations consist principally of alarm monitoring
services, enhanced security services, field repair services and patrol and
alarm response services.
ALARM MONITORING SERVICES
Subscriber Security Alarm Systems. Security alarm systems include
devices installed at the subscribers' premises designed to detect or react to
various occurrences or conditions, such as intrusion or the presence of fire or
smoke. These devices are connected to a computerized control panel that
communicates through telephone lines to a central monitoring station.
Subscribers may also initiate an emergency signal from a device such as a
"panic button." In most systems, control panels can identify the nature of the
alarm and the areas within a building where the sensor was activated, and can
transmit that information to the central monitoring station.
The Central Monitoring Station. The Company monitors substantially all
of its subscriber accounts at its central monitoring station in Portland,
Oregon. In addition, in connection with certain acquisitions, the monitoring of
certain subscriber accounts is subcontracted to independent monitoring
companies to comply with certain state regulations. However, it is the
Company's policy to transfer all monitoring services for its acquired
subscriber accounts to its central monitoring station as soon as practicable.
The central monitoring station incorporates the use of advanced
communications and computer systems that route incoming alarm signals and
telephone calls to operators. Each operator sits before a
8
<PAGE> 10
computer monitor that provides immediate information concerning the nature of
the alarm signal, the subscriber whose alarm has been activated, and the
premises on which such alarm is located. All telephone conversations are
automatically recorded.
The central monitoring station has the capacity to monitor up to
250,000 subscribers and its capacity can be increased to 500,000 subscribers
for a cost of approximately $500,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" included in Item 7. The equipment at the central monitoring station
includes: sophisticated phone switching equipment; digital receivers that
process the incoming signals; two computers with built-in redundancy; a network
of "smart" computer terminals; a multi-channel, voice-activated recording
system; uninterruptable power supply; and dual backup generators supplied by
different fuel sources.
The Company's central monitoring station is listed by Underwriters
Laboratories Inc. ("UL") as a protective signaling services station. UL
specifications for central monitoring stations include building integrity,
back-up systems, staffing and standard operating procedures. In many
jurisdictions, applicable law requires that security alarms for certain
buildings be monitored by UL-listed facilities. In addition, such listing is
required by certain commercial subscribers' insurance companies as a condition
to insurance coverage.
Operation of the Central Monitoring Station. Depending upon the type
of service for which the subscriber has contracted, central monitoring station
personnel respond to alarms by relaying information to the local fire or police
departments, notifying the subscriber, or taking other appropriate action, such
as dispatching alarm response personnel to the subscriber's premises where this
service is available. The Company also provides a substantial number of
subscribers with remote audio verification capability that enables the central
monitoring station to listen and speak directly into the subscriber's premises
in the event of an alarm activation. This feature allows the Company's
personnel to verify that an emergency exists, to reassure the subscriber, and
to expedite emergency response, even if the subscriber is unable to reach a
telephone. Remote audio verification capability also assists the Company in
quickly determining if the alarm was activated inadvertently, and thus whether
a response is required.
The Company's central monitoring station operates 24 hours per day,
seven days a week, including all holidays. Each operator receives training that
includes familiarization with substantially every type of alarm system in the
Company's subscriber base. This enables the operator to tell subscribers how to
turn off their systems in the event of a false alarm, thus reducing the
instances in which a field service person must be dispatched. Other
non-emergency administrative signals are generated by low battery status,
deactivation and reactivation of the alarm monitoring system, and test signals,
and are processed automatically by computer.
Subscriber Contracts. The Company's alarm monitoring subscriber
contracts generally have initial terms ranging from one to five years in
duration, and provide for automatic renewal for a fixed period (typically one
year) unless the Company or the subscriber elects to cancel the contract at the
end of its term. The Company maintains an individual file with a signed copy of
the contract for each of its subscribers and a computerized customer data base.
Substantially all of the Company's alarm monitoring agreements for the
Company's residential subscribers (which constitute approximately 80% of the
Company's total accounts) provide for subscriber payments of between $20 and
$40 per month. The Company's commercial subscribers typically pay from $25 to
$45 per month.
In the normal course of its business, the Company experiences customer
cancellations of monitoring and related services as a result of subscribers
relocating, the cancellation of purchased accounts in the process of
assimilation into the Company's operations, unfavorable economic conditions,
dissatisfaction with field maintenance services and other reasons. This
attrition is offset to a certain extent by revenues from the sale of additional
services to existing subscribers, price increases, the reconnection of premises
9
<PAGE> 11
previously occupied by subscribers, conversions of accounts previously
monitored by other alarm companies and guarantees provided by the sellers of
such accounts. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview -- Subscriber Attrition" included in Item
7.
10
<PAGE> 12
ENHANCED SECURITY SERVICES
Additional MRR is generated by the provision of enhanced security
services that the Company offers to both its existing subscribers and in
conjunction with the sales of new systems. These enhanced security services
include:
Extended Service Protection, which covers the normal costs of repair
and maintenance of the system during normal business hours, after the
expiration of the initial warranty period.
Two-Way Voice Communication (Remote Audio Verification), which
consists of the ability, in the event of an alarm activation, to
listen and talk to persons at the monitored premises from the central
monitoring station through speakers and microphones located within the
premises. Among other things, such remote audio verification helps the
Company to determine whether an alarm activation is a false alarm.
Supervised Monitoring Service, which allows the alarm system to send
various types of signals containing information on the use of the
system, such as what users armed or disarmed the system and at what
time of the day. This information is supplied to subscribers for use
in connection with the management of their households or businesses.
Supervised monitoring service can also include a daily automatic test
feature.
Pager Service, which provides the subscriber, at discounted rates,
with standard pager services that also enable the Company to reach the
subscriber in the event of an alarm activation.
Medical Identification Card, which enables medical personnel in the
event of a medical emergency to access a subscriber's medical
information (i.e., allergies, medications and family history),
emergency contacts and doctors by calling the Company's central
monitoring station.
Wireless Back-Up, which permits the alarm system to send signals over
a cellular telephone or dedicated radio system, in the event that
regular telephone service is interrupted.
FIELD REPAIR SERVICES
The Company believes one of the most effective ways of improving
customer retention is the provision of quality, responsive field repair service
by Company employees. Field service personnel are trained by the Company to
provide repair services for the various types of security systems owned by the
Company's subscribers. Field service personnel also inspect installations
performed by the Company's installation subcontractors.
Repair services generate revenues primarily through billable field
service calls and contractual payments under the Company's extended service
program. The increasing density of the Company's subscriber base, as a result
of the Company's continuing effort to infill areas surrounding its branch
operations with new subscribers, permits more efficient scheduling and routing
of field service technicians, and results in economies of scale at the branch
level. The increased efficiency in scheduling and routing also allows the
Company to provide faster field service response and support, which leads to a
higher level of subscriber satisfaction.
ALARM RESPONSE AND PATROL SERVICES; PROPAC(R)
The Company offers its subscribers in southern California and Las
Vegas a patrol and alarm response enhanced service in addition to its other
security services, and employs over 100 alarm response and patrol officers
operating in 25 regular patrol "beats," or designated neighborhoods to provide
such service. These armed officers supplement the Company's alarm monitoring
service by providing "alarm response service" to alarm system activations,
"patrol service" consisting of routine patrol of subscribers' premises
11
<PAGE> 13
and neighborhoods and, in a few cases, "special watch" services, such as
picking up mail and newspapers and increased surveillance when the subscriber
is traveling. Alarm response service requires the Company's patrol officers to
observe and report to police or other emergency agencies any potential criminal
activity at a subscriber's home.
The Company has begun to offer a new bundle of services under the
Propac(R) brand name in Las Vegas. Propac consists of alarm monitoring, field
repair and alarm response services billed to the subscriber as a flat monthly
charge regardless of the number of service calls or responses to alarm
activations. The Company believes this service package is attractive to
current and prospective subscribers because it (i) enables the Company to offer
a reliable and timely alarm response service and (ii) eliminates subscriber
uncertainty arising from "per response" charges. The Company intends to expand
the offering of Propac to other areas within its markets over the next several
years.
Patrol officers are dispatched by a 24-hour central radio dispatch
office located in the local dispatch office. An alarm activation signal from a
subscriber to alarm response service is automatically processed by computer at
the central monitoring station in Portland and sent electronically to the local
dispatch office. If the patrol officer dispatched observes potential criminal
activity, the officer will report the activity to the dispatch office, which
will in turn notify local law enforcement. The patrol officer will then
maintain surveillance until law enforcement officers arrive. If a patrol
officer does not detect criminal activity, he will report his conclusion to the
dispatch office, which will cancel police response and thereby reduce the
potential for a false alarm fine.
The Company also offers "dedicated" patrol service to homeowners'
associations in selected markets, for which the Company provides a
Company-marked car for patrol exclusively in such association's neighborhood. A
significant percentage of the homeowners in such associations purchase the
Company's alarm monitoring services.
The Company's patrol officers are subject to extensive pre-employment
screening. Officers are subject to background checks and drug screening before
being hired, and are required to have gun and baton permits and state and city
guard licenses. Officers also must be licensed by the state to carry firearms
and to provide patrol services. The Company's training program includes arrest
procedures, criminal law, weaponless defense, firearms and baton usage, patrol
tactics, and first-aid and CPR. This training program exceeds state-mandated
training requirements. However, the provision of patrol and alarm response
services subjects the Company to greater risks, relating to accidents or
employee behavior, than other types of businesses.
The cost of providing patrol and alarm response services presently
exceeds the revenues generated by such services. However, the Company believes
that its ability to provide these services gives the Company a competitive
advantage in marketing its monitoring services over alarm service companies
that do not have these capabilities. Additionally, the Company believes such
services are an effective impediment to subscriber attrition.
The Company believes that demand for alarm response and patrol
services is likely to increase as a result of a trend on the part of local
police departments to limit their response to alarm activations and other
factors that may lead to a decrease of police presence. Although the Company
currently incurs a loss in its patrol and alarm response operations, the
Company believes further demand for such services would allow the Company to
increase subscriber density in its patrol routes, thereby reducing losses. In
addition, the Company's provision of alarm response and patrol services is a
sales method used to convert subscribers of other alarm monitoring companies
that do not provide such services. To the extent that further demand develops
for alarm response and patrol services, the Company believes its current
presence will enable it to increase its conversions of competitors' subscribers
to the Company's services.
12
<PAGE> 14
SALES AND MARKETING
Each of the Company's 13 branch offices includes sales representatives
who sell new systems, equipment add-ons and upgrades and enhanced services to
subscribers. Although the Company does not actively use outbound marketing
methods to sell new security alarm systems, the Company receives in-bound
telephone requests for such systems, primarily as a result of subscriber
referrals, local crime activity and responses to yellow pages advertising. Such
leads are pursued by one of the Company's sales representatives. Alarm sales
are made at the subscriber's home, typically in a single visit by a sales
representative. The Company markets additional services through both its
account sales representatives and through a centralized telephone sales force
in the Company's corporate offices.
The Company believes that the increasing density of the Company's
subscriber base has increased the overall presence and visibility of the
Company. Both in the Dealer Program and in Company sales, new subscribers are
provided with highly visible reflective yard signs placed prominently in front
of their homes or businesses. The presence of these signs develops greater
awareness in a neighborhood and leads to more inbound and referral business.
The Company encourages referrals from existing subscribers through an incentive
program promoted through newsletters, billing inserts and employee contacts.
Alarm response service, which uses marked patrol cars, also increases the
Company's visibility.
COMPETITION
The security alarm industry is highly competitive and highly
fragmented. The Company competes with major firms with substantial financial
resources, including ADT Operations Inc.; the Protection Securities Division of
Honeywell, Inc.; The National Guardian Corporation, a subsidiary of the
Ameritech Corporation; Brinks Home Security Inc., a subsidiary of The Pittston
Company; and Westinghouse Security, currently a division of Westinghouse
Electric Corporation. Other alarm service companies have adopted a strategy
similar to the Company's that entails the aggressive purchase of alarm
monitoring accounts both through acquisitions of account portfolios and through
dealer programs. Some of such competitors have greater financial resources than
the Company, or may be willing to offer higher prices than the Company is
prepared to offer to purchase subscriber accounts.
Competition in the security alarm industry is based primarily on
reliability of equipment, market visibility, services offered, reputation for
quality of service and price. The Company believes it competes effectively with
other national, regional and local security alarm companies in the western
United States because of the Company's reputation for reliable equipment and
services, its concentrated presence in the areas surrounding its branch
offices, its ability to bundle monitoring, maintenance and repair and enhanced
services and its low cost structure.
REGULATORY MATTERS
A number of local governmental authorities have adopted or are
considering various measures aimed at reducing the number of false alarms. Such
measures include (i) subjecting alarm monitoring companies to fines or
penalties for transmitting false alarms, (ii) licensing individual alarm
systems and the revocation of such licenses following a specified number of
false alarms, (iii) imposing fines on alarm subscribers for false alarms, (iv)
imposing limitations on the number of times the police will respond to alarms
at a particular location after a specified number of false alarms, and (v)
requiring further verification of an alarm signal before the police will
respond.
The Company's operations are subject to a variety of other laws,
regulations and licensing requirements of federal, state, and local
authorities. In certain jurisdictions, the Company is required to obtain
licenses or permits, to comply with standards governing employee selection and
training, and to meet certain standards in the conduct of its business. Many
jurisdictions also require certain of the Company's employees to obtain
licenses or permits. Those employees who serve as patrol officers are often
13
<PAGE> 15
subject to additional licensing requirements, including firearm licensing and
training requirements in jurisdictions in which they carry firearms.
The alarm industry is also subject to requirements imposed by various
insurance, approval, listing and standards organizations. Depending upon the
type of subscriber served, the type of security service provided, and the
requirements of the applicable local governmental jurisdiction, adherence to
the requirements and standards of such organizations is mandatory in some
instances and voluntary in others.
The Company's advertising and sales practices are regulated by both
the Federal Trade Commission and state consumer protection laws. Such laws and
regulations include restrictions on the manner in which the Company promotes
the sale of its security alarm systems and the obligation of the Company to
provide purchasers of its alarm systems with certain recision rights. From time
to time subscribers have submitted complaints to state and local authorities
regarding the Company's sales and billing practices. Such complaints can result
in regulatory action against the Company, including civil complaints seeking
monetary and injunctive remedies.
The Company's alarm monitoring business utilizes telephone lines and
radio frequencies to transmit alarm signals. The cost of telephone lines, and
the type of equipment which may be used in telephone line transmission, are
currently regulated by both federal and state governments. The operation and
utilization of radio frequencies are regulated by the Federal Communications
Commission and state public utilities commissions.
RISK MANAGEMENT
The nature of the services provided by the Company potentially exposes
it to greater risks of liability for employee acts or omissions, or system
failure, than may be inherent in other businesses. Substantially all of the
Company's alarm monitoring agreements, and other agreements pursuant to which
it sells its products and services contain provisions limiting liability to
subscribers in an attempt to reduce this risk.
The Company's alarm response and patrol services require Company
personnel to respond to emergencies that may entail risk of harm to such
employees and to others. In most cities in which the Company provides such
services, the Company's patrol officers carry firearms, which may increase such
risk. Although the Company conducts extensive screening and training of its
employees, the provision of patrol and alarm response service subjects it to
greater risks related to accidents or employee behavior than other types of
businesses.
The Company carries insurance of various types, including general
liability and errors and omissions insurance. The loss experience of the
Company, and other security service companies, may affect the availability and
cost of such insurance. Certain of the Company's insurance policies, and the
laws of some states, may limit or prohibit insurance coverage for punitive or
certain other types of damages, or liability arising from gross negligence.
EMPLOYEES
At September 30, 1996, the Company employed 814 individuals on a
full-time basis. Currently, none of the Company's employees is represented by a
labor union or covered by a collective bargaining agreement. The Company
believes that its relations with its employees are good.
14
<PAGE> 16
ITEM 2. FACILITIES
The Company's executive offices are located at 6011 Bristol Parkway,
Culver City, California, and its central monitoring station and administrative
office are located in the Portland, Oregon metropolitan area at 3900 S.W. Murray
Boulevard, Beaverton, Oregon. The offices at both locations are leased by the
Company. The Culver City lease expires in 1998, but can be renewed by the
Company for an additional term of five years. The Beaverton lease expires in
2005, but can be renewed by the Company for two additional terms of five years
each. The Company also leases office space in Bullhead City, Arizona; Tempe,
Arizona; Las Vegas, Nevada; Albuquerque, New Mexico; Salt Lake City, Utah; Kent,
Washington; Riverside, California; Irvine, California; Bakersfield, California;
San Leandro, California; San Diego, California; Santa Clara, California; and Van
Nuys, California. The leases for these properties expire on various dates
through 2005, and in some cases are renewable at the option of the Company.
ITEM 3. LEGAL PROCEEDINGS
Each of POI and Monitoring experiences routine litigation in the
normal course of its business. Neither of the Registrants believes that any of
such pending litigation will have a material adverse effect on the financial
condition or results of operations of that Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
POI's Common Stock, par value $.01 per share ("Common Stock"), has been
traded on the Nasdaq National Market since September 29, 1994 under the symbol
"ALRM." The following table sets forth the range of high and low closing sales
prices of the Common Stock on the Nasdaq National Market for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- ---
<S> <C> <C>
September 29-30, 1994 $6 5/8 $6 7/32
Fiscal 1995:
First Quarter 7 4 7/8
Second Quarter 6 7/8 5
Third Quarter 7 4 7/16
Fourth Quarter 9 3/4 6 1/8
Fiscal 1996:
First Quarter 10 1/2 7 9/32
Second Quarter 14 9/16 9
Third Quarter 17 5/16 13 3/8
Fourth Quarter 16 5/8 12 3/8
</TABLE>
As of December 17, 1996, there were 37 holders of record of the Common
Stock.
POI has never paid any cash dividends on the Common Stock and does not
intend to pay any cash dividends in the foreseeable future. The Company intends
to retain its cash flows for the operation and expansion of its business.
Monitoring's $100.0 million revolving credit facility (the "Revolving Credit
Facility"), the indenture (the "Discount Note Indenture") pursuant to which
Monitoring's 13 5/8% Senior Subordinated Discount Notes due 2005 (the "Discount
Notes") were issued and the indenture (the "Convertible Note Indenture")
pursuant to which Monitoring's 6 3/4% Convertible Senior Subordinated Notes due
2003 (the "Convertible Notes") were issued restrict POI's ability to declare or
pay any dividend on, or make any other distribution in respect of, POI's capital
stock.
Pursuant to the terms of the credit agreement (the "Credit Agreement")
governing the Revolving Credit Facility, Monitoring is restricted from making
dividend payments on its common stock. The Discount Note Indenture contains
restrictions on dividends paid by Monitoring that are similar to the
restrictions summarized above. During each of fiscal 1994, 1995 and 1996,
Monitoring paid dividends to POI of approximately $0.7 million, $0.7 million and
$0.2 million, respectively.
13 5/8% Senior Subordinated Discount Notes due 2005; Warrants to
Purchase Common Stock. On May 17, 1995, Monitoring and POI issued and sold to
Morgan Stanley & Co. Incorporated and Montgomery Securities (the "Placement
Agents") $166 million aggregate principle amount of 13 5/8% Senior Subordinated
Discount Notes due 2005 (the "Original Discount Notes") and 531,200 warrants to
purchase shares of Common Stock at a price of $6.60 per share (the "1995
Warrants" and together with the Discount Notes, the "Units"). The Discount Notes
are fully and unconditionally guaranteed by POI and, as of October 1996,
Monitoring's subsidiary Security Holdings, Inc. ("Security Holdings"). POI and
Monitoring received gross proceeds from the sale of the Units of approximately
$110 million. The Placement Agents resold the Units to 17 "qualified
institutional buyers" (as such term is defined in Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"), at prices not disclosed to POI
or Monitoring. In November 1995, the Original Discount Notes were exchanged by
the holders thereof for a like principal amount of 13 5/8% Senior Subordinated
Discount Notes due 2005 also issued by
16
<PAGE> 18
Monitoring, the principal terms of which were identical to those of the Original
Discount Notes, which exchange was registered under the Securities Act pursuant
to a Registration Statement on Form S-4 (Registration Statement No. 33-94684)
declared effective by the Securities Exchange Commission on October 11, 1995.
Common Stock. On June 28, 1996, Monitoring acquired all of the
outstanding capital stock of Metrol Security Services, Inc. a Delaware
corporation ("Metrol" and such acquisition the "Metrol Acquisition"), from the
Buckey Family Trust and the 10 other stockholders of Metrol. In consideration of
such acquisition, Monitoring paid approximately $15.7 million of Metrol's bank
and third party indebtedness, paid to the Metrol stockholders an aggregate of
approximately $9.1 million in cash and delivered to the Metrol stockholders an
aggregate of 417,885 shares of Common Stock. Of the cash portion of the purchase
price, $3.0 million was placed in an escrow account to secure the Metrol
stockholders' obligation to indemnify Monitoring against certain liabilities and
obligations relating to Metrol, including certain tax claims. Prior to the
Metrol Acquisition, Metrol and its subsidiaries sold, installed, serviced and
monitored security alarm systems and provided guard and patrol services to
residential and commercial subscribers in Arizona and New Mexico.
On September 30, 1996, Monitoring acquired the security alarm accounts,
accounts receivable, telephone lines and certain other assets of Sequence
Systems, Inc., an Oregon corporation d/b/a Alltec ("Alltec" and such acquisition
the "Alltec Acquisition"). In consideration of the Alltec Acquisition,
Monitoring paid an aggregate of $0.7 million of Alltec's indebtedness, assumed
certain operating obligations of Alltec and delivered to Alltec an aggregate of
167,647 shares of Common Stock; in addition, Monitoring agreed to deliver to
Alltec (i) up to an 24,765 additional shares of Common Stock in October 1997,
depending upon the actual postclosing attrition rate for the acquired accounts,
and (ii) up to 9,500 additional shares of Common Stock if Monitoring acquires
from Alltec prior to January 30, 1997 certain subscriber accounts generated
after the closing of the Alltec Acquisition.
On October 4, 1996, Monitoring acquired all of the outstanding shares
of capital stock of Security Holdings (such acquisition the "Security Holdings
Acquisition"). In consideration of the Security Holdings Acquisition, Monitoring
delivered an aggregate of 482,903 shares of Common Stock to the four
stockholders of Security Holdings. An additional 68,985 shares of Common Stock
have been placed in an escrow account and will be delivered to the former
shareholders of Security Holdings in June 1997 if the actual postclosing
attrition rate of the Security Holdings alarm accounts does not exceed an
assumed rate reflected in the purchase agreement for the acquisition. Prior to
the Security Holdings Acquisition, Security Holdings was engaged in the business
of providing security alarm monitoring services to residential and commercial
subscribers located primarily in Washington and Oregon.
The offer and sale from time to time of the shares of Common Stock
issued and issuable in connection with the above-described acquisitions by the
holders of such shares has been registered under the Securities Act pursuant to
two Registration Statements on Form S-3 (the "Registration Statements"). The
Registration Statement relating to the shares of Common Stock issued in
connection with the Metrol Acquisition (Registration No. 333-05849) was declared
effective by the Securities and Exchange Commission (the "SEC") on July 1, 1996;
the Registration Statement relating to the shares of Common Stock issued and
issuable in connection with the Alltec and Security Holdings Acquisitions
(Registration No. 333-13733) was declared effective by the SEC on October 16,
1996.
Exemptions; Underwriters. The offer, sale and distribution of the Units
and the offer and sale of the shares of Common Stock to the stockholders of
Metrol, the stockholders of Security Holdings and Alltec were not registered
under the Securities Act in reliance on Section 4(2) thereof and Rule 506 (and,
in the case of the distribution of the Units, Rule 144A) thereunder. The Units
were distributed pursuant to an offering memorandum only to persons that were
established pursuant to an investor letter to be qualified institutional buyers,
and the Original Discount Notes were, and the 1995 Warrants are, subject to
legends, stop transfer orders and other restrictions on transfer. Each person to
whom such shares of Common Stock were issued (i) certified to POI that such
person was an "accredited investor" as such term is defined
17
<PAGE> 19
in Rule 501 under the Securities Act and was otherwise able to bear the economic
risk of the investment, (ii) was provided with registration statements and
reports of, and access to other information concerning, the Company and (iii)
warranted to POI that the shares were acquired for investment purposes and not
with a view to distribution thereof, and agreed to restrictions on transfer of
such securities pending the registration of such securities as described below.
Except as set forth above with respect to the Units, no underwriter participated
in the offer or sale of any of these securities and no underwriter's fees or
commissions were paid.
18
<PAGE> 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
AND SUBSCRIBER DATA)
The selected consolidated financial data for fiscal 1992, 1993, 1994,
1995 and 1996 are derived from the consolidated financial statements of the
Company that have been audited by Coopers & Lybrand L.L.P. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements, and the related notes
thereto, included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Monitoring and service . . . . $12,408 $14,850 $27,109 $46,308 $65,860
Other . . . . . . . . . . . . . 5,190 7,040 7,371 9,574 7,597
------- ------- ------- ------- -------
Total revenues . . . . . . . 17,598 21,890 34,480 55,882 73,457
------- ------- ------- ------- -------
Cost of revenues:
Monitoring and service . . . . 3,784 3,547 6,520 11,795 17,770
Other . . . . . . . . . . . . . 3,013 3,914 5,804 7,424 6,323
------- ------- ------- ------- -------
Total cost of revenues . . . 6,797 7,461 12,324 19,219 24,093
------- ------- ------- ------- -------
Gross profit . . . . . . . . 10,801 14,429 22,156 36,663 49,364
Selling, general and administrative
expenses . . . . . . . . . . . 10,239 12,084 10,380 12,409 14,809
Loss on acquisition terminations -- -- 26 208 --
Performance warrants compensation
expense . . . . . . . . . . . . -- -- 4,504 -- --
Adjustment of purchase accounting
accruals, net . . . . . . . . . -- (742) -- -- --
Acquisition and transition expenses -- -- -- 3,090 4,219
Amortization of subscriber accounts and
goodwill . . . . . . . . . . . 2,525 3,864 8,772 15,460 23,275
------- ------- ------- ------- -------
Operating income (loss) . . . (1,963) (777) (1,526) 5,496 7,061
Interest expense, net(a) . . . . 1,941 1,564 6,932 7,626 4,885
Amortization of debt issuance cost
and OID . . . . . . . . . . . . 49 185 891 6,797 17,812
Loss before income taxes,
extraordinary items and
cumulative
effect of change in accounting
method -- net of taxes . . $(3,953) $(2,526) $(9,349) $(9,432) $(15,744)
Extraordinary item -- loss on early
extinguishment of debt -- net (b) -- (281) (1,174) (8,906) --
Cumulative effect of change in
accounting method -- net (c) . -- -- -- (1,955) --
Net loss . . . . . . . . . . $(3,953) $(2,807) $(7,660) $(16,698) $(15,497)
Loss attributable to common stock $(5,033) $(4,635) $(9,161) $(18,453) $(15,745)
Loss per common share:
Before extraordinary items and
cumulative effect of change in
accounting method . . . . . . $(48.40) $(41.86) $(27.11) $(0.87) $(1.40)
Net loss per share . . . . . . $(48.40) $(44.57) $(31.10) $(2.12) $(1.40)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1992 1993 1994 1995 1996
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) . $(3,112) $(1,632) $(11,505) $(9,159) $(13,193)
Subscriber accounts and intangibles 31,561 37,204 114,620 162,239 257,354
Total assets . . . . . . . . . . . . 39,071 44,472 126,085 178,669 290,075
Long-term debt . . . . . . . . . . . 20,923 23,591 86,842 146,023 225,650
Redeemable preferred stock . . . . . 15,371 22,957 22,210 6,127 --
Total stockholders' equity (deficit) (4,195) (8,796) (6,084) 6,347 28,827
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
MRR(d) . . . . . . . . . . . . . . $ 1,015 $ 1,208 $ 2,737 $ 3,924 $ 6,187
Number of subscribers at end of
period . . . . . . . . . . . . . . 35,538 39,527 85,269 129,420 196,531
EBITDA(e) . . . . . . . . . . . . . $ 1,043 $ 3,609 $12,294 $ 22,247 $ 32,181
</TABLE>
- -----------------
(a) Includes interest expense to related parties of $1.2 million in fiscal
1992 and $0.3 million in fiscal 1993.
(b) In connection with the early extinguishment of the $50.0 million
principal amount of the Company's 12% Senior Subordinated Notes, the
Company incurred an extraordinary loss of approximately $8.9 million,
net of the effect of taxes of $0.9 million, in fiscal 1995.
(c) For information regarding this change, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview
-- Recent Change in Accounting Method" included in Item 7 and Note 2 of
Notes to Consolidated Financial Statements included in Item 8.
(d) MRR means monthly recurring revenue (excluding revenues from patrol
services) that the Company is entitled to receive under contracts in
effect at the end of the period. MRR is a term commonly used in the
security alarm industry as a measure of the size of a company, but not
as a measure of profitability or performance, and does not include any
allowance for future attrition or allowance for doubtful accounts. The
Company does not have sufficient information as to the attrition of
acquired subscriber accounts to predict the amount of acquired MRR
that will be realized in future periods or the impact of the attrition
of acquired accounts on the Company's overall rate of attrition.
(e) EBITDA does not represent cash flow from operations as defined by
generally accepted accounting principles, should not be construed as
an alternative to net income and is indicative neither of the
Company's operating performance nor of cash flows available to fund
all the Company's cash needs. Items excluded from EBITDA are
significant components in understanding and assessing the Company's
financial performance. Management believes presentation of EBITDA
enhances an understanding of the Company's financial condition,
results of operations and cash flows because EBITDA is used by the
Company to satisfy its debt service obligations and its capital
expenditure and other operational needs as well as to provide funds
for growth. In addition, EBITDA has been used by senior lenders and
subordinated creditors and the investment community to determine the
current borrowing capacity and to estimate the long-term value of
companies with recurring cash flows from operations and net losses.
The following table provides a calculation of EBITDA for each of the
periods presented above:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loss before income taxes,
extraordinary items and cumulative
effect of change in accounting
method-net of taxes (a).......................... $ (3,953) $ (2,526) $ (9,349) $ (9,432) $(15,744)
Plus:
Loss on sales of assets ......................... -- -- -- 505 19
Loss on assets held for sale .................... -- -- -- -- 89
Amortization of debt issuance costs and OID ..... 49 185 891 6,797 17,812
Interest expense, net ........................... 1,941 1,564 6,932 7,626 4,885
Amortization of subscriber accounts
and goodwill .................................... 2,525 3,864 8,772 15,460 23,275
Depreciation expense ............................ 481 522 518 1,083 1,845
Performance warrants compensation expense ....... -- -- 4,504 -- --
Loss on acquisition terminations ................ -- -- 26 208 --
-------- -------- -------- -------- --------
EBITDA ....................................... $ 1,043 $ 3,609 $ 12,294 $ 22,247 $ 32,181
======== ======== ======== ======== ========
</TABLE>
--------------
(a) Such amount reflects a reduction of $0.7 million for adjustment of
purchase accounting accruals, net in fiscal 1993.
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained below includes statements of the Company's or
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a description of such risks and uncertainties,
see the information set forth and incorporated by reference in the Introductory
Note to this Annual Report on Form 10-K under the caption "Forward-Looking
Statements," which information is incorporated in this Item by reference. As
described in "Introductory Note - Company Structure," POI's sole asset is, and
all of POI's operations are conducted through, POI's investment in Monitoring;
in addition, all of Monitoring's long-term debt has been guaranteed on a full
and unconditional basis by POI. (See Note 8 of Notes to Consolidated Financial
Statements included in Item 8 hereof.) Accordingly, no separate analysis of the
results of operations of Monitoring has been included herein.
OVERVIEW
A majority of the Company's revenues are derived from recurring
payments for the monitoring and servicing of security systems and additional
security services, pursuant to contracts with initial terms ranging from one to
five years. Service revenues are derived from payments under extended service
contracts and for service calls performed on a time and materials basis. The
remainder of the Company's revenues are derived from revenues from the sale and
installation of security systems, add-ons and upgrades. Payment for monitoring
services is typically required in advance. Monitoring and service revenues are
recognized as the service is provided. Installation, add-on and upgrade revenue
is recognized when the required work is completed. All direct installation
costs, which include materials, labor and installation overhead, and selling and
marketing costs are expensed in the period incurred.
Alarm monitoring services generate a significantly higher gross margin
than do the other services provided by the Company. In fact, the cost of
providing patrol and alarm response services exceeds the revenues generated by
patrol services and, while sales and installation services contribute to the
Company's gross profits, the total expenses associated with alarm system
installations (including not only the direct costs of providing such services
but also the expenses associated with the sales and marketing of alarm systems)
also exceed the revenues generated by such services. The Company's strategy,
however, is to provide patrol and alarm response services and to invest in
system sales and installation because the Company believes that such services
and products contribute to the generation and retention of alarm monitoring
subscribers.
Accounting Differences for Account Purchases and New Installations. A
difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of subscriber accounts
through direct sales by the Company's sales force has a significant impact on
the Company's results of operations. All direct external costs associated with
purchases of subscriber accounts (either through the Dealer Program or through
acquisitions of subscriber account portfolios) are capitalized and amortized
over 10 years on a straight- line basis. Company personnel and related support
and duplicate costs incurred solely in connection with subscriber account
acquisitions and transitions are expensed as incurred. Other acquisition
transition costs that reflect the Company's estimate of costs associated with
incorporating the purchased subscriber accounts into its operations, including
costs incurred by the Company in fulfilling the seller's pre- acquisition
warranty repair service and other obligations to the acquired subscribers are
capitalized and amortized as described above. In contrast, all of the Company's
costs related to the sales, marketing and installation of new alarm monitoring
systems generated by the Company's sales force are expensed in the period in
which incurred.
The Company's purchase activity increased significantly in fiscal 1995
and 1996. In addition, beginning in fiscal 1994, the Company adopted a strategy
of reducing its sales of new systems and related marketing expenditures. As a
result of the difference in the methods by which such activities are
21
<PAGE> 23
accounted for, the combined effect of these two factors was to improve operating
results during fiscal 1995 and 1996. The Company does not expect to further
reduce sales of new systems by Company personnel and related marketing
expenditures.
Change in Accounting Method. In the third quarter of fiscal 1995, the
Company changed its method of accounting for certain subscriber account
acquisition and transition costs, effective as of October 1, 1994. The
acquisition and transition costs previously capitalized, which under the new
method are expensed as incurred, are the Company personnel and related support
and duplicate costs incurred solely in connection with acquisitions and
transitions.
The new method is consistent with the guidelines published on July 21,
1995 by the Emerging Issue Task Force of the Financial Accounting Standards
Board. See "--Accounting for Account Purchases and New Installations" and Note 2
of Notes to Consolidated Financial Statements included in Item 8.
As a result of the change in accounting policy: (i) in the quarter
ended December 31, 1994, the Company recorded a non-cash, non-recurring charge
of approximately $2.0 million, which amount represents the cumulative effect
(net of income tax benefit of approximately $1.2 million) of the accounting
change on prior years' results of operations; and (ii) the Company's statements
of operations include an expense item captioned "acquisition and transition
expenses". The expense was approximately $3.1 million for fiscal 1995 and $4.2
million for fiscal 1996 (in each case before associated tax benefit). The
foregoing non-recurring charge and expenses are reflected in the financial
information presented in this report. Such expenses will fluctuate from quarter
to quarter based primarily on the amount of the Company's acquisition activity
and its ability to require sellers to bear certain of such acquisition-related
expenses.
Acquisition and Dealer Program Activity. As described in this Annual
Report on Form 10-K, a significant portion of the Company's growth has been
generated by the acquisition of portfolios of subscriber accounts from other
alarm companies. Because the Company typically acquires only the subscriber
accounts (and not the accounts receivable or other assets) of the sellers, the
Company focuses its pre-acquisition review and analysis on the quality and
stability of the subscriber accounts to verify the MRR represented by such
accounts. If the subscriber accounts to be purchased pass such due diligence
scrutiny, the Company then applies its monitoring costs to such MRR as a basis
for determining the purchase price to be paid by the Company. To protect the
Company against the loss of acquired accounts, the Company typically seeks to
obtain from the seller a guarantee against the subscriber account cancellation
for a period following the acquisition and the right to retain a portion of the
acquisition price (a "purchase price holdback") against the MRR lost due to
subscriber account cancellations during the specified period.
During fiscal 1996, the Company added (through acquisitions of 30
portfolios of subscriber accounts and through its Dealer Program) an aggregate
of approximately 91,000 subscriber accounts for a total purchase price of
approximately $119.6 million (including assumed liabilities of approximately
$27.2 million). The MRR of the acquired accounts ranged from approximately
$10.00 to $40.00, with an average of $31.20. Of the acquisitions completed
during fiscal 1996 by the Company, the substantial majority included purchase
price holdbacks in amounts that ranged from 5% to 20% of the initial purchase
price (and averaged 13% of the initial purchase price) and attrition guarantees
for periods that ranged from six months to 12 months (and averaged 8.8 months).
22
<PAGE> 24
Two of the Company's acquisitions during fiscal 1996 involved
portfolios representing MRR that exceeded 5% of the Company's MRR at the time of
the acquisition, as set forth below:
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AVERAGE MRR RANGE OF MRR RESIDENTIAL
SELLER ACCOUNTS PER ACCOUNT PER ACCOUNT SUBSCRIBERS
------ -------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
InterCap Funds Joint Venture ... 9,975 $27.39 $18.00-45.00 80%
Metrol Security Services ....... 18,500 27.03 $15.00-80.00 70
</TABLE>
Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects both the Company's revenues
and its amortization expense. Attrition can be measured in terms of canceled
subscriber accounts and in terms of decreased MRR resulting from canceled
subscriber accounts. Gross subscriber attrition is defined by the Company for a
particular period as a quotient, the numerator of which is equal to the number
of subscribers who disconnect service during such period and the denominator of
which is the average of the number of subscribers at each month end during such
period. Net MRR attrition is defined by the Company for a particular period as a
quotient, the numerator of which is an amount equal to gross MRR lost as the
result of canceled subscriber accounts or services during such period, net of
(i) MRR generated during such period by the sale of additional services and
increases in rates to existing subscribers, (ii) MRR generated during such
period from the connection of subscribers who move into premises previously
occupied by subscribers and in which existing systems are installed and from
conversion of accounts that were previously monitored by other companies to the
Company's monitoring service (i.e., "reconnects" and "conversions"); and (iii)
MRR attributable to canceled accounts that, by virtue of a purchase holdback are
"put" back to the seller of such accounts during such period (i.e., "guaranteed
accounts"); and the denominator of which is the average month-end MRR in effect
during such period. While the Company reduces the gross MRR lost during a period
by the amount of guaranteed accounts provided for in purchase agreements with
sellers, in some cases the Company may not collect all or any of the
reimbursement due it from the seller. The following table sets forth the
Company's gross subscriber attrition and net MRR attrition for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
---------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Gross subscriber 19.6% 19.3% 18.3%
attrition
Net MRR attrition 5.3 6.6 7.0
</TABLE>
MRR represents the monthly recurring revenue the Company is entitled to
receive under subscriber contracts in effect at the end of the period. Included
in MRR and the number of subscribers are amounts associated with subscribers
with past due balances. It is the policy and practice of the Company that every
effort be made to preserve the revenue stream associated with these contractual
obligations. To this end, the Company actively works to both collect amounts
owed and to retain the subscriber. In certain instances, this collection and
evaluation period may exceed six months in length. When, in the judgment of the
Company's collection personnel, all reasonable efforts have been made to collect
balances due, subscribers are disconnected from the Company's monitoring center
and are included in the calculation of gross subscriber and net MRR attrition.
Because the Company determines payments to sellers under purchase price
holdbacks subsequent to the periods to which such holdbacks apply, and because
holdbacks are not allocated to specific guaranteed accounts or specific fiscal
periods, the Company reduces gross MRR lost during a period by the amount of
guaranteed accounts provided for in purchase agreements with sellers. However,
in some cases, the Company has not retained the full amount of such holdback to
which the Company is contractually entitled. If guaranteed accounts for which
the Company was not compensated by the seller were taken into account in
calculating net MRR attrition, net MRR attrition would have been higher in each
period presented in the table above.
Generally, net MRR attrition is less than actual "net account attrition,"
which the Company defines as canceled subscriber accounts net of reconnects,
conversions and guaranteed accounts. Estimated net account attrition is the
basis upon which the Company determines the period over which it amortizes its
23
<PAGE> 25
investment in subscriber accounts. The Company amortizes such investment over 10
years based on current estimates. If actual subscriber account attrition were to
exceed such estimated attrition, the Company could be required to amortize its
investment in subscriber accounts over a shorter period, thus increasing
amortization expense in the period in which such adjustment is made and in
future periods. Since the majority of the subscriber accounts acquired by the
Company since its formation were purchased recently, there can be no assurance
that the actual attrition rates for such accounts will not be greater than the
rate assumed by the Company. See " -- Results of Operations -- Fiscal 1996
Compared to Fiscal 1995 -- Amortization of subscriber accounts and goodwill" and
Note 7 of Notes to Consolidated Financial Statements included in Item 8.
The table below sets forth the change in the Company's subscriber base
over fiscal years 1994-1996:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Number of subscribers:
Beginning of period .................................................. 39,527 85,269 129,420
Additions through portfolio acquisitions and Dealer
Program, net of sales of subscriber accounts ....................... 54,211 60,909 91,325
Installations by Company personnel ................................... 1,646 1,502 881
Reconnects and conversions ........................................... 3,060 3,585 4,633
Gross subscriber attrition ........................................... (13,175) (21,845) (29,728)
-------- -------- --------
End of period ..................................................... 85,269 129,420 196,531
======== ======== ========
</TABLE>
Impact of SFAS 121. In March of 1995, the Financial Accounting
Standards Board issued SFAS 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," effective for financial
statements for fiscal years beginning after December 15, 1995. This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company determines the value of its "Subscriber Accounts and
Intangibles, net" based on the undiscounted cash flows from the MRR stream using
the most recent historical attrition rate and aggregate MRR. At September 30,
1996, the undiscounted cash flows from the MRR stream were significantly in
excess of the carrying value of "Subscriber Accounts and Intangibles, net." The
Company does not anticipate a material impact on its financial statements
resulting from the adoption of this standard.
Restrictions on Dividends. POI has never paid any cash dividends on the
Common Stock and does not intend to pay any cash dividends in the foreseeable
future. The Revolving Credit Facility and the Discount Note Indenture restrict
POI's ability to declare or pay any dividend on, or make any other distribution
in respect of, POI's capital stock. See Item 5 for information as to
restrictions on dividends payable by Monitoring.
24
<PAGE> 26
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Monitoring and service ...................... 78.6% 82.9% 89.7%
Other ....................................... 21.4 17.1 10.3
----- ----- -----
Total revenues ...................... 100.0% 100.0% 100.0%
----- ----- -----
Cost of revenues:
Monitoring and service ...................... 18.9% 21.1% 24.2%
Other ....................................... 16.8 13.3 8.6
----- ----- -----
Total cost of revenues .............. 35.7 34.4 32.8
----- ----- -----
Gross profit ........................ 64.3 65.6 67.2
Selling, general and administrative expenses .. 30.1 22.2 20.2
Loss on acquisition terminations .............. 0.1 0.4 --
Acquisition and transition expenses ........... -- 5.5 5.7
Performance warrants compensation expense ..... 13.1 -- --
Amortization of subscriber accounts
and goodwill ................................ 25.4 27.7 31.7
----- ----- -----
Operating income (loss) ............. (4.4)% 9.8% 9.6%
===== ===== =====
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues for fiscal 1996 increased by $17.6 million, or 31.5%, to $73.5
million from $55.9 million for fiscal 1995. Monitoring and service revenues
increased by $19.6 million, or 42.2%, substantially all of which resulted from
the addition of approximately 55,000 subscribers from the acquisition of
portfolios of subscriber accounts and approximately 36,000 subscribers from the
Dealer Program. Other revenues declined by 20.6% to $7.6 million in fiscal 1996
from $9.6 million in fiscal 1995. The decline in other revenues reflects a
decrease in installation revenues of $1.4 million and a net decrease in patrol,
alarm response and lock revenues of $0.6 million. The decline in installation
revenues resulted from the Company's continued emphasis on growth through
acquisitions and the Dealer Program, rather than through sales of new alarm
systems by Company personnel.
Cost of revenues for fiscal 1996 increased by $4.9 million, or 25.4%,
to $24.1 million. Cost of revenues as a percentage of total revenues declined to
32.8% during fiscal 1996 from 34.4% during fiscal 1995. Monitoring and service
expenses increased by $6.0 million, or 50.7%, primarily due to increased
activity at the Company's central monitoring station and field service branches
due to a substantially larger subscriber base. Monitoring and service expenses
as a percentage of monitoring and service revenues increased to 27.0% from 25.5%
during fiscal 1995. Such increase reflects a higher level of staffing at the
Company's central monitoring station as well as a lower MRR per subscriber in
fiscal 1996, due primarily to the acquisition of portfolios of subscriber
accounts that had a lower average MRR per subscriber than the Company's average.
See "-- Overview -- Acquisition and Dealer Program Activity". Other expenses
declined by $1.1 million to $6.3 million in fiscal 1996 from $7.4 million in
fiscal 1995, reflecting the decline in installation activities.
Gross profit for fiscal 1996 was $49.4 million, which represents an
increase of $12.7 million, or 34.6%, over the $36.7 million of gross profit
recognized in fiscal 1995. Such increase was caused primarily by an increase in
monitoring and service activities, which reflected the increase in the Company's
subscriber base from 129,420 at September 30, 1995 to 196,531 at September 30,
1996. Gross profit as a percentage of total revenues was 67.2% for fiscal 1996
compared to 65.6% for fiscal 1995. This increase was caused primarily by an
increase in monitoring and service revenues as a percentage of total revenues.
25
<PAGE> 27
Selling, general and administrative expenses rose to $14.8 million in
fiscal 1996, an increase of $2.4 million, or 19.3%, over such expenses in fiscal
1995, but declined as a percentage of total revenues from 22.2% in fiscal 1995
to 20.2% in fiscal 1996. Sales and marketing expense declined 29.5% (or $0.8
million) and general and administrative expenses increased 32.2% (or $3.2
million). Sales and marketing expenses declined due to the Company's continued
emphasis on growth through acquisitions and the Dealer Program, rather than
through sales of new alarm systems by Company personnel. The increase in general
and administrative expenses was caused by increases in corporate and branch
overhead expenses incurred to supervise a larger employee base associated with a
larger subscriber base. Advertising and marketing expenses are expensed as
incurred and comprised 1% of revenues in each of fiscal 1995 and 1996. The
provision for doubtful accounts increased to $2.6 million in fiscal 1996 from
$1.8 million in fiscal 1995, reflecting the 51.8% increase in the Company's
average subscriber base from fiscal 1995 to fiscal 1996.
Acquisition and transition expenses for fiscal 1996 totaled $4.2
million compared to $3.1 million for fiscal 1995. Such expenses will fluctuate
from quarter to quarter based primarily on the Company's acquisition activity
and the extent sellers bear certain of the related expenses.
Amortization of subscriber accounts and goodwill for fiscal 1996
increased by $7.8 million, or 50.6%, to $23.3 million. This increase is the
result of the Company's purchase of approximately 91,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and the Dealer
Program in fiscal 1996.
Operating income for fiscal 1996 was $7.1 million, compared to
operating income of $5.5 million in fiscal 1995. Operating income as a
percentage of revenue was 9.6% in fiscal 1996, compared to 9.8% in fiscal 1995.
Interest expense, net and amortization of debt issuance costs and OID
increased by $8.3 million, or 57.4%, to $22.7 million in fiscal 1996. This
increase reflects the Company's continued use of debt to finance a substantial
portion of its subscriber account growth, including the issuance of the Discount
Notes in May 1995. See "-- Liquidity and Capital Resources."
Balance sheet data. At September 30, 1996, the Company's working
capital deficit was $13.2 million, as compared to a working capital deficit of
$9.2 million at September 30, 1995. Significant changes in working capital items
include a $6.9 million increase in accounts receivable offset by increases in
purchase holdbacks ($5.0 million), acquisition and transition costs ($3.4
million) and deferred revenue ($4.7 million). Subscriber accounts and
intangibles, net increased to $257.4 million at September 30, 1996 from $162.2
million at September 30, 1995. This increase of $95.1 million, or 58.6%, was
caused by the acquisition of new subscribers, net of amortization expense. Total
stockholders' equity increased to $28.8 million at September 30, 1996 from $6.3
million at September 30, 1995 reflecting the conversion of redeemable preferred
stock to common stock, the issuance of common stock in the Company's February
1996 public offering, the issuance of $6.0 million of common stock in the
acquisition of Metrol Security Services and a loss of $15.7 million for fiscal
1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues for fiscal 1995 increased by $21.4 million, or 62.1%, to $55.9
million from $34.5 million for fiscal 1994. Monitoring and service revenues
increased by $19.2 million, or 70.8%, a substantial majority of which resulted
from the addition of approximately 53,000 subscribers from the acquisition of
portfolios of subscriber accounts and approximately 10,000 subscribers from the
Dealer Program. The sale of enhanced services and new subscribers generated by
Company personnel comprised the remainder of revenue growth. Other revenue
increased by 29.9% to approximately $9.6 million in fiscal 1995 from $7.4
million in fiscal 1994. The increase in other revenue was generated by an
increase in lock revenue of $1.4 million, as fiscal 1995 included twelve months
of lock revenues and fiscal 1994 included two months of such revenues and by an
increase in patrol and alarm response revenues of 18.9%, or $0.4 million, offset
26
<PAGE> 28
by a decline in installation revenues of $1.1 million. The decline in
installation revenues resulted from the Company's increased emphasis on growth
through acquisitions and the Dealer Program, rather than through sales of new
alarm systems by Company personnel. In addition, the Company recognized $1.6
million of other revenue arising from the sales of security alarm equipment
received from a vendor.
Cost of revenues for fiscal 1995 increased by $6.9 million, or 56.0%,
to $19.2 million. Cost of revenues as a percentage of total revenues declined to
34.4% during fiscal 1995 from 35.7% during fiscal 1994. Monitoring and service
expenses increased by $5.3 million, or 80.9%, primarily due to increased
activity at the Company's central monitoring station and field service branches
due to a substantially larger subscriber base. Monitoring and service expenses
as a percentage of monitoring and service revenues increased to 25.5% from 24.1%
during fiscal 1994. Such increase reflects a higher level of staffing at the
Company's central monitoring station. MRR per subscriber was lower in fiscal
1995, due primarily to the acquisition of portfolios of subscriber accounts that
had a lower average MRR per subscriber than the Company's average. See "--
Overview -- Acquisition and Dealer Program Activity". Other expenses increased
by $1.6 million, or 27.9%, to $7.4 million in fiscal 1995 from $5.8 million in
fiscal 1994. The increase primarily was caused by a 32.8% increase in patrol and
alarm response expenses, or approximately $0.8 million, and an increase in lock
expenses of approximately $0.8 million.
Gross profit for fiscal 1995 was $36.7 million, an increase of $14.5
million, or 65.5%, over the $22.2 million of gross profit in fiscal 1994. Such
increase was caused primarily by an increase in monitoring and service
activities, which paralleled the increase in the Company's subscriber base from
85,269 at September 30, 1994 to 129,420 at September 30, 1995. Gross profit as a
percentage of total revenues was 65.6% for fiscal 1995 compared to 64.3% for
fiscal 1994. This increase was caused primarily by an increase in monitoring and
service revenues as a percentage of total revenues.
Selling, general and administrative expenses rose to $12.4 million in
fiscal 1995, which represents an increase of $2.0 million, or 19.6%, over
selling, general and administrative expenses in fiscal 1994. Such figure as a
percentage of total revenues declined from 30.1% in fiscal 1994 to 22.2% in
fiscal 1995, due primarily to a decline in sales and marketing expense of 34.0%
(or $1.3 million) and an increase of 52.1% (or $3.4 million) in general and
administrative expenses. Sales and marketing expenses declined due to the
Company's increased emphasis on growth through acquisitions and the Dealer
Program, rather than through sales of new alarm systems by Company personnel.
The increase in general and administrative expenses was caused by increases in
corporate and branch overhead expenses incurred to supervise a larger employee
base associated with a larger subscriber base. The percentage increase in
general and administrative expenses from fiscal 1994 to fiscal 1995 was lower
than the 62.1% increase in total revenues between the comparable periods,
reflecting economies of scale and efficiencies realized in the Company's branch
and corporate offices. Advertising and marketing expenses are expensed as
incurred and comprised 1% of revenues in each of fiscal 1994 and 1995. The
provision for doubtful accounts increased to approximately $1.8 million in
fiscal 1995 from $0.8 million in fiscal 1994, reflecting an increase in the
Company's average subscriber base of approximately 72.1% and the Company's
willingness to work with subscribers experiencing credit difficulties in order
to maintain long-term subscriber relationships.
Acquisition and transition expenses for fiscal 1995 totaled $3.1
million, reflecting the Company's change in its method of accounting for certain
expenses, effective as of October 1, 1994. See "-- Overview -- Recent Change in
Accounting Method." Had the Company enacted the change in accounting method on
October 1, 1993, acquisition and transition expenses would have been $2.4
million for fiscal 1994. Such expenses will fluctuate from quarter to quarter
based primarily on the amount of the Company's acquisition activity and its
ability to require sellers to bear certain of such acquisition-related expenses.
Amortization of subscriber accounts and goodwill for fiscal 1995
increased by $6.7 million, or 76.2%, to $15.5 million. This increase is the
result of the Company's purchase of approximately 63,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and through the
Dealer Program in fiscal 1995.
27
<PAGE> 29
Operating income for fiscal 1995 was $5.7 million, compared to an
operating loss of $1.5 million in fiscal 1994. The operating loss in fiscal 1994
included a non-recurring charge for performance warrants compensation expense of
$4.5 million. Operating income as a percentage of revenue was 9.8% in fiscal
1995, compared to 8.7% in fiscal 1994 (excluding the non-recurring charge).
Comparisons of this figure for fiscal 1995 and 1994 are impacted by the change
in accounting method adopted by the Company effective as of the beginning of
fiscal 1995. The increase in such figure over fiscal 1994 reflects the increase
in gross profit and efficiencies realized in branch office and corporate general
and administrative expenses noted above.
Interest expense, net and amortization of debt issuance costs and OID
increased by $6.6 million, or 84.4%, to $14.4 million in fiscal 1995, reflecting
the Company's use of debt to finance a substantial portion of its subscriber
account growth.
Extraordinary item. During fiscal 1995, the Company recorded an
extraordinary charge of $8.9 million (net of a tax benefit of $0.9 million) due
to the loss on early extinguishment of debt. The loss, which arose from the
purchase of the Company's $50.0 million principal amount of 12% Senior
Subordinated Notes issued in November 1993, included the write-off of the
remaining unamortized portions of the OID ($4.1 million) and the capitalized
fees and expenses associated with the November 1993 note offering ($3.0
million), a 5% premium paid in the tender offer for the notes ($2.5 million) and
certain fees incurred in the tender offer.
Balance sheet data. At September 30, 1995, the Company's working
capital deficit was $9.2 million, as compared to a working capital deficit of
$11.5 million at September 30, 1994. The decline in the working capital deficit
was caused primarily by an increase in accounts receivable and inventory and a
decline in accrued interest. Subscriber accounts and intangibles, net increased
to $162.2 million at September 30, 1995 from $114.6 million at September 30,
1994. This increase of $47.6 million, or 41.6%, was caused by the addition of
new subscribers, net of amortization expense. Total stockholders' equity
(deficit) increased to $6.3 million at September 30, 1995 from a deficit of $6.1
million at September 30, 1994. The increase in such figure reflects the
conversion of redeemable preferred stock to common stock and the issuance of
common stock in the Company's initial public offering (the "Initial Public
Offering") completed in October 1994, offset by a loss of $18.5 million for
fiscal 1995.
28
<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES
General. Since September 1991, the Company has financed its operations
and growth from a combination of capital raised through debt and equity
offerings and, to a lesser extent, cash flow from operations. During the fiscal
1994-1996 period, the Company completed three long-term debt offerings,
including the issuances of $50.0 million principal amount of Senior Subordinated
Notes issued in November 1993 (which notes were retired in fiscal 1995), $166.0
million principal amount ($105.2 million net proceeds) of Discount Notes issued
in May 1995 and $103.5 million principal amount of Convertible Notes issued in
September and October 1996; the Company also has utilized borrowings under its
Revolving Credit Facility to fund acquisitions and the Dealer Program. For
additional information with respect to this indebtedness, see Note 8 of Notes to
Consolidated Financial Statements included in Item 8. In September 1994, the
Company raised $18.3 million in net proceeds from its Initial Public Offering of
Common Stock and in February 1996, the Company raised $23.1 million in net
proceeds from another public offering of the Common Stock. The Company intends
to use cash flows from operations, together with borrowings under the Revolving
Credit Facility, to finance the addition of subscriber accounts and capital
expenditures. Although the Company anticipates that it will continue to acquire
portfolios of subscriber accounts, the Company cannot estimate the number, size
or timing of such acquisitions. Depending on such factors, additional funds
beyond those currently available to the Company may be required to continue the
acquisition program and to finance the Dealer Program, and there can be no
assurance that the Company will be able to obtain such financing on acceptable
terms or at all.
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $5.3 million
at September 30, 1996 and could be as high as $100.0 million through the period
ended January 3, 2000, the current maturity date of the Revolving Credit
Facility. While the Company believes it will be able to obtain further
extensions of the maturity date of the Revolving Credit Facility from time to
time, or will be able to refinance the Revolving Credit Facility prior to its
maturity date, there can be no assurance that the Company will be able to do so.
The Convertible Notes require the Company to make semi-annual cash interest
payments of $3.5 million, or $7.0 million annually. The Discount Notes require
the Company to begin to make interest payments on such obligations on December
31, 1998. Based on an interest rate of 13 5/8%, such payment will be
approximately $11.3 million semiannually, or approximately $22.6 million on an
annual basis. As a result, a substantial portion of the Company's operating cash
flows will be required to make interest payments on the Convertible Notes and
the Discount Notes, and there can be no assurance that the Company's cash flow
from operations will be sufficient to meet such obligations, or that there will
be sufficient funds available to the Company after such interest payments to
meet other debt, capital expenditure and operational obligations. The $103.5
million principal amount of the Convertible Notes matures on September 15, 2003,
although they may be converted into the Common Stock at any time prior to such
date. The $166.0 million principal amount of the Discount Notes matures on
September 30, 2005. There can be no assurance that the Company will have the
cash necessary to repay either the Convertible Notes or the Discount Notes at
maturity or will be able to refinance such obligations. The Company maintains a
$2.0 million letter of credit sub-facility under its Revolving Credit Facility,
and has extended an approximately $0.8 million letter of credit to a seller,
scheduled payments under which are approximately $0.4 million during each of
fiscal 1997 and fiscal 1998.
The Company has had, and expects to continue to have, a working capital
deficit. For fiscal 1994, 1995 and 1996, the Company had a working capital
deficit of $11.5 million, $9.2 million and $13.2 million, respectively. There
are two principal categories of current liabilities that cause the Company to
have a working capital deficit: (i) "purchase holdbacks," which represent the
portion of the aggregate acquisition cost of subscriber accounts retained by the
Company to offset lost MRR arising from the cancellation of acquired accounts;
and (ii) "deferred revenue," which represents billings and cash collections
received by the Company from its subscriber base in advance of performance of
services. Both purchase holdbacks and deferred revenues are recorded as a
current liability on the Company's balance sheet.
29
<PAGE> 31
For fiscal 1996, the Company's net cash provided by operating
activities was $24.1 million, compared to $8.5 million net cash provided by
operating activities for fiscal 1995. During fiscal 1994, the Company's net cash
provided by operating activities was $7.4 million.
For fiscal 1996, the Company's net cash used in investing activities
was $103.5 million, compared to $63.5 million during fiscal 1995, primarily as a
result of the acquisition of subscriber accounts, including the purchases of
subscriber accounts from InterCap Funds Joint Venture and Metrol Security
Services, as well as the Dealer Program. During fiscal 1994, the Company's net
cash used in investing activities was $66.8 million, primarily as a result of
acquisitions.
During fiscal 1996, the Company's net cash provided by financing
activities was $83.6 million, compared to $55.2 million in fiscal 1995. During
fiscal 1994, the Company's net cash provided by financing activities was $59.1
million. Financing activities are comprised of those debt and equity issuances
discussed above.
The Discount Note Indenture, the Convertible Note Indenture and the
Revolving Credit Facility agreements contain certain restrictions on transfers
of funds, such as dividends, loans and advances, by the Company. The Company
believes that such restrictions have not had and will not have a significant
impact on the Company's ability to meet its cash obligations. The Company does
not anticipate payment of dividends on Common Stock.
Capital Expenditures. The Company anticipates making capital
expenditures in fiscal 1997 of approximately $3.0 million for routine
replacement and upgrading of vehicles, computers and other capital items. In
addition, the Company anticipates making capital expenditures of approximately
$1.0 million to complete a project to upgrade its monitoring and administrative
software. The Company believes the installation of the new computer software
will create efficiencies Company-wide, and particularly in the customer service,
data entry and field maintenance and repair functions. The Company believes the
complete implementation of the new software will not occur until the end of
fiscal 1997. In addition, the Company anticipates making capital expenditures of
approximately $500,000 in fiscal 1997 and 1998 to expand the capacity of the
central monitoring station to approximately 500,000 subscribers. The Company
believes cash flows from operations, together with borrowing under the Revolving
Credit Facility, will be sufficient to fund the Company's capital expenditures
in fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
POI's consolidated financial statements and supplementary data,
together with the report of Coopers and Lybrand L.L.P., independent auditors,
are included elsewhere herein. See "Index to Financial Statements" immediately
preceding page F-1. Separate audited financial statements for Monitoring have
not been provided because the Company does not believe such financial statements
are material to investors. See "Introductory Note- Company Structure" and the
introductory note to Item 7 above. The Company includes, however, in the
footnotes to the consolidated financial statements summary financial information
concerning Monitoring. See Note 16 to Notes to Consolidated Financial Statements
included in Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Reference is made to POI's Proxy Statement dated December 30, 1996 (the
"Proxy Statement") and to the information appearing therein under the captions
"I. Election of Directors- Nominees for Election," "Executive Officers;
Executive Compensation and Related Information- Executive Officers" and
"Security Ownership of Management- Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information appearing in
the Proxy Statement under the captions "I. Election of Directors- Compensation
of Directors" and "Executive Officers; Executive Compensation and Related
Information- Executive Compensation and Related Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information appearing in
the Proxy Statement under the caption "Security Ownership of Management" and
"Security Ownership of Certain Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information appearing in
the Proxy Statement under the caption "Certain Relationships and Related
Transactions."
31
<PAGE> 33
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS FORM 10-K.
A. CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES.
The following consolidated financial statements and schedules are
included in this Annual Report on Form 10-K on the pages listed below.
<TABLE>
<CAPTION>
Page Consolidated Financial Statements
---- ---------------------------------
<S> <C>
F-2 Report of Independent Accountants
F-3 Consolidated Balance Sheets as of September 30, 1995 and 1996
F-4 Consolidated Statements of Operations for the years ended September 30, 1994, 1995, and 1996
F-5 Consolidated Statements of Cash Flows for the years ended September 30, 1994, 1995, and 1996
F-6 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended September 30,
1994, 1995, and 1996
F-7 Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
Page Schedule
---- --------
<S> <C>
S-1 Schedule II- Valuation and Qualifying Accounts
</TABLE>
B. EXHIBITS.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Fifth Amended and Restated Certificate of Incorporation of
Protection One, Inc. ("POI") (incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-K for the year
ended September 30, 1994 filed by POI(1), Protection One Alarm
Monitoring, Inc. ("Monitoring")(2) and Protection One Alarm
Services, Inc. ("Services") (the "Fiscal 1994 Form 10-K")).
3.2 Certificate of Designation of the Voting Powers,
Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations and Restrictions of the Series H Preferred Stock
(incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-4 (Registration No. 33-94684) originally
filed by POI, Monitoring and Services on July 18, 1995 (the
"1995 Form S-4")).
3.3 By-laws of POI (incorporated by reference to Exhibit 3.1 to
the Quarterly Report on Form 10-Q filed by POI and Monitoring
for the quarter ended March 31, 1996).
__________________________________
1 The Commission File Number of Protection One, Inc. is 0-24780.
2 The Commission File Number of Protection One Alarm Monitoring, Inc. is
33-73002-01.
<PAGE> 34
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.4 Certificate of Incorporation of Monitoring, as amended
(incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-3 (Registration No. 333-09401) originally
filed by Monitoring, POI, Metrol Security Services, Inc.
("Metrol") and Sonitrol of Arizona, Inc. ("Sonitrol") on
August 1, 1996 (the "August 1996 Form S-3")).
3.5 Bylaws of Monitoring (incorporated by reference to Exhibit
3.2 to the Fiscal 1994 Form 10-K).
4.1 Indenture, dated as of May 17, 1995, among Monitoring, as
Issuer, POI, Services and A-Able Lock & Alarm, Inc.
("A-Able"), as Guarantors, and The First National Bank of
Boston ("FNBB"), as Trustee (incorporated by reference to
Exhibit 4.1 to the 1995 Form S-4).
4.2 First Supplemental Indenture dated as of July 26, 1996, among
Monitoring, POI, Metrol, Sonitrol and State Street Bank and
Trust Company ("SSBTC") as successor trustee to FNBB.
4.3 Second Supplemental Indenture dated as of October 28, 1996,
among Monitoring, POI and Security Holdings, Inc. ("Security
Holdings").
4.4 Subordinated Debt Shelf Indenture dated as of August 29,
1996, among Monitoring as Issuer, POI as Guarantor and SSBTC
as Trustee (incorporated by reference to Exhibit 4.2 to the
August 1996 Form S-3).
4.5 Supplemental Indenture No. 1 dated as of September 20, 1996,
among Monitoring, POI and SSBTC as Trustee (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K
filed by POI and Monitoring dated September 20, 1996 (the
"September 1996 Form 8-K")).
4.6 Supplemental Indenture No. 2 dated as of October 28, 1996,
among Monitoring, POI, Security Holdings and SSBTC as
Trustee.
4.7 Amended and Restated Credit Agreement dated as of June 7,
1996, among Monitoring, Heller Financial, Inc. ("Heller
Financial") as Agent and the financial institutions signatory
thereto (the "Lenders") (incorporated by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring for the quarter ended June 30, 1996 (the "June
1996 Form 10-Q")).
4.8 Consent and First Amendment to Credit Agreement dated as of
September 16, 1996, among Monitoring, Heller Financial as
Agent and the Lenders (incorporated by reference to Exhibit
10.1 to the September 1996 Form 8-K).
4.9 Form of Revolving Note executed by Monitoring in favor of
each Lender pursuant to the Amended and Restated Credit
Agreement filed as Exhibit 4.7.
4.10 Amended and Restated Guaranty dated as of June 7, 1996,
executed by POI in favor of Heller Financial as Agent.
4.11 Amended and Restated Stock Pledge Agreement dated as of June
7, 1996, between POI and Heller Financial as Agent.
33
<PAGE> 35
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
4.12 Amended and Restated Security Agreement dated as of June 7,
1996, between Monitoring and Heller Financial as Agent.
4.13 Amended and Restated Continuing Security Interest and
Conditional Assignment of Patents, Trademarks, Copyrights and
Licenses dated as of June 7, 1996, between Monitoring and
Heller Financial as Agent.
10.1 Stock Purchase Warrant dated as of September 16, 1991, issued
by POI to Merita Bank Ltd. (formerly Kansallis-Osake-Pankki)
(incorporated by reference to Exhibit 10.25 to the Quarterly
Report on Form 10-Q filed by POI, Monitoring and Services for
the quarter ended March 31, 1994 (the "March 1994 Form
10-Q")).
10.2 Stock Purchase Warrant dated as of September 16, 1991, issued
by POI to Dove Partners, G.P. (incorporated by reference to
Exhibit 10.24 to the March 1994 Form 10-Q).
10.3 Modification Agreement dated as of June 29, 1994, among POI,
Dove Partners, G.P. and SAMCO Partners, G.P. (incorporated by
reference to Exhibit 10.27 to the Registration Statement on
Form S-1 (Registration No. 33-81292) originally filed by POI
on July 8, 1994 (the "1994 Form S-1")).
10.4 Stock Purchase Warrant dated December 31, 1992, issued by POI
to Chemical Bank (incorporated by reference to Exhibit 10.26
to the March 1994 Form 10-Q).
10.5 Agreement Concerning Chemical Warrant and Chemical Shares
dated as of June 27, 1994, between POI and Chemical Bank
(incorporated by reference to Exhibit 10.27 to the March 1994
Form 10-Q).
10.6 Amended and Restated Stockholders' Agreement dated as of
August 15, 1994, among POI and the stockholders of POI named
therein (incorporated by reference to Exhibit 10.42 to the
1994 Form S-1)).
10.7 Warrant Agreement dated as of November 3, 1993, between
Monitoring and United States Trust Company of New York, as
Warrant Agent (incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-4 (Registration No.
33-73002) originally filed by POI, Monitoring and certain
former subsidiaries of Monitoring on December 15, 1993 (the
"1993 Form S- 4")).
10.8 Registration Rights Agreement dated as of November 3, 1993,
among Monitoring, POI, certain former subsidiaries of
Monitoring and Bear, Stearns & Co. Inc. (incorporated by
reference to Exhibit 4.4 to the 1993 Form S-4).
10.9 Warrant Agreement dated as of May 17, 1995, between POI and
The First National Bank of Boston, as Warrant Agent
(incorporated by reference to Exhibit 10.40 to the 1995 Form
S-4).
10.10 Common Stock Registration Rights Agreement dated May 17,
1995, among POI, Morgan Stanley & Co. Incorporated and
Montgomery Securities (incorporated by reference to Exhibit
10.41 to the 1995 Form S-4).
34
<PAGE> 36
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.11 Amended and Restated Employment Agreement dated as of May 24,
1996, between POI and James M. Mackenzie, Jr. (incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form
10-Q filed by POI and Monitoring for the quarter ended June
30, 1996, as amended (the "June 1996 Form 10-Q")).*
10.12 Amended and Restated Employment Agreement dated as of May 24,
1996 between POI and John W. Hesse (incorporated by reference
to Exhibit 10.4 to the June 1996 Form 10-Q).*
10.13 Amended and Restated Employment Agreement dated as of May 24,
1996 between POI and John E. Mack, III (incorporated by
reference to Exhibit 10.5 to the June 1996 Form 10-Q).*
10.14 Amended and Restated Employment Agreement dated as of May 24,
1996 between POI and Thomas K. Rankin (incorporated by
reference to Exhibit 10.6 to the June 1996 Form 10-Q).*
10.15 Employment Agreement dated as of November 3, 1993, between
Monitoring and George A. Weinstock (incorporated by reference
to Exhibit 10.13 to the 1993 Form S-4).*
10.16 Non-Competition and Non-Solicitation Agreement dated as of
November 3, 1993, between Monitoring and George A. Weinstock
(incorporated by reference to Exhibit 10.14 to the 1993 Form
S-4)*.
10.17 Common Stock Performance Warrant Agreement dated as of
September 16, 1991 between POI and James M. Mackenzie, Jr.
(incorporated by reference to Exhibit 10.15 to the 1993 Form
S-4).*
10.18 Common Stock Performance Warrant Agreement dated as of
September 16, 1991, between POI and John W. Hesse
(incorporated by reference to Exhibit 10.16 to the 1993 Form
S-4).*
10.19 Common Stock Performance Warrant Agreement dated as of
September 16, 1991, between POI and John E. Mack, III
(incorporated by reference to Exhibit 10.17 to the 1993 Form
S-4).*
10.20 Common Stock Performance Warrant Agreement dated as of
September 16, 1991, between POI and Thomas K. Rankin
(incorporated by reference to Exhibit 10.18 to the 1993 Form
S-4).*
10.21 Form of Amendment to Common Stock Performance Warrant dated
as of June 29, 1994, between POI and each of James M.
Mackenzie, Jr., John W. Hesse, John E. Mack, III and Thomas
K. Rankin (incorporated by reference to Exhibit 10.31 to the
March 1994 Form 10-Q).*
10.22 Consulting Agreement dated as of February 19, 1996 between
POI and Dr. Ben Enis (incorporated by reference to Exhibit
10.7 to the June 1996 Form 10-Q).*
10.23 1994 Stock Option Plan of POI, as amended.*
35
<PAGE> 37
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.24 Series F Preferred Stock Repurchase Agreement dated May 10,
1995, between POI and PacifiCorp Financial Services, Inc.
(incorporated by reference to Exhibit 10.39 to the 1995 Form
S-4).
10.25 Notes Registration Rights Agreement dated as of May 17, 1995,
among POI, Monitoring, Morgan Stanley & Co., Incorporated and
Montgomery Securities (incorporated by reference to Exhibit
4.2 to the 1995 Form S-4).
10.26 Agreement for Purchase and Sale of Assets, dated May 25,
1995, between Alert Centre, Inc. and Monitoring (incorporated
by reference to Exhibit 2 to the Current Report on Form 8-K
filed by POI and Monitoring dated May 25, 1995).
10.27 Agreement to Purchase and Sell Stock dated as of May 23,
1996, among Metrol, the persons named therein as the
"Shareholders" (the "Metrol Shareholders"), Monitoring and
POI (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-3 (Registration No. 33-5849)
originally filed by POI on June 12, 1996 (the "June 1996 Form
S-3")).
10.28 Amendment No. 1 to Agreement dated as of June 28, 1996, among
Metrol, the Metrol Shareholders, Monitoring and POI
(incorporated by reference to Exhibit 2.2 to the June 1996
Form S-3).
10.29 Escrow Agreement dated May 31, 1996, among Metrol, the Metrol
Shareholders, Monitoring, POI and First National Bank of
Denver, N.A. as the Escrow Agent (incorporated by reference
to Exhibit 2.3 to the Current Report on Form 8-K filed by POI
and Monitoring dated June 7, 1996 (the "June 1996 Form
8-K")).
10.30 Registration Rights Agreement dated as of June 28, 1996,
among POI and the Metrol Shareholders (incorporated by
reference to Exhibit 99.1 to the June 1996 Form 8-K).
21.1 Subsidiaries of POI.
23.1 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule.
99.1 Information included as Item 5(d) of the September 20, 1996
Form 8-K (incorporated by reference to Item 5(d) of the
September 20, 1996 Form 8-K).
- ----------------------
* Each exhibit marked with an asterisk constitutes a management
contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of
Form 10-K.
36
<PAGE> 38
C. CURRENT REPORTS ON FORM 8-K.
(i) Current Report on Form 8-K filed by POI and Monitoring and
dated September 16, 1996, reporting in response to Item 5 the
commencement of the underwritten public offering of the
Convertible Notes; and
(ii) Current Report on Form 8-K filed by POI and Monitoring dated
September 20, 1996, reporting in response to Item 5 the
consummation of the Convertible Notes offering, the amendment
of the Credit Agreement and the entering into an agreement
with PacifiCorp, and setting forth certain cautionary
statements for purposes of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
37
<PAGE> 39
PROTECTION ONE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants ........................................ F-2
Consolidated Balance Sheets as of
September 30, 1995 and 1996 .......................................... F-3
Consolidated Statements of Operations for the years ended
September 30, 1994, 1995 and 1996 .................................... F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 .................................... F-5
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended
September 30, 1994, 1995 and 1996 .................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
Schedule VIII Valuation and Qualifying Accounts .......................... S-1
</TABLE>
F-1
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Protection One, Inc.
Culver City, California
We have audited the consolidated financial statements and the financial
statement schedule of Protection One, Inc. and Subsidiaries listed in the index
on page F-1 of this Annual Report on Form 10-K. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protection One,
Inc. and Subsidiaries as of September 30, 1996 and 1995, and their consolidated
results of operations and cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
As discussed in Note 2, effective October 1, 1994, the Company changed its
method of accounting for certain subscriber account acquisition and transition
costs.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
December 10, 1996
F-2
<PAGE> 41
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................... $ 1,256 $ 1,782
Restricted cash .................................... -- 3,680
Receivables, net ................................... 5,806 12,743
Inventories ........................................ 3,125 1,920
Prepaid expenses ................................... 547 1,221
--------- ---------
Total current assets ............................ 10,734 21,346
Property and equipment, net .......................... 5,307 9,952
Subscriber accounts and intangibles, net ............. 162,239 257,354
Assets held for sale ................................. -- 775
Deposits ............................................. 389 648
--------- ---------
$ 178,669 $ 290,075
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 2,078 $ 2,278
Accrued salaries, wages and benefits ............... 1,401 1,495
Other accruals ..................................... 529 1,048
Purchase holdbacks ................................. 4,949 9,942
Acquisition transition costs ....................... 970 4,326
Other current liabilities .......................... 800 1,623
Deferred revenue ................................... 9,166 13,827
--------- ---------
Total current liabilities ....................... 19,893 34,539
Long-term debt, net of current portion ............... 146,023 225,650
Other liabilities .................................... 279 1,059
--------- ---------
Total liabilities ............................... 166,195 261,248
--------- ---------
Commitments and contingencies (Note 14)
Series H cumulative convertible preferred
stock, $.10 par value, 6,127 shares
authorized, issued and outstanding
at September 30, 1995 ............................. 6,127 --
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000
shares authorized, 9,047,638 and
12,914,783 shares issued
and outstanding at
September 30, 1995 and 1996 respectively ......... 90 129
Additional paid-in capital ......................... 41,829 79,767
Accumulated deficit ................................ (35,572) (51,069)
--------- ---------
Total stockholders' equity ...................... 6,347 28,827
--------- ---------
$ 178,669 $ 290,075
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 42
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Monitoring and service ............................ $ 27,109 $ 46,308 $ 65,860
Other.............................................. 7,371 9,574 7,597
-------- -------- --------
Total revenues ................................. 34,480 55,882 73,457
-------- -------- --------
Cost of revenues:
Monitoring and service ............................ 6,520 11,795 17,770
Other ............................................. 5,804 7,424 6,323
-------- -------- --------
Total cost of revenues ......................... 12,324 19,219 24,093
-------- -------- --------
Gross profit ................................... 22,156 36,663 49,364
Selling, general and administrative expenses ........ 10,380 12,409 14,809
Loss on acquisition terminations .................... 26 208 --
Performance warrants compensation expense ........... 4,504 -- --
Acquisition and transition expenses ................. -- 3,090 4,219
Amortization of subscriber accounts and goodwill .... 8,772 15,460 23,275
-------- -------- --------
Operating income (loss) ........................ (1,526) 5,496 7,061
Other expenses:
Interest expense, net ............................. 6,932 7,626 4,885
Amortization of debt issuance costs and OID ....... 891 6,797 17,812
Loss on assets held for sale ...................... -- -- 89
Loss on sales of assets ........................... -- 505 19
-------- -------- --------
Loss before income taxes, extraordinary items
and cumulative effect of change in accounting
method -- net of taxes ....................... (9,349) (9,432) (15,744)
Income tax benefit .................................. 2,863 3,595 247
-------- -------- --------
Loss before extraordinary items and cumulative
effect of change in accounting method --
net of taxes ................................. (6,486) (5,837) (15,497)
Extraordinary items--losses on early extinguishment
of debt--net ...................................... (1,174) (8,906) --
Cumulative effect of change in
accounting method--net ............................ -- (1,955) --
-------- -------- --------
Net loss ....................................... (7,660) (16,698) (15,497)
Preferred stock dividends ........................... 748 958 248
Accretion of redeemable preferred stock ............. 753 797 --
-------- -------- --------
Loss attributable to common stock .............. $ (9,161) $(18,453) $(15,745)
======== ======== ========
Loss per common share:
Before extraordinary items and cumulative effect of
change in accounting method ..................... $ (27.11) $ (0.87) $ (1.40)
Net loss per share ................................ $ (31.10) $ (2.12) $ (1.40)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 43
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (7,660) $ (16,698) $ (15,497)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation ......................................... 518 1,083 1,845
Amortization of subscriber accounts and goodwill ..... 8,772 15,460 23,275
Amortization of debt issuance costs .................. 479 1,212 1,212
Amortization of OID ................................. 412 5,585 16,600
Performance warrants earned .......................... 4,504 -- --
Cumulative effect of change in accounting method ..... -- 1,955 --
Loss on sales and abandonments ....................... -- 713 --
Inventory received in settlements of claim ........... -- (1,562) --
Deferred income tax benefit .......................... (2,863) (3,595) (792)
Extraordinary items .................................. 1,174 8,906 --
Provision for doubtful accounts ...................... 789 1,751 2,649
Other ................................................ -- -- (204)
Receivables .......................................... (1,362) (2,795) (8,737)
Inventories .......................................... (355) 89 2,002
Prepaid expenses and deposits ........................ 383 (408) (752)
Accounts payable ..................................... 621 (121) 199
Accrued liabilities .................................. 2,662 (2,247) 1,793
Deferred revenue ..................................... (675) (832) 470
--------- --------- ---------
Net cash provided by operating activities ....... 7,399 8,496 24,063
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment ..................... (1,417) (3,268) (5,420)
Acquisitions, net of cash received ...................... (60,069) (52,249) (89,776)
Acquisition payments held in escrow ..................... (456) 456 (3,680)
Payments on purchase holdbacks .......................... (941) (3,626) (3,532)
Deferred acquisition payments ........................... (469) (2,167) (1,613)
Acquisition transition costs ............................ (3,136) (2,558) (3,111)
Payment of other liabilities ............................ (322) (109)
--------- --------- ---------
Net cash used in investing activities ........... (66,810) (63,521) (107,132)
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term debt .............................. (25,805) (118,699) (111,222)
Proceeds from long-term debt ............................ 88,328 168,005 174,248
Debt and equity issuance costs .......................... (6,444) (6,780) (4,981)
Payments on stockholders' notes receivable .............. 15 47 --
Issuance of preferred and common stock and warrants ..... 5,494 20,219 25,798
Redemption of preferred stock .......................... (1,500) (2,125) --
Note redemption and premium costs ....................... -- (2,627) --
Cash dividends paid on preferred stock .................. (965) (2,816) (248)
--------- --------- ---------
Net cash provided by financing activities ....... 59,123 55,224 83,595
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... (288) 199 526
Cash and cash equivalents:
Beginning of period ..................................... 1,345 1,057 1,256
--------- --------- ---------
End of period ........................................... $ 1,057 $ 1,256 $ 1,782
========= ========= =========
Interest paid during the period ........................... $ 4,563 $ 9,968 $ 4,784
========= ========= =========
Income taxes paid during the period ....................... $ -- $ -- $ 160
========= ========= =========
Supplemental disclosure (see Note 12)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 44
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS B SERIES A ADDITIONAL STOCKHOLDERS'
COMMON COMMON PREFERRED PAID-IN NOTES ACCUMULATED
STOCK STOCK STOCK CAPITAL RECEIVABLE DEFICIT TOTAL
-------- -------- -------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1993 ............................ $ 10 $ 962 $ 7 $ (62) $ (9,713) $ (8,796)
Net loss ...................................... (7,660) (7,660)
Restatement of par value ...................... (9) (895) 904
Issuance of preferred shares .................. 2,358 2,358
Cancellation of preferred shares .............. (122) (122)
Issuance of common shares ..................... $ 18 982 1,000
Issuance of common stock warrants ............. 4,494 4,494
Stock and warrant issuance costs .............. (376) (376)
Accretion of Series C and E
Redeemable Preferred Stock .................. (753) (753)
Payments on stockholders' notes receivable .... 15 15
Dividends on Series F Redeemable
Preferred Stock ............................. (748) (748)
Exercise of stock purchase warrant ............ 1 (1)
Performance warrants .......................... 4,504 4,504
-------- -------- -------- ----------- --------- ----------- ---------
September 30, 1994 ............................ 2 18 67 12,750 (47) (18,874) (6,084)
Net loss ...................................... (16,698) (16,698)
Issuance of common stock and warrants ......... 30 20,120 20,150
Exercise of stock purchase warrants ........... 2 71 73
Stock and warrant issuance costs .............. (2,283) (2,283)
Accretion of Series C and E
Redeemable Preferred Stock .................. (797) (797)
Dividends on Series A, F, and H
Preferred Stock ............................. (876) (876)
Conversion to common stock .................... 56 (18) (67) 12,844 12,815
Payments on stockholders' notes receivable .... 47 47
-------- -------- -------- ----------- --------- ----------- ---------
September 30, 1995 ............................ 90 -- -- 41,829 -- (35,572) 6,347
Net loss ...................................... (15,497) (15,497)
Issuance of common shares ..................... 38 38,913 38,951
Exercise of stock purchase warrants ........... 1 65 66
Stock issuance costs .......................... (792) (792)
Dividends on Series H Preferred Stock ......... (248) (248)
-------- -------- -------- ----------- --------- ----------- ---------
September 30, 1996 ............................ $ 129 $ -- $ -- $ 79,767 $ -- $ (51,069) $ 28,827
======== ======== ======== =========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 45
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation and Business
The consolidated financial statements include the accounts of Protection
One, Inc. (POI) and its wholly-owned subsidiary, Protection One Alarm
Monitoring, Inc. (Monitoring) (together with POI, the Company). Monitoring's
former wholly-owned subsidiary, Protection One Alarm Services, Inc. was merged
into Monitoring in May 1996. The assets, results of operations and stockholders'
equity of Monitoring comprise substantially all of the assets, results of
operations and stockholders' equity of the Company on a consolidated basis.
POI's principal assets and sole operations are in and through its investment in
Monitoring. All significant intercompany balances and transactions have been
eliminated in consolidation. Separate audited financial statements for
Monitoring have not been provided because the Company does not believe such
separate financial statements are material to investors. Summarized financial
information of Monitoring is included in Note 16.
The Company provides security alarm monitoring services and sells, installs
and services security alarm systems for residential and small business
subscribers principally in the western United States.
Revenues
Revenues are recognized when installation of security alarm systems occurs
and when monitoring, extended service protection, patrol and repair services are
provided. The Company does not receive separate connection fees in any aspect of
its business. Subscribers are billed for monitoring, extended service protection
and patrol and alarm response services in advance of the period in which such
services are provided, on a monthly, quarterly or annual basis. Deferred
revenues result from billings in advance of performance of monitoring, extended
service protection and patrol service. Deferred revenues relating to subscriber
accounts acquired are recorded as part of the allocation of the purchase price
and are amortized to income during the period in which service is provided.
Costs of providing service and installations, including inventory, are charged
to income in the period incurred and when the installation occurs. Losses on
contracts for which future costs are anticipated to exceed revenues are accrued
in the period such losses are identified. Costs of services provided to dealers
are expensed as incurred and are included in acquisition and transition
expenses. Contracts for services are generally for an initial non-cancellable
term of one to five years with automatic renewal on an annual basis thereafter
unless terminated by either party. A substantial number of contracts are now on
an automatic renewal basis.
Inventories
Inventories, comprised of alarm systems and parts, are stated at the lower
of average cost or market.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over its estimated useful life. Costs of property and
equipment of purchased businesses are based on estimated replacement costs at
the date of acquisition. When property and equipment is retired or sold, the
cost and the related allowance for depreciation is eliminated from the property
and allowance accounts. Gains or losses from retirements and dispositions of
property and equipment are recognized in the period realized. Repair and
maintenance costs are expensed as incurred.
F-7
<PAGE> 46
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Income Taxes
Deferred tax liabilities and assets reflect the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities and the availability of net operating losses and tax credits.
Subscriber Accounts and Intangibles
Subscriber accounts acquired and intangible assets are stated at cost. The
cost of acquired subscriber accounts includes the cost of accounts purchased and
the estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. The Company's personnel and related support costs and duplicative costs
incurred solely in support of acquiring and transitioning subscriber accounts
are expensed as incurred. Direct and incremental external costs associated with
the acquisition of subscriber accounts are capitalized. If the acquisition is
terminated prior to completion of the purchase transaction the costs are
recorded as a loss in the period of termination. The accrual for transition
costs includes liabilities assumed and incremental external costs related to
customer changeover and transition, warranty obligation costs, employee and
lease termination costs and other related costs. Costs related to sales,
marketing and installation of systems for accounts internally generated are
expensed as incurred.
The cost of subscriber accounts acquired is amortized on a straight-line
basis over a 10 year period. It is the Company's policy to evaluate acquired
subscriber account attrition on a quarterly basis utilizing historical attrition
rates for the subscriber accounts in total and, when necessary, adjust the
remaining useful lives.
The Company periodically estimates future cash flows from the subscriber
accounts. Because the expected cash flows have exceeded the unamortized cost of
the subscriber accounts the Company has not recorded an impairment loss.
Intangible assets include goodwill, which is amortized on a straight-line
basis over the estimated life of 10 years, and debt issuance costs, which are
amortized over the respective lives of associated debt using the interest
method.
Cash and Cash Equivalents
All highly liquid investments purchased with a remaining maturity of three
months or less at the date acquired are cash equivalents. These investments,
consisting of money market funds, are stated at cost, which approximates market.
Restricted Cash
Restricted cash is held in escrow pursuant to an acquisition agreement
pending final determination of the purchase price of the assets acquired by the
Company.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial, dispersed
across a wide geographic base. The Company extends credit to its customers in
the normal course of business, performs periodic credit evaluations and
maintains allowances for potential credit losses.
F-8
<PAGE> 47
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Advertising Costs
The Company expenses advertising costs as incurred. Total advertising
expense was $497, $411 and $374 during the years ended September 30,
1994, 1995 and 1996, respectively.
New Accounting Pronouncements
In March of 1995, the Financial Accounting Standards Board issued SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" effective for financial statements for fiscal years beginning
after December 15, 1995. This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company determines the
value of its subscriber accounts and intangibles, net based on the undiscounted
cash flows from the monthly recurring revenue (MRR) stream using the most recent
historical attrition rate and aggregate MRR. Based on estimates made as of
September 30, 1996, the Company does not anticipate a material impact on the
financial statements of the registrant that will result from the adoption of the
standard.
In October of 1995, the Financial Standards Accounting Board issued SFAS 123
"Accounting for Stock Based Compensation," which is effective for fiscal years
beginning after December 15, 1995. The Company has not made a decision with
regard to adoption of the optional provisions of the new standard.
Loss Per Common Share
The computation of fully diluted net loss per share for the years ended
September 30, 1994, 1995 and 1996 was antidilutive; as such, no presentation of
fully diluted earnings per share has been included in the consolidated
statements of operations. The weighted average shares outstanding used in the
computation of net loss attributable to common shares are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1994 1995 1996
----------- ----------- --------
<S> <C> <C> <C>
Common Stock.......................... 129,705 8,695,395 11,250,185
Class B Common Stock.................. 164,880 2,792 --
------- --------- ----------
294,585 8,698,187 11,250,185
======= ========= ==========
</TABLE>
Reclassifications
Certain prior period amounts were reclassified to conform to the September
30, 1996 presentation. Such reclassifications did not affect previously reported
net loss.
2. CHANGE IN ACCOUNTING METHOD:
In the third quarter of fiscal 1995, the Company changed its method of
accounting for certain subscriber account acquisition and transition costs,
effective as of October 1, 1994. Under the new method, the Company's personnel
and related support costs and duplicate costs incurred solely in support of
acquiring and transitioning subscriber accounts are expensed as incurred.
Capitalizable costs include the direct costs of accounts purchased and the
estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. Such capitalized transition costs include incremental external costs
related to customer changeover and transition, warranty obligation costs,
employee and lease termination costs and other related costs.
F-9
<PAGE> 48
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The new method is consistent with the guidelines adopted by the Emerging
Issues Task Force of the Financial Accounting Standards Board in Issue 95-3,
Recognition of Liabilities in Conjunction with Purchase Business Combinations.
The consolidated financial statements for the year ended September 30, 1995
reflect the change in accounting method as of October 1, 1994. The effect of the
change on such year was to increase the loss before cumulative effect of the
accounting change, net loss and loss attributable to Common Stock by
approximately $1.5 million or $0.17 per share. The cumulative effect of the
change as of October 1, 1994 was approximately $1.95 million or $0.22 per share,
net of income taxes of $1.2 million, and is reported separately in the
consolidated statement of operations for the year ended September 30, 1995.
The following unaudited pro forma amounts reflect the results of operations
as if the change in accounting method had been retroactively applied:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------
1994 1995
---- ----
<S> <C> <C>
Pro forma:
Loss before extraordinary items $ (7,333) $ (5,837)
Net loss $ (8,508) $(14,743)
Net loss attributable to common stock $(10,008) $(16,498)
Loss per common share:
Before extraordinary item $(29.99) $ (.87)
Net loss per share $(33.97) $(1.90)
Actual:
Net loss per share $(31.10) $(2.12)
</TABLE>
3. PUBLIC EQUITY OFFERINGS AND CONVERSION OF PREFERRED STOCK:
Initial Public Offering and Borrowing Under Revolving Credit Facility
On October 6, 1994, POI issued 2,700,000 shares of its common stock (Common
Stock) at $6.50 per share in an initial public offering (IPO). On November 4,
1994, the Company's underwriters exercised their option to purchase an
additional 330,000 shares of Common Stock at $6.50 per share. In conjunction
with the issuance of shares on October 6, 1994, the Company borrowed $3 million
under Monitoring's revolving credit facility to pay accumulated unpaid
dividends, stock conversion inducements and accounts payable.
Conversion of Shares
In conjunction with the IPO, all outstanding shares of POI's Series A, B, C,
E and G Preferred Stock and Class B Common Stock were converted into a total of
5,557,003 shares of Common Stock. At the time of conversion, the Company paid
accumulated unpaid dividends totaling $2,104 to the holders of the Series A, C
and E Preferred Stock and payments totaling $82 to the holders of the Series A
Preferred Stock to induce conversion of the shares into Common Stock. As a
result of the conversion, the Company recorded a charge to additional paid in
capital of $1,043 which reflects: (i) the accrual of dividends on the Series C
and E Redeemable Preferred Stock from September 30, 1994 through October 6, 1994
totaling $15, (ii) the acceleration of accretion to redemption value of the
Series C and E Redeemable Preferred
F-10
<PAGE> 49
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Stock totaling $782, (iii) payment of dividends to the holders of the Series A
Preferred Stock totaling $164 and (iv) payments of conversion inducements to the
holders of the Series A Preferred Stock totaling $82.
Secondary Public Offering and Conversion of Shares
On February 6, 1996, POI completed a public offering of 4.0 million shares
of Common Stock (2.5 million shares of which was sold by POI), resulting in net
proceeds to the Company of $23.1 million.
In connection with the secondary public offering, all the outstanding shares
of the Company's Series H preferred stock were converted into an aggregate of
680,777 shares of common stock.
4. EXTRAORDINARY ITEMS:
The extraordinary items all relate to losses on early extinguishment of debt
and include the following components:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1994 1995
<S> <C> <C>
Unamortized debt issuance costs........... 1,174 $ 3,044
Unamortized OID........................... -- 4,138
Conversion and tender fees and expenses... -- 2,635
------- -------
1,174 9,817
Deferred tax benefit...................... -- (911)
------- -------
$ 1,174 $ 8,906
======= =======
</TABLE>
5. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of $8,309
at September 30, 1995 and $18,284 at September 30, 1996, have been reduced by
allowances for doubtful accounts of $2,503 and $5,541, respectively. Included in
receivables and deferred revenue at September 30, 1995 and 1996 are October
invoices billed in advance of the periods in which the services are provided
totaling $4,667 and $7,309, respectively. The provisions for doubtful accounts
for the years ended September 30, 1994, 1995, and 1996 were $789, $1,751 and
$2,649, respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1996
------- -------
<S> <C> <C>
Furniture and fixtures....................... $2,004 $2,668
Data processing.............................. 2,563 6,361
Vehicles..................................... 2,568 4,038
Leasehold improvements....................... 634 927
------- -------
7,769 13,994
Less accumulated depreciation and amortization (2,462) (4,042)
------- -------
$5,307 $9,952
======= =======
</TABLE>
F-11
<PAGE> 50
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
7. SUBSCRIBER ACCOUNTS AND INTANGIBLES:
Subscriber accounts and intangibles (at cost) consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1995 1996
--------- ---------
<S> <C> <C>
Acquired subscriber accounts ............... $ 184,463 $ 298,767
Debt issuance costs ........................ 7,405 11,847
Goodwill and other ......................... 1,641 2,497
--------- ---------
193,509 313,111
Less accumulated amortization .............. (31,270) (55,757)
--------- ---------
$ 162,239 $ 257,354
========= =========
</TABLE>
Reconciliation of acquired subscriber accounts:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1995 1996
--------- ---------
<S> <C> <C>
Balance, beginning of year ..................... $ 122,330 $ 184,463
Cumulative effect of change in
accounting method ............................ (3,802) --
Acquisition of subscriber accounts ............. 70,105 119,629
Charges against acquisition holdbacks .......... (2,025) (5,325)
Sale of subscriber accounts .................... (2,145) --
--------- ---------
Balance, end of year ........................... $ 184,463 $ 298,767
========= =========
Number of subscriber accounts
acquired during the year ..................... 63,611 91,325
========= =========
</TABLE>
In conjunction with certain purchases of subscriber accounts the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired subscriber accounts for a specified period as provided
for in the purchase agreements, and as a reserve for purchase price settlements
of assets acquired and liabilities assumed. During the year ended September 30,
1995, purchase holdbacks as a percentage of total purchase price ranged from 0%
to 20% and extended for periods of up to 30 months. During the year ended
September 30, 1996, purchase holdbacks as a percentage of total purchase price
ranged from 0% to 20% and extended for periods of up to 12 months.
Reconciliation of purchase holdbacks:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1995 1996
-------- --------
<S> <C> <C>
Balance, beginning of year ..................... $ 4,250 $ 4,949
Purchase holdbacks additions ................... 6,349 13,850
Charges against subscriber accounts ............ (2,025) (5,325)
Cash payments to sellers ....................... (3,625) (3,532)
-------- --------
Balance, end of year ........................... $ 4,949 $ 9,942
======== ========
</TABLE>
8. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1995 1996
--------- ---------
<S> <C> <C>
Notes payable under credit agreements:
Senior Subordinated Discount Notes ............. $ 166,000 $ 166,000
Unamortized original issue discount ............ (52,229) (35,628)
Convertible Senior Subordinated Notes .......... -- 90,000
Revolving credit facility ...................... 32,252 5,278
--------- ---------
$ 146,023 $ 225,650
========= =========
</TABLE>
F-12
<PAGE> 51
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Senior Subordinated Discount Notes
In May 1995, the Company completed a refinancing plan (the "Refinancing") to
increase its operating and financial flexibility and provide additional funds to
finance the acquisition of subscriber accounts. The principal components of the
Refinancing were:
1. The offering of $166 million principal amount of Monitoring's Senior
Subordinated Discount Notes (the Senior Subordinated Discount Notes) and
warrants to purchase 531,200 shares of Common Stock at $6.60 per share. The
net proceeds of $105.2 million were used to (i) repurchase all $50 million
principal amount of the Series B Notes for an aggregate $52.5 million; (ii)
repay $51.1 million of the Company's borrowings under the Revolving Credit
Facility; (iii) finance the repurchase of 25% of the outstanding shares of
the Series F Preferred Stock from the holder thereof; and (iv) pay accrued
interest on the Series B Notes to the date of repurchase, accrued dividends
on the Series F Preferred Stock to the date of repurchase and certain fees
relating to the extension of the maturity date of the Revolving Credit
Facility.
2. The execution of an amendment to the Revolving Credit Facility in
order to permit the consummation of the Refinancing and to provide for the
extension of the maturity date of the Revolving Credit Facility from
November 1996 to November 1997.
3. The repurchase by POI of 25% of the outstanding shares of Series F
Preferred Stock from the holder thereof for consideration consisting of
approximately $2.0 million in cash and the exchange of the remaining shares
of Series F Preferred Stock for POI's Series H Cumulative Convertible
Preferred Stock.
The Senior Subordinated Discount Notes are unsecured subordinated
obligations of Monitoring, limited to $166 million aggregate principal amount at
maturity, and will mature on June 30, 2005. These notes were sold at a
substantial discount from their principal amount, and will accrete to face value
through June 30, 1998. Although for federal income tax purposes a significant
amount of original issue discount, taxable as ordinary income, will be
recognized by a holder as such discount accrues from the issue date, no interest
will be payable prior to December 31, 1998. From and after June 30, 1998, cash
interest on the notes will accrue at the rate of 13 5/8% per annum, payable in
cash semiannually on June 30 and December 31, of each year, commencing December
31, 1998.
The Senior Subordinated Discount Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after June
30, 2000 and prior to maturity, upon not less than 30 nor more than 60 days'
prior notice at certain specified redemption prices plus accrued and unpaid
interest.
The Senior Subordinated Discount Notes are fully, unconditionally and
jointly and severally guaranteed on a senior subordinated basis by POI and a
subsidiary of Monitoring, Security Holdings, Inc. (Security Holdings), purchased
by Monitoring in November 1996. As of September 30, 1996, Monitoring had no
subsidiaries.
The Senior Subordinated Discount Notes contain covenants which, among other
matters, limit the Company and its Subsidiaries' ability to incur indebtedness,
pay dividends, sell assets, make stock distributions or sell shares of certain
subsidiaries.
F-13
<PAGE> 52
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Senior Subordinated Notes
On November 3, 1993, the Company issued 50,000 units (the Units) with each
Unit consisting of one, $1,000 face value, 12%, Series A Senior Subordinated
Note (the Notes) of Monitoring and 28 detachable Warrants to purchase shares of
Common Stock. The Notes had an aggregate principal amount of $50,000 and were
scheduled to mature on November 1, 2003. Interest was payable semi-annually on
May 1 and November 1, commencing in May 1994. The Notes had optional redemption
provisions and mandatory redemption provisions in the event of change of control
of the Company. A portion of the proceeds from the Units was assigned as the
value attributable to the warrants resulting in a $4,494 original issue discount
(OID) which was being amortized over the maturity period of the Notes using the
effective interest method. The Company recorded discount amortization of $202
and $155 for the years ended September 30, 1994 and 1995, respectively; such
amounts are included in the consolidated statement of operations as a component
of interest expense. The Series B Notes were repaid with the proceeds from the
issuance of the Senior Subordinated Discount Notes.
Convertible Senior Subordinated Notes
In September 1996, Monitoring issued $90.0 million principal amount of
Convertible Senior Subordinated Notes (the "Convertible Notes"). In October
1996, the underwriters exercised an overallotment option, and Monitoring issued
an additional $13.5 million of Convertible Notes. The Convertible Notes are
unsecured subordinated obligations of Monitoring and rank pari passu with the
Senior Subordinated Discount Notes. The Convertible Notes mature on September
15, 2003 and are convertible, at any time, into Common Stock at a price of
$17.95 per share, subject to adjustment.
Interest on the Convertible Notes accrues at the rate of 6.75% per annum,
payable in cash semiannually on March 15 and September 15 of each year,
commencing March 15, 1997. The Convertible Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after
September 19, 1999 and prior to maturity, upon not less than 30 days prior
notice at certain specified redemption prices plus accrued and unpaid interest.
The Convertible Notes are fully, unconditionally and jointly and severally
guaranteed on a senior subordinated basis by POI and Security Holdings.
The indenture under which the Convertible Notes were issued contains
covenants which limit the Company and its subsidiaries' ability to incur certain
indebtedness.
Revolving Credit Facility
At September 30, 1996 Monitoring had a $100 million revolving credit
facility (the Revolving Credit Facility) which matures in January 2000.
Borrowings under the Revolving Credit Facility bear interest at the lesser of
the bank's prime rate plus 1.00% (9.25% at September 30, 1996) or LIBOR plus
2.50% (7.93% at September 30, 1996). Borrowings made under the Revolving Credit
Facility are collateralized by substantially all of the Company's assets,
including the stock of Monitoring and the Company's rights and interests in
subscriber contracts and agreements. Availability of funds under the agreement
is subject to certain financial covenants including: (i) maximum senior debt to
annualized earnings before interest, taxes, depreciation and amortization
(EBITDA); (ii) maximum total debt to annualized EBITDA; and (iii) maximum senior
debt to monthly recurring revenues (MRR). At September 30, 1996, borrowings
under the Revolving Credit Facility amounted to $5,278, all of which bear
interest at LIBOR plus 2.50%.
F-14
<PAGE> 53
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Annual scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30,
<S> <C>
1997 .................................. $ --
1998 .................................. --
1999 .................................. --
2000 .................................. 5,278
2001 .................................. --
Thereafter ............................ 256,000
---------
261,278
Less unamortized OID .................... (35,628)
---------
$ 225,650
=========
</TABLE>
9. OTHER LIABILITIES:
Other liabilities are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
------ ------
<S> <C> <C>
Deferred acquisition payments .................. $1,057 $2,297
Other .......................................... 22 385
------ ------
$1,079 $2,682
Classified as follows:
Other current liabilities .................... $ 800 $1,623
Other liabilities ............................ 279 1,059
------ ------
$1,079 $2,682
====== ======
</TABLE>
At September 30, 1996 deferred acquisition payments are due as follows:
<TABLE>
<S> <C>
Fiscal Year Ended September 30,
1997....................................... $1,238
1998....................................... 621
1999....................................... 438
------
$2,297
======
</TABLE>
10. STOCK WARRANTS AND OPTIONS:
Performance Warrants to purchase 500,472 shares of Common Stock at an
exercise price of $0.167 per share were issued to certain officers of the
Company on September 16, 1991 and were to be earned upon attainment of certain
return on investment objectives and were to vest over a five year period of
employment after the date of issuance. Such objectives were not achieved as of
June 29, 1994, when the Board of Directors and the officers modified the
earnings and vesting criteria such that vesting occurred on that date for all
Performance Warrants. Accordingly, compensation expense in an amount equal to
the excess of the fair market value of the Common Stock issuable on exercise of
the Performance Warrants over the exercise price is reflected as a non-cash
expense in the amount of $4,504 in the year ended September 30, 1994. The
Performance Warrants expire in September 2002.
On November 3, 1993, the Company issued 1,400,000 warrants to purchase
840,000 shares of Common Stock as a part of the Units offering. Each warrant,
when exercised, entitles the holder to receive six-tenths (0.6) of one share of
Common Stock at an exercise price of $.167 per share, subject to adjustment. The
outstanding warrants are exercisable and expire on November 1, 2003.
In June 1994, the Board of Directors adopted, and the stockholders of the
Company approved, the 1994 Stock Option Plan (the Plan). The Plan provides for
the award to directors, officers and key employees of qualified and nonqualified
options under the Internal Revenue Code. Nine hundred forty-
F-15
<PAGE> 54
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
four thousand (944,000) shares are reserved for issuance under the Plan, subject
to such adjustment as may be necessary to reflect changes in the Common Stock or
other securities of POI.
During the year ended September 30, 1995, the Company granted options to
purchase an aggregate of 288,000 shares of Common Stock including 132,000 shares
granted to officers of the Company. Each option has a term of 10 years and vests
20% on each of the third through seventh anniversaries of the commencement of
the participant's employment with the Company. The purchase price of the shares
issuable pursuant to the options is equal to fair market value of Common Stock
at the date of option grant.
In connection with the issuance of the Senior Subordinated Discount Notes in
May 1995, the Company issued warrants to purchase 531,200 shares of Common Stock
at an exercise price of $6.60 per share, subject to adjustment. The outstanding
warrants are exercisable and expire in May of 2005.
During the year ended September 30, 1996, the Company granted options to
purchase an aggregate of 616,800 shares of Common Stock including 400,000 shares
granted to officers of the Company. Each option has a term of 10 years and vests
20% on each of the first through fifth anniversaries of the later of November
15, 1995 or the commencement of the participant's employment with the Company.
The purchase price of the shares issuable pursuant to the options is equal to
(or greater than) the fair market value of the Common Stock at the date of
option grant.
A summary of warrant and option activity is as follows:
<TABLE>
<CAPTION>
WARRANTS
AND OPTIONS PRICE RANGE
------------ -------------
<S> <C> <C>
Outstanding September 30, 1993.................... 833,534 $0.167-$3.663
Granted........................................... 840,000 $0.167
Exercised......................................... (99,841) $0.167
Surrendered....................................... (1,264) $0.167
---------
Outstanding September 30, 1994.................... 1,572,429 $0.167-$3.663
Granted........................................... 819,200 $5.875-$9.125
Exercised......................................... (256,799) $0.167-$6.50
Surrendered....................................... (14,400) $6.50
---------
Outstanding September 30, 1995.................... 2,120,430 $0.167-$9.125
Granted........................................... 616,800 $8.00-$16.75
Exercised......................................... (74,252) $0.167-$6.50
Surrendered....................................... (17,760) $6.50-$8.00
---------
Outstanding September 30, 1996.................... 2,645,218 $0.167-$16.75
Exercisable:
September 30, 1994.............................. 1,572,429 $0.167-$3.663
September 30, 1995.............................. 1,907,310 $0.167-$6.50
September 30, 1996.............................. 1,886,818 $0.167-$6.50
</TABLE>
11. INCOME TAXES:
For the years ended September 30, 1995 and 1996, the Company recognized
federal and state deferred tax benefits of $3,595 and $247, respectively. Such
benefits were recognized because valuation allowances were reduced as a result
of utilization of net operating losses (NOL) to offset temporary differences
that generate deferred tax liabilities during the carryforward period. At
September 30, 1996, the Company had $32.1 million in NOL carryforwards for
regular federal tax purposes and $24.8 million for alternative minimum tax (AMT
NOL) purposes which expire in the years 2006-2010. The Company also has certain
general business and job credit carryforwards. These carryforwards are
available, subject to certain restrictions, to reduce taxable income,
alternative minimum taxable income and income taxes payable in future years. As
a result of the issuance of warrants in conjunction with the Company's
refinancing plan, as well as various prior issuances of preferred and common
stock and stock warrants, there are annual
F-16
<PAGE> 55
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
limitations on the amount of NOL and AMT NOL carryforwards, as well as tax
credits, that can be used to reduce taxable income, alternative minimum taxable
income and income tax payable. Future substantial changes in the Company's
ownership could create additional limitations.
The components of deferred tax assets and liabilities are
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowances for doubtful
accounts .......................................... $ 1,000 $ 2,214
Acquisition reserves and holdbacks ................... 2,365 5,701
Performance warrants ................................. 1,800 1,662
Net operating loss carryforwards ..................... 15,688 12,814
OID amortization ..................................... 2,174 8,634
Other ................................................ 37 139
Less valuation allowance ............................. (3,573) (1,907)
-------- --------
Total deferred tax assets .................... 19,491 29,257
Deferred tax liabilities:
Differences in depreciation and amortization ......... (19,491) (29,257)
-------- --------
Net deferred tax liabilities ................. $ -- $ --
======== ========
</TABLE>
The valuation allowances at September 30, 1995 and September 30, 1996
reflect current estimates of limitations on utilization of NOL carryforwards for
Federal and state income tax purposes. The valuation allowance at September 30,
1995 of $3,573 reflects a $2,953 increase over the valuation allowance at
September 30, 1994. The decrease in valuation allowance of $1,666 from September
30, 1995 to September 30, 1996 reflects amounts which were eliminated in
connection with the acquisition of Metrol Security Services, Inc. (see Note 17.)
The income tax benefit is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current
Federal ........................... $ -- $ -- $ (463)
State ............................. -- -- (82)
------ ------ ------
Total current ............. -- -- (545)
------ ------ ------
Deferred
Federal ........................... 2,663 4,594 674
State ............................. 200 1,120 118
------ ------ ------
Total deferred ............ 2,863 5,714 792
------ ------ ------
Total income tax benefit ............ $2,863 $5,714 $ 247
====== ====== ======
</TABLE>
The differences between the income tax benefit at the Company's effective
tax rate and at the statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax benefit ......... $ 3,178 $ 7,620 $ 5,408
State income tax benefit, net ........... 537 1,336 948
Other ................................... (8) (289) (188)
Loss for which no tax benefits
were provided ........................ (844) (2,953) (5,921)
--------- --------- ---------
Total income tax benefit ................ $ 2,863 $ 5,714 $ 247
========= ========= =========
Income tax benefits included in
the statement of operations are as
follows:
Continuing operations ................... $ 2,863 $ 3,595 $ 247
Extraordinary items-loss on early
extinguishment of debt ................ -- 911 --
Cumulative effect of change in
accounting method .................... -- 1,208 --
--------- --------- ---------
$ 2,863 $ 5,714 $ 247
========= ========= =========
</TABLE>
F-17
<PAGE> 56
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The tax benefit of the extraordinary item and change in accounting
method resulted from recognition of the benefit of the related NOL carryforward
to the extent of available deferred tax credits. Such credits permitted full
recognition of the benefit related to the change in accounting method and
limited the benefit of the extraordinary item to $911.
12. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Subscriber accounts acquired ......... $ 81,525 $ 70,105 $ 119,629
Goodwill ............................. 1,641 -- 792
Cash acquired ........................ 240 -- 31
Other assets acquired ................ 2,584 113 4,983
--------- --------- ---------
Total assets acquired ...... $ 85,990 $ 70,218 $ 125,435
========= ========= =========
Cash paid to seller .................. $ 58,404 $ 49,361 $ 88,330
Stock issued to seller ............... 2,358 -- 8,960
Acquisition expenses ................. 1,905 1,451 943
Deferred revenue assumed ............. 4,567 3,213 3,676
Other assumed liabilities ............ 18,756 16,193 23,526
--------- --------- ---------
Purchase price and assumed
liabilities .......................... $ 85,990 $ 70,218 $ 125,435
========= ========= =========
</TABLE>
Cash paid to sellers, payments for acquisition expenses and payments on
liabilities assumed in conjunction with acquisitions are included in cash used
in investing activities in the period paid. Deferred revenue, which represents
advance payments by subscribers, is recognized as revenues in the period in
which the related service is provided. Such amounts are considered a non-cash
component of operations and are reflected as a reduction in cash provided by
operating activities.
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1994:
<TABLE>
<CAPTION>
REDEEMABLE ADDITIONAL
SUBSCRIBER PURCHASE COMMON PREFERRED PREFERRED PAID-IN ACCUMULATED
ACCOUNTS HOLDBACKS STOCK STOCK STOCK CAPITAL DEFICIT
---------- --------- ------ ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Restatement of par value...... $9 $895 $(904)
Charge-off of purchase
holdbacks................... $(1,059) $1,059
Cancellation of Series G
preferred stock............... (122) 122
Exercise of stock purchase
warrants.................... (1) 1
Accretion to redemption value
of preferred stock............ $(753) $753
------- ------- ----- ------ ------- ------- ----
$(1,181) $1,059 $8 $(753) $895 $(781) $753
======= ======= ===== ====== ======= ======= ====
</TABLE>
F-18
<PAGE> 57
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1995:
<TABLE>
<CAPTION>
CLASS B
COMMON
REDEEMABLE AND ADDITIONAL
SUBSCRIBER PURCHASE COMMON PREFERRED PREFERRED PAID-IN
ACCOUNTS HOLDBACKS STOCK STOCK STOCK CAPITAL
---------- --------- ------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Accretion to redemption value of
preferred stock....................... $ (15) $ 15
Charge-off of purchase holdbacks........ $(2,025) $2,025
Accelerated accretion upon conversion of
preferred stock....................... (782) 782
Reclassification of IPO costs........... (1,305) 1,305
Conversion of Class B common and
preferred stock......................... $(56) 12,897 $85 (12,926)
------- ------- ----- ------ --- -------
$(3,330) $2,025 $(56) $12,100 $85 $(10,824)
======= ======= ===== ======= === ========
</TABLE>
In 1995 the Company received inventory from a supplier in settlement of a
claim. The estimated fair value of the inventory was determined through a
subsequent sale to an independent third party. In connection with such
settlement, the Company recorded revenue of approximately $1.6 million, which is
reflected in other revenues in the Company's statement of operations.
The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1996:
<TABLE>
<CAPTION>
ADDITIONAL SERIES H
PURCHASE COMMON PAID-IN PREFERRED
INTANGIBLES HOLDBACKS STOCK CAPITAL STOCK
----------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Charge-off of purchase holdbacks........ $(5,325) $5,325
Conversion of Series H Preferred........ $(7) $(6,120) $6,127
Common shares issued for Metrol......... 6,843 (4) (6,839)
Common shares issued for Alltec......... 2,117 (2) (2,115)
Reclassification of stock offering costs (792) 792
-------- ----- --- -------- ------
$2,843 $5,325 $(13) $(14,282) $6,127
====== ====== ===== ======== ======
</TABLE>
13. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company maintains a tax-qualified, defined contribution plan designed to
meet the requirements of Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). The Company at its election also may make contributions to the
401(k) Plan, which contributions are allocated among participants based upon the
respective contributions made by the participants through salary reductions
during the applicable plan year. The Company's matching contribution may be made
in Common Stock, in cash or in a combination of both stock and cash; the Company
made $40 of such contributions to the plan during the three year period ended
September 30, 1996.
F-19
<PAGE> 58
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
Employee Stock Purchase Plan
POI's Employee Stock Purchase Plan is designed to qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Internal Revenue
Code, and allows eligible employees to acquire shares of Common Stock at
periodic intervals through their accumulated payroll deductions. A total of
650,000 shares of Common Stock have been reserved for issuance under the
Employee Stock Purchase Plan, which is administered by the Compensation
Committee.
The purchase price of shares of Common Stock purchased under the Employee
Stock Purchase Plan during any purchase period is the lower of (i) 85% of the
fair market value of the Common Stock on the first day of that purchase period
or (ii) 85% of the fair market value of the Common Stock on the purchase date.
Termination of a participant's employment for any reason (including death,
disability or retirement) cancels participation in the Employee Stock Purchase
Plan immediately. The Employee Stock Purchase Plan will in all events terminate
upon the earliest to occur of (i) the last business day in September 2005, (ii)
the date on which all shares available for issuance under the plan have been
sold or (iii) the date on which all purchase rights are exercised in connection
with an acquisition of the Company or all or substantially all of its assets.
14. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities for lease terms maturing through 2005.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
Year ending September 30,
1997............................ $ 1,641
1998............................ 1,431
1999............................ 1,102
2000............................ 969
Thereafter...................... 2,799
--------
$ 7,942
========
</TABLE>
Total rent expense for the years ended September 30, 1994, 1995 and 1996 was
$787, $1,261 and $1,101, respectively.
The Company is a party to claims and matters of litigation incidental to the
normal course of its business. The ultimate outcome of these matters cannot
presently be determined; however, in the opinion of management of the Company,
the resolution of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations and cash flows.
The Company has entered into employment agreements with five of its
officers. The term of the employment agreements with three of the officers is
continually extended so as to cause each such agreement to have a remaining term
of three years; the other two agreements expire in September and November 1998.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other accrued
liabilities, the carrying amounts approximate fair market value due to their
short maturities. The Company's Revolving Credit Facility, which bears a
floating
F-20
<PAGE> 59
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
market rate of interest, and the Series H Redeemable Preferred Stock are carried
at amounts which approximate fair market value.
At September 30, 1996, the Senior Subordinated Discount Notes have an
estimated fair value of approximately $153,550 based on their quoted market
price as compared to their carrying value of $130,372.
At September 30, 1996, the Convertible Senior Subordinated Notes have an
estimated fair value of approximately $90,000 based on their quoted market price
as compared to their carrying value of $90,000.
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized at year end or may be
realized in the future.
16. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
The assets, results of operations and stockholders' equity of Monitoring
comprise substantially all of the assets, results of operations and
stockholders' equity of the Company on a consolidated basis. POI's principal
assets and sole operations are in and through its investment in Monitoring. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate audited financial statements for Monitoring have not
been provided because the Company does not believe such separate financial
statements are material to investors.
The summarized consolidated financial information of Monitoring is
presented below.
<TABLE>
<CAPTION>
At September 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Summarized Balance Sheet
Assets
Current assets .................................... $ 10,733 $ 21,345
Subscriber accounts and intangibles, net .......... $162,239 $257,354
Other non-current assets .......................... $ 5,696 $ 11,375
Liabilities and Stockholders' Equity
Deferred revenue .................................. $ 9,166 $ 13,827
Other current liabilities ......................... $ 10,727 $ 20,712
Long-term debt, net of current portion ............ $146,023 $225,650
Other long term liabilities ....................... $ 279 $ 1,059
Shareholders' equity .............................. $ 12,473 $ 28,826
</TABLE>
<TABLE>
<CAPTION
Year Ended September 30,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Summarized Statements of Operations
Revenues ............................. $34,480 $ 55,882 $ 73,457
Gross profit ......................... $22,156 $ 36,663 $ 49,364
Loss before extraordinary items
and cumulative effect
of change in accounting method ..... $(6,492) $ (5,839) $(15,497)
Net loss ............................. $(7,666) $(16,700) $(15,497)
</TABLE>
F-21
<PAGE> 60
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
17. METROL SECURITY SERVICES, INC. ACQUISITION:
On June 28, 1996 the Company acquired all of the outstanding stock of
Metrol Security Services, Inc. ("Metrol"). Metrol sells, installs, services and
monitors security alarm systems and provides guard and patrol services to
residential and commercial subscribers in Arizona and New Mexico.
The following unaudited pro forma condensed consolidated results of
operations present information as if the acquisition had occurred as of the
beginning of each period presented. The pro forma information is presented after
giving effect to certain adjustments for the amortization of subscriber
accounts, interest expense and the disposition of Metrol's guard operations.
Certain of Metrol's expenses were estimated based on annual amounts incurred.
Management believes the estimates provide a reasonable approximation of actual
results. The pro forma information is provided for informational purposes only.
It is based on historical information and is not necessarily indicative of
future results of operations.
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR
ENDED SEPTEMBER 30,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Revenues ............................................. $ 67,093 $ 82,313
Net loss before extraordinary item and
cumulative effect of change in accounting method ... (8,328) (14,275)
Net loss ............................................. (16,355) (14,275)
Net loss before extraordinary item and cumulative
effect of change in accounting method, per share ... $ (1.11) $ (1.26)
Net loss per common share ............................ $ (1.99) $ (1.26)
</TABLE>
18. SUBSEQUENT EVENTS:
On October 4, 1996, Monitoring purchased all of the outstanding shares of
capital stock of Security Holdings in exchange for an aggregate of 551,888
shares of Common Stock. Of such shares, 68,985 shares have been placed in an
escrow account and will be delivered to the former shareholders of Security
Holdings in June 1997 if the actual postclosing attrition rate of Security
Holding's alarm accounts does not exceed the assumed rate reflected in the
purchase agreement.
Pursuant to the acquisition, Security Holdings became Monitoring's wholly
owned subsidiary and a guarantor of both the Senior Subordinated Discount Notes
and the Convertible Senior Subordinated Notes.
On December 18, 1996, the Company announced that it entered into a
definitive agreement to acquire substantially all of the assets of Phillips
Electronics, Inc. for an aggregate purchase price of $14.5 million. The Company
will issue to Phillips Electronics, Inc. $2.0 million of Common Stock to fund a
portion of the purchase price. The Company anticipates closing the acquisition
in early January, 1997.
F-22
<PAGE> 61
PROTECTION ONE, INC. AND SUBSIDIARIES
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(A) DEDUCTIONS(B) OF PERIOD
----------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1994
Allowances deducted from assets
for doubtful accounts $610 $789 $994 ($1,211) $1,182
============== ============== ============== ============== ==============
YEAR ENDED SEPTEMBER 30, 1995
Allowances deducted from assets
for doubtful accounts $1,182 $1,751 -- ($430) $2,503
============== ============== ============== ============== ==============
YEAR ENDED SEPTEMBER 30, 1996
Allowances deducted from assets
for doubtful accounts $2,503 $2,649 $1,218 ($829) $5,541
============== ============== ============== ============== ==============
</TABLE>
(a) Allowances recorded on receivables purchased in conjunction with
acquisition of customer accounts.
(b) Results from write-offs of accounts receivable.
S-1
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the registrants has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ John W. Hesse
-----------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
Date: December 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of each of the
registrants and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James M. Mackenzie, Jr. President, Chief Executive Officer and December 30, 1996
--------------------------- Director
James M. Mackenzie, Jr.
/s/ John W. Hesse Executive Vice President, December 30, 1996
---------------------- Chief Financial Officer
John W. Hesse (principal financial officer)
and Secretary
/s/ Robert M. Chefitz Director December 30, 1996
-------------------------
Robert M. Chefitz
/s/ Ben Enis Director December 30, 1996
----------------
Ben Enis
/s/ James Q. Wilson Director December 30, 1996
---------------------
James Q. Wilson
</TABLE>
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ------------
<S> <C> <C>
3.1 Fifth Amended and Restated Certificate of Incorporation of Protection One, Inc. ("POI")
(incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year
ended September 30, 1994 filed by POI(1), Protection One Alarm Monitoring, Inc.
("Monitoring")(2) and Protection One Alarm Services, Inc. ("Services") (the "Fiscal 1994
Form 10-K")).
3.2 Certificate of Designation of the Voting Powers, Designations, Preferences and Relative,
Participating, Optional or Other Special Rights, and Qualifications, Limitations and
Restrictions of the Series H Preferred Stock (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-4 (Registration No. 33-94684) originally filed by
POI, Monitoring and Services on July 18, 1995 (the "1995 Form S-4")).
3.3 By-laws of POI (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form
10-Q filed by POI and Monitoring for the quarter ended March 31, 1996).
3.4 Certificate of Incorporation of Monitoring, as amended (incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-3 (Registration No. 333-09401)
originally filed by Monitoring, POI, Metrol Security Services, Inc. ("Metrol") and
Sonitrol of Arizona, Inc. ("Sonitrol") on August 1, 1996 (the "August 1996 Form S-3")).
3.5 Bylaws of Monitoring (incorporated by reference to Exhibit 3.2 to the Fiscal 1994
Form 10-K).
4.1 Indenture, dated as of May 17, 1995, among Monitoring, as Issuer, POI, Services and A-Able
Lock & Alarm, Inc. ("A-Able"), as Guarantors, and The First National Bank of Boston
("FNBB"), as Trustee (incorporated by reference to Exhibit 4.1 to the 1995 Form S-4).
4.2 First Supplemental Indenture dated as of July 26, 1996, among Monitoring, POI, Metrol,
Sonitrol and State Street Bank and Trust Company ("SSBTC") as successor trustee to FNBB.
4.3 Second Supplemental Indenture dated as of October 28, 1996, among Monitoring, POI and
Security Holdings, Inc. ("Security Holdings").
4.4 Subordinated Debt Shelf Indenture dated as of August 29, 1996, among Monitoring as Issuer,
POI as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.2 to the
August 1996 Form S-3).
</TABLE>
__________________________________
(1) The Commission File Number of Protection One, Inc. is 0-24780.
(2) The Commission File Number of Protection One Alarm Monitoring,
Inc. is 33-73002-01.
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ------------
<S> <C> <C>
4.5 Supplemental Indenture No. 1 dated as of September 20, 1996, among Monitoring, POI and
SSBTC as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form
8-K filed by POI and Monitoring dated September 20, 1996 (the "September 1996 Form 8-K")).
4.6 Supplemental Indenture No. 2 dated as of October 28, 1996, among Monitoring, POI, Security
Holdings and SSBTC as Trustee.
4.7 Amended and Restated Credit Agreement dated as of June 7, 1996, among Monitoring, Heller
Financial, Inc. ("Heller Financial") as Agent and the financial institutions signatory
thereto (the "Lenders") (incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q filed by POI and Monitoring for the quarter ended June 30, 1996 (the "June
1996 Form 10-Q")).
4.8 Consent and First Amendment to Credit Agreement dated as of September 16, 1996, among
Monitoring, Heller Financial as Agent and the Lenders (incorporated by reference to
Exhibit 10.1 to the September 1996 Form 8-K).
4.9 Form of Revolving Note executed by Monitoring in favor of each Lender pursuant to the
Amended and Restated Credit Agreement filed as Exhibit 4.7.
4.10 Amended and Restated Guaranty dated as of June 7, 1996, executed by POI in favor of Heller
Financial as Agent.
4.11 Amended and Restated Stock Pledge Agreement dated as of June 7, 1996, between POI and
Heller Financial as Agent.
4.12 Amended and Restated Security Agreement dated as of June 7, 1996, between Monitoring and
Heller Financial as Agent.
4.13 Amended and Restated Continuing Security Interest and Conditional Assignment of Patents,
Trademarks, Copyrights and Licenses dated as of June 7, 1996, between Monitoring and
Heller Financial as Agent.
10.1 Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Merita Bank Ltd.
(formerly Kansallis-Osake-Pankki) (incorporated by reference to Exhibit 10.25 to the
Quarterly Report on Form 10-Q filed by POI, Monitoring and Services for the quarter ended
March 31, 1994 (the "March 1994 Form 10-Q")).
10.2 Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Dove Partners,
G.P. (incorporated by reference to Exhibit 10.24 to the March 1994 Form 10-Q).
</TABLE>
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ------------
<S> <C> <C>
10.3 Modification Agreement dated as of June 29, 1994, among POI, Dove Partners, G.P. and SAMCO
Partners, G.P. (incorporated by reference to Exhibit 10.27 to the Registration Statement
on Form S-1 (Registration No. 33-81292) originally filed by POI on July 8, 1994 (the "1994
Form S-1")).
10.4 Stock Purchase Warrant dated December 31, 1992, issued by POI to Chemical Bank
(incorporated by reference to Exhibit 10.26 to the March 1994 Form 10-Q).
10.5 Agreement Concerning Chemical Warrant and Chemical Shares dated as of June 27, 1994,
between POI and Chemical Bank (incorporated by reference to Exhibit 10.27 to the March
1994 Form 10-Q).
10.6 Amended and Restated Stockholders' Agreement dated as of August 15, 1994, among POI and
the stockholders of POI named therein (incorporated by reference to Exhibit 10.42 to the
1994 Form S-1)).
10.7 Warrant Agreement dated as of November 3, 1993, between Monitoring and United States Trust
Company of New York, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-4 (Registration No. 33-73002) originally filed by POI,
Monitoring and certain former subsidiaries of Monitoring on December 15, 1993 (the "1993
Form S-4")).
10.8 Registration Rights Agreement dated as of November 3, 1993, among Monitoring, POI, certain
former subsidiaries of Monitoring and Bear, Stearns & Co. Inc. (incorporated by reference
to Exhibit 4.4 to the 1993 Form S-4).
10.9 Warrant Agreement dated as of May 17, 1995, between POI and The First National Bank of
Boston, as Warrant Agent (incorporated by reference to Exhibit 10.40 to the 1995
Form S-4).
10.10 Common Stock Registration Rights Agreement dated May 17, 1995, among POI, Morgan Stanley &
Co. Incorporated and Montgomery Securities (incorporated by reference to Exhibit 10.41 to
the 1995 Form S-4).
10.11 Amended and Restated Employment Agreement dated as of May 24, 1996, between POI and James
M. Mackenzie, Jr. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q filed by POI and Monitoring for the quarter ended June 30, 1996, as amended (the
"June 1996 Form 10-Q")).*
10.12 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John W.
Hesse (incorporated by reference to Exhibit 10.4 to the June 1996 Form 10-Q).*
</TABLE>
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ------------
<S> <C> <C>
10.13 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John E.
Mack, III (incorporated by reference to Exhibit 10.5 to the June 1996 Form 10-Q).*
10.14 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and Thomas
K. Rankin (incorporated by reference to Exhibit 10.6 to the June 1996 Form 10-Q).*
10.15 Employment Agreement dated as of November 3, 1993, between Monitoring and George A.
Weinstock (incorporated by reference to Exhibit 10.13 to the 1993 Form S-4).*
10.16 Non-Competition and Non-Solicitation Agreement dated as of November 3, 1993, between
Monitoring and George A. Weinstock (incorporated by reference to Exhibit 10.14 to the 1993
Form S-4)*.
10.17 Common Stock Performance Warrant Agreement dated as of September 16, 1991 between POI and
James M. Mackenzie, Jr. (incorporated by reference to Exhibit 10.15 to the 1993 Form S-
4).*
10.18 Common Stock Performance Warrant Agreement dated as of September 16, 1991, between POI and
John W. Hesse (incorporated by reference to Exhibit 10.16 to the 1993 Form S-4).*
10.19 Common Stock Performance Warrant Agreement dated as of September 16, 1991, between POI and
John E. Mack, III (incorporated by reference to Exhibit 10.17 to the 1993 Form S-4).*
10.20 Common Stock Performance Warrant Agreement dated as of September 16, 1991, between POI and
Thomas K. Rankin (incorporated by reference to Exhibit 10.18 to the 1993 Form S-4).*
10.21 Form of Amendment to Common Stock Performance Warrant dated as of June 29, 1994, between
POI and each of James M. Mackenzie, Jr., John W. Hesse, John E. Mack, III and Thomas K.
Rankin (incorporated by reference to Exhibit 10.31 to the March 1994 Form 10-Q).*
10.22 Consulting Agreement dated as of February 19, 1996 between POI and Dr. Ben Enis
(incorporated by reference to Exhibit 10.7 to the June 1996 Form 10-Q).*
10.23 1994 Stock Option Plan of POI, as amended.*
10.24 Series F Preferred Stock Repurchase Agreement dated May 10, 1995, between POI and
PacifiCorp Financial Services, Inc. (incorporated by reference to Exhibit 10.39 to the
1995 Form S-4).
</TABLE>
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ------------
<S> <C> <C>
10.25 Notes Registration Rights Agreement dated as of May 17, 1995, among POI, Monitoring,
Morgan Stanley & Co., Incorporated and Montgomery Securities (incorporated by reference to
Exhibit 4.2 to the 1995 Form S-4).
10.26 Agreement for Purchase and Sale of Assets, dated May 25, 1995, between Alert Centre, Inc.
and Monitoring (incorporated by reference to Exhibit 2 to the Current Report on Form 8-K
filed by POI and Monitoring dated May 25, 1995).
10.27 Agreement to Purchase and Sell Stock dated as of May 23, 1996, among Metrol, the persons
named therein as the "Shareholders" (the "Metrol Shareholders"), Monitoring and POI
(incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-3
(Registration No. 33-5849) originally filed by POI on June 12, 1996 (the "June 1996 Form
S-3")).
10.28 Amendment No. 1 to Agreement dated as of June 28, 1996, among Metrol, the Metrol
Shareholders, Monitoring and POI (incorporated by reference to Exhibit 2.2 to the June
1996 Form S-3).
10.29 Escrow Agreement dated May 31, 1996, among Metrol, the Metrol Shareholders, Monitoring,
POI and First National Bank of Denver, N.A. as the Escrow Agent (incorporated by reference
to Exhibit 2.3 to the Current Report on Form 8-K filed by POI and Monitoring dated June 7,
1996 (the "June 1996 Form 8-K")).
10.30 Registration Rights Agreement dated as of June 28, 1996, among POI and the Metrol
Shareholders (incorporated by reference to Exhibit 99.1 to the June 1996 Form 8-K).
21.1 Subsidiaries of POI.
23.1 Consent of Coopers & Lybrand, L.L.P.
27 Financial Data Schedule.
99.1 Information included as Item 5(d) of the September 20, 1996 Form 8-K (incorporated by
reference to Item 5(d) of the September 20, 1996 Form 8-K).
</TABLE>
______________________
* Each exhibit marked with an asterisk constitutes a management
contract or compensatory plan or arrangement required to be filed
as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
<PAGE> 1
EXHIBIT 4.2
Protection One Alarm Monitoring, Inc.,
as Issuer
Protection One, Inc.,
Metrol Security Services, Inc.
and
Sonitrol of Arizona, Inc.,
as Guarantors
13 5/8% Senior Subordinated Discount Notes Due 2005
--------------------
First Supplemental Indenture
dated as of July 26, 1996
to
Indenture dated as of May 17, 1995
--------------------
State Street Bank and Trust Company,
as Trustee
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE dated as of July 26, 1996, by and among
PROTECTION ONE ALARM MONITORING, INC., a Delaware corporation ("Monitoring"),
PROTECTION ONE, INC., a Delaware corporation (the "Parent Company"), METROL
SECURITY SERVICES, INC., a Delaware corporation ("Metrol"), SONITROL OF ARIZONA,
INC. an Arizona corporation ("Sonitrol" and together with the Parent Company and
Metrol, each a guarantor and collectively, the "Guarantors"), and STATE STREET
BANK AND TRUST COMPANY, a Massachusetts trust company, as successor trustee to
The First National Bank of Boston under the Indenture hereinafter referred to
(the "Trustee"). All terms used herein and not otherwise defined shall have the
meanings ascribed thereto in the Indenture (as defined below).
WHEREAS, Monitoring, the Parent Company, Protection One Alarm
Services, Inc., an Oregon corporation ("Services"), A-Able Lock & Alarm, Inc., a
Nevada corporation ("A-Able"), and The First National Bank of Boston entered
into an Indenture dated as of May 17, 1995 (the "Indenture") providing for the
issuance by Monitoring of up to $166,000,000 aggregate principal amount 13 5-8%
Senior Subordinated Discount Notes due 2005 (the "Discount Notes"); and
WHEREAS, in accordance with applicable provisions of the Indenture,
each of Services and A-Able heretofore has been merged into Monitoring;
WHEREAS, State Street Bank and Trust Company has acquired
substantially all of the corporate trust business of The First National Bank of
Boston and has thereby become successor trustee under the Indenture;
WHEREAS, Section 9.01 of the Indenture provides that Monitoring and
the Guarantors, in each case when authorized by a resolution of such company's
board of directors (or, in the case of a Guarantor, any committee of such
company's board of directors duly authorized to act under the Indenture), and
the Trustee, at any time and from time to time, may,f without the consent of any
Holder, enter into an indenture supplemental to the Indenture for the purpose
of, among other things, adding a Note Guarantee;
WHEREAS, pursuant to Sections 4.21 and 11.05 of the Indenture,
Monitoring and the Guarantors desire to provide for Note Guarantees of payment
of the Securities by Metrol and Sonitrol;
WHEREAS, Monitoring and the Guarantors desire among other things to
amend the preamble of the Indenture to reflect the addition of Metrol and
Sonitrol as Guarantors; and
WHEREAS, all things necessary to make this First Supplemental
Indenture a valid indenture supplemental to the Indenture have been done;
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises, it is hereby mutually
covenanted and agreed, for the equal and proportionate benefit of all Holders of
the Notes, as follows:
2
<PAGE> 3
ARTICLE I
AMENDMENT OF THE INDENTURE
A. Preamble. The preamble of the Indenture is hereby amended and restated
in its entirety to read as follows:
"INDENTURE dated as of May 17, 1995 by and among PROTECTION
ONE ALARM MONITORING, INC., a Delaware corporation ("Monitoring"),
PROTECTION ONE, INC., a Delaware corporation (the "Parent Company"),
METROL SECURITY SERVICES, INC., a Delaware corporation ("Metrol"), and
SONITROL OF ARIZONA, INC., an Arizona corporation ("Sonitrol", and
together with the Parent Company and Metrol, the "Guarantors"), as
Guarantors (collectively, the "Guarantors"), and STATE STREET BANK AND
TRUST COMPANY, a Massachusetts trust company, as trustee (the "Trustee")."
B. Note Guarantees. Pursuant to Section 4.21 of the Indenture, each of
Metrol and Sonitrol hereby provides a Note Guarantee of payment of the
Securities by such Restricted Subsidiary pursuant to Article Eleven of the
Indenture,
C References to Guarantors. Any reference in any Section of the Indenture
to the Guarantors or any of them shall be deemed to include each of Metrol and
Sonitrol.
ARTICLE II
MISCELLANEOUS
I. Execution of Supplemental Indenture. This First Supplemental Indenture is
executed and shall be construed as an indenture supplemental to the Indenture
and, as provided in the Indenture, this First Supplemental Indenture forms a
part thereof. The Indenture, as supplemented and amended by this First
Supplemental Indenture, is in all respects hereby adopted, ratified and
confirmed and shall remain in full force and effect in accordance with its
terms.
A. Responsibility for Recitals. etc. The recitals herein shall be taken as
the statements of Monitoring and the Guarantors, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee makes no representation
as to the validity or sufficiency of this First Supplemental Indenture.
B. Provisions Binding on Successors. All the covenants and agreements in
this First Supplemental Indenture by Monitoring and the Guarantors shall bind
their respective successors and assigns whether so expressed or not.
C. Governing Law. This First Supplemental Indenture shall be governed by
the internal laws of the State of New York.
D. Execution and Counterparts. This First Supplemental Indenture may be
executed in any number of counterparts, each of which shall be an original but
such counterparts shall together constitute but one and the same instrument.
3
<PAGE> 4
This First Supplemental Indenture shall become effective immediately
upon its execution and delivery by Monitoring, each of the Guarantors and the
Trustee.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, all as of the date first written
above.
PROTECTION ONE ALARM MONITORING, INC.
By: JOHN W. HESSE
-----------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
PROTECTION ONE, INC.
By: JOHN W. HESSE
-----------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
METROL SECURITY SERVICES, INC.
By: JOHN W. HESSE
-----------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
SONITROL OF ARIZONA, INC.
By: JOHN W. HESSE
-----------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
STATE STREET BANK AND TRUST COMPANY,
as Trustee
By: ANDREW M. SINASKY
-----------------------------------
Name: Andrew M. Sinasky
Title: Assistant Vice President
4
<PAGE> 1
EXHIBIT 4.3
Protection One Alarm Monitoring, Inc.,
as Issuer
Protection One, Inc.
and
Security Holdings, Inc.
as Guarantors
13 5/8% Senior Subordinated Discount Notes Due 2005
--------------------
Second Supplemental Indenture
dated as of October 28, 1996
to
Indenture dated as of May 17, 1995
--------------------
State Street Bank and Trust Company,
as Trustee
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE dated as of October 28, 1996, by and
among PROTECTION ONE ALARM MONITORING, INC., a Delaware corporation
("Monitoring"), PROTECTION ONE, INC., a Delaware corporation (the "Parent
Company") and SECURITY HOLDINGS, INC., an Oregon corporation ("Security
Holdings" and together with the Parent Company, each a guarantor and
collectively, the "Guarantors"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company, as successor trustee to The First National Bank of
Boston under the Indenture hereinafter referred to (the "Trustee"). All terms
used herein and not otherwise defined shall have the meanings ascribed thereto
in the Indenture (as defined below).
WHEREAS, Monitoring, the Parent Company, Protection One Alarm
Services, Inc., an Oregon corporation ("Services"), A-Able Lock & Alarm, Inc., a
Nevada corporation ("A-Able"), and The First National Bank of Boston entered
into an Indenture dated as of May 17, 1995 (the "Indenture") providing for the
issuance by Monitoring of up to $166,000,000 aggregate principal amount 13 5-8%
Senior Subordinated Discount Notes due 2005 (the "Discount Notes"); and
WHEREAS, in accordance with applicable provisions of the Indenture,
each of Services and A-Able was merged into Monitoring;
WHEREAS, State Street Bank and Trust Company has acquired
substantially all of the corporate trust business of The First National Bank of
Boston and has thereby become successor trustee under the Indenture;
WHEREAS, Section 9.01 of the Indenture provides that Monitoring and
the Guarantors, in each case when authorized by a resolution of such company's
board of directors (or, in the case of a Guarantor, any committee of such
company's board of directors duly authorized to act under the Indenture), and
the Trustee, at any time and from time to time, may,f without the consent of any
Holder, enter into an indenture supplemental to the Indenture for the purpose
of, among other things, adding a Note Guarantee;
WHEREAS, pursuant to said Section 9.01, Metrol Security Services,
Inc., a Delaware corporation ("Metrol"), Sonitrol of Arizona, Inc., an Arizona
corporation ("Sonitrol"), Monitoring, the Parent Company and the Trustee
thereafter entered into a First Supplemental Indenture dated as of July 26, 1996
for the purpose of adding Note Guarantees by Metrol and Sonitrol;
WHEREAS, in accordance with applicable provisions of the Indenture,
Metrol and Sonitrol thereafter were merged into Monitoring;
WHEREAS, pursuant to Sections 4.21 and 11.05 of the Indenture,
Monitoring, the Parent Company and Security Holdings desire to provide for a
Note Guarantee of payment of the Securities by Security Holdings;
WHEREAS, Monitoring and the Guarantors desire among other things to
amend the preamble of the Indenture to reflect the addition of Security Holdings
as a Guarantor; and
WHEREAS, all things necessary to make this Second Supplemental
Indenture a valid indenture supplemental to the Indenture have been done;
2
<PAGE> 3
NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WIT-
NESSETH:
For and in consideration of the premises, it is hereby mutually
covenanted and agreed, for the equal and proportionate benefit of all Holders of
the Notes, as follows:
ARTICLE I
AMENDMENT OF THE INDENTURE
A. Preamble. The preamble of the Indenture is hereby amended and restated
in its entirety to read as follows:
"INDENTURE dated as of May 17, 1995 by and among PROTECTION
ONE ALARM MONITORING, INC., a Delaware corporation ("Monitoring"),
PROTECTION ONE, INC., a Delaware corporation (the "Parent Company"), and
SECURITY HOLDINGS, INC., an Oregon corporation ("Security Holdings", and
together with the Parent Company, the "Guarantors"), as Guarantors
(collectively, the "Guarantors"), and STATE STREET BANK AND TRUST COMPANY,
a Massachusetts trust company, as trustee (the "Trustee")."
B. Note Guarantees. Pursuant to Section 4.21 of the Indenture, Security
Holdings hereby provides a Note Guarantee of payment of the Securities by such
Restricted Subsidiary pursuant to Article Eleven of the Indenture,
C. References to Guarantors. Any reference in any Section of the Indenture
to the Guarantors or any of them shall be deemed to include Security Holdings.
ARTICLE II
MISCELLANEOUS
I. Execution of Supplemental Indenture. This Second Supplemental Indenture
is executed and shall be construed as an indenture supplemental to the Indenture
and, as provided in the Indenture, this Second Supplemental Indenture forms a
part thereof. The Indenture, as supplemented and amended by the First
Supplemental Indenture and this Second Supplemental Indenture, is in all
respects hereby adopted, ratified and confirmed and shall remain in full force
and effect in accordance with its terms.
A. Responsibility for Recitals. etc. The recitals herein shall be taken as
the statements of Monitoring and the Guarantors, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee makes no representation
as to the validity or sufficiency of this Second Supplemental Indenture.
B. Provisions Binding on Successors. All the covenants and agreements in
this Second Supplemental Indenture by Monitoring and the Guarantors shall bind
their respective successors and assigns whether so expressed or not.
C. Governing Law. This Second Supplemental Indenture shall be governed by
the internal laws of the State of New York.
D. Execution and Counterparts. This Second Supplemental Indenture may be
executed in
3
<PAGE> 4
any number of counterparts, each of which shall be an original but such
counterparts shall together constitute but one and the same instrument.
This Second Supplemental Indenture shall become effective
immediately upon its execution and delivery by Monitoring, each of the
Guarantors and the Trustee.
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed, all as of the date first written
above.
PROTECTION ONE ALARM MONITORING, INC.
By: JOHN W. HESSE
------------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
PROTECTION ONE, INC.
By: JOHN W. HESSE
------------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
SECURITY HOLDINGS, INC.
By: JOHN W. HESSE
------------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
STATE STREET BANK AND TRUST COMPANY,
as Trustee
By: ANDREW M. SINASKY
------------------------------------
Name: Andrew M. Sinasky
Title: Assistant Vice President
4
<PAGE> 1
EXHIBIT 4.6
Protection One Alarm Monitoring, Inc.,
as Issuer
Protection One, Inc.
and
Security Holdings, Inc.
as Guarantors
6 3/4% Convertible Senior Subordinated Discount Notes Due 2003
--------------------
Supplemental Indenture No. 2
dated as of October 28, 1996
to
Subordinated Debt Shelf Indenture
dated as of August 29, 1996
as amended and supplemented by
Supplemental Indenture No. 1
dated as of September 20, 1996
--------------------
State Street Bank and Trust Company,
as Trustee
<PAGE> 2
SUPPLEMENTAL INDENTURE NO. 2 dated as of October 28, 1996, by and
among PROTECTION ONE ALARM MONITORING, INC., a Delaware corporation
("Monitoring"), PROTECTION ONE, INC., a Delaware corporation (the "Parent
Company") and SECURITY HOLDINGS, INC., an Oregon corporation ("Security
Holdings" and together with the Parent Company, each a guarantor and
collectively, the "Guarantors"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company ("State Street"), as successor trustee to The First
National Bank of Boston under the Indenture hereinafter referred to (the
"Trustee"). All terms used herein and not otherwise defined shall have the
meanings ascribed thereto in the Indenture (as defined below).
WHEREAS, Monitoring and the Parent Company and State Street entered
into a Subordinated Debt Shelf Indenture dated as of August 29, 1996 (the "Shelf
Indenture") providing for the issuance by Monitoring of up to $150,000,000
aggregate principal amount of debt securities;
WHEREAS, pursuant to Supplemental Indenture No. 1 dated as of
September 20, 1996 to the Shelf Indenture ("Supplemental Indenture No. 1", and
the Shelf Indenture as amended and supplemented by Supplemental Indenture No. 1
the "Indenture"), Monitoring issued $103,500,000 aggregate principal amount of 6
3/4% Convertible Senior Subordinated Notes due 2003 (the "Convertible Notes");
WHEREAS, Section 8.01 of the Indenture provides that Monitoring,
when authorized by a resolution of the Issuer's board of directors, and the
Trustee, at any time and from time to time, may, without the consent of any
Holder, enter into an indenture supplemental to the Indenture for the purpose
of, among other things, adding a Note Guarantee;
WHEREAS, pursuant to Sections 3.07 and 13.05 of the Indenture,
Monitoring, the Parent Company and Security Holdings desire to provide for a
Note Guarantee of payment of the Securities by Security Holdings;
WHEREAS, Monitoring and the Guarantors desire among other things to
amend the preamble of the Indenture to reflect the addition of Security Holdings
as a Guarantor; and
WHEREAS, all things necessary to make this Supplemental Indenture
No. 2 a valid indenture supplemental to the Indenture have been done;
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE NO. 2 WITNESSETH:
For and in consideration of the premises, it is hereby mutually
covenanted and agreed, for the equal and proportionate benefit of all Holders of
the Notes, as follows:
ARTICLE I
AMENDMENT OF THE INDENTURE
A. Preamble. The preamble of the Indenture is hereby amended and restated
in its entirety to read as follows:
"THIS INDENTURE, dated as of August 29, 1996, by and among
PROTECTION ONE ALARM MONITORING, INC., a Delaware corporation (the
"Issuer"), PROTECTION ONE, INC., a Delaware corporation (the "Parent
Company"), SECURITY HOLDINGS, INC., an Oregon corporation ("Security
2
<PAGE> 3
Holdings", and together with the Parent Company, the "Guarantors"), and
STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, as
trustee (the "Trustee")."
B. Note Guarantees. Pursuant to Section 3.29 of the Indenture, Security
Holdings hereby provides a Note Guarantee of payment of the Securities by such
Restricted Subsidiary pursuant to Article Thirteen of the Indenture,
C. References to Guarantors. Any reference in any Section of the Indenture
to the Guarantors or any of them shall be deemed to include Security Holdings.
ARTICLE II
MISCELLANEOUS
1. Execution of Supplemental Indenture. This Supplemental Indenture No. 2 is
executed and shall be construed as an indenture supplemental to the Shelf
Indenture and, as provided in the Indenture, this Supplemental Indenture No. 2
forms a part thereof. The Shelf Indenture, as supplemented and amended by the
Supplemental Indenture No. 1 and this Supplemental Indenture No. 2, is in all
respects hereby adopted, ratified and confirmed and shall remain in full force
and effect in accordance with its terms.
A. Responsibility for Recitals. etc. The recitals herein shall be taken as
the statements of Monitoring and the Guarantors, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee makes no representation
as to the validity or sufficiency of this Supplemental Indenture No. 2.
B. Provisions Binding on Successors. All the covenants and agreements in
this Supplemental Indenture No. 2 by Monitoring and the Guarantors shall bind
their respective successors and assigns whether so expressed or not.
C. Governing Law. This Supplemental Indenture No. 2 shall be governed by
the internal laws of the State of New York.
D. Execution and Counterparts. This Supplemental Indenture No. 2 may be
executed in any number of counterparts, each of which shall be an original but
such counterparts shall together constitute but one and the same instrument.
This Supplemental Indenture No. 2 shall become effective immediately
upon its execution and delivery by Monitoring, each of the Guarantors and the
Trustee.
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<PAGE> 4
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture No. 2 to be duly executed, all as of the date first written above.
PROTECTION ONE ALARM MONITORING, INC.
By: JOHN W. HESSE
-------------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
PROTECTION ONE, INC.
By: JOHN W. HESSE
-------------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
SECURITY HOLDINGS, INC.
By: JOHN W. HESSE
-------------------------------------
John W. Hesse
Executive Vice President and
Chief Financial Officer
STATE STREET BANK AND TRUST COMPANY,
as Trustee
By: ANDREW M. SINASKY
-------------------------------------
Name: Andrew M. Sinasky
Title: Assistant Vice President
4
<PAGE> 1
EXHIBIT 4.9
REVOLVING NOTE(1)
$75,000,000 Chicago, Illinois
June 7, 1996
FOR VALUE RECEIVED, the undersigned, Protection One Alarm
Monitoring, Inc., a Delaware corporation ("Borrower"), hereby unconditionally
promises to pay to the order of Heller Financial, Inc., a Delaware corporation
("Lender"), at the office of Agent (as defined in the Credit Agreement) at 500
West Monroe Street, Chicago, Illinois 60611, or at such other place as Agent may
from time to time designate in writing, in lawful money of the United States of
America and in immediately available funds, the principal sum of SEVENTY-FIVE
MILLION DOLLARS ($75,000,000) or, if less, the aggregate unpaid principal amount
of the Revolving Loan advanced by Lender pursuant to that certain Amended and
Restated Credit Agreement dated as of the date hereof among Borrower, Heller
Financial, Inc., as Agent and as Lender, and certain other Persons signatory
thereto, together with Heller, as Lenders (as the same may from time to time
hereafter be amended, supplemented, restated or modified, the "Credit
Agreement").
This Revolving Note is referred to in and was executed and
delivered pursuant to and evidences obligations of Borrower under the Credit
Agreement, to which reference is hereby made for a statement of the terms and
conditions under which the loans evidenced hereby are made and are to be repaid
and for a statement of Agent's and Lenders' remedies upon the occurrence of an
Event of Default as defined therein. The Credit Agreement is incorporated herein
by reference in its entirety. All capitalized terms used in this Revolving Note
shall have the meanings ascribed to them by the Credit Agreement, unless
otherwise defined herein.
This Revolving Note is secured pursuant to the Security
Agreement and the other Security Documents. Reference is made to the foregoing
documents for a statement of terms and conditions of such security.
This Revolving Note shall be paid in full as provided in the
Credit Agreement. Borrower further promises to pay interest, including default
interest, on the outstanding unpaid principal amount hereof, as provided in the
Credit Agreement. Interest shall be calculated on the basis of a three hundred
sixty (360) day year for the actual number of days elapsed.
If a payment hereunder becomes due and payable hereunder on a
day which is not a Business Day, the due date thereof shall be extended to the
next succeeding Business Day, and interest shall be payable thereon during such
extension at the applicable rate specified in the Credit Agreement. Credit for
payments made by Borrower shall, for the purpose of computing interest earned by
Lender, be given in accordance with the Credit Agreement.
In no event shall interest charged hereunder, however such
interest may be characterized or computed, exceed the highest rate permissible
under any law which a court of competent jurisdiction shall, in a final
determination, deem applicable hereto. In the event that such a court determines
that Lender has received interest hereunder in excess of the highest rate
applicable hereto, such excess interest shall be applied in accordance with the
term of the Credit Agreement.
Borrower hereby waives demand, presentment, protest, and
notice of demand, presentment, protest and nonpayment. Except for such notice as
may be specifically provided for in the Credit Agreement, Borrower also waives
all rights to notice and hearing of any kind prior to the exercise by Agent, on
behalf of
- --------
(1) Notes in different principal amounts were executed by the Borrower in favor
of each of the other "Lenders" under the Amended and Restated Credit
Agreement dated as of June 7, 1996.
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Lenders, of the right to repossess the Collateral without judicial process or to
replevy, attach or levy upon the Collateral without notice or hearing.
In addition to and not in limitation of the foregoing and the
provisions of the Credit Agreement, Borrower further agrees, subject only to any
limitation imposed by applicable law, to pay all fees, costs and expenses,
including reasonable attorney's fees and legal expenses, incurred by the holder
of this Revolving Note in endeavoring to collect any amounts payable hereunder
which are not paid when due, whether by acceleration or otherwise.
THIS REVOLVING NOTE SHALL BE DEEMED TO HAVE BEEN DELIVERED
AND MADE AT CHICAGO, ILLINOIS AND SHALL BE INTERPRETED AND THE RIGHTS AND
LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE INTERNAL
LAWS (WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS) AND DECISIONS OF THE STATE
OF WHENEVER POSSIBLE EACH PROVISION OF THE REVOLVING NOTE SHALL BE INTERPRETED
IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY
PROVISION OF THIS REVOLVING NOTE SHALL BE PROHIBITED BY OR INVALID UNDER
APPLICABLE LAW, SUCH PROVISION SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH
PROHIBITION OR INVALIDITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION
OR THE REMAINING PROVISIONS OF THIS REVOLVING NOTE. WHENEVER IN THIS REVOLVING
NOTE REFERENCE IS MADE TO AGENT, ANY OF THE LENDERS OR BORROWER, SUCH REFERENCE
SHALL BE DEEMED TO INCLUDE, AS APPLICABLE, A REFERENCE TO THEIR RESPECTIVE
SUCCESSORS AND ASSIGNS. THE PROVISIONS OF THIS REVOLVING NOTE SHALL BE BINDING
UPON AND SHALL INURE TO THE BENEFIT OF SUCH SUCCESSORS AND ASSIGNS. THE
PROVISIONS OF THIS REVOLVING NOTE SHALL BE BINDING UPON AND SHALL INURE TO THE
BENEFIT OF SUCH SUCCESSORS AND ASSIGNS. BORROWER'S SUCCESSORS AND ASSIGNS SHALL
INCLUDE, WITHOUT LIMITATION, A RECEIVER, TRUSTEE OR DEBTOR-IN-POSSESSION OF OR
FOR BORROWER.
This Revolving Note supersedes, amends and restates the
revolving note (the "Existing Note") issued to Lender pursuant to the Existing
Credit Agreement. This Revolving Note is issued in substitution and replacement
of such Existing Note and not in payment thereof and any and all amounts
outstanding pursuant to such Existing Note shall be evidenced by this Revolving
Note and shall be paid in accordance with the terms hereof.
IN WITNESS WHEREOF, this Revolving Note has been duly executed
and delivered by Borrower as of the date first above written.
PROTECTION ONE ALARM MONITORING, INC.
By: JOHN W. HESSE
___________________________________
Title: Executive Vice President
___________________________________
2
<PAGE> 1
EXHIBIT 4.10
AMENDED AND RESTATED GUARANTY
This AMENDED AND RESTATED GUARANTY ("Guaranty") is dated as of
June 7, 1996 by PROTECTION ONE, INC., a Delaware corporation ("Guarantor"),
having an office at 3900 S.W. Murray Boulevard, Beaverton, Oregon 97005, in
favor of HELLER FINANCIAL, INC., a Delaware corporation, individually and as
agent (the "Agent") for the other Lenders under the Credit Agreement (as
hereinafter defined), having an office at 500 West Monroe Street, Chicago,
Illinois 60661.
WHEREAS, the Guarantor is the legal and beneficial owner of
all of the issued and outstanding capital stock of Protection One Alarm
Monitoring, Inc., a Delaware corporation ("Debtor");
WHEREAS, the Agent and the other Lenders named therein have
entered into that certain Amended and Restated Credit Agreement of even date
herewith (as the same may hereafter be further amended, supplemented or
otherwise modified from time to time, the "Credit Agreement") with the Debtor;
WHEREAS, the Debtor will become liable for the "Obligations"
(as defined in the Credit Obligations being hereinafter referred to as the
"Indebtedness"); and
WHEREAS, the Guarantor will derive substantial benefit and
advantage from the financial accommodations to the Debtor set forth in the
Credit Agreement, including the loans and advances made to the Debtor
thereunder, and it will be to the Guarantor's direct interest and economic
benefit to assist the Debtor in procuring such financial accommodations from the
Lender;
NOW, THEREFORE, for and in consideration of the premises and
in order to induce the Lenders to enter into the Credit Agreement and to make
loans thereunder, and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the Guarantor hereby agrees as
follows (unless otherwise defined herein all capitalized terms used herein shall
have the meanings ascribed thereto in the Credit Agreement):
1. Guaranty of Payment.
(a) The Guarantor hereby unconditionally guarantees
the full and prompt payment to the Lenders, when due, upon demand, at
maturity or by reason of acceleration or otherwise and at all times
thereafter, of any and all of the Indebtedness.
(b) The Guarantor acknowledges that valuable
consideration supports this Guaranty, including, without limitation,
the consideration set forth in the recitals above as well as any
commitment to lend, extension of credit or other financial
accommodation, whether heretofore or hereafter made by the Lenders to
the Debtor, any extension, renewal or replacement of any of the
Indebtedness; any forbearance with respect to any of the Indebtedness
or otherwise any cancellation of an existing guaranty, any purchase of
any of the Debtor's assets by the Lenders; or any other valuable
consideration.
(c) The Guarantor agrees that all payments under this
Guaranty shall be made in United States currency and in the same manner
as provided for the Indebtedness.
2. Agent's and Lenders' Costs and Expenses. The Guarantor
agrees to pay on demand, if not paid by the Debtor, all costs and expenses of
every kind incurred by the Agent or the Lenders: (a) in enforcing this Guaranty;
(b) in collecting any of the Indebtedness from the Debtor or the Guarantor; (c)
in realizing upon or protecting any collateral for this Guaranty or for payment
of any of the Indebtedness;, and (d) for any other purpose related to the
Indebtedness or this Guaranty. "Costs and expenses" as used in the preceding
sentence shall include, without limitation, attorneys' fees incurred by the
Agent or any Lender in retaining counsel for advice, suit, appeal, any
insolvency or other proceedings under the United States Bankruptcy Code or
otherwise, or for any purpose specified in the preceding sentence.
3. Nature of Guaranty Continuing, Absolute and Unconditional.
<PAGE> 2
(a) This Guaranty is and is intended to be a
continuing guaranty of payment of the Indebtedness, independent of and
in addition to any other guaranty, endorsement, collateral or other
agreement held by the Agent or the Lenders therefor or with respect
thereto, whether or not furnished by the Guarantor, The obligations of
the Guarantor to repay the Indebtedness hereunder shall be unlimited.
Notwithstanding anything to the contrary in this Guaranty, the
Guarantor hereby irrevocably waives all rights which may have arisen in
connection with this Guaranty to be subrogated to any of the rights
(whether contractual, under the Bankruptcy code, including section 509
thereof, under common law or otherwise) of the Agent or any Lender
against the Debtor or against any collateral security or guarantee or
right of offset held by the Agent or any Lender for the payment of the
Indebtedness. The Guarantor hereby further irrevocably waives all
contractual, common law, statutory or other rights of reimbursement,
contribution, exoneration or indemnity (or any similar right) from or
against the Debtor or any other Person which may have arisen in
connection with this Guaranty So long as the Indebtedness remains
outstanding, if any amount shall be paid by or on behalf of the Debtor
to the Guarantor on account of any of the fights waived in this
paragraph, such amount shall be held by the Guarantor in trust,
segregated from other funds of such Guarantor, and shall, forthwith
upon receipt by such Guarantor, be turned over to the Agent in the
exact form received by the Guarantor (duly endorsed by the Guarantor to
the Agent if required), to be applied against the Indebtedness, whether
matured or unmatured, in such order as the Agent may determine. The
provisions of this paragraph shall survive the term of this Guaranty
and the payment in full of the Indebtedness and the termination of the
Commitments. Notwithstanding the foregoing, in the event of the
bankruptcy or insolvency of the Debtor, the Agent, on behalf of the
Lenders, shall be entitled notwithstanding the foregoing, to file in
the name of the Guarantor or in its own name a claim for any and all
indebtedness owing to the Guarantor by the Debtor, vote such claim and
to apply the proceeds of any such claim to the Indebtedness.
(b) For the further security of the Lenders and
without in any was diminishing the liability of the Guarantor,
following the occurrence of an Event of Default and acceleration of the
Indebtedness, all debts and liabilities, present or future of Ml Debtor
to the Guarantor and all monies received from the Debtor or for its
account by the Guarantor in respect thereof shall be received in trust
for the Agent and the Lenders and forthwith upon receipt shall be paid
over to the Agent, for the benefit of the Lenders, until all of the
Indebtedness has been paid in full. This assignment and postponement Is
independent of and severable from this Guaranty and shall remain in
full force and effect whether or not the Guarantor is liable for any
amount under this Guaranty.
(c) This Guaranty is absolute and unconditional and
shall not be changed or affected by any representation, oral agreement,
act or thing whatsoever, except as herein provided. This Guaranty is
intended by the Guarantor to be the final, complete and exclusive
expression of the guaranty agreement between the Guarantor and the
Agent. No modification or amendment of any provision of this Guaranty
shall be effective unless in writing and signed by a duly authorized
officer of the Agent.
4. Certain Rights and Obligations.
(a) The Guarantor authorizes the Agent and the
Lenders, without notice, demand or any reservation of fights against
the Guarantor and without affecting the Guarantor's obligations
hereunder, from time to time: (i) to renew, extend, increase,
accelerate or otherwise change the time for payment of, the terms of or
the interest on the Indebtedness or any part thereof or grant other
indulgences to the Debtor or others; (ii) to accept from any Person and
hold collateral for the payment of the Indebtedness or any part
thereof, and to modify, exchange, enforce or refrain from enforcing, or
release, compromise, settle, waive, subordinate or surrender, with or
without consideration, such collateral or any part thereof, (iii) to
accept and hold any endorsement or guaranty of payment of the
Indebtedness or any part thereof, and to discharge, release or
substitute any such obligation of any such endorser or guarantor, or
any Person who has given any security interest in any collateral as
2
<PAGE> 3
security for the payment of the Indebtedness or any part thereof or any
other Person in any was obligated to pay the Indebtedness or any part
thereof, and to enforce or refrain from enforcing, or compromise or
modify, the terms of any obligation of any such indorser, guarantor, or
Person, (iv) to dispose of any and all collateral securing the
Indebtedness in any manner as the Agent or the Lenders, in their sole
discretion, may deem appropriate, and to direct the order or manner of
such disposition and the enforcement of any and all endorsements and
guaranties relating to the Indebtedness or any part thereof as the
Agent or the Lenders, in their sole discretion may determine, (v) to
determine the manner, amount and time of application of payments and
credits, if any, to be made on all or any part of any component or
components of the Indebtedness (whether principal, interest, fees,
costs, and expenses, or otherwise), including, without limitation, the
application of payments received from any source to the payment of
indebtedness other than the Indebtedness even though the Lenders might
lawfully have elected to apply such payments to the Indebtedness to
amounts which are not covered by this Guaranty; and (VI) to take
advantage or refrain from taking advantage of any security or accept or
make or refrain from accepting or making any compositions or
arrangements when and in such manner as the Agent or the Lenders, in
their sole discretion, may deem appropriate and generally do or refrain
from doing any act or thing which might otherwise, at law or in equity,
release the liability of Guarantor as a guarantor or surety in whole or
in part, and in no case shall the Lenders or Agent be responsible or
shall the Guarantor be released either in whole or in part for any act
or omission in connection with the Lenders or Agent having sold any
security at an under value.
(b) If any default shall be made in the payment of
any of the Indebtedness and any grace period has expired with respect
thereto, the Guarantor hereby agrees to pay the same in full to the
extent hereinafter provided: (i) without deduction by reason of any
setoff, defense (other than payment) or counterclaim of the Debtor,
(ii) without requiring presentment, protest or notice of nonpayment or
notice of default to the Guarantor, to the Debtor or to any other
Person; (iii) without demand for payment or proof of such demand or
filing of claims with a court in the event of receivership, bankruptcy
or reorganization of the Debtor, (iv) without requiring the Agent or
the Lenders to resort first to the Debtor (this being a guaranty of
payment and not of collection) or to any other guaranty or any
collateral which the Agent or the Lenders may hold; (v) without
requiring notice of acceptance hereof or assent hereto by the Agent;
and (VI) without requiring notice that any of the Indebtedness has been
incurred, extended or continued or of the reliance by the Agent or the
Lenders upon this Guaranty, all of which the Guarantor hereby waives.
(c) The Guarantor's obligation hereunder shall not be
affected by any of the following, all of which the Guarantor hereby
waives (i) any failure to perfect or continue the perfection of any
security interest in or other lien on any Collateral securing payment
of any of the Indebtedness or the Guarantor's obligation hereunder,
(ii) the invalidity, unenforceability, propriety, of manner of
enforcement of, or loss or change in priority of any such security
interest or other lien or guaranty of the Indebtedness; (iii) any
failure to protect, preserve or insure any such Collateral, (iv)
failure of the Guarantor to receive notice of any intended disposition
of such Collateral; (v) any defense arising by reason of the cessation
from any cause whatsoever of liability of the Debtor, including,
without limitation, any failure, negligence or omission by the Agent or
the Lenders in enforcing their claims against the Debtor, (vi) any
release, settlement or compromise of any obligation of the Debtor,
(vii) the invalidity or unenforceability of any of the Indebtedness;
(viii) any change of' ownership of the Debtor or the insolvency,
bankruptcy or any other change in the legal status of the Debtor. (ix)
any change in, or the imposition of, any law, decree, regulation or
other governmental act which does or might impair, delay or in any way
affect the validity, enforceability or the payment when due of the
Indebtedness; (x) the existence of any setoff or other right which the
Guarantor may have at any time against the Agent, any Lender or the
Debtor in connection herewith or any unrelated transaction; (xi) the
Lenders' election in any case instituted under chapter 11 of the United
States Bankruptcy Code, of the application of section 1111(b)(2) of the
United States Bankruptcy Code; (xii) any borrowing, use of cash
collateral, or grant of a security interest by the Debtor, as debtor in
possession, under sections 363 or 364 of the United States Bankruptcy
Code, (xiii) the disallowance of all or any portion of any of the
Lenders' claims for repayment of the Indebtedness under sections 502 or
506 of the United States
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<PAGE> 4
Bankruptcy Code; or (xiv) any other fact or circumstance which might
otherwise constitute grounds at law or in equity for the discharge or
release of the Guarantor from its obligations hereunder, all whether or
not the Guarantor shall have had notice or knowledge of any act or
omission referred to in the foregoing clauses (i) through (xiv) of this
paragraph.
5. Representations and Warranties. The Guarantor further
represents and warrants to the Agent and the Lenders that: (a) it is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, and has full power, authority and
legal right to own its property and assets and to transact the business in which
it is engaged; (b) it has full power, authority and legal night to execute and
deliver, and to perform its obligations under, this Guaranty, and has taken all
necessary action to authorize the guaranty hereunder on the terms and conditions
of this Guaranty and to authorize the execution, delivery and performance of
this Guaranty; (c) this Guaranty has been duly executed and delivered by the
Guarantor and constitutes the legal, valid and binding obligation of the
Guarantor enforceable against the Guarantor in accordance with its terms; and
(d) the representations and warranties of the other Loan Parties contained in
the Credit Agreement and the other Loan Documents are true, correct and complete
in all material respects on and as of the date hereof and all such
representations and warranties which are hereafter remade on any subsequent date
shall be true, correct and complete in all material respects on and as of such
date to the same extent made on and as of such date.
6. Security, Conduct of Business. Concurrently with the
execution hereof, Guarantor has entered into that certain Amended and Restated
Stock Pledge Agreement dated as of the date hereof with the Agent (the "Stock
Pledge Agreement"), pursuant to which the Guarantor has pledged the Pledged
Stock (as defined in the Stock Pledge Agreement) to the Agent, for the benefit
of the Lenders, as security for, among other things, its performance and
obligations under this Guaranty, The Guarantor warrants and represents to and
covenants with the Agent and the Lenders that: (a) the Guarantor has good,
indefeasible and merchantable title to all of its assets; (b) the Guarantor
shall not sell or dispose of any of the Pledged Stock and shall not grant a
security interest in or permit a lien, claim or encumbrance upon any of its
assets in favor of any third party other than its pledge of the Pledged Stock to
the Agent, for the benefit of the Lenders; (c) the Debtor will at all times be a
wholly-owned subsidiary of the Guarantor and (d) the Guarantor will not engage
in any type of business activity other than ownership of the capital stock of
the Debtor and the performance of its obligations under this Guaranty, the Stock
Pledge Agreement and any other Loan Document to which it is a party.
7. Termination. This Guaranty shall remain in full force and
effect until an officer of Agent shall actually receive from the Guarantor
written notice of its discontinuance; provided, however, this Guaranty shall
remain in full force and effect thereafter until all of the Indebtedness
outstanding, or contracted or committed for (whether or not outstanding), before
the receipt of such notice by Agent, and any extensions, renewals or
replacements thereof (whether made before or after receipt of such notice),
together with interest accruing thereon after such notice, shall be finally and
irrevocably paid in full. Payment of all of the Indebtedness from time to time
shall not operate as a discontinuance of this Guaranty. The Guarantor further
agrees that, to the extent that the Debtor makes a payment or payments to the
Agent or any of the Lenders on the Indebtedness, or the Agent or any of the
Lenders receive any proceeds of Collateral securing the Indebtedness, which
payment or receipt of proceeds or any part thereof is subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be returned
or repaid to the Debtor, its estate, trustee, receiver, debtor in possession or
any other Person, including, without limitation, any guarantor, under any
insolvency or bankruptcy law, state or federal law, common law or equitable
cause, then to the extent of such payment, return or repayment, the obligation
or part thereof which has been paid, reduced or satisfied by such amount shall
be reinstated and continued in full force and effect as of the date when such
initial payment, reduction or satisfaction occurred, and this Guaranty shall
continue in full force notwithstanding any contrary action which may have been
taken by the Agent or the Lenders in reliance upon such payment, and any such
contrary action so taken shall be without prejudice to the Agent's or the
Lenders' rights under this Guaranty and shall be deemed to have been conditioned
upon such payment having become final and irrevocable
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<PAGE> 5
8. Guaranty of Performance. The Guarantor also guarantees the
full, prompt and unconditional performance of all obligations and agreements of
every kind owed or hereafter to be owed by the Guarantor or the Debtor to the
Agent or the Lenders Every provision for the benefit of the Agent or the Lenders
contained in this Guaranty shall apply to the guaranty of performance given in
this paragraph. Without limiting the foregoing, the Guarantor shall cause each
other Loan Party to perform all obligations and agreements of such Loan Party
contained in the Credit Agreement or any other Loan Document in accordance with
the terms thereof
9. Assumption of Liens and Indebtedness. To the extent that
the Guarantor has received or shall hereafter receive contributions to its
capital consisting of assets of the Debtor that are subject, at the time of such
contribution, to liens and security interests in favor of the Agent or the
Lenders in accordance with the Credit Agreement, the Guarantor hereby expressly
agrees that: (1) it shall hold such assets subject to such liens and security
interests and subject to the terms of the Credit Agreement; and (ii) it shall be
liable for the payment of the Indebtedness secured thereby, The Guarantor's
obligations under this Section 9 shall be in addition to its obligations as set
forth in other sections of this Guaranty and not in substitution therefor or in
lieu thereof
10. Parents. The Guarantor covenants and agrees that the
Obligations will be paid strictly in accordance with their respective terms
regardless of any law, regulation or order now or hereafter in effect in any
jurisdiction affecting any of such terms or the rights of the Agent or the
Lenders with respect thereto. Without limiting the generality of the foregoing,
the Guarantor's obligations hereunder with respect to any Obligations shall not
be discharged by a payment in a currency other than the currency in which the
Obligations are denominated (the "Obligation Currency") or at a place other than
the place specified for the payment of the Obligations, whether pursuant to a
judgment or otherwise, to the extent that the amount so paid on conversion to
the Obligation Currency and transferred to Chicago,, Illinois under normal
banking procedures, does not yield the amount of Obligation Currency due
thereunder.
11. Taxes. All payments hereunder shall be made without any
counterclaim or setoff, free and clear of, and without reduction by reason of,
any taxes, levies, imposts, charges and withholdings, restrictions or conditions
of any nature ("Taxes"), which are now or may hereafter be imposed, levied or
assessed by any country, political subdivision or taxing authority, all of which
will be for the account of and paid by the Guarantor. If for any reason, any
such reduction is made or any Taxes are paid by the Agent or the Lenders, the
Guarantor will pay to the Agent or the Lenders such additional amounts as may be
necessary to ensure that the Agent or the Lenders receives the same net amount
which they would have received had no reduction been made or Taxes paid.
12. Miscellaneous.
(a) The terms "Debtor" and the "Guarantor" as used in
this Guaranty shall include: (i) any successor individual or
individuals, association, partnership or corporation to which all or a
substantial part of the business or assets of the Debtor or the
Guarantor shall have been transferred; and (ii) any other corporation
into or with which the Debtor or the Guarantor shall have been merged,
consolidated, reorganized or absorbed.
(b) Without limiting any other right of the Agent of
the Lenders, whenever the Agent or the Lenders have the right to
declare any of the Indebtedness to be immediately due and payable
(whether or not it has been so declared), the Lenders at their sole
election without notice to the undersigned may appropriate and set off
against the Indebtedness: (i) any and all indebtedness or other monies
due or to become due to the Guarantor by the Agent or any of the
Lenders in any capacity; and (ii) any credits or other property
belonging to the Guarantor (including all account balances, whether
provisional or final and whether or not collected or available) at any
time held by or coming into the possession of the Agent or any of the
Lenders, or any affiliate of the Agent or any of the Lenders, whether
for deposit or otherwise, whether or not the Indebtedness or the
obligation to pay such monies owed by the Agent or the Lenders is
then due, and the Agent or the Lenders shall be
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<PAGE> 6
deemed to have exercised such right of set off immediately at the time
of such election even though any charge therefor is made or entered on
the Agent's or the Lender's records subsequent thereto.
(c) The Guarantees obligation hereunder is to pay the
Indebtedness in fill] when due according to the Credit Agreement to the
extent provided herein, and shall not be affected by any stay or
extension of time for payment by the Debtor resulting from any
proceeding under the United States Bankruptcy Code or any similar law
(d) The Agent or the Lenders shall not by any act,
delay, omission or otherwise be deemed to have waived any of their
remedies hereunder, and no waiver by the Agent or the Lenders shall be
valid unless in writing and signed by the Agent or the Lenders and then
only to the extent therein set forth. A waiver by the Agent or the
Lenders of any right or remedy hereunder on any one occasion shall not
be construed as a bar to any right or remedy which the Agent or the
Lenders would otherwise have on any further occasion, No course of
dealing between the Guarantor and the Agent or the Lenders and no
failure to exercise, nor any delay in exercising on the part of the
Agent or the Lenders, any night, power or privilege hereunder or under
the Credit Agreement shall impair such right or remedy or operate as a
waiver thereof, nor shall any single or partial exercise of any night,
power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other fight, power or privilege. The
fights and remedies herein provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any fights or remedies
provided by law
(e) The term "Lenders" as used herein shall have the
same meaning as in the Credit Agreement and this Guaranty shall inure
to the benefit of the Agent and the Lenders under the Credit Agreement
(f) Section headings in this Guaranty are included
herein for convenience of reference only and shall not constitute a
part of this Guaranty for any other purpose or be given any substantive
effect
(g) THE GUARANTOR AGREES THAT ANY ACTION OR
PROCEEDING ARISING OUT OF OR TO ENFORCE THIS GUARANTY MAY BE COMMENCED
IN THE FEDERAL DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, OR
IF SUCH COURT DENIES JURISDICTION, IN THE CIRCUIT COURT OF COOK COUNTY,
ILLINOIS, AND THE GUARANTOR WAIVES PERSONAL SERVICE OF PROCESS AND
AGREES THAT A SUN"*IONS AND COMPLAINT COMMENCING AN ACTION OR
PROCEEDING IN ANY SUCH COURT SHALL BE PROPERLY SERVED AND SHALL CONFER
PERSONAL JURISDICTION IF SERVED BY MESSENGER OR REGISTERED MAIL TO THE
GUARANTOR AND, IF BY REGISTERED MAUL, SERVICE SO MADE SHALL BE DEEMED
TO BE COMPLETED THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED,
OR AS OTHERWISE PROVIDED BY THE LAWS OF ]ILLINOIS OR THE UNITED STATES.
(h) Any provision of this Guaranty which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, and any
such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
(i) THIS GUARANTY SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS.
13. Notices. Unless otherwise specifically provided herein,
any notice or other communication required or permitted to be given shall be in
writing addressed to the respective party as set forth below and may be
personally served, telecopied or sent by overnight courier service or United
States mail certified or registered and shall be deemed to have been given (a)
if delivered in person, when delivered; (b) if delivered by telecopy, on the
date of transmission if transmitted on a Business Day before 5:00 p.m. (Chicago
time) or, if not, on the next succeeding Business Day, (c) if delivered by
overnight courier, two Business Days
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after delivery to such courier properly addressed; or (d) if by United States
mail, four Business Days after depositing in the United States mail, with
postage prepaid and properly addressed.
Notices shall be addressed as follows:
(a) If to Guarantor
Protection One, Inc.
3900 5.W. Murray Boulevard
Beaverton, Oregon 97005
Attn John W. Hesse
With a copy to
Protection One, Inc.
6011 Bristol Parkway
Culver City, Los Angeles, California 90230
Attn James W. MacKenzie, Jr., President
(b) If to Agent
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Attn: Portfolio Manager
Portfolio Organization
Corporate Finance Group
Telecopy: (312) 441-7367
With a copy to:
Heller Financial, Inc.
500 West Monroe Street Chicago, Illinois 60661
Attn: Leo Department
Portfolio Organization
Corporate Finance Group
Telecopy: (312) 441-7367
or in any case, to such other address as the party addressed shall have
previously designated by written notice to the serving party, given in
accordance with this Section
14. A notice not given as provided above shall, if it is in
writing, be deemed given if and when actually received by the party to whom
given
15. Waivers.
(a) THE GUARANTOR WAIVES THE BENEFIT OF ALL
VALUATION, APPRAISAL AND EXEMPTION LAWS.
(b) IN THE EVENT OF A DEFAULT UNDER THE CREDIT
AGREEMENT, THE GUARANTOR HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING
OF ANY KIND PRIOR TO THE EXERCISE BY THE AGENT OR THE LENDERS OF THEIR
RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO
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<PAGE> 8
REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR
HEARING. THE GUARANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL
OF ITS CHOICE WITH RESPECT TO THIS TRANSACTION AND THIS GUARANTY.
(c) THE GUARANTOR AND AGENT ACKNOWLEDGE THAT THE TIME
AND EXPENSE REQUIRED FOR TRIAL BY JURY EXCEED THE TIME AND EXPENSE
REQUIRED FOR A BENCH TRIAL AND HEREBY WAIVE, TO THE EXTENT PERMITTED BY
LAW, TRIAL BY JURY. THE GUARANTOR HEREBY WAIVES, TO THE EXTENT
PERMITTED BY LAW, ANY OBJECTION BASED ON FORUM NON CONVENIENS, ANY
OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER, AND WAIVES ANY
BOND OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER BE
REQUIRED OF THE AGENT OR THE LENDERS.
(d) THE GUARANTOR HEREBY WAIVES ANY RIGHT TO REQUIRE
A PROCEEDING FIRST AGAINST THE DEBTOR OR RIGHT TO REQUIRE THE PRIOR
DISPOSITION OF THE ASSETS OF THE DEBTOR TO MEET ITS OBLIGATIONS AND
COVENANTS THAT THIS GUARANTY WILL NOT BE DISCHARGED EXCEPT BY COMPLETE
PERFORMANCE OF THE OBLIGATIONS OF THE DEBTOR UNDER THE CREDIT
AGREEMENT.
16. Effect of Restatement. This Guaranty amends, restates and
supersedes that certain Guaranty dated as of November 3, 1993, by guarantor in
favor of Agent (the "Existing Guaranty"); provided, that all references in the
other Loan Documents to the Existing Guaranty shall be deemed to refer without
amendment to this Guaranty.
IN WITNESS WHEREOF, this Guaranty has been executed as of the
day first written above.
PROTECTION ONE, INC
By: JOHN W. HESSE
______________________________
Title: Executive Vice President
______________________________
Accepted and Agreed to as
of the day first written above.
HELLER FINANCIAL, INC.,
individually and as Agent for
the Lenders
By: TIMOTHY CANON
________________________
Title: Vice President
_________________________
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<PAGE> 1
EXHIBIT 4.11
AMENDED AND RESTATED STOCK PLEDGE AGREEMENT
This AMENDED AND RESTATED STOCK PLEDGE AGREEMENT ("Agreement")
is dated as of June 7, 1996, by and between PROTECTION ONE, INC., a Delaware
corporation ("Pledgor"), having an office at 3900 S.W. Murray Boulevard,
Beaverton, Oregon 97005 and HELLER FINANCIAL, INC., a Delaware corporation,
individually and as agent ("Agent") for the other Lenders under the Credit
Agreement (as hereinafter defined), having an office at 500 West Monroe Street,
Chicago, Illinois 60661.
WHEREAS, Pledgor is the legal and beneficial owner of one
hundred percent (100%) of the issued and outstanding capital stock of Protection
One Alarm Monitoring, Inc., a Delaware corporation ("Borrower"), all of which
stock is described on Exhibit A;
WHEREAS, Borrower has entered into that certain Amended and
Restated Credit Agreement dated as of the date hereof (as the same may hereafter
be amended, supplemented or otherwise modified from time to time, the "Credit
Agreement") with Agent and the other Lenders named therein;
WHEREAS, the Pledgor has entered into that certain Amended and
Restated Guaranty dated as of the date hereof with the Agent (the "Guaranty"),
pursuant to which the Pledgor guarantees the Obligations (as defined in the
Credit Agreement) of the Borrower under the Credit Agreement;
WHEREAS, the Borrower has received, and may hereafter receive,
loans and other financial accommodations from Agent under the Credit Agreement,
as a result of which it has incurred, and will hereafter, incur, Obligations (as
hereinafter defined) to the Agent;
WHEREAS, Pledgor acknowledges that, as the sole stockholder of
the Borrower, it will receive substantial direct and indirect benefit by reason
of the making of loans and other financial accommodations to the Borrower as
provided in the Credit Agreement, and it will be to Pledgor's direct interest
and economic benefit to assist the Borrower in procuring such financial
accommodations from Agent and to induce Agent to make such financial
accommodations; and
WHEREAS, Pledgor wishes to grant further security and
assurance to Agent in order to secure the performance by Pledgor of its
obligations under the Guaranty and by the Borrower of its Obligations under the
Credit Agreement and to that effect to pledge to Agent all of the present and
future capital stock of the Borrower owned by Pledgor;
NOW, THEREFORE, in consideration of the premises and in order
to induce Agent to make the loans under the Credit Agreement and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Pledgor hereby agrees with Agent as follows:
1. Defined Terms. Unless otherwise defined herein, all
capitalized terms used herein shall have the meanings ascribed thereto in the
Credit Agreement. Terms defined in the Illinois Uniform Commercial Code which
are not otherwise defined in this Agreement or in the Credit Agreement are used
in this Agreement as defined in the Illinois Uniform Commercial Code as in
effect on the date hereof
2. Pledge. Pledgor hereby pledges, assigns, hypothecates,
transfers, delivers and grants to Agent, for the benefit of the Lenders, a first
Lien on all of the capital stock of the Borrower (collectively, the "Pledged
Shares"), all other property hereafter delivered to Pledgor in substitution for
or in addition to the Pledged Shares and in all proceeds thereof, and any other
property of Pledgor, as described in Section 4 or,otherwise, now or hereafter
delivered to, or in the possession or in the custody of, Agent and any and all
proceeds thereof as collateral security for: (a) the prompt and complete payment
when due (whether at the stated maturity, by acceleration or otherwise) of all
the Obligations of the Borrower regardless of whether the Credit Agreement shall
have terminated; and (b) the due and punctual payment and performance by Pledgor
of its obligations and liabilities under, arising out of or in connection with
the Holdings Guaranty and this Agreement (all of the foregoing being referred to
hereinafter, collectively, as the "Liabilities"). All of the Pledged Shares are
presently represented by the stock certificates listed on Exhibit A, which stock
certificates, with undated stock powers duly executed in blank by Pledgor, are
being delivered to Agent simultaneously
<PAGE> 2
herewith. Agent shall maintain possession and custody of the certificates
representing the Pledged Shares and shall return the Pledged Shares in
accordance with Section 5.
3. Representations and Warranties of Pledgor. Pledgor
represents and warrants to Agent that:
(a) With respect to the Borrower, Exhibit B sets
forth (i) its authorized capital stock, and (ii) the number of shares
of its capital stock that are issued and outstanding as of the date
hereof and the number of its shares of capital stock held in its
treasury. Pledgor is the record and beneficial owner of, and has good
and marketable title to, the Pledged Shares, and such shares are and
will remain free and clear of all Liens and other restrictions
whatsoever (other than restrictions arising out of federal and state
securities laws), except the Liens created by this Agreement;
(b) Pledgor has full power, authority and legal right
to execute the pledge provided for herein and to pledge the Pledged
Shares to Agent;
(c) this Agreement has been executed and delivered by
Pledgor and constitutes a legal, valid and binding obligation of
Pledgor enforceable in accordance with its terms;
(d) there are no outstanding options, warrants or
other agreements with respect to the Pledged Shares and there are no
outstanding options;
(e) the Pledged Shares have been duly and validly
authorized and issued, are fully paid and non-assessable and represent
one hundred percent (1000/o) of the issued and outstanding shares of
capital stock of the Borrower; and
(f) no consent, approval or authorization of or
designation or filing with any authority on the part of Pledgor is
required in connection with the pledge and security interest granted
under this Agreement;
(g) the execution, delivery and performance of this
Agreement will not violate any provision of any applicable law or
regulation or of any order, judgment, writ, award or decree of any
court, arbitrator or governmental authority, domestic or foreign, or of
the charter or by-laws of Pledgor or the Borrower or of any securities
issued by. Pledgor or the Borrower or of any mortgage, indenture,
lease, contract, or other agreement, instrument or undertaking to which
Pledgor or the Borrower is a party or which is binding upon Pledgor or
the Borrower or upon any of their respective assets, and will not
result in the creation or imposition of any lien, charge or encumbrance
on or security interest in any of the assets of Pledgor or the Borrower
except as contemplated by this Agreement, and
(h) the pledge, assignment and delivery of such
Pledged Shares pursuant to this Agreement creates a valid and first
lien on and a first perfected security interest in such Pledged Shares
and the proceeds thereof in favor of Agent, on behalf of the Lenders,
subject to no prior pledge, lien, mortgage, hypothecation, security
interest, charge, option or encumbrance or to any agreement purporting
to grant to any third party a security interest in the property or
assets of Pledgor which would include the Pledged Shares. Pledgor
covenants and agrees that it will defend Agent's, on behalf of the
Lenders, right, title and security interest in and to the Pledged
Shares and the proceeds thereof against the claims and demands of all
persons whomsoever.
4. Stock Dividends, Distributions. etc. If, while this
Agreement is in effect, Pledgor shall become entitled to receive or shall
receive any stock certificate (including, without.limitation, any certificate
representing a stock dividend or a stock distribution in connection with any
reclassification, increase or reduction of capital, or issued in connection with
any reorganization), or any options or rights, whether as an addition to, in
substitution for, or in exchange for any of the Pledged Shares, or otherwise,
Pledgor agrees to
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<PAGE> 3
accept the same as Agent's agent and to hold the same in trust for Agent, and to
deliver the same forthwith to Agent in the exact form received, with the
endorsement of Pledgor. when necessary and/or appropriate pursuant to undated
stock powers duly executed in blank, to be held by Agent subject to the terms
hereof, as additional collateral security for the Liabilities. In case any
distribution of capital shall be made on or in respect of the Pledged Shares or
any property shall be distributed upon or with respect to the Pledged Shares
pursuant to the recapitalization or reclassification of the capital of the
issuer thereof or pursuant to the reorganization thereof, the property so
distributed shall be delivered to Agent to be held by it, for the benefit of the
Lenders, as additional collateral security for the Liabilities. All sums of
money and property so paid or distributed in respect of the Pledged Shares which
are received by Pledgor shall, until paid or delivered to Agent, be held by
Pledgor in trust as additional collateral security for the Liabilities.
5. Administration of Security. The following provisions shall
govern the administration of the Pledged Shares:
(a) So long as no Event of Default has occurred and is
continuing, Pledgor shall be entitled (subject to the other provisions hereof,
including, without limitation, Section 8) (i) to vote or consent with respect to
the Pledged Shares and otherwise exercise the incidents of ownership thereof in
any manner not inconsistent with this Agreement, the Credit Agreement, the
Notes, the Loan Documents or any other document or instrument delivered or to be
delivered pursuant to or in connection with the Credit Agreement, and (ii) to
receive cash dividends or other distributions in the ordinary course made in
respect of the Pledged Shares. Pledgor hereby grants to Agent or its nominee an
irrevocable proxy to exercise all voting and corporate rights relating to the
Pledged Shares in any instance, including, without limitation, to approve any
merger involving the Borrower as a constituent corporation, which proxy shall be
effective immediately upon the occurrence of an Event of Default. After the
occurrence and during the continuance of an Event of Default and upon the
request of Agent, Pledgor agrees to deliver to Agent such further evidence of
such irrevocable proxy or such further irrevocable proxies to vote the Pledged
Shares as Agent may request;
(b) Upon the occurrence and during the continuance of an Event
of Default, in the event that Pledgor, as record and beneficial owner of the
Pledged Shares, shall receive or shall have become entitled to receive, any cash
dividends or other distributions in the ordinary course, Pledgor shall deliver
to Agent, and Agent shall be entitled to receive and retain, all such cash or
other distributions as additional security for the Liabilities, and
(c) Subject to any sale or other disposition by Agent of the
Pledged Shares or other property pursuant to this Agreement, upon full payment,
satisfaction and termination of all of the Liabilities and the termination
pursuant to Section 15 of the Liens hereby granted, the Pledged Shares and any
other property then held as part of the Pledged Shares in accordance with the
provisions of this Agreement shall be returned to Pledgor.
6. Rights of Agent. Agent shall not be liable for failure to
collect or realize upon the Obligations or any collateral security or guaranty
therefor, or any part thereof, or for any delay in so doing, nor shall Agent be
under any obligation to take any action whatsoever with regard thereto. Any or
all of the Pledged Shares held by Agent hereunder may, if an Event of Default
has occurred and is continuing, without notice, be registered in the name of
Agent or its nominee and Agent or its nominee may thereafter without notice
exercise all voting and corporate rights at any meeting with respect to the
Borrower and exercise any and all rights of conversion, exchange, subscription
or any other rights, privileges or options pertaining to any of the Pledged
Shares as if it were the absolute owner thereof, including, without limitation,
the right to vote in favor of, and to exchange at its discretion any and all of
the Pledged Shares upon, the merger, consolidation, reorganization,
recapitalization or other readjustment with respect to the Borrower or upon the
exercise by Agent or the Borrower of any right, privilege or option pertaining
to any of the Pledged Shares, and in connection therewith, to deposit and
deliver any and all of the Pledged Shares with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms and
conditions as Agent may determine, all without liability except to account for
property actually received by Agent, but Agent shall have no duty to
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<PAGE> 4
exercise any of the aforesaid rights, privileges or options and shall not be
responsible for any failure to do so or delay in so doing.
7. Remedies. Upon the occurrence and during the continuance of
an Event of Default, Agent without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon Pledgor or any other Person (all
and each of which demands, advertisements and/or notices are hereby expressly
waived), may forthwith collect, receive, appropriate and realize upon the
Pledged Shares, or any part thereof, and/or may forthwith sell, assign, give an
option or options to purchase, contract to sell or otherwise dispose of
(including the disposition by merger) and deliver such Pledged Shares, or any
part thereof, in one or more portions at public or private sale or sales or
transactions, at any exchange, broker's board or at any of Agent's offices or
elsewhere upon such terms and conditions as Agent may deem advisable and at such
prices as it may deem best, for any combination of cash and/or securities or
other property or on credit or for future delivery without assumption of any
credit risk, with the right to Agent upon any such sale or sales, public or
private, to purchase the whole or any part of such Pledged Shares so sold, free
of any fight or equity of redemption in Pledgor, which right or equity is hereby
expressly waived or released. Agent shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization, sale or disposition,
after deducting all reasonable costs and expenses of every kind incurred therein
or incidental to the safekeeping or otherwise of any and all of the Pledged
Shares or in any way relating to the rights of Agent hereunder, including
reasonable attorneys' fees and legal expenses, first to the payment, in whole or
in part, of the Obligations incurred under or pursuant to the Credit Agreement
in such order (unless a court of competent jurisdiction shall otherwise direct)
as Agent may elect. Only after so paying over such net proceeds and after the
payment by Agent of any other amount required by any provision of law,
including, without limitation, Section 9-504(l)(c) of the Uniform Commercial
Code of the State of Illinois, need Agent account for the surplus, if any, to
the Pledgor. Pledgor agrees that Agent need not give more than ten (I 0) days'
notice of the time and place of any public sale or of the time after which a
private sale or other intended disposition is to take place and that such notice
is reasonable notification of such matters. No notification need be given to
Pledgor if it has signed after default a statement renouncing or modifying any
right to notification of sale or other intended disposition. In addition to the
rights and remedies granted to Agent in this Agreement and in any other
instrument or agreement securing, evidencing or relating to any of the
Obligations or the Liabilities, Agent shall have all the rights and remedies of
a secured party under the Uniform Commercial Code of the State of Illinois and
under any other applicable law. Pledgor further agrees to waive and agrees not
to assert any rights or privileges which it may acquire under Section 9-112 of
the Uniform Commercial Code of the State of Illinois and Pledgor shall be liable
for the deficiency if the proceeds of any sale or other disposition of the
Pledged Shares are insufficient to pay all amounts to which Agent is entitled,
and the fees of any attorneys employed by Agent to collect such deficiency and
any other costs and expenses incurred by Agent.
8. No Disposition, etc. Without the prior written consent of
Agent, Pledgor agrees that it will not sell, assign, transfer, exchange, or
otherwise dispose of, or grant any option with respect to, the Pledged Shares,
nor will Pledgor create, incur or permit to exist any Lien or any other
restriction whatsoever with respect to any of the Pledged Shares, or any
interest therein, or any proceeds thereof, except for the Lien provided for by
this Agreement. Without the prior written consent of Agent, Pledgor agrees that
it will not vote to enable, and will not otherwise permit, the Borrower to (a)
issue any stock or other securities of any nature in addition to or in exchange
or substitution for the Pledged Shares, or (b) except as expressly provided
under the Credit Agreement, dissolve, liquidate, retire any of its capital
stock, reduce its capital or merge or consolidate with any other Person.
9. Sale of Pledged Shares.
(a) Pledgor recognizes that Agent may be unable to effect a
public sale or disposition of any or all the Pledged Shares by reason of certain
prohibitions contained in the Securities Act of 1933, as amended (the "Act"),
and applicable state securities laws, but may be compelled to resort to one or
more private sales or dispositions thereof to a restricted group of purchasers
who will be obliged to agree, among other things, to acquire such securities for
their own account for investment and not with a view to the
4
<PAGE> 5
distribution or resale thereof Pledgor acknowledges and agrees that any such
private sale or disposition may result in prices and other terms (including the
terms of any securities or other property received in connection therewith) less
favorable to the seller than if such sale or disposition were a public sale or
disposition and, notwithstanding such circumstances, agrees that any such
private sale or disposition shall be deemed to be reasonable and affected in a
commercially reasonable manner. Agent shall be under no obligation to delay a
sale or disposition of any of the Pledged Shares in order to permit Pledgor or
the Borrower as the case may be, to register such securities for public sale
under the Act, or under applicable state securities laws, even if Pledgor or the
Borrower, as the case may be, would agree to do
(b) Pledgor further agrees to do or cause to be done all such
other acts and things as may be necessary to make such sale or sales or
dispositions of any portion or all of the Pledged Shares valid and binding and
in compliance with any and all applicable laws, regulations, orders, writs,
injunctions, decrees or awards of any and all courts, arbitrators or
governmental instrumentalities, domestic or foreign, having jurisdiction over
any such sale or sales or dispositions, all at Pledgor's expense, provided that
Pledgor shall be under no obligation to take any action to enable any or all of
the Pledged Shares to be registered under the provisions of the Act or to
prepare and file a prospectus in connection therewith or under any comparable
state law. Pledgor further agrees that a breach of any of the covenants
contained in Sections 2, 4, 8, 9 and 10 will cause irreparable injury to Agent,
that Agent has no adequate remedy at law in respect of such breach and, as a
consequence, agrees, without limiting the right of Agent, to seek and obtain
specific performance of other obligations of Pledgor contained in this
Agreement, that each and every covenant above referenced shall be specifically
enforceable against Pledgor, and Pledgor hereby waives and agrees not to assert
any defenses against an action for specific performance of such covenants except
for a defense that no Event of Default has occurred under the Credit Agreement.
(c) Pledgor further agrees to indemnify and hold harmless
Agent, its successors and assigns, its officers, directors, employees and
agents, and any Person in control of any thereof, from and against any loss,
liability, claim, damage and expense, including, without limitation, counsel
fees (in this paragraph collectively called the "Indemnified Liabilities"),
under federal and state securities laws or otherwise insofar as such loss,
liability, claim, damage or expense (i) arises out of or is based upon any
untrue statement or alleged untrue statement by Pledgor of a material fact
contained in any registration statement, prospectus or offering memorandum or in
any preliminary prospectus or preliminary offering memorandum or in any
amendment or supplement to any of the foregoing or in any other writing prepared
in connection with the offer, sale or resale of all or any portion of the
Pledged Shares or other Collateral, or (ii) arises out of or is based upon any
omission by Pledgor to state therein a material fact required to be stated or
necessary to make the statements therein not misleading. The obligations of
Pledgor under this clause shall survive any termination of this Agreement.
10. Further Assurances. Pledgor agrees that at any time, and
from time to time, upon the written request of Agent. Pledgor will execute and
deliver all stock powers, financing statements and such further documents and do
such further acts and things as Agent may reasonably request consistent with the
provisions hereof in order to effect the purposes of this Agreement.
11. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
12. No Waiver Cumulative Remedies. Agent shall not by any act,
delay, omission or otherwise be deemed to have waived any of its remedies
hereunder, and no waiver by Agent shall be valid unless in writing and signed by
Agent and then only to the extent therein set forth. A waiver by Agent of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which Agent would otherwise have on any further occasion. No
course of dealing between Pledgor and Agent and no failure to exercise, nor any
delay in exercising on the part of Agent, any right, power or privilege
hereunder or under the Credit Agreement shall impair such right or remedy or
operate as a waiver thereof, nor shall any
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single or partial exercise of any right, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. The rights and remedies herein provided are cumulative and may be
exercised singly or concurrently, and are not exclusive of any rights or
remedies provided by law.
13. Successors and Assigns.
(a) This Agreement shall inure to the benefit of the
successors and assigns of the Agent and shall be binding upon the heirs,
executors, administrators, legal representatives, successors and assigns of the
Pledgor.
(b) Should the Agent at any time assign any of its rights
under the other Loan Documents, the Agent may assign its rights under this
Agreement, and may deliver the Pledged Shares or any portion thereof to the
assignee who shall thereupon, to the extent provided in the instrument of
assignment, have all of the rights of the Agent hereunder with respect to the
Pledged Shares and the Agent shall, thereafter, be fully discharged from any
responsibility with respect to the Pledged Shares so delivered to such assignee.
No such assignment, however, shall relieve such assignee of those duties and
obligations of the Agent specified hereunder.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS, WITHOUT
REGARD TO CONFLICT OF LAWS PROVISIONS, OF THE STATE OF ILLINOIS.
15. Termination. This Agreement and the Liens granted
hereunder shall terminate upon full and complete performance and satisfaction of
the Liabilities.
16. Possession of Pledged Shares. Beyond the exercise of
reasonable care to assure the safe custody of the Pledged Shares in the physical
possession of Agent pursuant hereto, neither Agent nor any nominee of Agent
shall have any duty or liability to collect any sums due in respect thereof or
to protect, preserve or exercise any rights pertaining thereto, and shall be
relieved of all responsibility for the Pledged Shares upon surrendering them to
Pledgor.
17. Survival of Represent. All representations and warranties
of Pledgor contained in this Agreement shall survive the execution and delivery
of this Agreement.
18. Taxes and Expenses. Pledgor will upon demand Pay to Agent
(a) any taxes (excluding income taxes, franchise taxes or other taxes levied on
gross earnings, profits or the like) payable or ruled payable by any federal or
state authority in respect of this Agreement, together with interest and
penalties, if any, and (b) all reasonable expenses, including the reasonable
fees and expenses of counsel for Agent and of any experts and agents, that Agent
may incur connection with (i) the administration of this Agreement, (ii) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Pledged Shares, (iii) the exercise or enforcement
of any of the rights of Agent hereunder, or (iv) the failure of Pledgor to
perform or observe any of the provisions hereof
19. Agent Appointed Attorney-In-Fact. Pledgor hereby
irrevocably appoints Agent as Pledgor's attorney-in-fact, effective upon the
occurrence and during the continuance of an Event of Default, with full
authority in the place and stead of Pledgor and in the name of Pledgor or
otherwise, from time to time in Agent's discretion, to take any action and to
execute any instrument that Agent deems reasonably necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation, to
receive, endorse and collect all instruments made payable to Pledgor
representing any dividend, interest payment or other distribution in respect of
the Pledged Shares or any part thereof and to give full discharge for the same,
when and to the extent permitted by this Agreement.
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20. Notices. Unless otherwise specifically provided herein,
any notice or other communication required or permitted to be given shall be in
writing addressed to the respective party as set forth below and may be
personally served, telecopied or sent by a reputable overnight courier service
and shall be deemed to have been given: (a) if delivered in person, when
delivered; (b) if delivered by telecopy, on the date of transmission if
transmitted on a Business Day before 4:00 P. M. (Chicago, Illinois time) (but
only if such telecopied document is also delivered by another method permitted
by this Agreement by the next Business Day) or, if not, on the next succeeding
Business Day; or (c) if delivered by reputable overnight courier, the day such
delivery is made by such courier.
Notices shall be addressed as follows:
(a) If to Pledgor:
Protection One, Inc.
3900 S.W. Murray Boulevard
Beaverton, Oregon 97005
Attn: John W. Hesse, Executive Vice President
With a copy to:
Protection One, Inc.
6011 Bristol Parkway
Culver City, Los Angeles, California 90230
Attn: James W. MacKenzie, Jr., President
(b) If to Agent:
Heller Financial, Inc.
500 West Monroe Street
Chicago, IL 60661
Attn: Portfolio Manager
Portfolio Organization
Corporate Finance Group
Telecopy: (312) 441-7367
With a copy to:
Heller Financial, Inc.
500 West Monroe Street
Chicago, IL 60661
Attn: Legal Department
Portfolio Organization
Corporate Finance Group
Telecopy: (312) 441-7367
or in any case, to such other address as the party addressed shall have
previously designated by written notice to the serving party, given in
accordance with this Section 20.
21. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. PLEDGOR
HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES
THAT, SUBJECT TO THE AGENTS ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF
OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS. PLEDGOR ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF
FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. PLEDGOR HEREBY AGREES THAT
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SERVICE OF PROCESS UPON HIM BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, SHALL
CONSTITUTE SUFFICIENT NOTICE IN ANY COURT OR PROCEEDING. NOTHING HEREIN SHALL
AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL
LIMIT THE RIGHT OF THE AGENT TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE COURTS
OF ANY OTHER JURISDICTION FOR THE PURPOSES OF ENFORCING ITS LIENS.
22. Changes in Writing. No amendment, modification,
termination or waiver of any provision of this Agreement or consent to any
departure by Pledgor therefrom, shall in any event be effective without the
written concurrence of Agent and Pledgor, and then only to the extent
specifically set forth in such writing.
23. Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose or be given any substantive effect.
24. Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
25. Entire Agreement. This Agreement embodies the entire
agreement and understanding between Pledgor and Agent and supersedes all prior
oral and written agreements and understandings between Pledgor and Agent
relating to the subject matter hereof
26. Effect of Restatement. This Agreement amends, restates and
supersedes that certain Stock Pledge Agreement dated as of November 3, 1993,
between Pledgor and Agent (the "Existing Pledge Agreement"); provided, that (i)
the liens and security interests in favor of Agent for the benefit of Lenders
securing payment of the Liabilities are in all respects continuing and in full
force and effect with respect to all Liabilities and (ii) all references in the
other Loan Documents to the Existing Pledge Agreement shall be deemed to refer
without amendment to this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered individually or by their duly
authorized officers as of the date first above written.
PROTECTION ONE, INC., a Delaware corporation
By: JOHN W. HESSE
------------------------------------------
Its: Executive Vice President
------------------------------------------
HELLER FINANCIAL, INC., a Delaware
corporation, individually and as Agent for
the Lenders
By: TIMOTHY CANON
------------------------------------------
Its: Vice President
------------------------------------------
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<PAGE> 1
EXHIBIT 4.12
AMENDED AND RESTATED SECURITY AGREEMENT
AMENDED AND RESTATED SECURITY AGREEMENT dated as of June 7, 1996 (this
"Agreement") between Protection One Alarm Monitoring, Inc., a Delaware
corporation ("Borrower"), and Heller Financial, Inc., a Delaware corporation, as
agent ("Agent") for the benefit of all Lenders.
W I T N E S S E T H :
WHEREAS, Borrower, Agent and Lenders are parties to an Amended and
Restated Credit Agreement dated as of June 7, 1996 (as the same may be amended
and in effect from time to time, the "Credit Agreement"), providing for
extensions of credit to be made to Borrower by Lenders; and
WHEREAS, it is a condition precedent to the making of Loans and the
issuance of Lender Letters of Credit that Borrower shall have granted the
security interests contemplated by this Agreement;
NOW, THEREFORE, in consideration of the premises and in order to induce
Lenders to make Loans and to issue Lender Letters of Credit, Borrower hereby
agrees with Agent for its benefit and the benefit of Lenders as follows:
SECTION 1. Definitions
1.1 Certain Defined Terms. Terms defined in the Credit Agreement and
not otherwise defined herein have the respective meanings provided for in the
Credit Agreement. The following terms, as used herein, have the meanings set
forth below:
"Accounts" means all "accounts" (as defined in the UCC) now owned or
hereafter created or acquired by Borrower including, without limitation, all of
the following now owned or hereafter created or acquired by Borrower: (a)
accounts receivable, contract rights, book debts, notes, drafts and other
obligations or indebtedness owing to Borrower arising from the sale, lease or
exchange of goods or other property and/or the performance of services; (b)
Borrower's rights in, to and under all purchase orders for goods, services or
other property; (c) Borrower's rights to any goods, services or other property
represented by any of the foregoing (including returned or repossessed goods and
unpaid sellers' rights of rescission, replevin, reclamation and rights to
stoppage in transit); (d) monies due to or to become due to Borrower under all
contracts for the sale, lease or exchange of goods or other property and/or the
performance of services (whether or not yet earned by performance on the part of
Borrower); (e) uncertificated securities; and (f) Proceeds of any of the
foregoing and all collateral security and guaranties of any kind given by any
Person with respect to any of the foregoing.
"Collateral" has the meaning assigned to that term in Section 2.
"Copyright License" means any written agreement now or hereafter in
existence granting to Borrower any right to use any Copyright including, without
limitation, the agreements described in Schedule 1 of the Copyright Security
Agreement.
"Copyrights" means collectively all of the following: (a) all
copyrights, rights and interests in copyrights, works protectable by copyright,
copyright registrations and copyright applications now owned or hereafter
created or acquired by Borrower, including, without limitation, those listed on
Schedule B to the Intellectual Property Security Agreement; (b) all renewals of
any of the foregoing; (c) all income, royalties, damages and payments now or
hereafter due and/or payable under any of the foregoing, including, without
limitation, damages or payments for past or future infringements of any of the
foregoing; (d) the right to sue for past, present and future infringements of
any of the foregoing; (e) all rights corresponding to any of the foregoing
throughout the world; and (f) all goodwill associated with and symbolized by any
of the foregoing.
"Depository Account" has the meaning assigned to such term in Section
7.
"Documents" means all "documents" (as defined in the UCC) or other
receipts covering, evidencing or representing goods now owned or hereafter
acquired by Borrower.
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"Equipment" means all "equipment" (as defined in the UCC) now owned or
hereafter acquired by Borrower including, without limitation, all machinery,
motor vehicles, trucks, trailers, vessels, aircraft and rolling stock and all
parts thereof and all additions and accessions thereto and replacements
therefor.
"Existing Security Agreement" means the Security Agreement dated
November 3, 1993 between Borrower and Agent, as heretofore amended, modified and
supplemented from time to time.
"Fixtures" means all of the following now owned or hereafter acquired
by Borrower: plant fixtures; business fixtures; other fixtures and storage
office facilities, wherever located; and all additions and accessions thereto
and replacements therefor.
"General Intangibles" means all "general intangibles" (as defined in
the UCC) now owned or hereafter acquired by Borrower including, without
limitation, all right, title and interest of Borrower in and to: (a) all
agreements, leases, licenses and contracts to which Borrower is or may become a
party; (b) all obligations or indebtedness owing to Borrower (other than
Accounts) from whatever source arising; (c) all tax refunds; (d) Intellectual
Property; and (e) all trade secrets and other confidential information relating
to the business of Borrower including by way of illustration and not limitation:
systems and techniques for the analysis, diagnosis and correction of
malfunctions of products used by Borrower's customers; the names and addresses
of, and credit and other business information concerning, Borrower's past,
present or future customers; the prices which Borrower obtains for its services
or at which it sells merchandise; estimating and cost procedures; profit
margins; policies and procedures pertaining to the sale and design of equipment,
components, devices and services furnished by Borrower; information concerning
suppliers of Borrower; and information concerning the manner of operation,
business plans, pledges, projections, and all other information of any kind or
character, whether or not reduced to writing, with respect to the conduct by
Borrower of its business not generally known by the public.
"Instruments" means all "instruments", "chattel paper" or "letters of
credit" (each as defined in the UCC) including, but not limited to, promissory
notes, drafts, bills of exchange and trade acceptances, now owned or hereafter
acquired by Borrower.
"Intellectual Property" shall mean collectively all of the following:
Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks and
Trademark Licenses.
"Intellectual Property Security Agreement" means the Amended and
Restated Continuing Security Interest and Conditional Assignment of Patents,
Trademarks, Copyrights and Licenses executed and delivered by Borrower to Agent,
substantially in the form of Exhibit A, as such agreement may hereafter be
amended, supplemented or otherwise modified from time to time.
"Inventory" means all "inventory" (as defined in the UCC), now owned or
hereafter acquired by Borrower, wherever located including, without limitation,
finished goods, raw materials, work in process and other materials and supplies
(including packaging and shipping materials) used or consumed in the manufacture
or production thereof and goods which are returned to or repossessed by
Borrower.
"Patent License" means any written agreement now or hereafter in
existence granting to Borrower any right to use any invention on which a Patent
is in existence including, without limitation, the agreements described in
Schedule D of the Intellectual Property Security Agreement.
"Patents" means collectively all of the following: (a) all patents and
patent applications now owned or hereafter created or acquired by Borrower
including, without limitation, those listed on Schedule A of the Intellectual
Property Security Agreement and the inventions and improvements described and
claimed therein, and patentable inventions; (b) the reissues, divisions,
continuations, renewals, extensions and continuations-in-part of any of the
foregoing; (c) all income, royalties, damages or payments now and hereafter due
and/or payable under any of the foregoing with respect to any of the foregoing,
including, without limitation, damages of payments for past or future
infringements of any of the foregoing; (d) the right to sue for past, present
and future infringements of any of the foregoing; (e) all rights corresponding
to any of the foregoing throughout the world; and (f) all goodwill associated
with any of the foregoing.
"Proceeds" means all proceeds of, and all other profits, rentals or
receipts, in whatever form, arising from the collection, sale, lease, exchange,
assignment, licensing or other disposition of, or realization upon, any
Collateral including, without limitation, all claims of Borrower against third
parties for loss of, damage to or destruction of,
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or for proceeds payable under, or unearned premiums with respect to, policies of
insurance with respect to any Collateral, and any condemnation or requisition
payments with respect to any Collateral, in each case whether now existing or
hereafter arising.
"Secured Obligations" has the meaning assigned to that term in Section
3.
"Security Interests" means the security interests granted pursuant to
Section 2, as well as all other security interests created or assigned as
additional security for the Secured Obligations pursuant to the provisions of
this Agreement.
"Trademark License" means any written agreement now or hereafter in
existence granting to Borrower any right to use any Trademark, including,
without limitation, the agreements described in Schedule D to the Intellectual
Property Security Agreement.
"Trademarks" means collectively all of the following now owned or
hereafter created or acquired by Borrower: (a) all trademarks, trade names,
corporate names, company names, business names, fictitious business names, trade
styles, service marks, logos, other business identifiers, prints and labels on
which any of the foregoing have appeared or appear, all registrations and
recordings thereof, and all applications in connection therewith including
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or any political subdivision thereof,
including, without limitation, those described in Schedule C of the Intellectual
Property Security Agreement; (b) all reissues, extensions or renewals thereof;
(c) all income, royalties, damages and payments now or hereafter due and/or
payable under any of the foregoing or with respect to any of the foregoing
including damages or payments for past or future infringements of any of the
foregoing; (d) the right to sue for past, present and future infringements of
any of the foregoing; (e) all rights corresponding to any of the foregoing
throughout the world; and (f) all goodwill associated with and symbolized by any
of the foregoing.
"UCC" means the Uniform Commercial Code as in effect on the date hereof
in the State of Illinois, provided that if by reason of mandatory provisions of
law, the perfection or the effect of perfection or non- perfection of the
Security Interest in any Collateral or the availability of any remedy hereunder
is governed by the Uniform Commercial Code as in effect on or after the date
hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in
effect in such other jurisdiction for purposes of the provisions hereof relating
to such perfection or effect of perfection or non-perfection or availability of
such remedy.
1.2 Other Definition Provisions. References to "Subsections",
"subsections", "Exhibits" and "Schedules" shall be to Sections, subsections,
Exhibits and Schedules, respectively, of this Agreement unless otherwise
specifically provided. Any of the terms defined in subsection 1.1 may, unless
the context otherwise requires, be used in the singular or the plural depending
on the reference. All references to statutes and related regulations shall
include (unless otherwise specifically provided herein) any amendments of same
and any successor statutes and regulations.
1.3 Effect of Restatement. This Agreement amends, restates and
supersedes the Existing Security Agreement; provided, that (i) the liens and
security interests in favor of Agent for the benefit of Lenders securing payment
of the Secured Obligations are in all respects continuing and in full force and
effect with respect to all Secured Obligations and (ii) all references in the
other Loan Documents to the Existing Security Agreement shall be deemed to refer
without further amendment to this Agreement.
SECTION 2. Grant of Security Interests
In order to secure the payment and performance of the Secured
Obligations in accordance with the terms thereof, Borrower hereby grants to
Agent for the benefit of Lenders a continuing security interest in and to all
right, title and interest of Borrower in the following property, whether now
owned or existing or hereafter acquired or arising and regardless of where
located (all being collectively referred to as the "Collateral"):
(A) Accounts;
(B) Inventory;
(C) General Intangibles;
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(D) Documents;
(E) Instruments;
(F) Equipment;
(G) Fixtures;
(H) All deposit accounts of Borrower maintained with any bank
or financial institution;
(I) All Depository Accounts, all cash deposited therein from
time to time and other monies and property of Borrower in the
possession or under the control of Agent or any Lender;
(J) All books, records, ledger cards, files, correspondence,
computer programs, tapes, disks and related data processing
software that at any time evidence or contain information
relating to any of the property described in subparts (A) -
(I) above or are otherwise necessary or helpful in the
collection thereof or realization thereon; and
(K) Proceeds of all or any of the property described in
subparts (A) - (J) above.
Notwithstanding the foregoing, so long as no Event of Default has occurred and
is continuing, Borrower shall have the exclusive, non-transferable right and
license to use the Intellectual Property and the exclusive right to grant to
other Persons licenses and sublicenses with respect to Intellectual Property.
Notwithstanding the foregoing, the term "Collateral" shall not include
the monies (and any investment contracts and life insurance policies purchased
therewith and any other proceeds thereof) deposited with the Protection-I Trust
and the Protection-II Trust, each dated September 24, 1993, in accordance with
the Ion Acquisition Documents to defease the promissory notes issued by
Monitoring to Ion Leasing Inc. under the Ion Acquisition Documents.
SECTION 3. Security for Obligations
This Agreement secures the payment and performance of the Obligations
and all obligations of Borrower now or hereafter existing under this Agreement
and all renewals, extensions, restructurings and refinancings of any of the
above (all such debts, obligations and liabilities of Borrower being
collectively called the "Secured Obligations").
SECTION 4. Borrower Remains Liable
Anything herein to the contrary notwithstanding: (a) Borrower shall
remain liable under the contracts and agreements included in the Collateral to
the extent set forth therein to perform all of its duties and obligations
thereunder to the same extent as if this Agreement had not been executed; (b)
the exercise by Agent of any of the rights hereunder shall not release Borrower
from any of its duties or obligations under the contracts and agreements
included in the Collateral; and (c) Agent shall not have any obligation or
liability under the contracts and agreements included in the Collateral by
reason of this Agreement, nor shall Agent be obligated to perform any of the
obligations or duties of Borrower thereunder or to take any action to collect or
enforce any claim for payment assigned hereunder.
SECTION 5. Representations and Warranties
Borrower represents and warrants as follows:
5.1 Binding Obligation. This Agreement is the legally valid and binding
obligation of Borrower, enforceable against it in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, or similar laws or equitable principles relating to or limiting
creditor's rights generally.
5.2 Location of Equipment and Inventory. All of the Equipment and
Inventory is located at the places specified on Schedule I.
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<PAGE> 5
5.3 Ownership of Collateral; Bailees. Except for matters disclosed on
Schedule II, other Permitted Encumbrances and the Security Interests, Borrower
owns the Collateral free and clear of any Lien. No effective financing statement
or other form of lien notice covering all or any part of the Collateral is on
file in any recording office, except for those in favor of Agent and as
disclosed on Schedule II. Except as disclosed on Schedule II, none of the
Collateral is in the possession of any bailee, warehouseman, agent or processor.
5.4 Office Locations; FEIN; Fictitious Names. The chief place of
business, the chief executive office and the office where Borrower keeps its
books and records are located at the places specified on Schedule I. Borrower's
federal employee identification number is specified in Schedule I. Borrower does
not do business nor has Borrower done business during the past five years under
any trade-name or fictitious business name except as disclosed on Schedule III.
5.5 Perfection. This Agreement creates a valid, perfected and, except
for the Permitted Encumbrances, first priority security interest in the
Collateral, securing the payment of the Secured Obligations, and all filings and
other actions necessary or desirable to perfect and protect such security
interest have been duly taken.
5.6 Governmental Authorizations; Consents. No authorization, approval
or other action by, and no notice to or filing with, any governmental authority
or regulatory body or consent of any other Person (including without limitation
any Licensor of Intellectual Property or party to any Assigned Agreement) is
required either (a) for the grant by Borrower of the security interest granted
hereby or for the execution, delivery or performance of this Agreement by
Borrower or (b) for the perfection of or the exercise by Agent of its rights and
remedies hereunder (except as may have been taken by or at the direction of
Borrower or Agent).
5.7 Accounts. Each Account constitutes the legally valid and binding
obligation of the customer obligated to pay the same. The amount represented by
Borrower to Agent as owing by each customer is the correct amount actually and
unconditionally owing, except for normal cash discounts and allowances where
applicable. No customer has any defense, set-off, claim or counterclaim against
Borrower that can be asserted against Agent, whether in any proceeding to
enforce Agent's rights in the Collateral or otherwise except defenses, set-offs,
claims or counterclaims that are not, in the aggregate, material to the value of
the Accounts. None of the Accounts is evidenced by a promissory note or other
instrument other than a check.
5.8 Intellectual Property. The Copyrights, Copyright Licenses, Patents,
Patent Licenses, Trademarks and Trademark Licenses listed on the respective
schedules to the Intellectual Property Security Agreement constitute all of the
Intellectual Property owned by Borrower.
5.9 Accurate Information. All information heretofore, herein or
hereafter supplied to Agent by or on behalf of Borrower with respect to the
Collateral is and will be accurate and complete in all material respects.
5.10 Credit Agreement Warranties. Each representation and warranty set
forth in Section 4 of the Credit Agreement is true and correct in all material
respects and such representations and warranties are hereby incorporated herein
by this reference with the same effect as though set forth in their entirety
herein.
SECTION 6. Further Assurances; Covenants
6.1 Other Documents and Actions. Borrower will, from time to time, at
its expense, promptly execute and deliver all further instruments and documents
and take all further action that may be necessary or desirable, or that Agent
may request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Agent to exercise and enforce its
rights and remedies hereunder with respect to any Collateral. Without limiting
the generality of the foregoing, Borrower will: (a) execute and file such
financing or continuation statements, or amendments thereto, and such other
instruments or notices, as may be necessary or desirable, or as Agent may
request, in order to perfect and preserve the security interests granted or
purported to be granted hereby; (b) at any reasonable time, upon demand by Agent
exhibit the Collateral to allow inspection of the Collateral by Agent or persons
designated by Agent; and (c) upon Agent's request, appear in and defend any
action or proceeding that may affect Borrower's title to or Agent's security
interest in the Collateral.
6.2 Agent Authorized. Borrower hereby authorizes Agent to file one or
more financing or continuation statements, and amendments thereto, relating to
all or any part of the Collateral without the signature of Borrower where
permitted by law.
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6.3 Corporate or Name Change. Borrower will notify Agent promptly in
writing prior to any change in Borrower's name, identity or corporate structure.
6.4 Business Locations. Borrower will keep the Collateral at the
locations specified on Schedule I. Borrower will give Agent thirty (30) days
prior written notice of any change in Borrower's chief place of business or of
any new location of business or any new location for any of the Collateral. With
respect to any new location (which in any event shall be within the continental
United States), Borrower will execute such documents and take such actions as
Agent deems necessary to perfect and protect the Security Interests.
6.5 Bailees. If any Collateral is at any time in the possession or
control of any warehouseman, bailee or any of Borrower's agents or processors,
Borrower shall, upon the request of Agent, notify such warehouseman, bailee,
agent or processor of the Security Interests created hereby and shall instruct
such Person to hold all such Collateral for Agent's account subject to Agent's
instructions.
6.6 Instruments. Borrower will deliver and pledge to Agent all
Instruments duly endorsed and accompanied by duly executed instruments of
transfer or assignment, all in form and substance satisfactory to Agent.
Borrower will mark conspicuously all chattel paper with a legend, in form and
substance satisfactory to Agent, indicating that such chattel paper is subject
to the Security Interests. Without limiting the generality of the foregoing
Borrower will mark conspicuously all subscriber agreements and alarm system
purchase agreements (whether or not constituting chattel paper) with the legend
referred to in the proceeding sentence.
6.7 Certificates of Title. Upon Agent's request, Borrower shall
promptly deliver to Agent any and all certificates of title, applications for
title or similar evidence of ownership of all Equipment and shall cause Agent to
be named as lienholder on any such certificate of title or other evidence of
ownership. Borrower shall promptly inform Agent of any additions to or deletions
from the Equipment and shall not permit any such items to become fixtures to
real estate other than real estate described in the Mortgages.
6.8 Account Covenants. Except as otherwise provided in this subsection
6.8, Borrower shall continue to collect, at its own expense, all amounts due or
to become due Borrower under the Accounts. In connection with such collections,
Borrower may take (and, at Agent's direction, shall take) such action as
Borrower or Agent may deem necessary or advisable to enforce collection of the
Accounts; provided, that Agent shall have the right at any time after the
occurrence of a Default or an Event of Default to: (a) notify the customers or
obligors under any Accounts of the assignment of such Accounts to Agent (on
behalf of Lenders) and to direct such customers or obligors to make payment of
all amounts due or to become due directly to Agent; (b) enforce collection of
any such Accounts; and (c) adjust, settle or compromise the amount or payment of
such Accounts. After the occurrence of an Event of Default (i) all amounts and
proceeds (including Instruments) received by Borrower with respect to the
Accounts shall be received in trust for the benefit of Agent (on behalf of
Lenders), shall be segregated from other funds of Borrower and shall be
forthwith paid over to Agent in the same form as so received (with any necessary
endorsement) to be applied in accordance with Section 13 and (ii) Borrower shall
not adjust, settle or compromise the amount or payment of any Account, or
release wholly or partly any customer or obligor thereof, or allow any credit or
discount thereon without the prior consent of Agent.
6.9 Intellectual Property Covenants. Borrower shall concurrently
herewith deliver to Agent the Intellectual Property Security Agreement and all
other documents, instruments and other items as may be necessary for Agent to
file such agreement with the United States Copyright Office, United States
Patent and Trademark Office and any similar domestic or foreign office,
department or agency. If, before the Secured Obligations are paid in full,
Borrower obtains any new Intellectual Property or rights thereto or becomes
entitled to the benefit of any Intellectual Property not listed on the
respective schedules to each security agreement, Borrower shall give to Agent
prompt written notice thereof, and shall amend the respective security agreement
to include any such new Intellectual Property. Borrower shall: (a) prosecute
diligently any copyright, patent, trademark or license application at any time
pending; (b) make application on all new copyrights, patents and trademarks as
reasonably deemed appropriate by Borrower; (c) preserve and maintain all rights
in the Intellectual Property; and (d) use its best efforts to obtain any
consents, waivers or agreements necessary to enable Agent to exercise its
remedies with respect to the Intellectual Property. Borrower shall not abandon
any right to file a copyright, patent or trademark application nor shall
Borrower abandon any pending copyright, patent or trademark application, or
Copyright, Copyright License, Patent, Patent License, Trademark or Trademark
License without the prior written consent of Agent. Borrower represents and
warrants to Agent that the execution, delivery and performance of this Agreement
by Borrower will not violate or cause a default under any of the Intellectual
Property or any agreement in connection therewith.
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6.10 Equipment Covenants. Borrower shall cause the Equipment to be
maintained and preserved in the same condition, repair and working order as when
new, ordinary wear and tear excepted, and in accordance with any manufacturer's
manual, and shall promptly make or cause to be made all repairs, replacements,
and other improvements in connection therewith that are necessary or desirable
to such end.
6.11 Insurance. Borrower shall maintain insurance with respect to the
Collateral in accordance with the terms of the Credit Agreement.
6.12 Taxes and Claims. Borrower will pay promptly when due all property
and other taxes, assessments and governmental charges or levies imposed upon,
and all claims against, the Collateral (including claims for labor, materials
and supplies), except to the extent the validity thereof is being contested in
good faith.
6.13 Collateral Description. Borrower will furnish to Agent, from time
to time, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Agent may
reasonably request, all in reasonable detail.
6.14 Use of Collateral. Borrower will not use or permit any Collateral
to be used unlawfully or in violation of any provision of this Agreement or any
applicable statue, regulation or ordinance or any policy of insurance covering
any of the Collateral.
6.15 Records of Collateral. Borrower shall keep full and accurate books
and records relating to the Collateral and shall stamp or otherwise mark such
books and records in such manner as Agent may reasonably request indicating that
the Collateral is subject to the Security Interests.
6.16 Other Information. Borrower will, promptly upon request, provide
to Agent all information and evidence it may reasonably request concerning the
Collateral, and in particular the Accounts, to enable Agent to enforce the
provisions of this Agreement.
SECTION 7. Bank Accounts; Collection of Accounts and Payments
On or prior to the Closing Date, the Agent and Borrower shall enter
into a bank agency agreement ("Bank Agency Agreement") substantially in the form
of Exhibit B hereto with each financial institution with which the Borrower
maintains from time to time any deposit accounts (general or special) (a
"Depository Account"), except for petty cash accounts with an aggregate balance
in all such accounts not exceeding $100,000 at any time. Pursuant to the Bank
Agency Agreements and pursuant hereto, Borrower grants and shall grant to the
Agent, for the benefit of the Lenders, a continuing lien upon, and security
interest in, all such accounts and all funds at any time paid, deposited,
credited or held in such accounts (whether for collection, provisionally or
otherwise) or otherwise in the possession of such financial institutions, and
each such financial institution shall act as the Agent's agent in connection
therewith. Following the Closing Date, Borrower shall not establish any deposit
account (except for the above-described petty cash accounts) with any financial
institution unless prior thereto the Agent and Borrower shall have entered into
a Bank Agency Agreement with such financial institution and Borrower shall have
notified Agent of the establishment of such account. The Bank Agency Agreement
dated as of November 3, 1993 among Borrower, Agent and First Interstate Bank of
Oregon, N.A. shall be deemed a Bank Agency Agreement hereunder.
SECTION 8. Agent Appointed Attorney-in-Fact
Borrower hereby irrevocably appoints Agent as Borrower's
attorney-in-fact, with full authority in the place and stead of Borrower and in
the name of Borrower, Agent or otherwise, from time to time following the
occurrence and during the continuance of an Event of Default in Agent's
discretion to take any action and to execute any instrument that Agent may deem
necessary or advisable to accomplish the purposes of this Agreement, including,
without limitation:
(a) to obtain and adjust insurance required to be paid to
Agent;
(b) to ask, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become
due under or in respect of any of the Collateral;
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(c) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clauses
(a) and (b) above;
(d) to file any claims or take any action or institute any
proceedings that Agent may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights
of Agent with respect to any of the Collateral;
(e) to pay or discharge taxes or Liens, levied or placed upon
or threatened against the Collateral, the legality or validity thereof
and the amounts necessary to discharge the same to be determined by
Agent in its sole discretion, and such payments made by Agent to become
obligations of Borrower to Agent, due and payable immediately without
demand;
(f) to sign and endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, assignments,
verifications and notices in connection with Accounts and other
documents (including without limitation financing statements,
continuation statements and other documents necessary or advisable to
perfect the Security Interests) relating to the Collateral; and
(g) generally to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral as fully
and completely as though Agent were the absolute owner thereof for all
purposes, and to do, at Agent's option and Borrower's expense, at any
time or from time to time, all acts and things that Agent deems
necessary to protect, preserve or realize upon the Collateral.
Borrower hereby ratifies and approves all acts of Agent made or taken pursuant
to this Section 8. Neither Agent nor any person designated by Agent shall be
liable for any acts or omissions or for any error of judgment or mistake of fact
or law. This power, being coupled with an interest, is irrevocable so long as
this Agreement shall remain in force.
SECTION 9. Transfers and Other Liens
Except as otherwise permitted by the Credit Agreement, Borrower shall
not:
(a) Sell, assign (by operation of law or otherwise) or
otherwise dispose of, or grant any option with respect to, any of the
Collateral, except that Borrower may sell Inventory in the ordinary
course of business.
(b) Create or suffer to exist any lien, security interest or
other charge or encumbrance upon or with respect to any of the
Collateral to secure indebtedness of any Person except for the security
interest created by this Agreement or permitted under the Credit
Agreement.
SECTION 10. Remedies
If any Event of Default shall have occurred and be continuing, Agent
may exercise in respect of the Collateral, in addition to all other rights and
remedies provided for herein or otherwise available to it, all the rights and
remedies of a secured party on default under the UCC (whether or not the UCC
applies to the affected Collateral) and also may: (a) require Borrower to, and
Borrower hereby agrees that it will, at its expense and upon request of Agent
forthwith, assemble all or part of the Collateral as directed by Agent and make
it available to Agent at a place to be designated by Agent which is reasonably
convenient to both parties; (b) withdraw all cash in the Depository Accounts and
apply such monies in payment of the Secured Obligations in the manner provided
in Section 13; (c) without notice or demand or legal process, enter upon any
premises of Borrower and take possession of the Collateral; and (d) without
notice except as specified below, sell the Collateral or any part thereof in one
or more parcels at public or private sale, at any of the Agent's offices or
elsewhere, at such time or times, for cash, on credit or for future delivery,
and at such price or prices and upon such other terms as Agent may deem
commercially reasonable. Borrower agrees that, to the extent notice of sale
shall be required by law, at least ten days notice to Borrower of the time and
place of any public sale or the time after which any private sale is to be made
shall constitute reasonable notification. At any sale of the Collateral, if
permitted by law, Agent may bid (which bid may be, in whole or in part, in the
form of cancellation of indebtedness) for the purchase of the Collateral or any
portion thereof for the account of Agent (on behalf of Lenders). Agent shall not
be obligated to make any sale of Collateral regardless of notice of sale having
been given. Agent may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further
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notice, be made at the time and place to which it was so adjourned. To the
extent permitted by law, Borrower hereby specifically waives all rights of
redemption, stay or appraisal which it has or may have under any law now
existing or hereafter enacted.
SECTION 11. License of Intellectual Property
Borrower hereby assigns, transfers and conveys to Agent, effective upon
the occurrence of any Event of Default hereunder, the nonexclusive right and
license to use all Intellectual Property owned or used by Borrower together with
any goodwill associated therewith, all to the extent necessary to enable Agent
to realize on the Collateral and any successor or assign to enjoy the benefits
of the Collateral. This right and license shall inure to the benefit of all
successors, assigns and transferees of Agent and its successors, assigns and
transferees, whether by voluntary conveyance, operation of law, assignment,
transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and
license is granted free of charge, without requirement that any monetary payment
whatsoever be made to Borrower by Agent.
SECTION 12. Limitation on Duty of Agent with Respect to Collateral
Beyond the safe custody thereof, Agent shall have no duty with respect
to any Collateral in its possession or control (or in the possession or control
of any agent or bailee) or with respect to any income thereon or the
preservation of rights against prior parties or any other rights pertaining
thereto. Agent shall be deemed to have exercised reasonable care in the custody
and preservation of the Collateral in its possession if the Collateral is
accorded treatment substantially equal to that which it accords its own
property. Agent shall not be liable or responsible for any loss or damage to any
of the Collateral, or for any diminution in the value thereof, by reason of the
act or omission of any warehouseman, carrier, forwarding agency, consignee or
other agent or bailee selected by Agent in good faith.
SECTION 13. Application of Proceeds
Upon the occurrence and during the continuance of an Event of Default,
the proceeds of any sale of, or other realization upon, all or any part of the
Collateral and any cash held in the Depository Accounts shall be applied: first,
to all fees, costs and expenses incurred by Agent or any Lender with respect to
the Credit Agreement, the other Loan Documents or the Collateral including,
without limitation, those described in subsection 10.1 of the Credit Agreement
and in Section 14 hereof; second, to all fees due and owing to Agent or any
Lender; third, to accrued and unpaid interest on the Obligations (including any
interest which but for the provisions of the Bankruptcy Code, would have accrued
on such amounts); fourth, to the principal amounts of the Obligations
outstanding; and fifth, to any other indebtedness or obligations of Borrower
owing to Agent or any Lender.
SECTION 14. Expenses
Borrower shall pay all insurance expenses and all expenses of
protecting, storing, warehousing, appraising, insuring, handling, maintaining
and shipping the Collateral, all costs, fees and expenses of perfecting and
maintaining the Security Interests, and any and all excise, property, sales and
use taxes imposed by any state, federal or local authority on any of the
Collateral, or with respect to periodic appraisals and inspections of the
Collateral, or with respect to the sale or other disposition thereof. If
Borrower fails promptly to pay any portion of the above expenses when due or to
perform any other obligation of Borrower under this Agreement, Agent or any
other Lender may, at its option, but shall not be required to, pay or perform
the same and charge Borrower's account for all costs and expenses incurred
therefor, and Borrower agrees to reimburse Agent or such Lender therefor on
demand. All sums so paid or incurred by Agent or any other Lender for any of the
foregoing, any and all other sums for which Borrower may become liable hereunder
and all costs and expenses (including attorneys' fees, legal expenses and court
costs) incurred by Agent or any other Lender in enforcing or protecting the
Security Interests or any of their rights or remedies under this Agreement shall
be payable on demand, shall constitute Obligations, shall bear interest until
paid at the highest rate provided in the Credit Agreement and shall be secured
by the Collateral.
SECTION 15. Termination of Security Interests; Release of Collateral
Upon payment in full of all Secured Obligations and the termination of
all Commitments, the Security Interests shall terminate and all rights to the
Collateral shall revert to Borrower. Upon such termination of the Security
Interests or release of any Collateral, Agent will, at the expense of Borrower,
execute and deliver to
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Borrower such documents as Borrower shall reasonably request to evidence the
termination of the Security Interests or the release of such Collateral, as the
case may be.
SECTION 16. Notices
All notices, approvals, requests, demands and other communications
hereunder shall be given in accordance with the notice provision of the Credit
Agreement.
SECTION 17. Waivers, Non-Exclusive Remedies
No failure on the part of Agent to exercise, and no delay in exercising
and no course of dealing with respect to, any right under the Credit Agreement
or this Agreement shall operate as a waiver thereof; nor shall any single or
partial exercise by Agent of any right under the Credit Agreement or this
Agreement preclude any other or further exercise thereof or the exercise of any
other right. The rights in this Agreement and the Credit Agreement are
cumulative and are not exclusive of any other remedies provided by law.
SECTION 18. Successors and Assigns
This Agreement is for the benefit of Agent and Lenders and their
successors and assigns, and in the event of an assignment of all or any of the
Secured Obligations, the rights hereunder, to the extent applicable to the
Secured Obligations so assigned, may be transferred with such Secured
Obligations. This Agreement shall be binding on Borrower and its successors and
assigns.
SECTION 19. Changes in Writing
No amendment, modification, termination or waiver of any provision of
this Agreement or consent to any departure by Borrower therefrom, shall in any
event be effective without the written concurrence of Agent and Borrower.
SECTION 20. Applicable Law
THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
SECTION 21. Failure or Indulgence Not Waiver; Remedies Cumulative
No failure or delay on the part of Agent or any Lender in the exercise
of any power, right or privilege hereunder shall impair such power, right or
privilege or be construed to be a waiver of any default or acquiescence therein,
nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or any other right, power or
privilege. All rights and remedies existing under this Agreement are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
SECTION 22. Headings
Section and subsection headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose or be given any substantive effect.
SECTION 23. Counterparts
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument and any of the
parties hereto may execute this Agreement by signing any such counterpart.
Witness the due execution hereof by the respective duly authorized
officers of the undersigned as of the day first above written.
PROTECTION ONE ALARM HELLER FINANCIAL, INC.
MONITORING, INC.
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By: JOHN W. HESSE By: TIMOTHY CANON
------------------------ ----------------------------
Title: Executive Vice President Title: Vice President
11
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LIST OF SCHEDULES
Schedule I - Locations of Equipment, Inventory, Books and Records, Chief
Executive Office, Other Locations; FEIN
Schedule II - Other Liens, Security Interests and Financing Statements;
Bailees
Schedule III - Trade-names and Fictitious Names (Present and Past Five Years)
<PAGE> 1
EXHIBIT 4.13
AMENDED AND RESTATED CONTINUING
SECURITY INTEREST AND CONDITIONAL ASSIGNMENT
OF PATIENTS, TRADEMARKS AND LICENSES
This AMENDED AND RESTATED CONTINUING SECURITY INTEREST AND
CONDITIONAL ASSIGNMENT OF PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
("Agreement") is dated as of June 7, 1996 between PROTECTION ONE ALARM
MONITORING, INC., a Delaware corporation ("Borrower") and HELLER FINANCIAL,
INC., a Delaware corporation, individually and as agent ("Agent") for the other
Lenders under that certain Amended and Restated Credit Agreement dated as of the
date hereof among Assignor, Agent and the other Lenders named therein (as the
same may hereafter be amended, supplemented or otherwise modified from time to
time, the "Credit Agreement").
W I T N E S S E T H:
WHEREAS, it is a condition to the Credit Agreement that
Assignor shall have executed and delivered this Agreement; and
WHEREAS, that certain Amended and Restated Security Agreement
of even date herewith among Agent and Assignor (as the saw may hereafter be
amended, supplemented or otherwise modified from time to time, the "Security
Agreement") grants to Agent a Lien (as hereinafter defined) on Assignor's
assets, including, without limitation, all of Assignor's Intellectual Property
(as hereinafter defined);
NOW, THEREFORE, in consideration of the premises set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignor agrees as follows:
1. Incorporation of Security Agreement; Credit Agreement
Definitions. The Security Agreement and the terms and provisions thereof are
hereby incorporated herein in their entirety by this reference thereto.
Capitalized terms used but not otherwise defined herein or in the Security
Agreement shall have the meanings ascribed thereto in the Credit Agreement.
2. Grant of Lien. To secure the complete and timely payment
and satisfaction of the Secured Obligations, Assignor hereby grants to Agent,
for the benefit of the Lenders, a continuing Lien on Assignor's entire right,
title and interest in and to all of its now owned or existing and hereafter
acquired or arising:
(a) United States, Canada and all other foreign
Patents, including, without limitation, the Patents listed on Schedule
A;
(b) United States, Canada and WI other foreign
Copyrights, including, without limitation, the Copyrights listed on
Schedule B;
(c) United States, Canada and all other foreign
Trademarks, including, without limitation, the Trademarks listed on
Schedule C;
(d) United States, Canada and all other foreign
Patent Licenses, Copyright Licenses, Trademark Licenses and all license
agreements in which Assignor is or becomes licensed to use a patent,
copyright, trademark or the knowhow of any other Person,
<PAGE> 2
including, without limitation, the Patent Licenses, Copyright Licenses,
Trademark Licenses and all other license agreements listed on Schedule
D (collectively, the "Licenses"); and
(e) the goodwill of Assignor's business connected
with the use of and symbolized by the Trademarks and Trademark
Licenses.
3. Assignment of Patents. In addition to all other rights
granted to Agent under the Credit Agreement, the Security Agreement and this
Agreement, as collateral security only for the payment, performance and
observance of the Secured Obligations, Assignor hereby sells, assigns, transfers
and sets over to Agent, effective upon the occurrence and during the continuance
of any Event of Default, Assignor's entire right, title and interest in and to
all Patents, including, without limitation, any Patents that may pertain to any
other Collateral.
4. Assignment of Copyrights. In addition to all other rights
granted to Agent under the Credit Agreement, the Security Agreement and this
Agreement, as collateral security only for the payment, performance and
observance of the Secured Obligations, Assignor hereby sells, assigns, transfers
and sets over to Agent, effective upon the occurrence and during the continuance
of any Event of Default, Assignor's entire right, title and interest in and to
all Copyrights, including, without limitation, any Copyrights that may pertain
to any other Collateral.
5. Assignment of Trademarks and Goodwill. In addition to all
other rights granted to Agent under the Credit Agreement, the Security Agreement
and this Agreement, as collateral security only for the payment, performance and
observance of the Secured Obligations, Assignor hereby grants to Agent,
effective upon the occurrence and during the continuance of any Event of
Default, Assignor's entire right, title and interest in and to all Trademarks
and the goodwill of Assignor's business connected with the use of and symbolized
by the Trademarks, including, without limitation, any Trademarks or goodwill
that may pertain to any other Collateral.
6. Assignment of Licenses. In addition to all other rights
granted to Agent under the Credit Agreement, the Security Agreement and this
Agreement, as collateral security only for the payment, performance and
observance of the Secured Obligations, Assignor hereby sells, assigns, transfers
and sets over to Agent, effective upon the and during the continuance of any
Event of Default, Assignor's entire right, title and interest in, to and under
all Licenses (other than Licenses which terminate or are terminable upon such
assignment) and any license agreement with any other party, whether now existing
or hereafter entered into and whether Assignor is a licensor or licensee under
such license agreement, and the right to prepare for sale, sell and advertise
for sale, all Collateral now or hereafter owned by Assignor and now or hereafter
covered by such License and Assignor agrees that it will not take any action, or
permit any action to be taken by others subject to its control, including
licensees, or fall to take any action, which could affect the validity or
enforcement of the rights transferred to Agent under this Agreement, which
rights are used or usable in the conduct of Assignor's business. Assignor hereby
covenants that it will promptly notify Agent if any Patent, Copyright or
Trademark shall at any time hereafter become subject to any such license
agreement and that it will promptly provide Agent with full identification
thereof and with such further documentation as Agent may reasonably request to
accomplish or assure the accomplishment of the purpose of this Section 6.
7. Royalties; Term. Assignor hereby agrees that the use by
Agent of all Patents, Copyrights, Trademarks and Licenses shall be worldwide, to
the extent of Assignor's rights and without any liability for royalties or other
related charges from Agent to Assignor. The term of the grant of the Lien
granted herein shall extend until the expiration of each of the respective
Patents,
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Copyrights, Trademarks and Licenses assigned hereunder, or until Assignors
obligations under the Credit Agreement have been finally paid in full and the
Credit Agreement and the Security Agreement terminate, whichever first occurs.
8. Reports of Applications. The United States, Canada and all
other foreign Patents, Copyrights, Trademarks and Licenses constitute all of the
material patents, copyrights, trademarks, applications and licenses now owned by
or licensed to Assignor. Assignor shall provide Agent on a quarterly basis with
a list of all new applications for United States and foreign letters patent,
copyrights and registered trademarks and licenses, which new applications,
patents, copyrights, trademarks and licenses shall all be subject to the terms
and conditions of the Security Agreement and this Agreement.
9. Effect on Credit Agreement Cumulative Remedies. Assignor
acknowledges and agrees that this Agreement is not intended to limit or restrict
in any way the rights and remedies of Agent under the Credit Agreement or the
Security Agreement but rather is intended to supplement and facilitate the
exercise of such rights and remedies. All of the rights and remedies of Agent
with respect to the Patents, Copyrights, Trademarks and Licenses, whether
established hereby, by the Credit Agreement or the Security Agreement, by any
other agreements, or by law, shall be cumulative and may be exercised singularly
or concurrently. NOTWITHSTANDING ANY PROVISION CONTAINED HEREIN OR IN ANY OTHER
DOCUMENT TO THE CONTRARY, AGENT SHALL NOT HAVE THE RIGHT TO USE AND ENFORCE THE
PATENTS, COPYRIGHTS, TRADEMARKS AND LICENSES UNLESS AND UNTIL THE OCCURRENCE OF
AN EVENT OF DEFAULT THE CREDIT AGREEMENT; PROVIDED, THAT AGENT SHALL HAVE THE
RIGHT HEREUNDER PRIOR TO THE OCCURRENCE OF A DEFAULT, TO EXERCISE ANY RIGHTS OF
ASSIGNOR UNDER OR IN RESPECT OF ANY OF THE LICENSES TO RENEW OR EXTEND THE SAME.
10. Binding Effect; Benefits. This Assignment shall be binding
upon Assignor and its respective successors and assigns, and shall inure to the
benefit of Agent and its respective successors and assigns.
11. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS.
12. Severability. The invalidity, illegality or
unenforceability of any provision in or obligation under this Agreement, the
Security Agreement or the Credit Agreement shall not affect or impair the
validity, legality or enforceability of the remaining provisions or obligations
under this Agreement.
13. Counterparts. This Agreement and any amendments, waivers,
consents or supplements may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all of which
counterparts together shall constitute but one and the same instrument. This
Agreement shall become effective upon the execution of a counterpart hereof by
each of the parties hereto.
14. Effect of Amendment and Restatement. This Agreement
amends, restates and supersedes the Continuing Security Interest and Conditional
Assignment of Patents, Trademarks, Copyrights and Licenses dated November 3,
1993 between Assignor and Agent (the "Existing Agreement"); provided, that (i)
the liens and security interests in favor of Agent for the benefit of Lenders
securing payment of the Obligations are in all respects continuing and in full
force and
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effect with respect to all Secured Obligations and (ii) all references
in the other Loan Documents to the Existing Agreement shall be deemed to refer
without further amendment to this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their duly authorized
representatives as of the date first written above.
PROTECTION ONE ALARM MONITORING, INC.,
a Delaware corporation
By: JOHN W. HESSE
----------------------------------
Title: Executive Vice President
-----------------------------------
Accepted and Agreed to:
HELLER FINANCIAL, INC.,
a Delaware corporation,
individually and as
Agent for the Lenders
By: TIMOTHY CANON
--------------------------------
Title: Vice President
--------------------------------
<PAGE> 5
List of Schedules
Schedule A - United States, Canada and Other Foreign Patents
Schedule B - United States, Canada and Other Foreign Copyrights
Schedule C - United States, Canada and Other Foreign Trademarks
Schedule D - United States, Canada and Other Foreign Patents Licenses,
Copyrights, Licenses and Trademark Licenses
<PAGE> 1
EXHIBIT 10.23
PROTECTION ONE, INC.
1994 STOCK OPTION PLAN
(As amended through October 3, 1996)
1. PURPOSE.
The purposes of this 1994 Stock Option Plan (THIS "PLAN") are to
provide long-term incentives and rewards to directors, officers and key
employees of Protection One, Inc., a Delaware corporation (THE "COMPANY"), and
of the Company's subsidiaries, to assist the Company and its subsidiaries in
attracting and retaining such individuals on a basis competitive with industry
practices, to align their interests with those of the Company's stockholders,
and to provide additional compensation to them.
2. EFFECTIVE DATE.
This Plan shall be effective as of the date of its adoption by the
Board of Directors of the Company (THE "ADOPTION DATE"), subject to the approval
of this Plan by the holders of a majority of the issued and outstanding shares
of the Class A Common Stock of the Company (THE "COMMON STOCK") and the voting
preferred stock of the Company, voting together as a single class and with each
share of such preferred stock entitled to the number of votes determined in
accordance with Section 9(a) of Article IV of the Company's Restated Certificate
of Incorporation (THE DATE ON WHICH THE HOLDERS SO APPROVE THE PLAN TO BE
REFERRED TO HEREIN AS THE "APPROVAL DATE"). Grants of "Options" (as hereinafter
defined) may be made under this Plan on and after the Adoption Date, but all
rights of the participants shall be subject to such stockholder approval of this
Plan. In the event such stockholder approval is not obtained, all Options under
this Plan shall be null and void ab initio.
3. ADMINISTRATION OF THIS PLAN.
3.1 This Plan shall be administered by the Board of Directors or a
committee thereof designated by the Board of Directors, which committee (THE
"COMMITTEE") may be the Compensation Committee of the Board of Directors as
shall be designated by the Board of Directors; provided, however, that with
respect to grants of Options to persons who are then subject to Section 16 of
the Securities Exchange Act of 1934, as amended (THE "1934 ACT"), the Plan shall
at all times be administered so as to permit the Plan to comply with Rule 16b-3
under the 1934 Act or any successor thereto ("RULE 16B-3") and that any
Committee shall be so constituted so as to satisfy the legal requirements
relating to the administration of incentive stock option plans, if any, of
Delaware corporate and securities laws and of the Internal Revenue Code of 1986,
as from time to time amended (THE "IRC"). Once appointed, the Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. If permitted by Rule 16b-3, the Plan may be administered by different
bodies with respect to directors, non-director officers and employees who are
neither directors nor officers of the Company. If and to the extent the Plan is
then being administered by the Board, the Board shall have all authority and
each and all of the powers granted to the Committee by this Plan (including,
without limitation, Sections 3.2, 3.3, 3.4 and 6).
3.2 The Committee shall have full power and authority in its discretion,
subject to and not inconsistent with the express provisions of this Plan, to
take any and all actions required or permitted to be taken under this Plan. Such
full power and authority shall include, without limitation, the
<PAGE> 2
actions set forth in Section 6, the making of all required or appropriate
determinations under this Plan, and the adoption, amendment and recision of such
rules and regulations relating to this Plan as the Committee shall determine in
its discretion (THE "RULES"); in each case subject to the express provisions of
this Plan.
3.3 The interpretation or construction by the Committee of this Plan, any
Option or "Agreement" (as hereinafter defined) or any Rule and all
determinations by the Committee shall in each case be final, binding and
conclusive with respect to all interested parties, unless otherwise determined
by the Board of Directors. No member of the Committee shall be personally liable
for any action, failure to act, determination, interpretation or construction
made in good faith.
3.4 The Committee shall determine the "fair market value" of the Common
Stock from time to time for purposes of this Plan in accordance with such
procedures for the determination thereof as the Committee shall determine.
4. PARTICIPANTS.
Participants in this Plan shall be directors, officers and key
employees of the Company or its subsidiaries selected by the Committee. Nothing
set forth in this Plan or in any Agreement shall confer upon any director,
officer or employee any right to continue in the employ of the Company or its
subsidiaries or as an officer of the Company, nor limit in any manner the right
of the Company to terminate such office or employment for any reason whatsoever,
with or without good cause. No employee or other person shall have any right to
be granted an Option.
5. SHARES OF STOCK SUBJECT TO THIS PLAN.
The shares of Common Stock available for issuance under this Plan
pursuant to the exercise of "ISOs" or "NQSOs" (as each such term is hereinafter
defined), shall consist of 944,000 shares of Common Stock in the aggregate,
subject to adjustment as provided in Section 13. Such number of shares shall be
set aside out of the authorized but unissued shares of Common Stock not reserved
for any other purpose or out of Common Stock held in or acquired for the
treasury of the Company. Should an Option be terminated for any reason without
being exercised, or be cancelled in whole or in part, the shares of Common Stock
subject to such Option shall again be available for issuance under this Plan.
6. GRANT OF OPTIONS.
The Committee may from time to time, in its sole discretion, award
to such directors, officers and key employees as the Committee designates
options to purchase shares of the Common Stock (THE "OPTIONS"). In connection
therewith, the Committee shall have full and final authority in its discretion,
subject to the express provisions of this Plan, (i) in the case of each Option,
to determine whether the Option shall be an incentive stock option (AN "ISO")
pursuant to Section 422 of the IRC, as such section may from time to time be
amended or supplemented ("SECTION 422"), or an Option that does not qualify
under such Section 422 (AN "NQSO"), (ii) to determine the time or times at which
Options will be awarded, (iii) to determine the number of shares that may be
purchased upon the exercise of each Option, (iv) to determine the amount payable
by the participant upon the exercise of such Option (THE "EXERCISE PRICE"),
which price shall not be less than the minimum specified in
2
<PAGE> 3
Section 7.1, (v) to determine the time or times when each Option shall become
exercisable, the objectives or conditions, if any, to such exercise and the
duration of the exercise period, and (vi) to prescribe the form or forms of the
agreement or instrument reflecting the terms and conditions of each Option (THE
"AGREEMENTS").
The Committee also shall have full power and authority to delegate
to one or more of the executive officers of the Company, as the Committee deems
appropriate, (i) the selection of participants to whom Options shall be granted;
(ii) the determination of the number of shares of Common Stock purchasable upon
the exercise of each such Option and the Exercise Price thereof; (iii) the other
terms and conditions of each such Option and the applicable Agreement, including
without limitation establishing the objectives and conditions, if any, for the
earning or vesting of such Option; and (iv) the right to interpret and construe
each provision of this Plan as applicable to such Option; provided, however,
that no Option may be granted or other determination made pursuant to this
paragraph to any person who (i) is a "covered employee" within the meaning of
Section 162(m) of the IRC or who, in the Committee's judgment, is likely to be a
covered employee at any time during the period the Option granted to such
employee would be outstanding or (ii) an officer or other person subject to
Section 16 of the 1934 Act.
7. EXERCISE PRICE AND CONSIDERATION.
7.1 The Exercise Price shall be determined by the Committee at the time of
each grant of Options; provided, however, that the Exercise Price for an ISO
shall not be less than 100% of the fair market value of the Common Stock on the
date on which the ISO is granted and that the Exercise Price of any ISO granted
to a person who, at the time of such grant, owns capital stock possessing more
than 10% of the total combined voting power of all classes of capital stock of
the Company or of subsidiary of the Company (A "TEN PERCENT HOLDER") shall be
the price (currently 110% of fair market value of a share of Common Stock)
required by the IRC in order to constitute an ISO.
7.2 The Exercise Price shall be paid in cash, by check payable to the
order of the Company, by the surrender of shares of the Common Stock having a
fair market value (determined in accordance with Section 3.4 above) equal to the
Exercise Price on the date on which the Option is exercised, or any combination
of the foregoing. Notwithstanding the foregoing, the Exercise Price may also be
paid by delivery to the Company or its designated agent of an executed
irrevocable option exercise form together with irrevocable instructions to a
financial institution or broker-dealer approved by the Company to sell or margin
a sufficient portion of the shares and deliver the sale or margin loan proceeds
directly to the Company to pay the Exercise Price, such instructions to be in
such form is acceptable to the Committee; provided, however, that a participant
may pay the Exercise Price pursuant to this sentence if and only if either (x)
the Option being exercised is an NQSO, or (y) the Option being exercised is an
ISO and the Company is satisfied that the participant understands that the
effect of such arrangement will be to cause a "disqualifying disposition" of the
participant's shares and a loss to the participant of the favorable tax
treatment of such ISO provided by the IRC. The Committee may determine to cause
the Company to lend directly to a participant some or all of the funds required
to pay the Exercise Price, on such terms and subject to such conditions as the
Committee may establish.
8. MANNER OF EXERCISE.
Unless and to the extent otherwise provided in the applicable
Agreement, and subject to the limitations set forth in this Plan, each Option
may be exercised from time to time in whole or
3
<PAGE> 4
in part by the participant delivering to the Company at its main office (to the
attention of the President and the Chief Financial Officer) written notice of
the number of shares with respect to which the Option is being exercised
accompanied by full payment to the Company of the Exercise Price of the shares
being purchased; provided, however, that in the event the consideration is other
than cash, such written notice shall include the participant's election to pay
some or all of the Exercise Price as otherwise permitted by Section 7.2, in
which case the participant shall have a reasonable time (as determined by the
Committee) to arrange for the delivery to the Company of the balance of the
Exercise Price or the agreement that will reflect the terms of such payment; and
provided, further, that if payment of the Exercise Price is to be made in shares
of Common Stock, the participant shall deliver to the Company stock certificates
evidencing such shares properly endorsed for transfer in negotiable form. If
someone other than the participant is exercising an Option, the person or
persons so exercising the Option shall be required to furnish to the Company
appropriate documentation that such person or persons have the full legal right
and power to exercise the Option on behalf of and for the participant.
9. DURATION AND PERIOD FOR EXERCISE OF OPTIONS.
9.1 Each Option shall be exercisable on such date or dates and during such
period as shall be determined by the Committee at the time of grant; provided,
however, that (i) no ISO shall be exercisable after the expiration of 10 years
after the grant date, (ii) no ISO granted to a Ten Percent Holder shall be
exercisable after the expiration of five years after the grant date, and (iii)
no Option shall be exercisable unless and until either a registration statement
under the Securities Act of 1933, as amended, is in effect registering the
shares of Common Stock to be issued upon exercise of the Options or, in the
opinion of counsel for the Company, an exemption from registration is available.
Subject to the foregoing, the Committee shall specify at the time each Option is
granted, and shall set forth in the corresponding Agreement, the time or times
at which, and in what amounts, the Option may be exercised.
9.2 Upon the termination of the employment by the Company or its
subsidiaries of a participant, such participant's rights to exercise an Option
then held shall be as follows, subject to the authority of the Committee to
shorten or extend the exercisability of an Option in its sole discretion (with
the consent of the participant or the participant's legal representative in the
case of an ISO):
(a) Death or Permanent and Permanent and Total Disability. If
the employment is terminated by reason of the death or "permanent and
total disability" as defined in Section 22(e)(3) of the IRC of the
participant, each Option held by the participant on the date of
termination shall terminate on the fixed expiration date of such Option;
provided, however, that in the case of ISOs the date of termination shall
be the date that is 12 months after the date of termination of employment
if such date is earlier than the fixed expiration date of the Option.
(b) Other Disability. If the employment is terminated by
reason of a disability of the participant that is not a "permanent and
total disability" as defined in Section 22(e)(3) of the IRC, each Option
held by the participant on the date of termination shall terminate on the
fixed expiration date of such Option; provided, however, that in the case
of ISOs the date of termination shall be the date that is three months
after the date of termination of employment if such date is earlier than
the fixed expiration date of the Option.
4
<PAGE> 5
(c) Other Termination. If the employment is terminated by any
reason other than death or disability, each Option held by the participant
on the date of termination shall terminate on the earlier of (i) the date
that is three months after the date of termination of employment, or (ii)
the fixed expiration date of such Option.
9.3 If the employment of a participant is terminated by reason of the
"death or permanent and total disability" (as defined in Section 22(e)(3) of the
IRC) of the participant, all Options held by such participant shall become
immediately vested, notwithstanding any conditions to the vesting of such
Options set forth herein or in the Agreement reflecting such Options. If the
employment of a participant is terminated by any reason other than the death or
permanent and total disability of the participant, all Options not vested as of
the time of termination shall be forfeited, subject to the authority of the
Committee to authorize, in the applicable Agreement, at the time of termination
or otherwise, the immediate vesting of all or such portion of such Options as it
may determine. The Committee shall have the authority to accelerate the vesting
of all or some portion of the Options notwithstanding any conditions to vesting
of such Options set forth herein or in the Agreement reflecting such Options.
9.4 The Options of a participant who dies shall be exercisable by a
legatee or legatees of such Options under the participant's last will, or by
such participant's executor, personal representative or distributee. However, in
the event of a participant's death after the date of termination of employment
(which termination was for a reason other than the death of the participant),
such deceased's participant's Options shall expire in accordance with their
terms as if such participant were still living.
9.5 The Committee shall have the authority to determine the reason for and
date of termination of employment of each participant (including but not limited
to determining whether a termination is by reason of disability), which
determination shall be final, binding and conclusive on all interested parties.
10. LIMITATION ON GRANT OF ISO'S.
10.1 The aggregate fair market value (determined as of the time the Option
is granted) of the shares of Common Stock for which ISO's may first be
exercisable by an participant during any calendar year shall not exceed $100,000
or such other amount as may be established by the Code.
10.2 No ISO may be granted under this Plan after the 10th anniversary of
the Adoption Date.
10.3 No ISO may be granted to any employee who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company.
11. ACCELERATION OF OPTIONS.
11.1 In the event that the Company enters into one or more agreements to
dispose of all or substantially all of its assets or the Company's stockholders
dispose of or become obligated to dispose of 50% or more of the outstanding
shares of Common Stock, other than to the Company or a subsidiary of the
Company, in either case by means of a tender offer, sale, merger, reorganization
or liquidation, in one or a series of related transactions (AN "ACCELERATION
EVENT"), then each outstanding
5
<PAGE> 6
Option shall become exercisable during the 30 days immediately prior to the
scheduled consummation of the Acceleration Event with respect to the full number
of shares for which such Option has been granted: provided, however, that no
Acceleration Event shall be deemed to occur for purposes of this section (unless
otherwise provided in the applicable Agreement) in the event that (i) the term
of the agreements pursuant to which such transaction is occurring require as a
condition to the consummation thereof that each Option shall either be assumed
by a successor corporation or parent thereof or be replaced with a comparable
option to purchase shares of capital stock of the successor corporation or
parent thereof, and (ii) the transaction is approved by a majority of the
directors who have been in office for more than 12 months prior to the scheduled
consummation of the transaction. Any exercise of Options during such 30-day
period shall be conditioned upon the consummation of the Acceleration Event and
shall be effective only concurrently with the consummation of the Acceleration
Event, and in the event the Acceleration Event is not consummated all exercises
of Options made pursuant to this section shall be of no further force or effect;
unless, with respect to any such Option, such Option was otherwise exercisable
in accordance with its terms without regard to this section and the participant
exercising such Option indicates in writing that such exercise is not
conditioned on the consummation of the Acceleration Event. Upon consummation of
the Acceleration Event, all outstanding Options, whether or not accelerated
pursuant to this section, shall terminate and cease to be exercisable, unless
assumed by the successor corporation or a parent thereof.
11.2 In the event of the occurrence of an Acceleration Event in which the
Company will not be the surviving entity or in which all of the shares of Common
Stock of the Company are being acquired, any participant who is then subject to
the filing requirements imposed under Section 16(a) of the 1934 Act with respect
to the Company shall receive a payment of cash equal to the difference between
the aggregate fair market value of the shares of Common Stock subject to such
accelerated Option and the aggregate Exercise Price of such shares. Payment
shall be made within 10 days after the consummation of the Acceleration Event.
The foregoing payments under this section shall be made in lieu of and in full
discharge of any and all obligations of the Company with respect to all subject
Options of the participant.
11.3 The grant of Options under this Plan shall in no way affect the right
of the Company to adjust, reclassify, reorganize or otherwise change its capital
or business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
12. CANCELLATION AND REPRICING OF OPTIONS.
12.1 The Committee shall have the authority to effect, at any time and
from time to time, with the consent of the affected participant, the
cancellation of any or all outstanding Options and the grant in substitution
therefor of new Options under this Plan (subject to the limitations hereof)
providing for the purchase of the same or a different number of shares of Common
Stock and, in the case of ISO's, the grant is at an Exercise Price not less than
100% of the fair market value of the Common Stock on the new grant date. The
Agreement reflecting the terms of the new Options may, in the discretion of the
Committee, include the same terms and conditions as the Agreement reflecting the
terms of the old Options including, without limitation, the same vesting
schedule.
12.2 The Committee may, in its discretion, amend the terms of any
Agreement, with the consent of the affected participant, to provide that the
Exercise Price of the shares remaining subject to the original Option shall be
reestablished at a price not less than 100% of the fair market value of the
Common Stock on the effective date of such amendment.
6
<PAGE> 7
13. ADJUSTMENTS AND CHANGES IN THE COMMON STOCK.
13.1 In the event that the shares of Common Stock as presently constituted
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Company, or if the number of such shares of
Common Stock shall be increased through the payment of a stock dividend, then
unless such change results in the termination of all outstanding Options
pursuant to the provisions of Section 11, there shall be substituted for or
added to each share of Common Stock theretofore appropriated or thereafter
subject or which may become subject to an Option, the number and kind of shares
of stock or other securities into which each outstanding share of Common Stock
shall be so changed, or for which each share shall be exchanged, or to which
each such share shall be entitled, as the case may be. Each Agreement shall be
deemed amended appropriately as to price and other terms as may be necessary in
the determination of the Committee to reflect the foregoing events. In the event
there shall be any other change in the number or kind of the outstanding Common
Stock, or of any stock or securities into which such shares have been changed,
or for which it shall have been exchanged, then if the Committee shall, in its
sole discretion, determine that such change requires an adjustment in the terms
of any Option granted or that may be granted, such adjustment shall be made in
accordance with such determination and each Agreement reflecting such terms
shall be deemed amended. Fractional shares resulting from any adjustment in
Options pursuant to this section shall be rounded down to the nearest whole
number of shares.
13.2 Notwithstanding the foregoing, any and all adjustments in the terms
of ISO's shall comply in all respects with applicable sections of the IRC and
the regulations thereunder.
13.3 Notice of any adjustment in the terms of Options shall be given by
the Company to each holder of an Option that has been so adjusted. However, such
adjustment shall be effective and binding for all purposes whether or not such
notice is given or received.
14. APPLICATION OF RULE 16B-3.
With respect to grants of Options to persons are then subject to
Section 16 of the 1934 Act, this Plan shall be governed by Rule 16b-3.
15. NO RIGHTS AS STOCKHOLDER.
No participant shall have rights as a holder of Common Stock with
respect to Options unless and until certificates for shares of such stock are
issued to the participant or the participant's legal representative.
16. WITHHOLDING TAXES.
The Company shall have the right to withhold from the participant,
at the time of the issuance by the Company of any shares, any federal, state or
other taxes required by law to be withheld with respect to such issuance or to
require, through withholding from the participant's salary or otherwise, the
payment by the participant of any such taxes. An Agreement may provide that the
participant may satisfy any such obligation by any of the following means: (i) a
cash payment to the Company by the participant, (ii) delivery to the Company of
previously owned shares of Common Stock that the participant has held for at
least six months prior to the delivery of such shares or that the
7
<PAGE> 8
participant purchased on the open market and for which the purchaser has good
and marketable title, free and clear of any security interest, lien or
encumbrance, having an aggregate fair mated value, determined as of the date the
obligation to withhold or pay taxes arises in connection with the Option (THE
"TAX DATE"), equal to the amount necessary to satisfy any such obligation, (iii)
a cash payment to the Company by a broker-dealer acceptable to the Company to
whom the purchaser has submitted an irrevocable notice of exercise, or (iv) the
withholding by the Company from the shares of Common Stock to be issued upon
exercise of the Option that number of shares having a fair market on the Tax
Date equal to the amount required to be withheld; provided, however, that the
Committee shall have sole discretion to disapprove of an election pursuant to
clauses (ii) or (iii) and that if the participant is a person subject to Section
16 of the 1934 Act, the Company may require that the method of satisfying any
such withholding obligation be in compliance with said Section 16 and Rule 16b-3
thereunder.
17. TRANSFERABILITY.
No Incentive Stock Option may be in any way transferred, assigned,
pledged or hypothecated by the participant to which it was granted or awarded,
other than by will or the laws of descent or distribution, and an Incentive
Stock Option may be exercised during the participant's lifetime only by the
participant or the participant's legal representative.
No NQSO may be in any way transferred, assigned, pledged or
hypothecated by the participant to which that NQSO was granted or awarded other
than by will or the laws of descent or distribution or, if and to the extent
that the Agreement governing such NQSO so provides, to a family member of such
participant, to a trust established for the benefit of such participant or
family member or to a qualified charity (as defined in the Agreement). A NQSO
may be exercised during the participant's lifetime only by the participant or
the participant's legal representative or, if applicable Agreement so provides,
by a permitted transferee or his or her legal representative. Notwithstanding
the foregoing, the Committee may upon request consent to such additional
transfers of NQSO's as the Committee may determine in its sole discretion
subject to such conditions as the Committee may require and provided such
transfer will not cause the Plan to no longer comply with Rule 16b-3 or any
other regulatory requirements.
18. AMENDMENTS AND TERMINATION.
18.1 In addition to such amendments as are provided for in Section 12,
with the consent of the affected participant the Committee may amend any
outstanding Agreement in a manner not inconsistent with this Plan.
18.2 Unless the holders of at least a majority of the issued outstanding
shares of Common Stock shall have approved thereof, no amendment of this Plan
shall be effective which would cause the Plan to no longer comply with Rule
16b-3 or other regulatory requirements. In the event that the Committee or the
Board of Directors determines at any time or from time to time that Rule 16b-3
requires that the terms of any outstanding Option be modified, the Committee or
the Board of Directors shall have the right and power to amend any outstanding
Agreement, or otherwise modify the terms of any outstanding Option, without the
consent of the affected participant(s) and irrespective of whether such
modification is (i) consistent with the terms of this Plan, or (ii) adverse to
such participant(s). For the purposes of this section, any (I) cancellation and
reissuance, or (II) repricing
8
<PAGE> 9
of any Options granted at a new Exercise Price as provided in Section 12 shall
not constitute an amendment of this Plan.
18.3 The Board of Directors may at any time terminate or from time to time
amend this Plan in whole or in part, but no such amendment shall adversely
affect any rights or obligations with respect to any Options theretofore granted
under this Plan (except as contemplated by Section 18.2).
19. GOVERNING LAW.
The validity and construction of this Plan and the Agreements shall
be governed by the laws of the State of Delaware.
9
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
Protection One, Inc.
- --------------------
Protection One Alarm Monitoring, Inc., a Delaware corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Protection One, Inc. and Subsidiaries on Form S-3 (File Nos. 33-83484,
33-99220, 333-05849, 333-09401 and 333-13733) and Form S-8 (File
Nos. 33-95702, 33-97542, 333-02892 and 333-02828) of our report, which includes
an explanatory paragraph with respect to a change in method of accounting for
certain subscriber account acquisition and transition costs, dated December 10,
1996, on our audits of the consolidated financial statements and financial
statement schedule of Protection One, Inc. and Subsidiaries as of September 30,
1996 and 1995, and for each of the three years in the period ended September
30, 1996, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
December 30, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916230
<NAME> PROTECTION ONE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,462
<SECURITIES> 0
<RECEIVABLES> 18,284
<ALLOWANCES> 5,541
<INVENTORY> 1,920
<CURRENT-ASSETS> 21,346
<PP&E> 13,994
<DEPRECIATION> 4,042
<TOTAL-ASSETS> 290,075
<CURRENT-LIABILITIES> 34,539
<BONDS> 220,372
0
0
<COMMON> 129
<OTHER-SE> 28,698
<TOTAL-LIABILITY-AND-EQUITY> 290,075
<SALES> 73,457
<TOTAL-REVENUES> 73,457
<CGS> 24,093
<TOTAL-COSTS> 24,093
<OTHER-EXPENSES> 108
<LOSS-PROVISION> 2,649
<INTEREST-EXPENSE> 22,697
<INCOME-PRETAX> (15,744)
<INCOME-TAX> (247)
<INCOME-CONTINUING> (15,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,745)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000916310
<NAME> PROTECTION ONE ALARM MONITORING, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,462
<SECURITIES> 0
<RECEIVABLES> 18,284
<ALLOWANCES> 5,541
<INVENTORY> 1,920
<CURRENT-ASSETS> 21,346
<PP&E> 13,994
<DEPRECIATION> 4,042
<TOTAL-ASSETS> 290,075
<CURRENT-LIABILITIES> 34,539
<BONDS> 220,372
0
0
<COMMON> 129
<OTHER-SE> 28,698
<TOTAL-LIABILITY-AND-EQUITY> 290,075
<SALES> 73,457
<TOTAL-REVENUES> 73,457
<CGS> 24,093
<TOTAL-COSTS> 24,093
<OTHER-EXPENSES> 108
<LOSS-PROVISION> 2,649
<INTEREST-EXPENSE> 22,697
<INCOME-PRETAX> (15,744)
<INCOME-TAX> (247)
<INCOME-CONTINUING> (15,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,745)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
