<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
PROTECTION ONE, INC.( COMMISSION FILE NO. 0-24780)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION FILE
NUMBER)
<TABLE>
<S> <C>
DELAWARE 93-1063818
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230
(310) 338-6930
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER , INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PROTECTION ONE ALARM MONITORING, INC.(COMMISSION FILE NO. 33-73002-01)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER AND ITS COMMISSION FILE
NUMBER)
<TABLE>
<S> <C>
DELAWARE 93-1064579
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
6011 BRISTOL PARKWAY, CULVER CITY, CALIFORNIA 90230
(310) 338-6930
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER , INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrants (1) have 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 and (2) have been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 8, 1996, Protection One, Inc. had outstanding 12,738,175
shares of Common Stock, par value $.01 per share. At such date, Protection One
Alarm Monitoring, Inc. had outstanding 100 shares of Common Stock, par value
$.10 per share.
Protection One Alarm Monitoring, Inc. meets the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and therefore is filing this
form with the reduced disclosure format provided for therein.
<PAGE> 2
PART I
FINANCIAL INFORMATION
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
---- -----
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,256 $ 8,347
Receivables, net 5,806 11,146
Inventories 3,125 3,461
Prepaid expenses 547 1,172
-------- ----------
Total current assets 10,734 24,126
Property and equipment, net 5,307 10,956
Subscriber accounts, intangibles and goodwill, net 162,239 238,898
Deposits 389 449
--------- ----------
$ 178,669 $ 274,429
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1 $ 94
Accounts payable 2,078 2,462
Accrued salaries, wages and benefits 1,401 1,208
Accrued interest 318 216
Other accruals 210 412
Purchase holdbacks 4,949 12,588
Acquisition transition costs 970 3,779
Other current liabilities 800 646
Deferred revenue 9,166 13,763
--------- ---------
Total current liabilities 19,893 35,168
Long-term debt, net of current portion 146,023 206,956
Other liabilities 279 604
Deferred income tax -- 792
--------- ---------
Total liabilities 166,195 243,520
--------- ---------
Commitments and contingencies (Note 12)
Redeemable preferred stock, redemption value $6,127 at
September 30, 1995 6,127 --
Stockholders' equity:
Common Stock, $.01 par value, 24,000,000 shares
authorized, 9,047,638 and 12,736,255 shares issued
and outstanding at September 30,1995 and
June 30, 1996, respectively 90 127
Additional paid-in capital 41,829 77,453
Accumulated deficit (35,572) (46,671)
--------- ---------
Total stockholders' equity 6,347 30,909
--------- ---------
$ 178,669 $ 274,429
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE> 3
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine months ended June 30,
-------------------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues: (unaudited)
Monitoring and service $ 32,622 $ 46,377
Other 6,343 5,418
--------- --------
Total revenues 38,965 51,795
Cost of revenues:
Monitoring and service 8,151 12,651
Other 5,734 4,685
--------- --------
Total cost of revenues 13,885 17,336
--------- --------
Gross profit 25,080 34,459
Selling, general and administrative expenses 8,178 10,082
Loss on acquisition terminations 208 --
Acquisition and transition expenses 2,380 3,048
Amortization of subscriber accounts and goodwill 10,858 16,108
--------- --------
Operating income 3,456 5,221
Other expenses:
Interest expense, net 6,850 3,052
Amortization of OID and debt issuance costs 2,687 13,159
Loss on sales of subscriber accounts 433 19
--------- --------
Loss before income taxes and extraordinary item (6,514) (11,009)
Income tax benefit (expense) 2,432 (90)
--------- --------
Loss before extraordinary item and cumulative effect
of change in accounting method-net of taxes (4,082) (11,099)
Extraordinary item-loss on early extinguishment of debt (8,898) --
Cumulative effect of change in accounting method-net of taxes (1,954) --
--------- --------
Net loss (14,934) (11,099)
Preferred stock dividends 791 248
Accretion of redeemable preferred stock 796 --
--------- --------
Loss attributable to common stock $ (16,521) $(11,347)
========= ========
Loss per common share:
Before extraordinary item $ (0.66) $ (1.06)
Net loss per share $ (1.92) $ (1.06)
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE> 4
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------
1995 1996
--------- -----------
Revenues: (unaudited)
<S> <C> <C>
Monitoring and service $ 11,776 $ 16,854
Other 1,909 1,763
--------- --------
Total revenues 13,685 18,617
Cost of revenues:
Monitoring and service 2,872 4,460
Other 1,749 1,511
--------- --------
Total cost of revenues 4,621 5,971
--------- --------
Gross profit 9,064 12,646
Selling, general and administrative expenses 2,705 3,526
Loss on acquisition terminations 208 --
Acquisition and transition expenses 693 1,121
Amortization of subscriber accounts and goodwill 4,020 6,046
--------- --------
Operating income 1,438 1,953
Other expenses:
Interest expense, net 1,777 1,196
Amortization of OID and debt issuance costs 2,066 4,527
Loss on sales of subscriber accounts 433
--------- --------
Loss before income taxes and extraordinary items (2,838) (3,770)
Income tax benefit (expense) 1,052 (90)
--------- --------
Loss before extraordinary item (1,786) (3,860)
Extraordinary item-loss on early extinguishment of debt 8,898 --
--------- --------
Net loss (10,684) (3,860)
Preferred stock dividends 177 --
--------- --------
Loss attributable to common stock $ (10,861) $ (3,860)
========= =========
Loss per common share:
Before extraordinary item $ (0.22) $ (0.31)
Net loss per share $ (1.23) $ (0.31)
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 5
PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended June 30,
---------------------------------
1995 1996
---------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (14,934) $ (11,099)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of change in accounting method 1,955 --
Depreciation 745 1,250
Amortization of subscriber accounts and goodwill 10,858 16,108
Amortization of debt issuance costs 756 924
Amortization of OID 1,931 12,235
Loss on sale of subscriber accounts 433 --
Income tax benefit (2,432) --
Extraordinary loss on early retirement of debt 8,898 --
Provision for doubtful accounts 1,238 1,518
Changes in assets and liabilities, net of effects of acquisitions:
Receivables (2,292) (5,359)
Inventories (3) 528
Prepaid expenses and deposits (831) (505)
Accounts payable (904) 681
Accrued liabilities (2,546) (389)
Deferred revenue (239) 663
--------- ---------
Net cash provided by operating activities 2,633 16,555
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (1,946) (4,706)
Net proceeds on sale of subscriber accounts 1,323 --
Acquisitions, net of cash received (47,459) (72,275)
Payments on purchase holdbacks (3,059) (133)
Deferred acquisition payments (1,996) (1,438)
Acquisition transition costs (1,777) (2,272)
Payment of other liabilities (72) --
--------- ---------
Net cash used in investing activities (54,986) (80,824)
--------- ---------
Cash flows from financing activities:
Payments on long-term debt (118,678) (23,828)
Proceeds from long-term debt 164,428 72,619
Debt and equity issuance costs (6,420) (666)
Payments on stockholder notes 47 --
Issuance of common stock and warrants 20,164 23,483
Redemption and conversion of redeemable preferred stock (2,125) --
Note redemption premiums and costs (2,627) --
Cash dividends paid (2,648) (248)
--------- ---------
Net cash provided by financing activities 52,141 71,360
--------- ---------
Net increase (decrease) in cash and cash equivalents (212) 7,091
Cash and cash equivalents:
Beginning of period 1,057 1,256
--------- ---------
End of period $ 845 $ 8,347
========= =========
Interest paid during the period $ 9,266 $ 3,181
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE> 6
PROTECTION ONE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY; INTERIM FINANCIAL INFORMATION:
The accompanying financial statements of Protection One, Inc. ("POI")
and its subsidiaries (the "Company") include the accounts of POI, POI's
wholly-owned subsidiary, Protection One Alarm Monitoring, Inc. ("Monitoring"),
and Monitoring's former wholly-owned subsidiary, Protection One Alarm Services,
Inc. ("Services"), and Monitoring's current wholly-owned subsidiaries (See Note
14). On May 13, 1996, Services was merged into Monitoring. The assets, results
of operations and stockholder's equity of Monitoring comprise substantially all
of the assets, results of operations and stockholders' equity of the Company on
a consolidated basis. See Note 13 for separate consolidated financial
information of Monitoring. Results of operations of purchased companies are
consolidated in all periods after the date of acquisition.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q which mandates
adherence to Rule 10-01 of Regulation S-X. Accordingly, these statements do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management of
the Company, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. The results
of operations for the nine month and three month periods ended June 30, 1996 are
not necessarily indicative of the results to be expected for the full fiscal
year.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should
be read in conjunction with the audited financial statements and notes thereto
for the year ended September 30, 1995 included in the Company's Annual Report
on Form 10-K, as amended, filed with the Securities and Exchange Commission.
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 duplicative costs incurred solely in support of
acquiring and transitioning subscriber accounts are expensed as incurred.
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 $0.23 per
share, net of income taxes of approximately $1.2 million, and is reported
separately in the consolidated statement of operations for the year ended
September 30, 1995.
3. RECEIVABLES:
Receivables, which consist primarily of trade accounts receivable of
$15,580 at June 30, 1996 and $8,309 at September 30, 1995, have been reduced by
allowances for doubtful accounts of $4,434 and $2,503, respectively. Included
in receivables and deferred revenue at June 30, 1996 and September 30,
5
<PAGE> 7
1995 are July 1996 and October 1995 invoices billed in advance of the periods
in which services are provided totaling $6,321 and $4,667, respectively. The
provisions for doubtful accounts for the three months ended June 30, 1996 and
June 30, 1995 were $478 and $342, respectively. The provisions for doubtful
accounts for the nine months ended June 30, 1996 and June 30, 1995 were $1,518
and $1,238, respectively.
4. SUBSCRIBER ACCOUNTS, INTANGIBLES AND GOODWILL:
Subscriber accounts, intangibles and goodwill (at cost) consist of the
following (dollar amounts in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
---- ----
<S> <C> <C>
Acquired subscriber accounts $ 184,463 $ 276,058
Debt issuance costs 7,405 8,645
Goodwill and other 1,641 2,495
---------- ----------
193,509 287,198
Less accumulated amortization (31,270) (48,300)
---------- ----------
$ 162,239 $ 238,898
========== ==========
</TABLE>
Reconciliation of acquired subscriber accounts (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September 30, June 30,
1995 1996
---- ----
<S> <C> <C>
Balance, beginning of period $ 122,330 $ 184,463
Cumulative effect of change in accounting method (3,802) --
Acquisition of subscriber accounts 70,106 95,506
Charges against acquisition holdbacks (2,026) (3,911)
Sale of subscriber accounts (2,145) --
---------- ----------
Balance, end of period $ 184,463 $ 276,058
=========== ==========
</TABLE>
5. PURCHASE HOLDBACKS:
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.
Reconciliation of purchase holdbacks (dollar amounts in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September 30, June 30,
1995 1996
---- ----
<S> <C> <C>
Balance, beginning of period $ 4,250 $ 4,949
Purchase holdback additions 6,349 11,682
Charges against subscriber accounts (2,025) (3,911)
Cash paid to sellers (3,625) (132)
-------- --------
Balance, end of period $ 4,949 $ 12,588
======== ========
</TABLE>
6
<PAGE> 8
6. LOSS PER COMMON SHARE:
The computation of fully diluted net loss per common share for each of
the periods presented was antidilutive; as such, no presentation of fully
diluted loss per share has been included in the consolidated statements of
operations. The weighted average shares outstanding used in the computation of
the net loss attributable to common shares are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
June 30, June 30,
-------------------------- ---------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock 8,604,864 10,749,983 8,799,931 12,330,317
</TABLE>
7. CHANGES IN STOCKHOLDERS' EQUITY:
During the nine month period ended June 30, 1996, the Company issued
2.5 million shares of common stock generating net proceeds of $23.1 million.
Concurrently with the issuance of common stock, the Company converted 6,127
shares of Series H Preferred Stock to 680,777 shares of common stock at $9 per
share. Additionally, warrants and options for 72,332 shares of common stock
were exercised generating proceeds of $.05 million.
In April, 1996, the Company issued 7,623 shares of common stock under
its Employee Stock Purchase Plan ("ESPP"). In connection with the acquisition
in late June, 1996 of Metrol Security Services, Inc., the Company issued
417,885 shares of common stock as a portion of the purchase price paid.
Also during the period, additional paid in capital was reduced by $.8
million and $.2 million for costs related to the secondary offering and
dividends on preferred stock dividends, respectively.
8. DIVIDEND RESTRICTIONS:
The Company's Credit Agreement governing its Revolving Credit Facility
and the Indenture governing its Discount Notes place certain restrictions on
POI's and Monitoring's ability to make dividend payments, distributions and
other asset transfers in respect of such company's capital stock and assets. At
June 30, 1996, under provisions of the Credit Agreement (the most restrictive
agreement), no amounts were available for such dividend payments, distributions
or other transfers by either POI or Monitoring.
9. 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 a 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. The modified Performance Warrant agreements provide that
the officers will not exercise more than 40%, and 70% of the Warrants prior to
September 16, 1995 and 1996, respectively. In the event the Company is
acquired, such restriction on exercise by officers would be released.
7
<PAGE> 9
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 and 28 detachable Warrants (total of 1,400,000 warrants) to
purchase shares of the Company's Common Stock. Each warrant, when exercised,
will entitle the holder to receive six-tenths of a share of the Company's
Common Stock at an exercise price of $0.167 per share, subject to adjustment.
The outstanding warrants are exercisable and will automatically 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 of incentive stock options to directors, officers and
key employees. Three hundred fifty four thousand (354,000) shares were
reserved for issuance under the Plan, subject to such adjustment as may be
necessary to reflect changes in the number or kind of shares of Common Stock or
other securities of POI. In November 1995, the Board of Directors adopted, and
in January 1996, the shareholders of the Company approved, amending the Option
Plan to increase the number of shares for which options may be granted reserved
from 354,000 shares to 944,000 shares. The Option Plan provides for the
granting of options that qualify as incentive stock options under the Internal
Revenue Code and options that do not so qualify.
During the year ended September 30, 1995, the Company granted options
to purchase an aggregate of 273,600 shares of common stock including 132,000
shares to officers of the Company. The Company granted options for an
additional 19,200 shares during fiscal 1996. 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. During the nine
months ended June 30, 1996, the Company granted options to purchase 590,000
shares of common stock including options for 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 grant of the option. The purchase
price of the shares issuable pursuant to the options is equal to or greater
than the fair market value of the shares at the date of issue.
In connection with the issuance of the Senior Subordinated Discount
Notes in May of 1995, the Company issued warrants to purchase 531,200 shares of
common stock at an exercise price of $6.60 per share. The outstanding warrants
are exercisable and will automatically expire on May 17, 2005.
A summary of warrant and option activity is as follows:
<TABLE>
<CAPTION>
Warrants
and Options Price Range
----------- ---------------
<S> <C> <C>
Outstanding September 30, 1994 1,572,429 $0.167 - 3.633
Granted 804,800 5.875 - 9.125
Exercised (256,799) 0.167 - 6.50
Surrendered (14,400) 6.50
Outstanding September 30, 1995 2,106,030 0.167 - 9.125
Granted 609,200 8.00 - 15.00
Exercised (72,332) 0.167 - 6.50
Surrendered (14,760) 6.50 - 8.00
---------
Outstanding at June 30, 1996 2,628,138 0.167 - 15.00
=========
Exercisable:
September 30, 1995 1,907,310 0.167 - 6.50
June 30, 1996 1,705,957 0.167 - 6.50
</TABLE>
8
<PAGE> 10
10. INCOME TAXES:
For the nine months ended June 30, 1996, the Company experienced a net
decrease in its net deferred tax asset valuation allowance of $3.1 million. At
June 30, 1996, the Company had $33.4 million in NOL carryforwards for regular
tax purposes and $26.7 million for alternative minimum tax ("AMT NOL") purposes
which expire in the years 2006-2010. Included in these NOL carryforward amounts
are $1.5 million in NOL carry forwards that were acquired in the Metrol Security
corporate stock acquisition. This $1.5 million acquired NOL carryforward begins
to expire in 1999. These carryforwards are available, subject to certain
restrictions, to reduce taxable income, and alternative minimum taxable income
in future periods. As a result of various prior issuances of preferred and
common stock, or if there are future substantial changes in the Company's
ownership, there may be annual limitations on the amounts of NOL and AMT NOL, as
well as credits, that can be used to reduce the Company's taxable income, and
alternative minimum taxable income. The Company has utilized $7.1 million in
net operating loss carryforwards for the nine months ended June 30, 1996 which
results in the effective tax rate being lower than the expected statutory rate.
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 1,000 $ 1,772
Acquisition reserves and holdbacks 2,365 5,465
Performance warrants 1,800 1,800
Net operating loss carryforwards 15,688 13,340
Original issue discount amortization 2,174 6,936
Other 37 56
Less valuation allowance (3,573) (506)
-------- --------
Total deferred tax assets 19,491 28,863
Deferred tax liabilities:
Differences in depreciation and amortization (19,491) (29,655)
-------- --------
Net deferred tax liabilities $ 0 $ 792
======== ========
</TABLE>
The valuation allowance of $0.5 million at June 30, 1996 reflects
uncertainties regarding the utilization of state income tax NOL carryforwards on
the Company's tax returns prior to their dates of expiration.
In June 1996, the Company acquired all of the outstanding shares of
Metrol Security Services, Inc. (See Note 4) For financial reporting purposes,
the assets acquired and the liabilities assumed were valued at fair market value
as of the date of purchase. For income tax reporting purposes, the acquisition
was treated as a non-taxable stock purchase with acquired assets and liabilities
retaining their historical tax basis. The deferred tax liability resulting from
the acquisition basis difference, together with the Company's existing deferred
tax liability exceeded the Company's deferred tax assets at the date of
purchase. The taxable temporary differences creating the Company's deferred tax
liabilities are expected to reverse prior to expiration of the Company's NOLs
reducing the requirement for the Company's previously established deferred tax
asset valuation allowance which then affects the amount of the Metrol
acquisition cost that is allocated to subscriber accounts.
11. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
Acquisitions:
Nine months ended June 30,
1995 1996
---- ----
<S> <C> <C>
Subscriber accounts acquired $ 63,161 $ 95,506
Inventory 30 786
Accounts receivable, net 10 1,588
Plant, property and equipment 37 1,884
Other assets acquired 4 1,674
--------- ---------
Total assets acquired 63,242 101,438
--------- ---------
Cash paid to seller 44,992 72,757
Stock issued to seller -- 6,843
Acquisition expenses 500 646
Purchase holdback 5,559 8,682
Acquisition reserve 2,888 4,781
Deferred revenue acquired 3,117 3,934
Other liabilities assumed 6,186 3,795
--------- ---------
Total purchase price $ 63,242 $ 101,438
========= =========
</TABLE>
9
<PAGE> 11
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 billings to subscribers, is recognized as revenue 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 stockholders' equity
accounts resulting from non-cash investing and financing activities which
occurred in the nine months ended June 30, 1995 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Class B
Redeemable Common Additional
Purchase Preferred Common & Preferred Paid-in Accumulated
Intangibles Holdbacks Stock Stock Stock Capital Deficit
------------- --------- ----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Accretion to redemption
value of preferred stock $ (15) $ 15
Charge-off of purchase
holdbacks $(1,675) $1,675
Accelerated accretion upon
conversion of preferred stock (782) 782
Reclassification of IPO costs (1,305) $ 1,305
Conversion of Class B
Common and preferred 12,897 $(56) $ 85 (12,927)
------- ------ -------- ---- ---- -------- ----
$(2,980) $1,675 $ 12,100 $(56) $ 85 $ (11,622) $797
======= ====== ======== ==== ==== ======== ====
</TABLE>
The following reflects increases (decreases) in assets, and decreases
(increases) in liabilities and additional paid-in capital resulting from
non-cash investing and financing activities which occurred in the nine months
ended June 30, 1996 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Series H
Purchase Common Additional Paid Preferred
Intangibles Holdbacks Stock in Capital Stock
----------- --------- ------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Charge off of purchase holdbacks $( 3,911) $3,911 -- -- --
Conversion of Series H Preferred -- -- $ (7) $ (6,120) $ 6,127
Common shares issued for Metrol 6,843 (4) (6,839)
Reclassification of stock
offering costs (539) -- -- 539 --
-------- ------ ------ -------- -------
$ 2,393 $3,911 $ (11) $(12,420) $ 6,127
======== ====== ====== ======== =======
</TABLE>
12. COMMITMENT AND CONTINGENCIES:
The Company is a party to claims and matters of litigation incidental
to the normal course of 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.
13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:
POI and Services have fully and unconditionally guaranteed the 13 5/8%
Senior Subordinated Discount Notes of Monitoring due 2005 ("Discount Notes") on
a joint and several basis. POI has no independent operations and the
consolidated revenues and costs of operations of POI are substantially
reflected in the accounts of Monitoring. Prior to the merger of Services into
Monitoring, the operations of Monitoring and Services were significantly
interconnected and Monitoring and Services share common management,
10
<PAGE> 12
13. SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION
(CONTINUED):
employees and facilities and serve a common customer base. Separate summarized
financial information of Services is not presented because management believes
that such separate summarized financial information is not material to
investors. The summarized consolidated financial information of Monitoring and
its former subsidiary Services (see Note 1 above) is presented below (dollar
amounts in thousands).
<TABLE>
<CAPTION>
September 30, June 30,
1995 1996
---- ----
<S> <C> <C>
Summarized Balance Sheet
Assets
Current assets $ 10,734 $ 24,126
Subscriber accounts and intangibles, net 162,239 238,898
Other non-current assets 5,695 11,405
Liabilities and Stockholders' Equity
Deferred revenue $ 9,166 $ 13,763
Other current liabilities 10,727 21,405
Long-term debt, net of current portion 146,023 206,956
Other long-term liabilities 279 604
Redeemable preferred stock 6,127
Stockholders' equity 6,347 30,909
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Summarized Statements of Operations
Revenues $ 13,685 $ 18,617 $ 38,965 $ 51,795
Gross Profit 9,064 12,646 25,080 34,459
Loss before extraordinary item
and cumulative effect of change in
accounting method, net of taxes (1,786) (3,860) (4,082) (11,099)
Net loss (10,684) (3,860) (14,934) (11,099)
</TABLE>
14. ACQUISITION:
On June 28, 1996 the Company acquired all of the outstanding stock of
Metrol Security Services, Inc. ("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 purchase price was allocated to the assets and subscriber accounts
acquired and the liabilities assumed on the basis of fair values at June 28,
1996 as follows (in thousands):
<TABLE>
<S> <C>
Subscriber accounts acquired $30,294
Inventories 754
Receivables, net 1,711
Property and Equipment 1,884
Other assets acquired 622
-------
$35,265
=======
Cash paid to seller $21,296
Stock issued to seller 6,843
Acquisition costs 88
Purchase holdback 3,000
Acquisition transition costs 500
Deferred revenue 1,730
Other liabilities assumed 1,808
-------
$35,265
=======
</TABLE>
The following unaudited pro forma condensed consolidated results of
operations present information as if the acquisition had occurred as of the
beginning of each of the nine month periods ended June 30, 1995. 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 nine months ended
June 30, 1995 June 30, 1996
<S> <C> <C>
Revenue 46,139 60,651
Net loss before extraordinary item
and cumulative effect of change
in accounting method (6,255) (9,877)
Net loss before extraordinary item,
and cumulative effect of change
in accounting method per share (0.87) (0.91)
Net loss (14,281) (9,877)
Net loss per share (1.76) (0.91)
</TABLE>
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
For an overview of the Company's accounting policies and specific
discussions of, among other things, a change in the method of accounting for
certain acquisition and transition expenses, a change in statement of operations
presentation format and the impact of SFAS 121 on the Company's financial
statements, see the Company's Form 10-K, as amended, for the fiscal year ended
September 30, 1995.
Acquisition and Dealer Program Activity. As described in this Form
10-Q, 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 monthly recurring revenue ("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 the nine months ended June 30, 1996 the Company added (through
acquisitions of 27 portfolios of subscriber accounts and through its Dealer
Program) an aggregate of approximately 77,000 subscriber accounts for a total
purchase price of approximately $95.5 million. The MRR of the acquired
accounts ranged from approximately $10.00 to $60.00, with an average of $28.56,
and the average purchase price holdback was approximately 12% of the initial
purchase price. Approximately 80% of the acquired subscriber accounts were
residential.
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.
12
<PAGE> 14
The following table sets forth the Company's gross subscriber
attrition and net MRR attrition for the periods indicated:
<TABLE>
<CAPTION>
Twelve Months Ended
-------------------
6/30/95 9/30/95 12/31/95 3/31/96 6/30/96
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Gross subscriber attrition . . . . . . . 18.6% 19.3% 20.3% 20.5% 19.9%
Net MRR attrition . . . . . . . . . . . 6.2 6.6 6.6 7.9 7.1
</TABLE>
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 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 a significant portion 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.
The table below sets forth the change in the Company's subscriber base
over the periods indicated:
<TABLE>
<CAPTION>
Twelve Months Ended June 30,
----------------------------
1995 1996
---- ----
<S> <C> <C>
Number of subscribers:
Beginning of period . . . . . . . . . . . . . . . . 76,112 131,166
Additions through portfolio acquisitions and Dealer
Program, net of sales of subscriber accounts . 68,891 80,967
Installations by Company personnel . . . . . . . . 1,644 984
Reconnects and conversions . . . . . . . . . . . . 3,465 4,243
Gross subscriber attrition . . . . . . . . . . . . (18,946) (29,228)
-------- --------
End of period . . . . . . . . . . . . . . . . 131,166 188,132
======= =======
</TABLE>
Joint Ventures and Alliances. To evaluate other potential sources of
subscriber growth, the Company has initiated an analysis of companies that may
have an interest in entering the residential security alarm market. In
addition, 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. As of the date of this Form
10-Q, the Company is discussing with certain of such companies, and intends to
continue to explore, possible joint ventures, co-marketing arrangements and
other strategic alliances as a method of enhancing its subscriber growth and
reducing its cost of generating new subscribers. As of the date of this Form
10-Q, the Company has not entered into any agreement or arrangement for any
such joint venture or other alliance.
13
<PAGE> 15
Recent Developments On June 28, 1996, the Company acquired Metrol
Security Services, Inc. (together with its subsidiaries, "Metrol"), for $30.7
million, including the repayment of $15.7 million of Metrol's debt. To finance
the acquisition, the Company issued 417,885 shares of Common Stock to Metrol's
stockholders and borrowed $24.0 million under the Revolving Credit Facility.
Metrol, previously the 28th largest security alarm company in the United
States, had approximately 18,500 subscribers (approximately 5,500 of which
subscribed to Metrol's alarm response service), and provide other ancillary
security services, including guard services, a national accounts program, an
integrated system division and a probation monitoring operation. The acquired
subscriber accounts (approximately 70% of which are residential) represent
approximately $500,000 of MRR and $50,000 of recurring alarm response revenues.
Approximately 95% of the acquired Metrol subscribers are located in Phoenix and
Tucson, Arizona; the remainder are in Albuquerque and Santa Fe, New Mexico. As
a result of the Metrol acquisition, the Company believes that, based upon
number of subscribers, it has enhanced its position as the largest residential
security alarm monitoring company in Arizona.
On June 27, 1996, the Credit Agreement was amended to increase the
maximum amount of borrowings available under the Revolving Credit Facility to
$100 million, to reduce the interest rate payable on such borrowings, to extend
the term of the Revolving Credit Facility to January 3, 2000 and to make
certain other changes favorable to the Company.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
------------------------------- ----------------------------------
1995 1996 1995 1996
--------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues:
Monitoring and Service 86.1% 90.5% 83.7% 89.5%
Other 13.9 9.5 16.3 10.5
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenues:
Monitoring and Service 21.0% 24.0% 20.9% 24.4%
Other 12.8 8.1 14.7 9.0
----- ----- ----- -----
Total cost of revenues 33.8 32.1 35.6 33.4
----- ----- ----- -----
Gross profit 66.2 67.9 64.4 66.6
Selling, general and administrative expenses 19.8 18.9 21.0 19.5
Loss on acquisition terminations 1.5 -- 0.5 --
Acquisition and transition expenses 5.0 6.0 6.1 5.9
Amortization of subscriber accounts & goodwill 29.4 32.5 27.9 31.1
----- ----- ----- -----
Operating income 10.5% 10.5% 8.9% 10.1%
===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Revenues. Revenues for the nine months ended June 30, 1996 increased
by approximately $12.8 million, or 32.9%, to $51.8 million from $39.0 million
in the comparable period in 1995. Monitoring and service revenues increased by
approximately $13.8 million, or 42.2%, a substantial majority of which resulted
from the addition of subscribers through the acquisition of portfolios of
subscriber accounts and purchases of subscriber accounts from independent alarm
dealers with whom the Company has exclusive purchase agreements (the "Dealer
Program"). The Company's subscriber base increased by 43.4% to approximately
188,000 subscribers at the end of the third quarter of fiscal 1996 as compared
to approximately 131,000 subscribers at the end of the third quarter of fiscal
1995. The sale of enhanced services and new subscribers generated by Company
personnel comprised the remainder of revenue growth. Other revenues, consisting
primarily of revenues generated by the Company's patrol and alarm response,
installation and lock businesses, decreased by $0.9 million, or 14.6%, to $5.4
million. Such
14
<PAGE> 16
decrease was caused primarily by a decline in installation revenues of 36.9%,
or approximately $1.1 million. The decline in installation revenues (and the
decline in installation expense described below) resulted from the Company's
continued emphasis on growth through acquisitions and the Dealer Program,
rather than through the sale of new alarm systems by Company personnel.
Cost of revenues. Cost of revenues for the nine months ended June 30,
1996 increased by approximately $3.5 million, or 24.9%, to $17.3 million. Cost
of revenues as a percentage of total revenues declined to 33.4% for the three
quarters of fiscal 1996 from 35.6% for the comparable period in fiscal 1995.
Monitoring and service expenses increased by approximately $4.5 million, or
55.2%, 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 27.3% for the nine months ended June 30, 1996 from 25.0%
during the comparable period in 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 the nine months ended June 30, 1996, due primarily
to the acquisition of portfolios of subscriber accounts that had a lower
average MRR per subscriber than the Company's average at that time. Other
expenses decreased by approximately $1.0 million, or 18.3%, to approximately
$4.7 million for the nine months ended June 30, 1996 from $5.7 million for the
first nine months of fiscal 1995. The decrease primarily was caused by a 38.1%
decrease ($0.9 million) in installation expense.
Gross profit. Gross profit for the nine months ended June 30, 1996 was
approximately $34.5 million, which represents an increase of approximately $9.4
million, or 37.4%, over the $25.1 million of gross profit recognized in the
comparable period in fiscal 1995. Gross profit as a percentage of total
revenues was 66.6% for the nine months ended June 30, 1996 compared to 64.4%
for the comparable period in fiscal 1995. This increase was caused primarily by
an increase in monitoring and service revenues as a percentage of total
revenues to 89.5% in the nine months ended June 30, 1996 compared to 83.7% in
the comparable period in fiscal 1995. Gross profit from other revenues
increased slightly to approximately $0.7 million for the first nine months of
fiscal 1996 from $0.6 million for the comparable period in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses rose to approximately $10.1 million in the first nine
months of fiscal 1996, which represents an increase of approximately $1.9
million, or 23.3%, over selling, general and administrative expenses in the
comparable period in fiscal 1995. Such figure as a percentage of total revenues
declined from 21.0% in the nine months ended June 30, 1995 to 19.5% in the
comparable period in fiscal 1996, due primarily to the growth rate in revenues
exceeding that of selling general and administrative expenses. 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
management and 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 less than 1% of revenues in each of the
nine month periods ended June 30, 1995 and 1996. The provision for doubtful
accounts increased to approximately $1.5 million for the nine months ended June
30, 1996 from approximately $1.2 million for the comparable period in fiscal
1995.
Acquisition and transition expenses. Acquisition and transition
expenses for the nine months ended June 30, 1996 totaled approximately $3.0
million compared to $2.4 million for the comparable period in fiscal 1995.
Such increase reflects the Company's increased acquisition and Dealer Program
activity during the nine months ended June 30, 1996. 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. Amortization expense
during the nine months ended June 30, 1996 increased by approximately $5.2
million, or 48.4%, to $16.1 million. This increase is the
15
<PAGE> 17
result of the addition to the Company's intangible asset reflecting the
acquisition of portfolios of subscriber accounts and the purchase of subscriber
accounts through the Dealer Program.
Operating income. Operating income for the nine months ended June 30,
1996 was approximately $5.2 million, compared to approximately $3.5 million in
the comparable period in fiscal 1995. Operating income as a percentage of
total revenues was 10.1% in the first nine months of fiscal 1996, compared to
8.9% in the comparable period in fiscal 1995. The increase in such figure over
the comparable period in fiscal 1995 reflects the increase in gross profit as a
percentage of total revenues and the achievement of economies of scale.
Interest expense, net and amortization of debt issuance costs and OID.
Interest expense, net and amortization of debt issuance costs and OID increased
by $6.7 million, or 70.0%, to $16.2 million in the nine months ended June 30,
1996, reflecting the Company's use of debt to finance a substantial portion of
its subscriber account growth. Because the Company refinanced its cash
interest-paying subordinated debt in May of 1995 with non-cash interest-paying
subordinated debt (see"- Liquidity and Capital Resources"), amortization of
debt issuance costs and original issue discount ("OID") increased during the
nine months ended June 30, 1996 to approximately $13.2 million.
Balance sheet data. At June 30, 1996, the Company's working capital
deficit was $11.0 million, as compared to a working capital deficit of $9.2
million at September 30, 1995. The increase in the working capital deficit was
caused primarily by increases in purchase holdbacks, deferred revenue and
acquisition transition costs of $15.0 million offset by increases in cash,
accounts receivable, inventories and prepaid expenses of $13.4. Subscriber
accounts and intangibles, net increased to $238.9 million at June 30, 1996 from
$162.2 million at September 30, 1995. This increase of $76.7 million, or 47.3%,
was caused by the addition of new subscribers, net of amortization expense.
Total stockholders' equity increased to approximately $30.9 million at June 30,
1996 from $6.3 million at September 30, 1995. The increase in such figure
reflects the Company's public offering of 2.5 million shares of Common Stock
(resulting in approximately $23.1 million of net proceeds) and the conversion
of the Company's Series H Redeemable Preferred Stock to Common Stock in
February 1996 (approximately $6.1 million) and the issuance of 417,885 shares
of Common Stock as a portion of the purchase price payment for the Metrol
Security Services acquisition (resulting in an increase to shareholder's equity
of approximately $6.8 million) partially offset by approximately $11.3 million
of losses in the first nine months of fiscal 1996.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Revenues. Revenues for the three months ended June 30, 1996 (the
"third quarter of fiscal 1996") increased by approximately $4.9 million, or
36.0%, to $18.6 million from $13.7 million in the comparable period in 1995.
Monitoring and service revenues increased by approximately $5.1 million, or
43.1%, a substantial majority of which resulted from the addition of
subscribers through the acquisition of portfolios of subscriber accounts and
the Dealer Program. The Company's subscriber base increased by 43.4% to
approximately 188,000 subscribers at the end of the third quarter of fiscal
1996 as compared to approximately 131,000 subscribers at the end of the third
quarter of fiscal 1995. The sale of enhanced services and new subscribers
generated by Company personnel comprised the remainder of revenue growth. Other
revenues decreased by $0.2 million, or 7.6%, to $1.8 million. Such decrease was
caused primarily by a decline in installation revenues of 22.9%, or
approximately $0.2 million.
Cost of revenues. Cost of revenues for the third quarter of fiscal
1996 increased by approximately $1.4 million, or 29.2%, to $6.0 million. Cost
of revenues as a percentage of total revenues declined to 32.1% for the third
quarter of fiscal 1996 from 33.8% for the comparable period in fiscal 1995.
Monitoring and service expenses increased by approximately $1.6 million, or
55.3%, primarily due to increased activity at the Company's central monitoring
station and field service branches. Monitoring and service expenses as a
percentage of monitoring and service revenues increased to 26.5% for the third
quarter of fiscal 1996 from 24.4% during the comparable period in fiscal 1995.
Such increase reflects both a higher level of
16
<PAGE> 18
staffing at the Company's central monitoring station, and the acquisition of
portfolios of subscriber accounts that had a lower average MRR per subscriber
than the Company's average at the time. Other expenses decreased by
approximately $0.2 million, or 13.6%, to approximately $1.5 million for the
third quarter in fiscal 1996 from $1.7 million for the third quarter of fiscal
1995. The decrease primarily was caused by a 29.1% decrease ($0.2 million) in
installation expense.
Gross profit. Gross profit for the third quarter of fiscal 1996 was
approximately $12.6 million, which represents an increase of approximately $3.6
million, or 39.5%, over the $9.1 million of gross profit recognized in the
comparable period in fiscal 1995. Gross profit as a percentage of total
revenues was 67.9% for the third quarter of fiscal 1996 compared to 66.2% for
the comparable period in fiscal 1995. This increase was caused primarily by an
increase in monitoring and service revenues as a percentage of total revenues
to 90.5% in the third quarter of fiscal 1996 compared to 86.1% in the
comparable period in 1995. Gross profit from other revenues increased to
approximately $0.3 million for the third quarter of fiscal 1996 from $0.2
million for the comparable period in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses rose to approximately $3.5 million in the third quarter
of fiscal 1996, which represents an increase of approximately $0.8 million, or
30.3%, over selling, general and administrative expenses in the comparable
period in fiscal 1995. Such figure as a percentage of total revenues declined
from 19.8% in the third quarter of fiscal 1995 to 18.9% in the third quarter of
fiscal 1996. The increase in selling, general and administrative expenses was
caused by increases in corporate and branch management and overhead expenses
incurred to supervise a larger employee base associated with a larger
subscriber base. Advertising and marketing expenses comprised less than 1% of
revenues in each of the quarters ending June 30, 1995 and 1996. The provision
for doubtful accounts increased to approximately $0.5 million for the third
quarter of fiscal 1996 from $0.3 million for the comparable period in fiscal
1995.
Acquisition and transition expenses. Acquisition and transition
expenses for the third quarter of fiscal 1996 totaled approximately $1.1
million compared to $0.7 million for the comparable period in fiscal 1995.
Such increase was caused by significant acquisition activity in the third
quarter of fiscal 1996, as well as the assimilation of several large portfolios
of subscriber accounts acquired at the end of the second quarter of fiscal
1996.
Amortization of subscriber accounts and goodwill. Amortization expense
for the third quarter of fiscal 1996 increased by approximately $2.0 million,
or 50.4% to $6.0 million. This increase is the result of the addition of
subscriber accounts through the acquisition of portfolios of subscriber
accounts and the Dealer Program.
Operating income. Operating income for the third quarter of fiscal
1996 was approximately $2.0 million, compared to approximately $1.4 million in
the comparable period in fiscal 1995. Operating income as a percentage of
total revenues was 10.5% in the third quarter of fiscal 1996, compared to 10.5%
in the comparable period in fiscal 1995. Increases in acquisition, transition
and amortization expenses as a percentage of total revenues reflect the
Company's increased acquisition and Dealer Program activity.
Interest expense, net, and amortization of debt issuance costs and
OID. These amounts increased by $1.9 million, or 48.9%, to $5.7 million in the
third quarter of fiscal 1996, reflecting the Company's use of debt to finance a
substantial portion of its subscriber account growth. See "Liquidity and
Capital Resources" below.
17
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
General. Since September 1991, the Company has financed its operations
and growth from a combination of long-term debt, including the proceeds of the
$50.0 million principal amount of Senior Subordinated Notes issued in November
1993 and the $166.0 million principal amount ($105.2 million net proceeds) of
Discount Notes issued in May 1995, short-term borrowings under its Revolving
Credit Facility, sales of stock and, to a lesser extent, cash flows from
operations. In February 1996, the Company completed a public offering of 4.0
million shares of Common Stock (2.5 million shares of which were sold by the
Company and 1.5 million shares of which were sold by two selling stockholders).
Net proceeds from such offering were approximately $23.1 million, all of which
were used to reduce borrowings under the Revolving Credit Facility. The
Company believes that, based on the amount of net cash provided by operating
activities in fiscal 1994 and 1995 and the nine months ended June 30, 1996,
cash flows from operations will be sufficient to fund the Company's interest
payments on its debt and capital expenditures, which are the Company's
principal uses of cash other than the purchases of subscriber accounts from the
Company's dealers and acquisitions of portfolios of subscriber accounts.
On a long-term basis, the Company has several material commitments.
Borrowings under the Revolving Credit Facility were approximately $80.9 million
at June 30, 1996 and could be as high as $100.0 million through January 3, 2000,
the current maturity date of the Revolving Credit Facility. Although the
Company believes that 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 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 $22.6 million on an annual
basis. As a result, a substantial portion of the Company's cash flows from
operations will be required to make interest payments on the Discount Notes, and
there can be no assurance that the Company's cash flow from operations will be
sufficient to meet such obligation, 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 $166.0 million principal
amount of Discount Notes matures on June 30, 2005. There can be no assurance
that the Company will have the cash necessary to repay 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 $1.2 million letter of credit to a seller,
scheduled payments under which are approximately $0.4 million during each of
fiscal 1997, 1998 and 1999.
The Company intends to use the remaining cash flows from operations,
together with borrowings under the Revolving Credit Facility, to finance the
addition of subscriber accounts. 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 under
the Revolving Credit Agreement may be required to continue the acquisition
program and to finance the Dealer Program. In this regard, in August 1996, the
Company filed a shelf registration statement with the Securities and Exchange
Commission to register for sale to the public up to $150 million aggregate
principal amount of senior and subordinated debt securities. There can be no
assurance that any such public offering will be completed or that the Company
will be able to obtain such financing on acceptable terms or at all.
As noted above, the Company has had, and expects to continue to have,
a working capital deficit. 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.
For the nine months ended June 30, 1996, the Company's net cash
provided by operating activities was $16.6 million, compared to $2.6 million
for the comparable period in fiscal 1995. The increase in net cash provided by
operations of approximately $14.0 million was a result of higher earnings
before interest,
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taxes, depreciation and amortization and lower cash interest payments. The
decline in cash interest payments was due to the refinancing of cash interest
paying debt with the Discount Notes as described above.
For the first nine months of fiscal 1996, the Company's net cash used
in investing activities was $80.8 million, compared to $55.0 million during the
first nine months of fiscal 1995, primarily as a result of the acquisition of
portfolios of subscriber accounts.
During the first nine months of fiscal 1996, the Company's net cash
provided by financing activities was $71.4 million, compared to $52.1 million
in the comparable period in fiscal 1995. Financing activities reflect the
Company's borrowings under its Revolving Credit Facility and proceeds from the
Company's secondary stock offering in February 1996.
Restrictions on Dividends. POI has never paid any cash dividends on
the Common Stock and does not intend to pay cash dividends in the foreseeable
future. Both the Revolving Credit Facility and the Indenture governing the
Discount Notes restrict POI's ability to declare or pay any dividend on, or
make any other distribution in respect of, POI's capital stock.
Capital Expenditures. During the nine months ended June 30, 1996, the
Company made approximately $4.7 million of capital expenditures, of which $3.0
million were made for the routine replacement and required upgrading and
expansion of vehicles, computers, phone switches and other capital items, and
the remainder were made for the upgrading of its monitoring and administrative
hardware and 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 service functions. The
implementation of the new software is scheduled to be completed in fiscal 1997.
In addition, the Company anticipates making capital expenditures totaling
$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 the
remainder of fiscal 1996 and fiscal 1997.
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PART II
OTHER INFORMATION
ITEM 5. In February 1996, POI entered into one-year consulting agreement with
Dr. Ben Enis pursuant to which Dr. Enis advises the Company with
respect to advertising and marketing matters and is compensated for
such services at the rate of $7,500 per month.
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------ -----------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement to Purchase and Sell Stock dated as of May 23, 1996, among Metrol Security Services, Inc.
("Metrol"), the persons named therein as the "Shareholders" (the "Shareholders"), Protection One Alarm
Monitoring, Inc. ("Monitoring") and Protection One, Inc. ("POI"). (1)
2.2 Amendment No. 1 to Agreement dated as of June 28, 1996, among Metrol, the Shareholders, Monitoring, and
POI. (2)
2.3 Escrow Agreement dated May 31, 1996, among Metrol, the Shareholders, Monitoring, POI and First National
Bank of Denver, N.A. as the Escrow Agent. (3)
10.1 Registration Rights Agreement dated as of June 28, 1996, among POI and the Shareholders. (4)
10.2 Amended and Restated Credit Agreement dated as of June 7, 1996, among Monitoring, Heller Financial, Inc.
("Heller") and the other Lenders named therein and Heller as Agent for such Lenders. (5)
10.3 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and James M. Mackenzie, Jr. (5)
10.4 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John W. Hesse. (5)
10.5 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and John E. Mack, III. (5)
10.6 Amended and Restated Employment Agreement dated as of May 24, 1996 between POI and Thomas K. Rankin. (5)
10.7 Consulting Agreement dated as of February 19, 1996 between POI and Dr. Ben Enis. (5)
27.1 Financial Data Schedule for Protection One, Inc. (5)
27.2 Financial Data Schedule for Protection One Alarm Monitoring, Inc. (5)
(1) Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-3 (Commission File No.
333-5849) filed by POI with the Securities and Exchange Commission (the "Commission") on June 12, 1996
(the "June 1996 Form S-3").
(2) Incorporated by reference to Exhibit 2.2 to the June 1996 Form S-3.
(3) Incorporated by reference to Exhibit 2.3 to the Current Report on Form 8-K filed by POI and Monitoring
with the Commission reporting an event dated June 7, 1996 (the "June 1996 Form 8-K").
(4) Incorporated by reference to Exhibit 99.1 to the June 1996 Form 8-K.
(5) Previously filed.
</TABLE>
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ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K (CONT.).
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed during the quarter
for which this report is filed:
1. Current Report on Form 8-K dated May 23, 1996, filed by POI
and Monitoring with the Commission on May 24, 1996, and reporting in response
to Item 2 the entering into by POI and Monitoring of the agreement to purchase
all of the capital stock of Metrol filed as an exhibit to this report.
2. Current Report on Form 8-K dated June 7, 1996, filed by POI
and Monitoring with the Commission on July 2, 1996, as amended, reporting in
response to Item 2 Monitoring's acquisition of all of the outstanding capital
stock of Metrol and in response to Item 5 the entering into by POI and
Monitoring of the Amended and Restated Credit Agreement filed as an exhibit to
this report. Such report as amended also included the consolidated financial
statements of Metrol and its subsidiaries and pro forma financial information
with respect to the Metrol acquisition.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
September 3, 1996 PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
By: /s/ John W. Hesse
--------------------------
John W. Hesse
Executive Vice President
and Chief Financial Officer
</TABLE>
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